Filed Pursuant to Rule 424(b)(3)
Registration No. 333-119641
PROSPECTUS
CROMPTON CORPORATION
OFFER TO EXCHANGE (I) $375.0 MILLION AGGREGATE PRINCIPAL AMOUNT OF 9 7/8%
SENIOR NOTES DUE 2012 (WHICH WE REFER TO AS THE OLD SENIOR NOTES) FOR $375.0
MILLION AGGREGATE PRINCIPAL AMOUNT OF 9 7/8% SENIOR NOTES DUE 2012 (WHICH WE
REFER TO AS THE NEW SENIOR NOTES) WHICH HAVE BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, AND FULLY AND UNCONDITIONALLY GUARANTEED
BY THE SUBSIDIARY GUARANTORS, AND (II) $225.0 MILLION AGGREGATE PRINCIPAL
AMOUNT OF SENIOR FLOATING RATE NOTES DUE 2010 (WHICH WE REFER TO AS THE OLD
FLOATING RATE NOTES) FOR $225.0 MILLION AGGREGATE PRINCIPAL AMOUNT OF SENIOR
FLOATING RATE NOTES DUE 2010 (WHICH WE REFER TO AS THE NEW FLOATING RATE
NOTES) WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, AND FULLY AND UNCONDITIONALLY GUARANTEED BY THE SUBSIDIARY
GUARANTORS. WE REFER TO THE OLD SENIOR NOTES AND THE OLD FLOATING RATE NOTES
TOGETHER AS THE OLD NOTES, AND TO THE NEW SENIOR NOTES AND THE NEW FLOATING
RATE NOTES AS THE NEW NOTES.
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON
FEBRUARY 22, 2005 (THE 21ST BUSINESS DAY AFTER THE LAUNCH OF THE EXCHANGE
OFFER), UNLESS WE EXTEND THE EXCHANGE OFFER IN OUR SOLE AND ABSOLUTE DISCRETION.
Terms of the exchange offer:
o We will exchange new notes for all outstanding old notes that are validly
tendered and not withdrawn prior to the expiration or termination of the
exchange offer.
o You may withdraw tenders of old notes at any time prior to the expiration
or termination of the exchange offer.
o The terms of the new notes are substantially identical to those of the
outstanding old notes, except that the transfer restrictions and
registration rights relating to the old notes do not apply to the new
notes.
o The exchange of old notes for new notes will not be a taxable transaction
for U.S. federal income tax purposes, but you should see the discussion
under the caption "Material United States Federal Income Tax
Considerations" for more information.
o We will not receive any proceeds from the exchange offer.
o We issued the old notes in a transaction not requiring registration under
the Securities Act, and as a result, their transfer is restricted. We are
making the exchange offer to satisfy your registration rights, as a
holder of the old notes.
There is no established trading market for the new notes or the old notes.
SEE "RISK FACTORS" BEGINNING ON PAGE 13 FOR A DISCUSSION OF RISKS YOU SHOULD
CONSIDER PRIOR TO TENDERING YOUR OUTSTANDING OLD NOTES FOR EXCHANGE.
Neither the Securities and Exchange Commission, or SEC, nor any state
securities commission has approved or disapproved of these securities or
passed upon the adequacy or accuracy of this prospectus. Any representation to
the contrary is a criminal offense.
The date of this prospectus is January 24, 2005.
TABLE OF CONTENTS
PAGE
--------
SUMMARY ............................................................ 1
SUMMARY DESCRIPTION OF THE EXCHANGE OFFER .......................... 4
CONSEQUENCES OF NOT EXCHANGING OLD NOTES. .......................... 9
SUMMARY DESCRIPTION OF THE NEW NOTES ............................... 10
RISK FACTORS ....................................................... 13
USE OF PROCEEDS. ................................................... 26
RATIO OF EARNINGS TO FIXED CHARGES ................................. 26
UNAUDITED PRO FORMA FINANCIAL INFORMATION .......................... 27
SELECTED HISTORICAL FINANCIAL DATA ................................. 30
THE EXCHANGE OFFER ................................................. 33
DESCRIPTION OF OTHER INDEBTEDNESS AND ARRANGEMENTS ................. 39
DESCRIPTION OF THE NEW NOTES ....................................... 42
PLAN OF DISTRIBUTION ............................................... 84
MATERIAL UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS. .......... 85
LEGAL MATTERS. ..................................................... 86
EXPERTS. ........................................................... 86
AVAILABLE INFORMATION. ............................................. 86
INCORPORATION BY REFERENCE ......................................... 86
INDEX TO FINANCIAL STATEMENTS ...................................... F-1
This prospectus incorporates by reference important business and financial
information about us that is not included in or delivered with this document.
Copies of this information are available without charge to any person to whom
this prospectus is delivered, upon written or oral request. Written requests
should be sent to:
Crompton Corporation
199 Benson Road
Middlebury, Connecticut 06749
Attention: Corporate Communications
Oral requests should be made by telephoning Crompton Investor Relations at
(203) 573-2000.
IN ORDER TO OBTAIN TIMELY DELIVERY, YOU MUST REQUEST THE INFORMATION NO
LATER THAN FEBRUARY 14, 2005, WHICH IS FIVE BUSINESS DAYS BEFORE THE EXPIRATION
DATE OF THE EXCHANGE OFFER.
i
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus includes forward-looking statements. These forward-looking
statements are identified by terms and phrases such as "anticipate,"
"believe," "intend," "estimate," "expect," "continue," "should," "could,"
"may," "plan," "project," "predict," "will," and similar expressions, and
include references to assumptions and relate to our future prospects,
developments, and business strategies.
Factors that could cause our actual results to differ materially from those
expressed or implied in such forward-looking statements include, but are not
limited to:
o general economic conditions;
o the outcome and timing of antitrust investigations and related civil
lawsuits to which we are subject;
o our ability to obtain selling price increases;
o pension and other post-retirement benefit plan assumptions;
o energy and raw material prices and availability;
o production capacity;
o changes in interest rates and foreign currency exchange rates;
o changes in technology;
o market demand and customer requirements;
o the enactment of more stringent environmental laws and regulations;
o our ability to realize expected cost savings under our cost reduction
initiatives;
o the amount of any additional earn-out payments from General Electric
Company;
o our ability to reduce our debt levels; and
o other risks and uncertainties detailed throughout this prospectus.
These forward-looking statements are based on our estimates and assumptions,
and on currently available information. The forward-looking statements include
information concerning our possible or assumed future results of operations,
and our actual results may differ significantly from the results discussed in
this prospectus. Forward-looking information is intended to reflect opinions
as of the date of this prospectus and we undertake no obligation to revise the
forward-looking statements included or incorporated by reference in this
prospectus to reflect any future events or circumstances. Factors that could
cause or contribute to such differences are discussed in the section entitled
"Risk Factors" included in this prospectus.
ii
SUMMARY
The following summary contains basic information about us and this prospectus.
It likely does not contain all of the information that is important to you.
For a more complete understanding of this prospectus, we encourage you to read
this entire document and the documents we have referred you to. Except as
otherwise specified in this prospectus, "the Company," "we," "us," and "our"
refer to Crompton Corporation and its consolidated subsidiaries.
CROMPTON CORPORATION
COMPANY OVERVIEW
We are a global diversified producer of specialty chemicals (including
agricultural chemicals), polymer products, and polymer processing equipment.
Our products are used in a wide variety of end-use markets, principally
including automotive, transportation, construction, packaging, agriculture,
lubricants, plastics for durable and non-durable goods, and personal care
products. Most of our chemical products are sold to industrial manufacturing
customers for use as additives, ingredients, or intermediates that add value
to their end products. We manufacture and sell more than 5,000 products and
formulations. Of our 2003 net sales, 53% were to customers in the United
States and Canada, 27% to Europe and Africa, 13% to Asia/Pacific, and 7% to
Latin America.
We are a market leader in many of our key product lines, including polyvinyl
chloride ("PVC") additives, aluminum alkyl catalysts, high-performance
castable urethanes, and single-screw extrusion equipment. For the year ended
December 31, 2003 and the nine months ended September 30, 2004, we generated
net sales of $2.2 billion and $1.9 billion, respectively.
Our businesses are grouped into the following two units and five reporting
segments:
POLYMER PRODUCTS
Polymer Additives
Polymer Additives, our largest business segment, supplies specialty
additives used to manufacture plastic, rubber, urethane, and petroleum
products. We believe our product offerings, which we develop using our
application expertise, enable our customers to solve their complex engineering
and process challenges. Our additives are used to impart specific qualities in
our customers' products, such as strength, durability, heat resistance, or
flexibility. We often work with our customers to develop and formulate polymer
additives to meet specific manufacturing requirements. Our products are sold
to formulators, compounders, and fabricators of vinyl, olefins, styrenics,
rubber, polyurethanes, and high performance lubricants, and are ultimately
used in the automotive, transportation, packaging, construction, durable and
non-durable goods, and telecom industries. For the year ended December 31,
2003 and the nine months ended September 30, 2004, our Polymer Additives
business generated sales of $1.2 billion and $1.1 billion, respectively.
Polymers
Our Polymers business is a leading supplier of high-performance castable
urethanes and ethylene-propylene-diene-monomer ("EPDM"). Our castable urethane
products are abrasion-resistant and durable, and our customers use these
customized products to fabricate parts such as solid industrial tires,
industrial rollers, mining equipment, and recreational equipment (e.g., skate
wheels and golf ball covers). EPDM (sometimes referred to as "crackless
rubber") is a material that retains its elasticity despite its exposure to
elements such as sunlight and ozone. Over 40% of our EPDM is used in new and
replacement automotive parts, including tires, hoses, belts, weather-
stripping, brake components, and seals and gaskets. Other applications range
from high density, long-lasting commercial roofing membranes to low
1
density, liquified viscosity modifiers for better performing lubricants. For
the year ended December 31, 2003 and the nine months ended September 30, 2004,
our Polymers business generated sales of $285.7 million and $246.3 million,
respectively.
Polymer Processing Equipment
Davis-Standard, our Polymer Processing Equipment business, is a global
leader in the manufacture of integrated polymer processing systems, including
rubber and plastic single-screw extrusion equipment and industrial blow-
molding machines. We also provide installation, training, and maintenance
services for our equipment, and we refurbish and upgrade polymer processing
equipment manufactured by others. Integrated polymer processing systems, which
include extruders in combination with other equipment, are used to process
polymers into various products such as plastic sheets, extruded shapes, and
cast and blown film. For the year ended December 31, 2003 and the nine months
ended September 30, 2004, our Polymer Processing Equipment business generated
sales of $166.5 million and $125.3 million, respectively.
SPECIALTY PRODUCTS
Crop Protection
Our Crop Protection business focuses on specific niches in four major
product lines: fungicides, miticides and other insecticides, growth regulants,
and herbicides. We have primarily developed our products for use on high-value
cash crops, such as ornamentals, nuts, turf, citrus, and tree and vine fruits,
and secondarily for commodity crops, such as soybeans and corn. Our fungicides
and insecticides are also used to coat seeds in order to protect the seed
during germination and during its initial growth phases. Our dedicated Crop
Protection sales force works with growers and distributors to coordinate the
use of our products throughout a crop's growth cycle and to address selective
regional, climate, and growth challenges. We sell registered crop protection
products in more than 100 countries, which lessens our dependence on any one
market. Our experience with registering products is a valuable asset, as
registration is a significant barrier to entry, particularly in developed
countries. Registration of products is a complex process in which we have
developed a proficiency over time. We develop and sell our own products, and
we also sell and register products manufactured by others on a licensed basis.
For the year ended December 31, 2003 and the nine months ended September 30,
2004, our Crop Protection business generated sales of $270.9 million and
$251.0 million, respectively.
Refined Products
Our Refined Products business supplies a wide range of high-purity
hydrocarbon products, including white oils, petrolatums, specialty waxes, and
other refined products. Our products are used as emollients and moisture
barriers in personal care products, such as baby oils and cosmetics; as
lubricants in refrigerators and air conditioners; and as plasticizers and
carriers in plastic products such as PVC pipe and protective barriers for
copper telecommunications cables. For the year ended December 31, 2003 and the
nine months ended September 30, 2004, our Refined Products business generated
sales of $243.2 million and $199.5 million, respectively.
REFINANCING
The old notes were offered as part of a refinancing intended to provide
enhanced liquidity and extend our debt maturities. The refinancing included
(i) a new five-year $220.0 million Revolving Credit Facility including a
$120.0 million revolving credit facility and a $100.0 million pre-funded
letter of credit facility, (ii) a new three-year accounts receivable
securitization program with an ability to sell up to $125.0 million of
domestic accounts receivable, which
2
represents an increase of $10.0 million from our previous ability to sell up
to $115.0 million of domestic accounts receivable, and (iii) the simultaneous
consent solicitation and tender offer for any and all of the aggregate
principal amount of our outstanding 8.50% Senior Notes due 2005 and 6.125%
Senior Notes due 2006. The consent solicitation and tender offer resulted in
the retirement of our $350 million aggregate principal amount of our 8.5%
Senior Notes and $140 million of our $150 million aggregate principal amount
of 6.125% Senior Notes. We refer to these prior transactions collectively as
the "Refinancing." When we issued the old notes in August 2004, we entered
into a registration rights agreement with the initial purchasers of the old
notes. Under the terms of the registration rights agreement, we agreed to file
with the SEC and cause to become effective, a registration statement relating
to an offer to exchange the old notes for the new notes.
RECENT DEVELOPMENTS
COST REDUCTION PROGRAMS
We have nearly completed an activity-based restructuring initiative intended
to determine how to structure our operations in a more cost effective manner.
On June 29, 2004, we initiated a voluntary severance program offered to U.S.
based employees intended to facilitate the implementation of the activity-
based restructuring initiative by decreasing the number of involuntary
separations that may otherwise be required once the organizational design
phase of the activity-based restructuring initiative is completed. As a result
of the voluntary program, 138 U.S. based employees voluntarily elected to
terminate their employment. Based on the results of the voluntary program and
on the current status of the activity-based restructuring initiative, we
estimate that we will involuntary terminate at least 10% of our 5,200 person
worldwide workforce. As a result of this initiative, we expect to achieve
annual pre-tax savings of approximately $50.0 million, a portion of which will
be realized in the fourth quarter of 2004 as a result of terminations that
occurred in 2004, with the full benefit realized in 2005. To achieve these
savings, we expect to incur one-time restructuring charges that we believe
will not exceed $50 million. It is expected that the bulk of the savings will
come from streamlining our organization and our work processes. During the
third quarter 2004, we recorded a pre-tax charge of $40.2 million, primarily
for voluntary and involuntary severance costs.
APPOINTMENT OF EXECUTIVE VICE PRESIDENT, CROP PROTECTION
On November 10, 2004, we announced the appointment of Marcus Meadows-Smith
to the position of executive vice president, Crop Protection, effective
January 1, 2005, upon the retirement of incumbent Al Ingulli.
INCORPORATION AND PRINCIPAL EXECUTIVE OFFICES
We were incorporated in Delaware in 1999, following the merger of Crompton &
Knowles Corporation and Witco Coporation. Our principal executive offices are
located at 199 Benson Road, Middlebury, Connecticut 06749 and our telephone
number at that address is (203) 573-2000. Our website is located at
www.cromptoncorp.com. The information on our website is not part of this
prospectus.
3
SUMMARY DESCRIPTION OF THE EXCHANGE OFFER
Old Notes . . . . . . . . . . . . . . . . . . . . . . $375,000,000 principal
amount of 9 7/8% Senior
Notes due 2012,
$225,000,000 principal
amount of Senior
Floating Rate Notes due
2010, each of which have
been unconditionally
guaranteed by most of
our domestic
subsidiaries.
New Notes . . . . . . . . . . . . . . . . . . . . . . $375,000,000 principal
amount of 9 7/8% Senior
Notes due 2012,
$225,000,000 principal
amount of Senior
Floating Rate Notes due
2010, each of which have
been unconditionally
guaranteed by most of
our domestic
subsidiaries, the
issuance of which has
been registered under
the Securities Act of
1933. The form and terms
of the new notes are
identical in all
material respects to
those of the old notes,
except that the transfer
restrictions and
registration rights
relating to the old
notes do not apply to
the new notes.
Exchange Offer. . . . . . . . . . . . . . . . . . . . We are offering to issue
up to $375,000,000
principal amount of new
senior notes and related
subsidiary gurarantees
and $225,000,000
principal amount of new
floating rate notes and
related subsidiary
gurarantees, in exchange
for a like principal
amount of the old senior
notes and related
subsidiary gurarantees
and old floating rate
notes and related
subsidiary gurarantees,
to satisfy our
obligations under the
registration rights
agreement that we
entered into when the
old notes were issued in
transactions in reliance
upon the exemption from
registration provided by
Rule 144A and Regulation
S of the Securities Act.
Expiration Date; Tenders. . . . . . . . . . . . . . . The exchange offer will
expire at 5:00 p.m.,
New York City time,
on February 22, 2005,
unless extended in our
sole and absolute
discretion. We refer to
this as the "expiration
date." By tendering your
old notes, you represent
to us that:
o any new notes you
receive in the
exchange offer are
being acquired by
you in the ordinary
course of your
business;
o at the time of
commencement of the
exchange offer,
neither you nor
anyone receiving
new notes from you,
has any arrangement
or understanding
with any person to
participate in the
distribution, as
defined in the
Securities Act, of
the new notes in
violation of the
Securities Act;
o you are not our
"affiliate," as
defined in Rule 405
under the
Securities Act;
4
o you are holding old
notes that have, or
are reasonably
likely to have, the
status of an unsold
allotment in the
initial offering;
o if you are not a
participating
broker-dealer, you
are not engaged in,
and do not intend
to engage in, a
distribution of the
new notes, as
defined in the
Securities Act; and
o if you are a
broker-dealer, you
will receive the
new notes for your
own account in
exchange for old
notes that were
acquired by you as
a result of your
market-making or
other trading
activities and that
you will deliver a
prospectus in
connection with any
resale of the new
notes you receive.
For further
information
regarding resales
of the new notes by
participating
broker-dealers, see
the discussion
under the caption
"Plan of
Distribution."
Withdrawal; Non-Acceptance. . . . . . . . . . . . . . You may withdraw any old
notes tendered in the
exchange offer at any
time prior to 5:00 p.m.,
New York City time,
on February 22, 2005.
If we decide for any
reason not to accept any
old notes tendered for
exchange, any withdrawn
or unaccepted old notes
will be credited to the
tendering holder's
account at The Depository
Trust Company, or DTC.
For further information
regarding the withdrawal
of tendered old notes,
see the "The Exchange
Offer -- Terms of the
Exchange Offer; Period
for Tendering Old Notes"
and the "The Exchange
Offer -- Withdrawal
Rights."
Conditions to the Exchange Offer. . . . . . . . . . . The exchange offer is
subject to customary
conditions, which we may
waive. See the
discussion below under
the caption "The
Exchange Offer --
Conditions to the
Exchange Offer" for more
information regarding
the conditions to the
exchange offer.
Procedures for Tendering Old Notes. . . . . . . . . . Except as described in
the section titled "The
Exchange Offer --
Procedures for Tendering
Old Notes", a tendering
holder must, on or prior
to the expiration date
transmit an agent's
message to the exchange
agent at the address
listed in this
prospectus. In order for
your tender to be
considered valid, the
exchange agent must
receive a confirmation
of book entry transfer
of your old notes into
the exchange agent's
account at DTC prior to
the expiration or
termination of the
exchange offer.
Special Procedures for Beneficial Owners. . . . . . . If you are a beneficial
owner whose old notes
are registered in the
name of the broker,
dealer, commercial bank,
trust company or other
nominee
5
and you wish to tender
your old notes in the
exchange offer, you
should promptly contact
the person in whose name
the old notes are
registered and instruct
that person to tender on
your behalf. Any
registered holder that
is a participant in
DTC's book-entry
transfer facility system
may make book-entry
delivery of the old
notes by causing DTC to
transfer the old notes
into the exchange
agent's account.
Material Federal Income Tax
Considerations . . . . . . . . . . . . . . . . . . . The exchange of the old
notes for new notes in
the exchange offer will
not be a taxable
transaction for United
States federal income
tax purposes. See the
discussion under the
caption "Material United
States Federal Income
Tax Considerations" for
more information
regarding the tax
consequences to you of
the exchange offer.
Use of Proceeds . . . . . . . . . . . . . . . . . . . We will not receive any
proceeds from the
exchange offer.
Exchange Agent. . . . . . . . . . . . . . . . . . . . Deutsche Bank Trust
Company Americas is the
exchange agent for the
exchange offer. You can
find the address and
telephone number of the
exchange agent below
under the caption "The
Exchange Offer --
Exchange Agent."
Resales . . . . . . . . . . . . . . . . . . . . . . . Based on interpretations
by the staff of the SEC,
as set forth in no
action letters issued to
third parties, we
believe that the new
notes you receive in the
exchange offer may be
offered for resale,
resold or otherwise
transferred without
compliance with the
registration and
prospectus delivery
provisions of the
Securities Act. However,
you will not be able to
freely transfer the new
notes if:
o you are our
"affiliate," as
defined in Rule 405
under the
Securities Act;
o you are not
acquiring the new
notes in the
exchange offer in
the ordinary course
of your business;
o you have an
arrangement or
understanding with
any person to
participate in the
distribution, as
defined in the
Securities Act, of
the new notes, you
will receive in the
exchange offer;
o you are a
participating
broker-dealer that
received new notes
for its own account
in the exchange
offer in exchange
for old notes that
were acquired as a
result of market
making or other
trading activities;
or
6
o you are holding old
notes that have, or
are reasonably
likely to have, the
status of an unsold
allotment in the
initial offering.
If you fall within one
of the exceptions listed
above, you must comply
with the registration
and prospectus delivery
requirements of the
Securities Act in
connection with any
resale transaction
involving the new notes.
See the discussion below
under the caption "The
Exchange Offer --
Procedures for Tendering
Old Notes" for more
information.
Broker-Dealer . . . . . . . . . . . . . . . . . . . . Each broker-dealer that
receives new notes for
its own account pursuant
to the exchange offer
must acknowledge that it
will deliver a
prospectus in connection
with any resale of new
notes. By so
acknowledging and
delivering a prospectus,
a broker-dealer will not
be deemed to admit that
it is an "underwriter"
within the meaning of
the Securities Act. This
prospectus, as it may be
amended or supplemented
from time to time, may
be used by a broker-
dealer in connection
with resales of new
notes received in
exchange for old notes
which were received by
such broker-dealer as a
result of market making
activities or other
trading activities. We
have agreed that for a
period of up to 90 days
after the expiration
date, as defined in this
prospectus, we will make
this prospectus
available to any broker-
dealer for use in
connection with any such
resale. See "Plan of
Distribution" for more
information.
Registration Rights Agreement . . . . . . . . . . . . When we issued the old
notes in August 2004, we
entered into a
registration rights
agreement with the
initial purchasers of
the old notes. Under the
terms of the
registration rights
agreement, we agreed to
file with the SEC and
cause to become
effective, a
registration statement
relating to an offer to
exchange the old notes
for the new notes.
If we do not complete
the exchange offer
before April 16, 2005,
the interest rate borne
by the old notes will be
increased at a rate of
0.25% per annum every 90
days (but shall not
exceed 1.0% per annum)
until the exchange offer
is completed, or until
the old notes are freely
transferable under Rule
144 of the Securities
Act.
Under some circumstances
set forth in the
registration rights
agreement, holders of
old notes, including
holders who are not
permitted to participate
in the exchange offer or
who may not freely sell
new notes received in
the exchange offer, may
require us to file and
cause to become
7
effective, a shelf
registration statement
covering resales of the
old notes by these
holders.
A copy of the
registration rights
agreement is
incorporated by
reference as an exhibit
to the registration
statement of which this
prospectus is a part.
See "Description of the
New Notes --
Registration Rights and
Additional Interest."
8
CONSEQUENCES OF NOT EXCHANGING OLD NOTES
If you do not exchange your old notes in the exchange offer, your old notes
will continue to be subject to the restrictions on transfer described in the
legend on the certificate for your old notes. In general, you may offer or
sell your old notes only:
o if they are registered under the Securities Act and applicable state
securities laws;
o if they are offered or sold under an exemption from registration under
the Securities Act and applicable state securities laws; or
o if they are offered or sold in a transaction not subject to the
Securities Act and applicable state securities laws.
We do not currently intend to register the old notes under the Securities
Act. Under some circumstances, however, holders of the old notes, including
holders who are not permitted to participate in the exchange offer or who may
not freely resell new notes received in the exchange offer, may require us to
file, and to cause to become effective, a shelf registration statement
covering resales of old notes by these holders. For more information regarding
the consequences of not tendering your old notes and our obligation to file a
shelf registration statement, see "The Exchange Offer -- Consequences of
Exchanging or Failing to Exchange Old Notes."
9
SUMMARY DESCRIPTION OF THE NEW NOTES
The summary below describes the principal terms of the new notes. Certain of
the terms and conditions described below are subject to important limitations
and exceptions. The "Description of the New Notes" section of this prospectus
contains a more detailed description of the terms and conditions of the new
notes.
Issuer. . . . . . . . . . . . . . . . . . . . . . . . Crompton Corporation.
Securities. . . . . . . . . . . . . . . . . . . . . . Up to $375,000,000
aggregate principal
amount of 9 7/8% Senior
Notes due 2012, and up
to $225,000,000
aggregate principal
amount of Senior
Floating Rate Notes due
2010.
Maturity. . . . . . . . . . . . . . . . . . . . . . . The new senior notes
will mature on August 1,
2012.
The new floating rate
notes will mature on
August 1, 2010.
Interest Rate.. . . . . . . . . . . . . . . . . . . . The new senior notes
will bear interest at a
rate of 9 7/8% per
annum.
The new floating rate
notes will bear interest
at a rate per annum
equal to LIBOR plus
5.75%. Interest on the
new floating rate notes
will be reset quarterly.
Interest Payment Dates. . . . . . . . . . . . . . . . We will pay interest on
the new notes on August
1 and February 1,
commencing August 1,
2005. Interest on the
new notes will accrue
from the date of the last
interest payment made to
holders of the old notes,
and if none, from August
16, 2004.
Ranking.. . . . . . . . . . . . . . . . . . . . . . . The new notes will be
our senior unsecured
obligations and will
rank equally with all of
our existing and future
senior unsecured debt
and senior to our future
subordinated debt. The
new notes will be
effectively subordinated
to any existing or
future secured
indebtedness, including
our new Revolving Credit
Facility, and our 7.75%
Debentures due 2023 and
6.875% Debentures due
2026 to the extent of
the assets securing such
debt and structurally
subordinated to any debt
or other liabilities of
our subsidiaries which
are not guarantors.
Guarantees. . . . . . . . . . . . . . . . . . . . . . Most of our wholly-owned
domestic subsidiaries
unconditionally
guarantee the new notes.
Optional Redemption.. . . . . . . . . . . . . . . . . Except as set forth
below, we cannot redeem
the new senior notes
until August 1, 2008,
and the new floating
rate notes until August
1, 2007. Thereafter, in
each case, we may redeem
some or all of the new
notes at the redemption
prices listed in the
"Description of the New
Notes" section under the
heading "Optional
Redemption," plus
accrued interest to the
date of redemption.
10
We may redeem the new
senior notes at any time
prior to August 1, 2008,
and the new floating
rate notes at any time
prior to August 1, 2007,
at a specified "make-
whole" premium.
Optional Redemption
After Equity Offerings . . . . . . . . . . . . . . . At any time (i) prior to
August 1, 2007, we may
redeem up to 35% of the
aggregate principal
amount of the new senior
notes outstanding at a
redemption price equal
to 109.875% of the
principal amount thereof
and (ii) prior to August
1, 2007, we may redeem
up to 35% of the
aggregate principal
amount of the new
floating rate notes
outstanding at a
redemption price equal
to 100% of the principal
amount thereof plus a
premium equal to the
rate per annum on the
new floating rate notes
applicable on the date
on which notice of
redemption is given,
with money that we raise
in one or more equity
offerings, as long as:
o we redeem the
applicable notes
within 180 days of
completing the
equity offering;
and
o at least 65% of the
aggregate principal
amount of the new
notes issued of the
applicable series
remains outstanding
after the
redemption of the
applicable notes.
Change of Control Offer.. . . . . . . . . . . . . . . If a change in control
occurs, we must give
holders of the new notes
the opportunity to sell
us their notes at 101%
of their face amount,
plus accrued interest.
We might not be able to
pay you the required
price for new notes you
present to us at the
time of a change of
control, because:
o we might not have
enough funds at
that time; or
o the terms of our
other indebtedness
may prevent us from
making such
payment.
Asset Sale Proceeds.. . . . . . . . . . . . . . . . . If we or our
subsidiaries engage in
certain asset sales, we
generally must either
invest the net cash
proceeds from such sales
in our business within a
period of time, prepay
senior debt or make an
offer to purchase a
principal amount of the
new notes equal to the
excess net cash
proceeds. However, we
may, under certain
circumstances, use the
proceeds of certain
asset sales towards the
payment of litigation
settlements and/or
judgments and related
liabilities, and pension
related liabilities. The
purchase price of the
new notes will be 100%
of their principal
amount, plus accrued
interest.
11
Certain Indenture Provisions. . . . . . . . . . . . . The new notes are
governed by the same
indentures as those
governing the old notes,
and contain covenants
limiting our (and most
or all of our
subsidiaries') ability
to:
o incur additional
debt;
o pay dividends or
distributions on
our capital stock
or repurchase our
capital stock;
o issue stock of
subsidiaries;
o make certain
investments;
o create liens on our
assets to secure
debt;
o enter into
transactions with
affiliates;
o merge or
consolidate with
another company;
and
o transfer and sell
assets.
These covenants are
subject to a number of
important limitations
and exceptions. In
addition, during any
period that a series of
new notes are assigned
an investment grade
rating by Standard &
Poor's and Moody's
Investment Service,
Inc., our obligation to
comply with some of
those covenants with
respect to such series
of notes will be
suspended.
Risk Factors. . . . . . . . . . . . . . . . . . . . . Investing in the new
notes involves
substantial risks. See
"Risk Factors" for a
description of certain
of the risks you should
consider before
investing in the new
notes.
12
RISK FACTORS
Participating in the exchange offer involves a number of risks. You should
carefully consider all of the risks described below, together with the other
information contained or incorporated by reference in this prospectus. Any of
the events or circumstances described as risks below could result in a
significant or material adverse effect on our business, results of operations
or financial condition, and a corresponding decline in the market price of, or
our ability to repay, the new notes.
RISKS RELATING TO OUR BUSINESS
SIGNIFICANT INCREASES IN THE PRICES OF OUR RAW MATERIALS AND ENERGY HAVE
INCREASED OUR OPERATING EXPENSES.
We purchase large amounts of raw materials and energy for our businesses.
The costs of these materials, in the aggregate, represent a substantial
portion of our operating expenses. The prices and availability of these raw
materials vary with market conditions and may be highly volatile. In 2003 and
during the nine months ended September 30, 2004, our raw material and energy
costs increased approximately $63 million and $60 million, respectively. Over
the past few years, we have experienced significant cost increases in our
purchases of petrochemicals, tin, soybean oil, other raw materials and our
primary energy source, natural gas. The business segments most significantly
impacted by these cost increases are polymer additives, polymers and refined
products. While we may attempt to match our raw material price increases with
corresponding product price increases, we may not be able to immediately raise
product prices, if at all. For the year-ended December 31, 2003, our selling
prices decreased by approximately $14 million, whereas we have increased
selling prices by approximately $42 million during the nine months ended
September 30, 2004. Ultimately, our ability to pass on increases in the cost
of raw materials to our customers is greatly dependent upon market conditions.
There have been in the past, and will likely be in the future, periods of time
during which we are unable to pass raw material price increases on to our
customers, in whole or in part. This may increase our operating expenses and
negatively affect our results of operations.
SIGNIFICANT COMPETITION MAY FORCE US TO REDUCE PRICES, WHICH MAY ADVERSELY
IMPACT OUR RESULTS OF OPERATIONS.
We face significant competition in the markets in which we operate. Although
competition in specialty chemicals is based upon a number of considerations,
such as product innovation, product range and quality, relationships with
customers, reliability of delivery, technical support, and distribution
capability, price competition does exist in our operating markets due to
factors such as industry overcapacity and low-cost competition. As a result of
the trends toward global expansion and consolidation by competitors, we
anticipate that we will continue to face new competitive challenges as well as
additional risks inherent in international operations in developing regions.
We also expect increased competition from the further use and introduction of
generic and alternative products by our competitors. This increased
competition could cause us to reduce our prices and take other steps to
compete effectively, which could negatively affect our results of operations.
In addition, even if we raise our prices, our competitors' reactions to such
price increases could cause us to reevaluate and perhaps reverse such price
increases. For the year-ended December 31, 2003, our selling prices decreased
by approximately $14 million, whereas we have increased selling prices by
approximately $42 million during the nine months ended September 30, 2004.
13
THE CYCLICALITY OF THE CHEMICAL INDUSTRY MAY CAUSE SIGNIFICANT FLUCTUATIONS IN
OUR OPERATING RESULTS AND CASH FLOW.
Our historical operating results reflect the cyclical and volatile nature of
the supply and demand balance of the chemical industry. The chemical industry
has experienced alternating periods of inadequate capacity and tight supply,
allowing prices and profit margins to increase, followed by periods when
substantial capacity is added, resulting in oversupply, declining capacity and
utilization rates, and declining prices and profit margins. The cyclicality of
the markets in which we operate, such as EPDM, may result in volatile
operating results and cash flow over the business cycle. Currently, we believe
there is over-capacity in rubber chemicals and some excess capacity in vinyl
additives. Future growth in product demand may not be sufficient to utilize
current, or additional capacity. Excess industry capacity has depressed and
may continue to depress our volumes and margins on some products. As a result
of excess industry capacity, rising energy costs, and rising raw materials
costs, our operating results may be volatile. During 2003, our operating
results reflected increased sales volume of approximately $4 million,
increased raw material and energy costs of approximately $63 million and a
decrease in selling prices of approximately $14 million, compared to $30
million of increased sales volume, approximately $60 million of increased raw
material and energy costs and increased selling prices of approximately $42
million during the first nine months of 2004.
ANY DISRUPTION IN THE AVAILABILITY OR PRICE, OR DETERIORATION IN THE QUALITY,
OF THE RAW MATERIALS AVAILABLE FOR OUR PRODUCTS MAY HAVE A MATERIAL ADVERSE
EFFECT ON OUR RESULTS OF OPERATIONS.
Chemicals, steel, castings, parts, machine components, and other raw
materials required in the manufacture of our products are generally available
from a number of sources, some of which are foreign. We use significant
amounts of petrochemical feedstocks in many of our chemical manufacturing
processes. We are not dependent on any one supplier for a material amount of
our raw material requirements, except for one supplier who provides us with
approximately 8 to 10% of diverse raw materials sourced from the supplier's
multiple manufacturing/processing locations. While raw materials are currently
available, temporary shortages of raw materials used by our businesses may
occur occasionally. Additionally, their continuing availability and price are
subject to domestic and world market and political conditions and regulations.
Disruptions in these markets or changes in political conditions or regulations
could affect our ability to procure raw materials on a cost-efficient basis.
CHANGES IN OUR SALES STRATEGY MAY IMPACT OUR RESULTS OF OPERATIONS AND OUR
ABILITY TO SERVICE OUR CUSTOMERS.
We are planning to utilize third-party distributors for sales and service to
some customers who purchase small annual quantities of our products. We
believe this action will lower our costs to serve smaller customers, thus
enhancing profitability, and reduce our investment in inventory. However, it
is possible that changing our sales strategy with respect to these customers
could result in the loss of some sales to some customers or some disruption in
selling and in inventory management during the transition.
CURRENT AND FUTURE LITIGATION, GOVERNMENT INVESTIGATIONS AND ADMINISTRATIVE
CLAIMS, INCLUDING ANTITRUST-RELATED GOVERNMENTAL INVESTIGATIONS AND LAWSUITS,
COULD HARM OUR FINANCIAL CONDITION, RESULTS OF OPERATIONS AND CASH FLOWS.
We are currently involved in a number of governmental investigations,
administrative claims, and civil lawsuits, which number could increase in the
future. In particular, we are subject to certain antitrust governmental
investigations and civil lawsuits relating to the sale and marketing of
certain of our products, including rubber chemicals, EPDM, urethanes and
urethane chemicals, nitrite rubber and plastic additives. We have incurred and
may continue to incur significant expense in connection with the antitrust-
related matters, including
14
expenses related to our cooperation with governmental authorities and defense
of the related civil lawsuits.
On May 27, 2004, we pled guilty and were fined $50.0 million in connection
with an antitrust investigation by the DOJ related to rubber chemicals. On May
28, 2004, we pled guilty and were fined CDN $9.0 million (approximately U.S.
$7.0 million) in connection with an antitrust investigation by the Canadian
Commissioner of Competition involving rubber chemicals. We recorded pre-tax
charges of $77.7 million for antitrust related costs in our consolidated
statement of operations at December 31, 2003. This amount included a
$45.2 million charge to reserve for the payment of these U.S. and Canadian
fines, which represented the present value of the total of $57.0 million in
payments, which are payable in six annual installments beginning in 2004.
We and certain of our subsidiaries continue to be the subject of a
coordinated civil investigation by the European Commission ("EC") with respect
to the sale and marketing of rubber chemicals. We are not able to predict the
timing or outcome of this investigation, including the amount of any fine that
may be imposed by the EC. In addition, we, certain of our subsidiaries and
certain of our former officers and existing directors are defendants in
certain U.S. federal direct purchaser and state direct and indirect purchaser
lawsuits, a federal securities class action lawsuit and a shareholder
derivative lawsuit, each relating to certain alleged antitrust violations.
Additionally, we, certain of our subsidiaries and other companies are
defendants in two motions for authorization to institute a class action filed
in Quebec, Canada relating to purchases of rubber chemicals and a statement of
claim filed in Ontario, Canada relating to purchases of EPDM, in each case
alleging certain Canadian antitrust violations. While we will seek cost-
effective resolutions to the various pending and threatened legal proceedings
regarding our operations, we cannot predict their outcome. The resolution of
the EC investigation and any civil claims now pending or hereafter asserted
against us or any of our subsidiaries could require us to pay substantial
fines and/or damages, which could have a material adverse effect on our
financial condition, results of operations, and cash flows.
We are also involved in several significant lawsuits and claims relating to
environmental matters. In addition, we are routinely subject to other civil
claims, litigation and arbitration, and regulatory investigations, arising in
the ordinary course of our present business as well as in respect of our
divested businesses. Some of these claims and litigations relate to product
liability claims, including claims related to our current products and
asbestos-related claims concerning premises and historic products of our
corporate affiliates and predecessors. These claims have not had a material
impact on us to date. We believe that we have strong defenses to these claims
and the likelihood that a future material adverse outcome will result from
these claims is remote. However, an adverse outcome of one or more of these
claims could have a material adverse effect on our business or results of
operations.
For further information regarding the governmental investigations,
administrative claims and civil lawsuits to which we are subject, see "Legal
Proceedings" in our annual report on Form 10-K for the year ended December 31,
2003, and quarterly reports on Form 10-Q for the quarters ended March 31,
2004, June 30, 2004, and September 30, 2004, as well as our other public
filings with the SEC incorporated by reference into this prospectus.
ENVIRONMENTAL, HEALTH, AND SAFETY REGULATION MATTERS COULD HAVE A SUBSTANTIAL
NEGATIVE IMPACT ON OUR BUSINESS.
We are subject to extensive federal, state, local and foreign environmental,
safety and health laws, and regulations concerning, among other things,
emissions to the air, discharges to land and water, and the generation,
handling, treatment, and disposal of hazardous waste and other materials. Our
operations entail the risk of violations of those laws and regulations, many
of which provide for substantial fines and criminal sanctions for violations
such as
15
clean-up costs, costs of waste disposal, and payments for property damage and
personal injury. Although it is our policy to comply with such laws and
regulations, it is possible that we have not been or may be not at all times
in compliance with all of these requirements.
In addition, these requirements, and enforcement of these requirements, may
become more stringent in the future. The ultimate cost of compliance with any
such requirements could be material. Non-compliance could subject us to
material liabilities, such as government fines or orders, third-party
lawsuits, remediations, and settlements, or the suspension of non-compliant
operations. We may also be required to make significant site or operational
modifications at substantial cost. Future developments could also restrict or
eliminate the use of or require us to make modifications to our products,
packaging, manufacturing processes and technology, which could have a
significant negative impact on our cash flow and results of operations.
At any given time, we are involved in claims, litigation, administrative
proceedings, settlements, and investigations of various types in a number of
jurisdictions involving potential environmental liabilities, including clean-
up costs associated with hazardous waste disposal sites, natural resource
damages, property damage, personal injury, and regulatory compliance or
noncompliance. We evaluate and review estimates for future remediation and
operation and management costs directly related to remediation, to determine
appropriate environmental reserve amounts. For each site, a determination is
made of the specific measures that are believed to be required to remediate
the site, the estimated total cost to carry out the remediation plan, the
portion of the total remediation costs to be borne by us, and the anticipated
time frame over which payments toward the remediation plan will occur. The
resolution of these environmental matters could have a material adverse effect
on our results of operations or cash flow.
OUR PRODUCTION FACILITIES ARE SUBJECT TO OPERATING RISKS THAT MAY ADVERSELY
AFFECT OUR OPERATIONS.
We are dependent on the continued operation of our production facilities.
Our production facilities are subject to hazards associated with the
manufacturing, handling, storage, and transportation of chemical materials and
products, including pipeline leaks and ruptures, explosions, fires, inclement
weather and natural disasters, mechanical failure, unscheduled downtime, labor
difficulties, transportation interruptions, remediation complications,
chemical spills, discharges or releases of toxic or hazardous substances or
gases, storage tank leaks, and other environmental risks. These hazards can
cause personal injury and loss of life, severe damage to, or destruction of,
property and equipment and environmental damage, fines, and liabilities and
could have a material adverse effect on our business, financial condition, or
results of operations.
WE ARE AN INTERNATIONAL COMPANY AND ARE EXPOSED TO RISKS IN THE COUNTRIES IN
WHICH WE HAVE SIGNIFICANT OPERATIONS OR INTERESTS.
We are dependent, in large part, on the economies of the countries in which
we manufacture and market our products. Of our 2003 net sales, 53% were to
customers in the U.S. and Canada, 27% to Europe and Africa, 13% to Asia/
Pacific, and 7% to Latin America. Our net property, plant and equipment at
December 31, 2003 was located 67% in the U.S. and Canada, 29% in Europe and
Africa, 3% in Asia/Pacific and 1% in Latin America. The economies of the
countries in these areas are in different stages of socioeconomic development.
Consequently, we are exposed to risks from changes in foreign currency
exchange rates, interest rates, inflation, governmental spending, social
instability and other political, economic or social developments that may
materially reduce our net income. We may also face difficulties managing and
administering an internationally dispersed business. In particular, the
management of our personnel across offices in several countries can present
logistical and managerial challenges. Additionally, international operations
present challenges related to
16
operating under different business cultures and languages; we may have to
comply with unexpected changes in foreign laws and regulatory requirements
which could negatively impact our operations and ability to manage our global
financial resources; export controls or other regulatory restrictions could
prevent us from shipping our products into and from some markets; we may not
be able to adequately protect our trademarks and other intellectual property
overseas due to uncertainty of laws and enforcement in a number of countries
relating to the protection of intellectual property rights; and changes in tax
regulation and international tax treaties could significantly reduce the
financial performance of our foreign operations or the magnitude of their
contributions to our overall financial performance.
OUR RESULTS OF OPERATIONS ARE SUBJECT TO EXCHANGE RATE AND OTHER CURRENCY
RISKS.
A significant portion of our business is conducted in currencies other than
the U.S. dollar, which is our reporting currency. We recognize foreign
currency gains or losses arising from our operations in the period incurred.
As a result, currency fluctuations among the U.S. dollar and the currencies in
which we do business have caused and will continue to cause foreign currency
transaction gains and losses, which could be material. The foreign currency
impact on our pre-tax earnings (loss) for the year ended December 31, 2003 and
the nine months ended September 30, 2004 was a loss of $1.6 million and a loss
of $0.9 million, respectively. The foreign currency impact on our net sales
for the year ended December 31, 2003 and the nine months ended September 30,
2004 were gains of $85 million and $46.5 million, respectively. We cannot
predict the effects of exchange rate fluctuations upon our future operating
results because of the number of currencies involved, the variability of
currency exposures, and the potential volatility of currency exchange rates.
We take actions to manage our balance sheet foreign currency exposure, such as
entering into hedging arrangements designed to limit our exposure to potential
currency exchange rate volatility and projected profit and loss exposures,
where available, but our strategies may not adequately protect our operating
results from the effects of exchange rate fluctuations.
We also face risks arising from the imposition of exchange controls and
currency devaluations. Exchange controls may limit our ability to convert
foreign currencies into U.S. dollars or to remit dividends and other payments
by our foreign subsidiaries or businesses located in or conducted within a
country imposing controls. Currency devaluations result in diminished value of
funds denominated in the currency of the country instituting a devaluation.
Actions of this nature could adversely affect our earnings or cash flow.
WE HAVE UNFUNDED PENSION PLANS AND POST-RETIREMENT HEALTH CARE PLANS, WHICH
COULD RESULT IN CLAIMS AGAINST OUR ASSETS.
We have substantial unfunded obligations under our domestic tax-qualified
defined benefit pension plans, totaling approximately $155.0 million on a
projected benefit obligation basis as of December 31, 2003. A significant
decline in the value of plan investments in the future or unfavorable changes
in laws or regulations that govern pension plan funding could materially
change the timing and amount of required pension funding. We also sponsor
foreign and non-qualified pension plans under which we have substantial
unfunded liabilities, totaling approximately $181.8 million on a projected
benefit obligation basis as of December 31, 2003. In addition, we sponsor
post-retirement health care plans under which we have substantial unfunded
liabilities, totaling approximately $202.9 million on a projected benefit
obligation basis as of December 31, 2003. Mandatory funding contributions with
respect to our tax-qualified pension plans and potential unfunded benefit
liability claims could have a material adverse effect on our financial
condition, results of operations and cash flows.
17
OUR BUSINESS DEPENDS UPON MANY PROPRIETARY TECHNOLOGIES, INCLUDING PATENTS AND
LICENSES. OUR COMPETITIVE POSITION COULD BE ADVERSELY AFFECTED IF WE FAIL TO
PROTECT OUR PATENTS OR OTHER INTELLECTUAL PROPERTY RIGHTS, OR IF WE BECOME
SUBJECT TO CLAIMS THAT WE ARE INFRINGING UPON THE RIGHTS OF OTHERS.
We have over 2,500 United States and foreign patents and pending
applications and have over 3,000 trademark registrations for product names
world-wide. Patents, trademarks, trade secrets in the nature of know-how,
formulations, and manufacturing techniques assist us in maintaining the
competitive position of certain of our products. Our intellectual property is
of particular importance to a number of specialty chemicals we manufacture and
sell, and patents and know-how are also significant in the manufacture of
certain wire insulating and polymer processing equipment product lines. We are
licensed to use certain patents and technology owned by other companies,
including some foreign companies, to manufacture products complementary to our
own products, for which we pay royalties in amounts not considered material,
in the aggregate, to our consolidated results. Our trademarks or the patents
we own or license may be challenged, and as a result of such challenges we
could lose our exclusive rights to our proprietary technologies, which would
adversely affect our competitive position and our results of operations.
We also rely on unpatented proprietary know-how and continuing technological
innovation and other trade secrets to develop and maintain our competitive
position. While it is our policy to enter into confidentiality agreements with
our employees and third parties to restrict the use and disclosure of our
trade secrets and proprietary know-how, those confidentiality agreements may
be breached or may not provide meaningful protection. In addition, adequate
remedies may not be available in the event of an unauthorized use or
disclosure of such trade secrets and know-how, and others could obtain
knowledge of such trade secrets through independent development or other
access by legal means. The failure of our patents, trademarks or
confidentiality agreements to protect our processes, apparatuses, technology,
trade secrets, or proprietary know-how could have a material adverse effect on
our business, financial condition, results of operations, or cash flows.
OUR PATENTS MAY NOT PROVIDE FULL PROTECTION AGAINST COMPETING MANUFACTURERS
OUTSIDE THE UNITED STATES, THE EUROPEAN UNION COUNTRIES, AND CERTAIN OTHER
DEVELOPED COUNTRIES.
In some of the countries in which we operate, such as China, the laws
protecting patent holders are significantly weaker than in the United States,
the European Union, and certain other developed countries. Weaker protection
may help competing manufacturers be or become more competitive in markets
where, but for the weaker protection, they might not otherwise be able to
introduce competing products for a number of years. We therefore tend, in
these regions, to rely more heavily upon trade secret and know-how protection,
as applicable, than we do on patents. In addition, for our crop protection
products being sold in China, we rely on regulatory protection of intellectual
property provided by regulatory agencies that may not provide us with the
protection we desire.
AN INABILITY TO REMAIN TECHNOLOGICALLY INNOVATIVE AND TO OFFER IMPROVED
PRODUCTS AND SERVICES IN A COST-EFFECTIVE MANNER COULD NEGATIVELY IMPACT OUR
OPERATING RESULTS.
Our operating results are influenced in part by our ability to introduce new
products and services that offer distinct value to our customers. For example,
our Crop Protection business seeks to provide tailored products for our
customers' often unique problems, which requires an ongoing level of
innovation. In many of the markets where we sell our products, the products
are subject to a traditional product life cycle. We devote significant human
and financial resources to develop new technologically advanced products and
services and we may not be successful in our research and development efforts.
18
CONVERGENCE OF OUR INFORMATION SYSTEMS COULD HAVE ADVERSE EFFECTS.
We are in the process of converging our two separate SAP systems into one
standard platform in order to standardize our data and create efficiencies in
processing information. The transition from two SAP platforms to one standard
system could adversely affect our systems, our operations and the timeliness
with which we report our operating results.
OUR CREDIT RATINGS ARE BELOW INVESTMENT GRADE AND IF WE FAIL TO IMPROVE OUR
RESULTS OF OPERATIONS, OUR CREDIT RATINGS AND OUR NEW REVOLVING CREDIT
FACILITY COULD BE ADVERSELY AFFECTED.
The credit rating agencies have indicated that our cash flow from operations
must improve in order to maintain our current ratings. A reduction in our
ratings could make it very difficult for us to borrow in the capital markets.
In addition, our new Revolving Credit Facility requires us to meet certain
financial tests. If our earnings and cash flow do not improve in 2005, we
could have difficulty meeting our financial covenants, which would limit our
ability to borrow under our new Revolving Credit Facility, and could result in
the acceleration of our obligations under that facility.
THE RESULTS OF OUR CROP PROTECTION BUSINESS ARE DEPENDENT ON WEATHER, DISEASE,
AND PEST CONDITIONS AND CAN BE AFFECTED BY LOCAL AND REGIONAL ECONOMIC
CIRCUMSTANCES.
Sales volumes of our Crop Protection business, as with all agricultural
products, are subject to the sector's dependency on weather, disease, and pest
infestation conditions. Adverse conditions in a particular region could
materially adversely affect our Crop Protection business. Demand for crop
protection products is also influenced by the agricultural policies of
governments and regulatory authorities particularly in developing countries in
regions where we do business, such as in Asia and Latin America. Changes in
governmental policies or product registration requirements could have an
adverse impact on our ability to market and sell our products. Also, crop
protection products typically are sold pursuant to contracts with extended
payment terms in Latin America and Europe. Extended payment periods make our
Crop Protection business susceptible to losses from receivables during
economic crises and may adversely affect our operating results.
OUR POLYMER PROCESSING EQUIPMENT BUSINESS IS DEPENDENT ON BACKLOGS AND
CUSTOMER CAPITAL SPENDING CYCLES.
Backlog represents undelivered products or services that our customers have
contractually committed to purchase from us. Because machinery production
schedules range from about 60 days to 10 months, backlog is significant to our
Polymer Processing Equipment (Davis-Standard) business. Our backlog of
customer orders for this business at September 30, 2004 and December 31, 2003
was approximately $87.0 million and $62.0 million, respectively. While
approximately 87% of our 2003 backlog has been shipped as of September 30,
2004, cancellations of purchase orders, though infrequent, could substantially
reduce backlog and consequently, future revenues. Our failure to replace
cancelled or reduced backlog could result in lower revenues. In addition,
because these products represent major capital expenditures for many of our
customers, revenues and profits for this business are highly cyclical and are
still weak following a severe decline that began with the U.S. recession in
2000.
WE MAY FAIL TO REALIZE THE COST SAVINGS AND OTHER BENEFITS THAT WE EXPECT FROM
OUR COST REDUCTIONS AND SIX SIGMA INITIATIVES.
In July 2004, we announced an activity-based restructuring initiative
intended to structure our operations in a more effective manner and yield
expected cost savings. In July 2003, we announced a cost reduction program,
which includes expected savings from Six Sigma and other initiatives. We
practice Six Sigma throughout our company to increase efficiency and
19
capacity and to reduce waste. As a result of our efforts, we have realized and
expect to realize additional cost reductions. We may not realize additional
cost savings or other benefits, and even if we realize the benefits of our
cost saving initiatives, any cash savings that we achieve may be offset by
pressures from our customers to reduce prices or by higher raw material and
other costs. Our failure to realize the anticipated benefits of our cost
reductions and Six Sigma initiatives could have a material adverse effect on
our business, results of operations, and financial condition.
WE ARE DEPENDENT UPON A TRAINED, DEDICATED SALES FORCE, THE LOSS OF WHICH
COULD MATERIALLY AFFECT OUR OPERATIONS.
Our products, including our polymer additives, polymers, polymer processing
equipment, crop protection, and refined products are sold and supported
through dedicated staff and specifically trained personnel. Approximately 800
of our employees are engaged in sales and marketing. The loss of this sales
force due to market or other conditions could affect our ability to sell and
support our products effectively, which could have an adverse effect on our
results of operations.
CHANGES IN OUR MANAGEMENT AND STAFFING COULD CREATE DISRUPTION. THIS COULD
HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS AND OUR RESULTS OF OPERATIONS,
FINANCIAL CONDITION AND CASH FLOWS.
We have made significant changes to our senior management this year. While
our management team has considerable experience in the chemical industry and
in other manufacturing sectors, these changes could result in risks to our
business since the new management has not had prior experience at our company.
In addition, the activity-based restructuring initiative and the voluntary
severance programs initiated this year are expected to result in a reduction
of at least ten percent (10%) of our worldwide workforce. While this
initiative is intended to reduce our costs and increase our profitability,
these major headcount reductions could adversely affect our ability to operate
key staff functions effectively. Consequently, our results of operations,
financial condition and cash flows may be adversely affected.
TERRORIST ATTACKS, THE CURRENT MILITARY ACTION IN IRAQ, GENERAL INSTABILITY IN
THE MIDDLE EAST AND OTHER ATTACKS OR ACTS OF WAR IN THE UNITED STATES AND
ABROAD MAY ADVERSELY AFFECT THE MARKETS IN WHICH WE OPERATE, OUR OPERATIONS
AND OUR PROFITABILITY.
The attacks of September 11, 2001 and subsequent events, including the
current military action in Iraq, have caused political and financial
instability in the United States and other markets and have led to, and may
continue to lead to, further armed hostilities, prolonged military action in
Iraq, or further acts of terrorism in the United States or abroad, which could
cause further instability in financial markets and reduced consumer
confidence. The threat of terrorist attacks, the current military action in
Iraq, and other related developments may adversely affect economic conditions,
which may reduce demand for our products, decrease the ability of our
customers to pay on a timely basis, if at all, and diminish our ability to
sell in foreign markets. These developments would subject us to increased
risks, and depending on their magnitude, could have a material adverse effect
on our business.
20
RISKS RELATED TO THE EXCHANGE OFFER AND HOLDING THE NEW NOTES
YOU MUST COMPLY WITH THE EXCHANGE OFFER PROCEDURES IN ORDER TO RECEIVE NEW,
FREELY TRADABLE NEW NOTES.
Delivery of new notes in exchange for old notes tendered and accepted for
exchange pursuant to the exchange offer will be made only after timely receipt
by the exchange agent of a book entry confirmation of a book entry transfer of
old notes into the exchange agent's account at DTC, New York, New York as
depositary, including an Agent's Message (as defined herein). We are not
required to notify you of defects or irregularities in tenders of old notes
for exchange. Old notes that are not tendered or that are tendered but we do
not accept for exchange will, following consummation of the exchange offer,
continue to be subject to the existing transfer restrictions under the
Securities Act and, upon consummation of the exchange offer, certain
registration and other rights under the registration rights agreement will
terminate. See "The Exchange Offer -- Procedures for Tendering Old Notes" and
"The Exchange Offer -- Consequences of Exchanging or Failing to Exchange Old
Notes."
SOME HOLDERS WHO EXCHANGE THEIR OLD NOTES MAY BE DEEMED TO BE UNDERWRITERS AND
THESE HOLDERS WILL BE REQUIRED TO COMPLY WITH THE REGISTRATION AND PROSPECTUS
DELIVERY REQUIREMENTS IN CONNECTION WITH ANY RESALE TRANSACTION.
If you exchange your old notes in the exchange offer for the purpose of
participating in a distribution of the new notes, you may be deemed to have
received restricted securities and, if so, will be required to comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any resale transaction.
OUR LEVEL OF INDEBTEDNESS AND OTHER ARRANGEMENTS COULD LIMIT CASH FLOW
AVAILABLE FOR OUR OPERATIONS AND COULD ADVERSELY AFFECT OUR ABILITY TO SERVICE
OUR DEBT OR OBTAIN ADDITIONAL FINANCING, IF NECESSARY.
As of September 30, 2004, our total indebtedness was approximately
$865.5 million (of which $597.5 million consisted of the new notes, and the
balance consisted of $268.0 million of other debt). Our level of indebtedness
could restrict our operations and make it more difficult for us to satisfy our
obligations under the new notes. The indentures governing the new notes also
allow us to continue to engage in securitization transactions, and we expect
to sell up to approximately $250.0 million of our domestic and European
accounts receivable under these programs. Among other things, our substantial
indebtedness and the covenants contained therein, may:
o limit our ability to obtain additional financing for working capital,
capital expenditures, research and development, acquisitions, and general
corporate purposes;
o require us to dedicate all or a substantial portion of our cash flow to
service our debt, which will reduce funds available for other business
purposes, such as capital expenditures and research and development;
o limit our flexibility in planning for or reacting to changes in the
markets in which we compete;
o place us at a disadvantage relative to our competitors with less
indebtedness;
o render us more vulnerable to general adverse economic and industry
conditions; and
o make it more difficult for us to satisfy our financial obligations,
including those relating to the new notes.
In addition, the indentures governing the new notes and our new Revolving
Credit Facility contain financial and other restrictive covenants that limit
our ability to engage in activities that may be in our long-term best
interests. Our failure to comply with those covenants could
21
result in an event of default which, if not cured or waived, could result in
the acceleration of all of our debt.
DESPITE CURRENT INDEBTEDNESS LEVELS, WE AND OUR SUBSIDIARIES MAY STILL BE ABLE
TO INCUR SUBSTANTIALLY MORE DEBT. THIS COULD FURTHER EXACERBATE THE RISKS
ASSOCIATED WITH OUR SUBSTANTIAL LEVERAGE.
We and our subsidiaries may be able to incur substantial additional
indebtedness in the future. The terms of the indentures do not fully prohibit
us or our subsidiaries from doing so. Our new Revolving Credit Facility
permits additional borrowing in a principal amount of up to $220.0 million,
consisting of a $120.0 million revolving credit facility and a $100.0 million
pre-funded letter of credit facility, and all borrowings under the new
Revolving Credit Facility are secured and therefore effectively senior to the
new notes. If new debt is added to our and our subsidiaries' current debt
levels, the related risks that we and they now face could intensify. For a
more complete discussion of these financial covenants, see "Description of
Other Indebtedness and Arrangements," "Description of the New Notes," and the
documents incorporated by reference in this prospectus.
THE NEW NOTES AND THE SUBSIDIARY GUARANTEES ARE SUBJECT TO PRIOR CLAIMS OF OUR
SECURED CREDITORS, AND IF A DEFAULT OCCURS, WE MAY NOT HAVE SUFFICIENT FUNDS
TO FULFILL OUR OBLIGATIONS UNDER THE NEW NOTES AND THE SUBSIDIARY GUARANTEES.
Our assets and the assets of our subsidiaries are subject to prior claims by
our secured creditors. As of September 30, 2004, we had approximately
$260.0 million of secured debt (including the outstanding principal amount of
our 7.75% Debentures due 2023 and 6.875% Debentures due 2026), no borrowings
under our new Revolving Credit Facility, and approximately $69.7 million of
outstanding letters of credit. In addition, the indentures permit us to incur
additional secured debt, subject to specified limitations. The indentures also
allow us to continue to engage in securitization transactions, and we expect
to sell up to approximately $250.0 million of our domestic and European
accounts receivable under these programs. As a result of our entering into the
new Revolving Credit Facility, our 7.75% Debentures due 2023 and 6.875%
Debentures due 2026 became secured on an equal and ratable basis with certain
borrowings under the new Revolving Credit Facility, and therefore, are
effectively senior to the new notes to the extent of the assets securing such
debt.
OUR ABILITY TO SERVICE OUR DEBT AND MEET OUR CASH REQUIREMENTS DEPENDS ON MANY
FACTORS, SOME OF WHICH ARE BEYOND OUR CONTROL.
We believe that the level of borrowings available to us, including the net
proceeds from the Refinancing and available borrowings under our new Revolving
Credit Facility, combined with cash provided by our operations, will be
sufficient to provide for our cash requirements for the foreseeable future.
However, our ability to satisfy our obligations will depend on our future
operating performance and financial results, which will be subject, in part,
to factors beyond our control, including interest rates, commodity prices,
general economic conditions, and financial and business conditions. Certain of
our subsidiaries may become unrestricted subsidiaries under the indentures, in
which case we may not have access to the cash flows of these subsidiaries
which will not be subject to the restrictive covenants under the indentures
governing the new notes. If we are unable to generate sufficient cash flow to
service our debt, we may be required to:
o refinance all or a portion of our debt, including one or more series of
the new notes;
o obtain additional financing;
o sell some of our assets or operations;
o reduce or delay capital expenditures and acquisitions; or
22
o revise or delay our strategic plans.
Taking any of these actions could have a material adverse effect on our
business, financial condition and results of operations. In addition, we may
not be able to take any of these actions, and if undertaken, these actions may
not enable us to continue to satisfy our capital requirements and financial
and other contractual obligations. These actions may also not be permitted
under the terms of our various debt instruments, including our new Revolving
Credit Facility and the indentures.
YOUR RIGHT TO RECEIVE PAYMENTS ON THE NEW NOTES IS EFFECTIVELY SUBORDINATED TO
THE PRESENT AND FUTURE INDEBTEDNESS OF OUR SUBSIDIARIES THAT DO NOT GUARANTEE
THE NEW NOTES.
The new notes will be our general unsecured obligations. However, each of
our subsidiaries is a distinct legal entity, and our subsidiaries that do not
guarantee the new notes have no legal obligation to make payments on the new
notes or make funds available for those payments, whether by dividends, loans,
or other payments. The new notes, therefore, are structurally subordinated to
the indebtedness and other liabilities of non-guarantor subsidiaries,
including those owed to their trade creditors. In the event of a bankruptcy,
liquidation, reorganization, or similar proceeding with respect to us or any
of our subsidiaries, the assets of our non-guarantor subsidiaries will be
available to us only after all outstanding liabilities of the non-guarantor
subsidiaries have been paid in full. If our non-guarantor subsidiaries have
their debt accelerated under their respective indebtedness we may not be able
to repay the new notes. As of and for the year ended December 31, 2003, our
non-guarantor subsidiaries represented 46% of our total assets before
eliminations, and generated $1.2 billion of our revenues before eliminations.
The following expenses have been allocated only to us and the guarantors:
$24.7 million loss on early extinguishment of debt, $77.7 million of antitrust
costs, $15.6 million of facility closures, severance and related costs, and
$22.1 million of other expense, net.
THE COVENANTS IN OUR NEW REVOLVING CREDIT FACILITY AND THE INDENTURES
GOVERNING THE NEW NOTES IMPOSE RESTRICTIONS THAT LIMIT OUR ABILITY AND THE
ABILITY OF OUR SUBSIDIARIES TO TAKE CERTAIN ACTIONS.
The covenants in our new Revolving Credit Facility and the indentures
governing the new notes restrict our ability and the ability of our restricted
subsidiaries to, among other things:
o incur additional debt;
o pay dividends in excess of specified amounts and make other restricted
payments;
o make certain investments;
o create or permit certain liens;
o issue or sell capital stock of restricted subsidiaries;
o create or permit restrictions on the ability of our restricted
subsidiaries to pay dividends or make other distributions to us;
o enter into transactions with affiliates;
o enter into sale and leaseback transactions;
o engage in certain business activities; and
o consolidate or merge or sell all or substantially all of our or their
respective assets.
Our new Revolving Credit Facility also contains other covenants customary
for credit facilities of this nature, including requiring us to meet specified
financial ratios and financial tests. Our ability to borrow under our new
Revolving Credit Facility depends upon satisfaction of these covenants. Events
beyond our control can affect our ability to meet those covenants.
23
If we are unable to meet the terms of our financial covenants, or if we
breach any of these covenants, a default could occur under one or more of
these agreements. A default, if not waived by our lenders or bondholders as
required, could result in the acceleration of our outstanding indebtedness and
cause our debt to become immediately due and payable. If acceleration occurs,
we would not be able to repay our debt and it is unlikely that we would be
able to borrow sufficient funds to refinance our debt. Even if new financing
is made available to us, it may not be on terms acceptable to us.
WE MAY BE UNABLE TO PURCHASE THE NEW NOTES UPON A CHANGE OF CONTROL.
Upon a change of control, we will be required to offer to purchase all of
the new notes then outstanding for cash at 101% of the principal amount
thereof plus accrued and unpaid interest, if any. If a change of control were
to occur, we may not have sufficient funds to pay the change of control
purchase price, and we may be required to obtain third party financing to do
so. We may not be able to obtain this financing on commercially reasonable
terms, or on terms acceptable to us, or at all. The events that cause a change
of control under the indentures may also result in an event of default under
our new Revolving Credit Facility, which may cause the acceleration of our
other indebtedness, in which case we would be required to pay our senior
secured indebtedness before we repay the new notes. Our future indebtedness
may also contain restrictions on our ability to repurchase the new notes upon
certain events, including transactions that would constitute a change of
control under the indentures. Our failure to repurchase the new notes upon a
change of control would constitute an event of default under the indentures.
The change of control provisions in the indentures may not protect you in
the event we consummate a highly leveraged transaction, reorganization,
restructuring, merger, or other similar transaction, even if such transaction
constitutes a change of control under the indentures. Such a transaction may
not involve a change in voting power or beneficial ownership or, even if it
does, may not involve a change in the magnitude required under the definition
of change of control in the indenture to trigger our obligation to repurchase
the new notes. Except as otherwise described above, the indentures do not
contain provisions that permit the holders of the new notes to require us to
repurchase or redeem the new notes in the event of a takeover,
recapitalization, or similar transaction.
THERE IS NO PUBLIC MARKET FOR ANY SERIES OF NEW NOTES, AND WE DO NOT KNOW IF A
MARKET WILL EVER DEVELOP OR, IF A MARKET DOES DEVELOP, WHETHER IT WILL BE
SUSTAINED.
Each series of new notes is a new issue of securities for which there is no
existing trading market. A liquid market may not develop for any series of new
notes. Accordingly, you may not be able to sell your notes at a particular
time and the prices that you receive when you sell the new notes may not be
favorable.
We do not intend to apply for listing or quotation of any series of notes on
any securities exchange or stock market. The liquidity of any market for the
new notes will depend on a number of factors, including:
o the number of holders of new notes;
o our operating performance and financial condition;
o our ability to complete the offer to exchange the old notes for the new
notes;
o the market for similar securities;
o the interest of securities dealers in making a market in the new notes;
and
o prevailing interest rates.
24
Historically, the market for non-investment grade debt has been subject to
disruptions that have caused substantial volatility in the prices of these
securities. However, the market for any series of new notes may not be free
from similar disruptions. Any such disruptions could have an adverse effect on
holders of the new notes.
FEDERAL AND STATE STATUTES ALLOW COURTS, UNDER SPECIFIC CIRCUMSTANCES, TO VOID
GUARANTEES AND REQUIRE NOTEHOLDERS TO RETURN PAYMENTS RECEIVED FROM SUBSIDIARY
GUARANTORS.
Under the federal bankruptcy law and comparable provisions of state
fraudulent transfer laws, a subsidiary guarantee could be voided, or claims in
respect of a subsidiary guarantee could be subordinated to all other debts of
that subsidiary guarantor if, among other things, the subsidiary guarantor, at
the time it incurred the indebtedness evidenced by its subsidiary guarantee:
o received less than reasonably equivalent value or fair consideration for
the incurrence of such subsidiary guarantee; and
o was insolvent or rendered insolvent by reason of such incurrence; or
o was engaged in a business or transaction for which the subsidiary
guarantor's remaining assets constituted unreasonably small capital; or
o intended to incur, or believed that it would incur, debts beyond its
ability to pay such debts as they mature.
In addition, any payment by that subsidiary guarantor pursuant to its
subsidiary guarantee could be voided and required to be returned to the
subsidiary guarantor, or to a fund for the benefit of the creditors of the
subsidiary guarantor.
25
USE OF PROCEEDS
We will not receive any proceeds from the exchange offer. Any old notes that
are properly tendered and exchanged pursuant to the exchange offer will be
retired and cancelled. Approximately $46.5 million of the proceeds from the sale
of the old notes was used to repay outstanding borrowings under our previous
revolving credit facility; approximately $523.0 million was used to fund tender
offers and consent solicitations for our 8.50% Senior Notes due 2005 and our
6.125% Senior Notes due 2006, including tender costs of approximately $15
million, consent premiums of approximately $4 million, principal of
approximately $490.0 million and accrued and unpaid interest of approximately
$14.0 million; and approximately $22.1 million was used in connection with the
issuance of the old notes. The remaining proceeds will be used to fund working
capital and for general corporate purposes.
RATIO OF EARNINGS TO FIXED CHARGES
We have calculated the ratio of earnings to fixed charges in the following
table by dividing earnings by fixed charges. For this purpose, earnings
include earnings (loss) from continuing operations before income taxes and
cumulative effect of accounting change, equity income of equity method
investments, amortization of capitalized interest, adjustments for distributed
income of equity investees, plus fixed charges (less capitalized interest).
Fixed charges include interest expense, net of capitalized interest,
capitalized interest, and estimated interest within rental expense.
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------------------------- --------------
1999 2000 2001 2002 2003 2003 2004
------- ------ ------- ------ ------- ------ -----
DETERMINATION OF EARNINGS:
Earnings (loss) from continuing operations before income taxes
and cumulative effect of accounting change.................. $(162.9) $ 48.2 $(235.6) $(54.3) $(154.8) $(90.4) $30.9
Equity income of equity method investments.................... (10.6) (11.4) (9.2) (7.9) (13.2) (6.8) (9.8)
Fixed charges less capitalized interest....................... 76.7 131.8 120.3 110.9 97.8 79.9 60.7
Amortization of capitalized interest.......................... 1.8 2.0 2.4 2.6 1.8 1.4 1.3
Adjust for distributed income of equity investees............. 0.0 15.8 4.0 7.0 5.0 5.0 0.0
------- ------ ------- ------ ------- ------ -----
Total earnings (loss), as defined............................. $ (95.0) $186.4 $(118.1) $ 58.3 $ (63.4) $(10.9) $83.1
======= ====== ======= ====== ======= ====== =====
FIXED CHARGES:
Interest expense, net of capitalized interest (a)............. $ 69.8 $120.4 $ 109.9 $101.7 $ 89.7 $ 72.9 $55.7
Capitalized interest.......................................... 4.0 3.8 3.6 1.0 0.7 0.6 0.7
Estimate of interest within rental expense (b)................ 6.9 11.4 10.4 9.2 8.1 7.0 5.0
------- ------ ------- ------ ------- ------ -----
Total fixed charges, as defined............................... $ 80.7 $135.6 $ 123.9 $111.9 $ 98.5 $ 80.5 $61.4
======= ====== ======= ====== ======= ====== =====
Ratio of Earnings to Fixed Charges............................ (c) 1.37 (c) (c) (c) (c) 1.35
======= ====== ======= ====== ======= ====== =====
--------------------
(a) Interest expense includes amortization of debt discount and expenses.
(b) Represents 1/3 of rental expense under operating leases which is a
conservative estimate of an interest factor in our leases.
(c) Total earnings (loss), as defined were less than fixed charges by
$175.7 million, $242.0 million, $53.6 million, and $161.9 million in 1999,
2001, 2002 and 2003, respectively, and by $91.4 million for the nine months
ended September 30, 2003.
26
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma combined financial information gives
effect to the sale of the OrganoSilicones business (OSI) and the acquisition
of the Specialty Chemicals Business from General Electric Company (GESC),
together referred to as "the transaction," and the impact of the Refinancing.
The pro forma combined statements of operations give effect to the transaction
and the Refinancing as if they had occurred on the first day of the period
presented. The pro forma combined balance sheet gives effect to the
Refinancing as if it occurred on the last day of the period presented. The
information is based upon the historical financial statements of Crompton and
GESC. The information should be read in conjunction with Crompton's historical
financial statements, the related notes, and other information contained
elsewhere or incorporated by reference in this prospectus. Certain items
derived from Crompton's and GESC's historical financial statements have been
reclassified to conform to the combined presentation.
The unaudited pro forma combined financial information is not necessarily
indicative of what the actual combined financial position or results of
operations would have been had the foregoing transaction been consummated on
the dates set forth therein, nor does it give effect to (i) any transaction
other than the sale of our OrganoSilicones business, the acquisition of GESC
and the Refinancing or (ii) any synergies, cost savings, and one-time charges
or credits expected to result from the sale of our OrganoSilicones business
and the acquisition of GESC. Accordingly, the pro forma combined financial
information does not purport to be indicative of the financial position or
results of operations as of the date hereof, as of the effective date of the
transaction, or for any other future date or period.
UNAUDITED PRO FORMA COMBINED STATEMENT OF
OPERATIONS FOR THE
YEAR ENDED DECEMBER 31, 2003
----------------------------------------------
CROMPTON PRO FORMA PRO FORMA
AS REPORTED GESC ADJUSTMENTS COMBINED
----------- ----- ----------- ---------
($ IN MILLIONS, EXCEPT PER SHARE DATA)
Net sales ....................................................................... $2,185.0 $91.9 -- $2,276.9
Cost of products sold ........................................................... 1,616.0 70.8 -- 1,686.8
Selling, general and administrative ............................................. 353.0 13.7 -- 366.7
Depreciation and amortization ................................................... 115.4 6.0 -- 121.4
Research and development ........................................................ 51.5 1.0 -- 52.5
Equity income ................................................................... (13.2) -- -- (13.2)
Facility closures, severance and related costs .................................. 19.6 -- -- 19.6
Antitrust costs ................................................................. 77.7 -- -- 77.7
-------- ----- ----- --------
Operating profit (loss) ......................................................... (35.0) 0.4 -- (34.6)
Interest expense ................................................................ 89.7 -- 2.3(a) 92.0
Loss on early extinguishment of debt (e) ........................................ 24.7 -- -- 24.7
Other expense, net .............................................................. 5.4 (0.7) (0.6)(b) 2.1
(2.0)(c)
-------- ----- ----- --------
Earnings (loss) from continuing operations before income taxes and cumulative
effect of accounting change.................................................... (154.8) 1.1 0.3 (153.4)
Provision for income taxes ...................................................... (36.1) 0.4 0.1(d) (35.6)
-------- ----- ----- --------
Earnings (loss) from continuing operations before cumulative effect of
accounting change.............................................................. $ (118.7) $ 0.7 $ 0.2 $ (117.8)
======== ===== ===== ========
BASIC AND DILUTED EARNINGS (LOSS) PER COMMON SHARE:
Net earnings (loss) from continuing operations before cumulative effect of
accounting change.............................................................. $ (1.05) $ (1.05)
======== ========
Basic and diluted weighted average shares outstanding (in millions) ............. 112.5 112.5
======== ========
27
UNAUDITED PRO FORMA COMBINED STATEMENT
OF OPERATIONS FOR THE
NINE MONTHS ENDED SEPTEMBER 30, 2004
--------------------------------------
CROMPTON PRO FORMA PRO FORMA
AS REPORTED ADJUSTMENTS COMBINED
----------- ----------- ---------
($ IN MILLIONS, EXCEPT PER SHARE DATA)
Net Sales................................................................................ $1,910.5 $ -- $1,910.5
Cost of products sold.................................................................... 1,421.5 -- 1,421.5
Selling, general and administrative...................................................... 281.4 -- 281.4
Depreciation and amortization............................................................ 93.1 -- 93.1
Research and development................................................................. 37.4 -- 37.4
Equity income............................................................................ (9.8) -- (9.8)
Facility closures, severance and related costs........................................... 46.1 -- 46.1
Antitrust costs.......................................................................... 16.8 -- 16.8
-------- ----- --------
Operating profit......................................................................... 24.0 -- 24.0
Interest expense......................................................................... 55.6 8.7 (a) 64.3
Loss on early extinguishment of debt..................................................... 20.1 -- 20.1
Other income, net........................................................................ (82.6) -- (82.6)
-------- ----- --------
Earnings (loss) from continuing operations before income taxes and cumulative effect of
accounting change...................................................................... 30.9 (8.7) 22.2
Provision for income taxes............................................................... 11.7 (3.4) 8.3
-------- ----- --------
Earnings (loss) from continuing operations before cumulative effect of accounting change. $ 19.2 $(5.3) $ 13.9
======== ===== ========
BASIC AND DILUTED EARNINGS (LOSS) PER COMMON SHARE:
Net earnings (loss) from continuing operations before cumulative effect of accounting
change................................................................................. $ 0.17 $ 0.12
======== ========
BASIC AND DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING
(in millions):
Basic.................................................................................... 114.6 114.6
======== ========
Diluted.................................................................................. 114.8 114.8
======== ========
---------------
(a) Reflects a net increase in interest expense primarily resulting from
interest expense relating to the new notes, partially offset by the
repayment of our 8.50% Senior Notes and the 6.125% Senior Notes, borrowings
under our previous revolving credit facility and other long-term debt
outstanding as of the beginning of the period presented. Interest expense
relating to the new notes was based on a rate of 9 7/8% for the fixed rate
notes, a rate of 7.45% for the floating rate notes, which represents LIBOR
plus 5.75% as of August 3, 2004 and amortization of initial discount on the
fixed rate notes. Savings relating to the long-term debt repaid were based
on actual amounts reported and/or paid, and amounts relating to our
previous revolving credit facility were based on interest rates which were
in effect at the beginning of the pro forma period.
(b) Reflects the reduction of fees attributable to the outstanding accounts
receivable securitization program related to OSI that was assumed to be
repaid with the proceeds from the sale of OSI.
28
(c) Reflects the accretion of the receivable due from GE to its face value.
Such receivable represents the present value of the minimum contingent
quarterly payments of $105.0 million to be received from GE over the three-
year period following the sale of OSI.
(d) Reflects the income tax effect of the pro forma adjustments based on the
applicable statutory tax rates.
(e) The pro forma loss on early extinguishment of debt does not reflect the
impact of the
$20.1 million premium to repurchase the 8.50% Senior Notes and 6.125%
Senior Notes, the net impact of the write-off of the deferred transaction
costs relating to the 8.50% Senior Notes and previous revolving credit
facility and the write-off of unamortized discounts relating to the 8.50%
Senior Notes and 6.125% Senior Notes.
29
SELECTED HISTORICAL FINANCIAL DATA
The following selected financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" for the periods presented, found in our Annual Report on Form 10-K
and Quarterly Reports on Form 10-Q, which are incorporated by reference in
this prospectus, as well as in conjunction with the other information
contained or incorporated by reference in this prospectus. The selected
historical financial data as of December 31, 2002 and 2003 and for the years
ended December 31, 2001, 2002, and 2003 are derived from our audited
consolidated financial statements, and for the nine months ended September 30,
2003 and 2004 are derived from our unaudited condensed consolidated financial
statements, which are included in this prospectus. The selected historical
financial data as of and for the years ended December 31, 1999 and 2000 are
derived from our consolidated financial statements, which are not included in
this prospectus. The results for the nine months ended September 30, 2004, are
not necessarily indicative of results to be expected for the full year. The
selected historical financial data for the nine month periods below reflect
all adjustments (consisting primarily of normal recurring adjustments except
as otherwise described in the footnotes) which are, in the opinion of
management, necessary to present fairly the financial data for the nine month
periods.
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------------------------------------- -------------------
1999(A)(B) 2000 2001 2002 2003 2003 2004
---------- -------- -------- -------- -------- -------- --------
($ IN MILLIONS)
SUMMARY OF OPERATIONS:
Net sales....................................... $1,933.4 $2,554.0 $2,286.5 $2,090.3 $2,185.0 $1,624.1 $1,910.5
Gross profit.................................... 669.6 763.6 659.9 622.0 569.0 434.2 489.0
Selling, general and administrative............. 311.1 371.1 378.9 354.5 353.0 263.6 281.4
Depreciation and amortization................... 106.0 148.8 150.8 111.4 115.4 84.8 93.1
Research and development........................ 57.9 59.2 56.0 54.3 51.5 37.5 37.4
Equity income (c)............................... (10.6) (11.4) (9.2) (7.9) (13.2) (6.8) (9.8)
Facility closures, severance and related costs.. -- 20.2 101.5 18.0 19.6 14.1 46.1
Antitrust costs................................. -- -- -- 6.3 77.7 26.3 16.8
Impairment of long-lived assets................. -- -- 80.4 -- -- -- --
Acquired in-process research and development.... 195.0 -- -- -- -- -- --
Merger and related costs........................ 29.5 -- -- -- -- -- --
-------- -------- -------- -------- -------- -------- --------
Operating profit (loss)......................... (19.3) 175.7 (98.5) 85.4 (35.0) 14.7 24.0
Interest expense................................ 69.8 120.4 109.9 101.7 89.7 72.9 55.6
Loss on early extinguishment of debt (d)........ 24.6 -- -- -- 24.7 24.7 20.1
Other (income) expense, net (e)................. 49.2 7.1 27.2 38.0 5.4 7.5 (82.6)
-------- -------- -------- -------- -------- -------- --------
Earnings (loss) from continuing operations
before income taxes and cumulative effect of
accounting change............................. (162.9) 48.2 (235.6) (54.3) (154.8) (90.4) 30.9
Income taxes (benefit).......................... 27.0 22.8 (79.9) (18.9) (36.1) (29.8) 11.7
-------- -------- -------- -------- -------- -------- --------
Earnings (loss) from continuing operations
before cumulative effect of accounting change. (189.9) 25.4 (155.7) (35.4) (118.7) (60.6) 19.2
Earnings from discontinued operations........... 14.9 63.9 31.8 50.9 26.3 26.3 --
Gain on sale of discontinued operations......... -- -- -- -- 111.7 111.7 2.1
Cumulative effect of accounting change.......... -- -- -- (299.0) (0.4) (0.4) --
-------- -------- -------- -------- -------- -------- --------
Net earnings (loss) (f) $ (175.0) $ 89.3 $ (123.9) $ (283.5) $ 19.0 $ 77.0 $ 21.3
======== ======== ======== ======== ======== ======== ========
BALANCE SHEET DATA:
Cash and cash equivalents....................... $ 10.5 $ 20.8 $ 21.5 $ 16.9 $ 39.2 $ 49.8 $ 136.9
Working capital................................. 390.2 624.4 412.7 365.6 109.2 144.4 280.4
Total assets................................ 3,726.6 3,528.3 3,232.2 2,840.8 2,529.2 2,446.3 2,541.6
Total debt (g).............................. 1,375.5 1,493.9 1,412.0 1,256.8 814.7 786.4 865.5
Stockholders' equity............................ 759.9 754.0 547.5 199.9 302.7 322.0 311.4
30
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------------------------------- --------------
1999(A)(B) 2000 2001 2002 2003 2003 2004
---------- ------- ------- ------- ------ ------ -----
($ IN MILLIONS)
OTHER DATA:
Net cash:
Net cash (used in) provided by operations................. 88.6 210.6 205.0 201.8 (14.8) (18.0) 6.4
Net cash (used in) provided by investing activities....... 250.3 (246.9) (100.6) (21.8) 547.5 587.8 98.6
Net cash (used in) provided by financing activities....... (339.2) 47.1 (103.0) (185.2) (514.3) (538.4) (7.0)
Capital spending from continuing operations............... 131.8 107.1 92.3 84.3 81.7 49.4 44.0
Depreciation and amortization from continuing operations.. 106.0 148.8 150.8 111.4 115.4 84.8 93.1
Dividends (per common share).............................. 0.10 0.20 0.20 0.20 0.20 0.15 0.15
Interest expense.......................................... 69.8 120.4 109.9 101.7 89.7 72.9 55.7
Net debt (g)(h)........................................... 1,365.0 1,473.1 1,390.5 1,239.9 775.5 736.6 728.6
--------------------
(a) Our 1999 operating results may not be comparable to our operating results
in subsequent periods due to the merger of Crompton & Knowles Corporation
and Witco Corporation on September 1, 1999.
(b) The loss on early extinguishment of debt in 1999 has been reclassified from
an extraordinary item to a component of net earnings (loss) from continuing
operations before income taxes in accordance with FASB Statement No. 145,
"Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB
Statement No. 13, and Technical Corrections."
(c) Includes equity income from our 50% interest in the Gustafson seed
treatment joint venture of $10.8 million, $13.9 million, $12.1 million,
$7.6 million, and $12.7 million in 1999, 2000, 2001, 2002, and 2003,
respectively, and $6.5 million and $9.0 million for the nine months ended
September 30, 2003 and September 30, 2004, respectively.
(d) In August 2003, we repurchased $250.0 million of our 8.50% Senior Notes. As
a result of the repurchase, we recorded a loss on early extinguishment of
debt of $24.7 million.
(e) Other (income) expense, net includes a loss of $83.3 million on the sale of
the textile colors business unit partiallyoffset by a gain of $42.1 million
on the sale of the specialty ingredients business unit in 1999, losses of
$17.3 million and $1.8 million on the sale of the Industrial Colors
business unit and the nitrile rubber joint venture, respectively, in 2001,
a loss of $34.7 million on the sale of the Industrial Specialties business
unit in 2002, and a gain of $90.9 million on the sale of our 50% interest
in the Gustafson seed treatment joint venture for the nine months ended
September 30, 2004. Other (income) expense, net also includes fees related
to our accounts receivable securitization programs of $6.3 million,
$11.0 million, $10.5 million, $9.1 million and $7.8 million in 1999, 2000,
2001, 2002, and 2003, respectively, and $4.5 million and $6.9 million for
nine months ended September 30, 2003 and September 30, 2004, respectively.
(f) For the year ended December 31, 2003, our net earnings and results of
operations include:
o income tax benefit of $36.1 million;
o interest expense of $89.7 million; and
o depreciation and amortization of $115.4 million, as well as
o loss on early extinguishment of debt of $24.7 million;
o antitrust costs of $77.7 million;
o facility closures, severance and related costs of $19.6 million; and
o other expense, net of $5.4 million.
For the nine months ended September 30, 2004, our net earnings and
results of operations include:
o income tax expense of $11.7 million;
o interest expense of $55.6 million; and
31
o depreciation and amortization of $93.1 million, as well as
o antitrust costs of $16.8 million;
o facility closures, severance and related costs of $46.1 million; and
o other income, net of $82.6 million.
(g) Excludes accounts receivable securitization program to sell up to
$150.0 million of domestic accounts receivable to agent banks, which
program was reduced to $115.0 million on April 15, 2004. Amounts sold under
this program were $164.7 million, $176.3 million, $132.0 million,
$136.5 million, and $106.1 million as of December 31, 1999, December
31, 2000, December 31, 2001, December 31, 2002, and December 31, 2003,
respectively. Amounts sold under this program were $121.9 million and
$100.0 million as of September 30, 2003 and 2004, respectively. As part of
the Refinancing, this facility was extended for approximately three years
with an ability to sell up to $125.0 million of domestic accounts
receivable, which represents an increase of $10.0 million from our previous
ability to sell up to $115.0 million of domestic accounts receivable. In
addition, our European subsidiaries have a separate program to sell their
eligible accounts receivable to agent banks. International accounts
receivable sold under this program were $42.0 million, $105.6 million,
$101.0 million, and $93.3 million as of December 31, 2000, December 31,
2001, December 31, 2002, and December 31, 2003, respectively. Amounts sold
under this program were $96.8 million and $101.3 million as of September
30, 2003 and September 30, 2004, respectively.
(h) Total debt less cash and cash equivalents.
32
THE EXCHANGE OFFER
TERMS OF THE EXCHANGE OFFER; PERIOD FOR TENDERING OLD NOTES
Subject to the terms and the satisfaction or waiver of the conditions
detailed in this prospectus, we will accept for exchange old notes which are
properly tendered on or prior to the expiration date and not withdrawn as
permitted below. As used herein, the term "expiration date" means 5:00 p.m.,
New York City time, on February 22, 2005. We may, however, in our sole
discretion, extend the period of time during which the exchange offer is open.
The term "expiration date" means the latest time and date to which the exchange
offer is extended.
As of the date of this prospectus, $600.0 million aggregate principal amount
of old notes are outstanding. This prospectus is first being sent on or about
the date hereof, to all holders of old notes known to us.
We expressly reserve the right, at any time prior to the expiration of the
exchange offer, to extend the period of time during which the exchange offer
is open, and delay acceptance for exchange of any old notes, by giving oral or
written notice of such extension to holders thereof as described below. During
any such extension, all old notes previously tendered will remain subject to
the exchange offer and may be accepted for exchange by us. Any old notes not
accepted for exchange for any reason will be returned without expense to an
account maintained with DTC promptly after the expiration or termination of
the exchange offer.
Old notes tendered in the exchange offer must be in denominations of
principal amount of $1,000 and any integral multiple thereof.
We expressly reserve the right to amend or terminate the exchange offer, and
not to accept for exchange any old notes, upon the occurrence of any of the
conditions of the exchange offer specified under "-- Conditions to the
exchange offer." We will give oral or written notice of any extension,
amendment, non acceptance or termination to the holders of the old notes as
promptly as practicable. Such notice, in the case of any extension, will be
issued by means of a press release or other public announcement no later than
9:00 a.m., New York City time, on the next business day after the previously
scheduled expiration date.
PROCEDURES FOR TENDERING OLD NOTES
You may only tender your old notes by book-entry transfer of the old notes
into the exchange agent's account at DTC. The tender to us of old notes by you
as set forth below and our acceptance of the old notes will constitute a
binding agreement between us and you, upon the terms and subject to the
conditions set forth in this prospectus. Except as set forth below, to tender
old notes for exchange pursuant to the exchange offer, you must transmit an
agent's message to Deutsche Bank Trust Company Americas, as exchange agent at
the address listed below under the heading "-- Exchange Agent." In addition,
the exchange agent must receive, on or prior to the expiration date, a timely
confirmation of book-entry transfer (a "book-entry confirmation") of the old
notes into the exchange agent's account at DTC, along with an agent's message.
The term "agent's message" means a message, transmitted to DTC and received
by the exchange agent and forming a part of a book-entry transfer.
If you are a beneficial owner whose old notes are registered in the name of
a broker, dealer, commercial bank, trust company or other nominee, and wish to
tender, you should promptly instruct the registered holder to tender on your
behalf. Any registered holder that is a participant in DTC's book-entry
transfer facility system may make book-entry delivery of the old notes by
causing DTC to transfer the old notes into the exchange agent's account.
33
We or the exchange agent in our sole discretion will make a final and
binding determination on all questions as to the validity, form, eligibility
(including time of receipt) and acceptance of old notes tendered for exchange.
We reserve the absolute right to reject any and all tenders not properly
tendered or to not accept any tender which acceptance might, in our judgment
or our counsel's, be unlawful. Our or the exchange agent's interpretation of
the term and conditions of the exchange offer as to any particular tender
either before or after the expiration date will be final and binding on all
parties. We are not, nor is the exchange agent or any other person, under any
duty to notify you of any defect or irregularity with respect to your tender
of old notes for exchange, and no one will be liable for failing to provide
such notification.
By tendering old notes, you represent to us that, among other things, (i)
the new notes acquired pursuant to the exchange offer are being obtained in
the ordinary course of business of the person receiving such new notes,
whether or not such person is the holder, (ii) that at the time of the
commencement or consummation of the exchange offer, neither the holder nor
such other person has any arrangement or understanding with any person to
participate in the distribution of the new notes, (iii) that neither the
holder nor, to the holder's knowledge, such other person is our "affiliate,"
as defined under Rule 405 under the Securities Act, (iv) if you are not a
broker-dealer, you are not engaging nor intend to engage in a distribution of
the new notes, (v) if you are a broker-dealer that receives new notes for your
own account in exchange for old notes acquired by as a result of market-making
activities or other trading activities, you will deliver a prospectus in
connection with any resale of such new notes, and (vi) and that you are not
holding old notes that have, or are reasonably likely to have, the status of
an unsold allotment in the initial offering.
If you are our "affiliate," as defined under Rule 405 under the Securities
Act, and engage in or intend to engage in or have an arrangement or
understanding with any person to participate in a distribution of such new
notes to be acquired pursuant to the exchange offer, you or any such other
person:
o could not rely on the applicable interpretations of the staff of the SEC;
and
o must comply with the registration and prospectus delivery requirements of
the Securities Act in connection with any resale transaction.
See "Plan of Distribution." By so acknowledging and by delivering a
prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act.
By delivering an agent's message, a beneficial owner(whose old notes are
registered in the name of a broker, dealer, commercial bank, trust company or
other nominee) or holder will be deemed to have irrevocably appointed the
exchange agent as its agent and attorney-in-fact (with full knowledge that the
exchange agent is also acting as an agent for us in connection with the
exchange offer) with respect to the old notes, with full power of substitution
(such power of attorney being deemed to be an irrevocable power coupled with
in interest subject only to the right of withdrawal described in this
prospectus), to receive for our account all benefits and otherwise exercise
all rights of beneficial ownership of such old notes, in accordance with the
terms and conditions of the exchange offer.
Each beneficial owner or holder will also be deemed to have represented and
warranted to us that it has authority to tender, exchange, sell, assign and
transfer the old notes it tenders and that, when the same are accepted for
exchange, we will acquire good, marketable and unencumbered title to such old
notes, free and clear of all liens, restrictions, charges and encumbrances,
and that the old notes tendered are not subject to any adverse claims or
proxies. Each beneficial owner and holder, by tendering its old notes, also
agrees that it will comply with its obligations under the registration rights
agreement.
34
ACCEPTANCE OF OLD NOTES FOR EXCHANGE; DELIVERY OF NEW NOTES
Upon satisfaction or waiver of all of the conditions to the exchange offer,
we will accept, promptly after the expiration date, all old notes properly
tendered and will issue the new notes promptly after acceptance of the old
notes. See "-- Conditions to the Exchange Offer." For purposes of the exchange
offer, we will be deemed to have accepted properly tendered old notes for
exchange if and when we give oral (confirmed in writing) or written notice to
the exchange agent.
The holder of each old note accepted for exchange will receive a new note in
the amount equal to the surrendered old note. Holders of new notes on the
relevant record date for the first interest payment date following the
consummation of the exchange offer will receive interest accruing from the
most recent date to which interest has been paid on the old notes. Holders of
new notes will not receive any payment in respect of accrued interest on old
notes otherwise payable on any interest payment date, the record date for
which occurs on or after the consummation of the exchange offer.
In all cases, issuance of new notes for old notes that are accepted for
exchange will be made only after timely receipt by the exchange agent of an
agent's message and a timely confirmation of book-entry transfer of the old
notes into the exchange agent's account at DTC.
If any tendered old notes are not accepted for any reason set forth in the
terms and conditions of the exchange offer or if old notes are submitted for a
greater principal amount than the holder desires to exchange, such unaccepted
or non exchanged old notes will be returned without expense to an account
maintained with DTC promptly after the expiration or termination of the
exchange offer.
BOOK-ENTRY TRANSFERS
The exchange agent will make a request to establish an account for the old
notes at DTC for purposes of the exchange offer within two business days after
the date of this prospectus. Any financial institution that is a participant
in DTC's systems must make book-entry delivery of old notes by causing DTC to
transfer those old notes into the exchange agent's account at DTC in
accordance with DTC's procedure for transfer. This participant should transmit
its acceptance to DTC on or prior to the expiration date. DTC will verify this
acceptance, execute a book-entry transfer of the tendered old notes into the
exchange agent's account at DTC and then send to the exchange agent
confirmation of this book-entry transfer. The transmission of the notes and
agent's message to DTC and delivery by DTC to and receipt by the exchange
agent of the related agent's message will be deemed to be a valid tender.
WITHDRAWAL RIGHTS
For a withdrawal of a tender of notes to be effective, the exchange agent
must receive a valid withdrawal request through the Automated Tender Offer
Program system from the tendering DTC participant before the expiration date.
Any such request for withdrawal must include the VOI number of the tender to
be withdrawn and the name of the ultimate beneficial owner of the related
notes in order that such notes may be withdrawn. Properly withdrawn old notes
may be re-tendered by following the procedures described under "Procedures for
Tendering" above at any time on or before 5:00 p.m., New York City time, on
the expiration date.
We will determine all questions as to the validity, form and eligibility,
including time of receipt, of notices of withdrawal. Any old notes so
withdrawn will be deemed not to have been validly tendered for exchange. No
exchange notes will be issued unless the old notes so withdrawn are validly
retendered.
35
CONDITIONS TO THE EXCHANGE OFFER
Notwithstanding any other provision of the exchange offer, we are not
required to accept for exchange, or to issue new notes in exchange for, any
old notes and may terminate or amend the exchange offer, if any of the
following events occur prior to the expiration date:
(a) the exchange offer violates any applicable law or applicable
interpretation of the staff of the SEC;
(b) there is instituted or threatened any action or proceeding in any
court or by any governmental agency which might materially impair
our ability to proceed with the exchange offer, and no material
adverse development shall have occurred in any existing action or
proceeding with respect to us; or
(c) all governmental approvals shall have been obtained, which approvals
we deem necessary for the consummation of the Exchange Offer.
The foregoing conditions are for our sole benefit and may be asserted by us
regardless of the circumstances giving rise to any condition or may be waived
by us in whole or in part at any time in our reasonable discretion, except
that we will not waive any of the foregoing conditions with respect to an
individual holder unless we waive such condition or conditions with respect to
all holders. Our failure at any time to exercise any of the foregoing rights
will not be deemed a waiver of any such right and each such right will be
deemed an ongoing right which may be asserted at any time and from time to
time prior to the expiration of the exchange offer. All conditions to the
exchange offer, other than those relating to governmental approvals necessary
for consummation of the exchange offer, must be satisfied or waived by us
prior to the expiration of the exchange offer.
In addition, we will not accept for exchange any old notes tendered, and no
new notes will be issued in exchange for any such old notes, if at such time
any stop order is threatened or in effect with respect to the Registration
Statement, of which this prospectus constitutes a part, or the qualification
of the indenture under the Trust Indenture Act.
EXCHANGE AGENT
We have appointed Deutsche Bank Trust Company Americas as the exchange agent
for the exchange offer. Questions and requests for assistance, requests for
additional copies of this prospectus or of other documents should be directed
to the exchange agent addressed as follows:
DEUTSCHE BANK TRUST COMPANY AMERICAS
By Regular, Registered or By Hand: By Overnight Courier:
Certified Mail:
DB Services Tennessee, Inc. Deutsche Bank Trust Company Americas DB Services Tennessee, Inc.
Reorganization Unit C/O The Depository Trust Clearing Corporation Corporate Trust & Agency
P.O. Box 292737 55 Water Street, 1st floor Services
Nashville, TN 37229-2731 Jeannette Park Entrance Reorganization Unit
New York, NY 10041 648 Grassmere Park Road
Nashville, TN 37211
Attention: Security Holder
Relations
By Facsimile:
(615) 835-3701
Confirm by Telephone:
(800) 735-7777
36
FEES AND EXPENSES
The principal solicitation is being made by mail by Deutsche Bank Trust
Company Americas, as exchange agent. We will pay the exchange agent customary
fees for its services, reimburse the exchange agent for its reasonable out of
pocket expenses incurred in connection with the provision of these services
and pay other registration expenses, including fees and expenses of the
trustee under the indenture relating to the new notes, filing fees, blue sky
fees and printing and distribution expenses. We will not make any payment to
brokers, dealers or others soliciting acceptances of the exchange offer.
Additional solicitation may be made by telephone, facsimile or in person by
our and our affiliates' officers and regular employees and by persons so
engaged by the exchange agent.
ACCOUNTING TREATMENT
We will record the new notes at the same carrying value as the old notes, as
reflected in our accounting records on the date of the exchange. Accordingly,
we will not recognize any gain or loss for accounting purposes. The expenses
of the exchange offer will be expensed as incurred.
TRANSFER TAXES
You will not be obligated to pay any transfer taxes in connection with the
tender of old notes in the exchange offer unless you instruct us to register
new notes in the name of, or request that old notes not tendered or not
accepted in the exchange offer be returned to, a person other than the
registered tendering holder. In those cases, you will be responsible for the
payment of any applicable transfer tax.
CONSEQUENCES OF EXCHANGING OR FAILING TO EXCHANGE OLD NOTES
If you do not exchange your old notes for new notes in the exchange offer,
your old notes will continue to be subject to the provisions of the indenture
relating to the old notes regarding transfer and exchange of the old notes and
the restrictions on transfer of the old notes described in the legend on your
certificates. These transfer restrictions are required because the old notes
were issued under an exemption from, or in transactions not subject to, the
registration requirements of the Securities Act and applicable state
securities laws. In general, the old notes may not be offered or sold unless
registered under the Securities Act, except under an exemption from, or in a
transaction not subject to, the Securities Act and applicable state securities
laws. We do not plan to register the old notes under the Securities Act. Based
on interpretations by the staff of the SEC, as set forth in no action letters
issued to third parties, we believe that the new notes you receive in the
exchange offer may be offered for resale, resold or otherwise transferred
without compliance with the registration and prospectus delivery provisions of
the Securities Act. However, you will not be able to freely transfer the new
notes if:
o you are our "affiliate," as defined in Rule 405 under the Securities Act;
o you are not acquiring the new notes in the exchange offer in the ordinary
course of your business;
o you are holding old notes that have, or are reasonably likely to have,
the status of an unsold allotment in the initial offering;
o you have an arrangement or understanding with any person to participate
in the distribution, as defined in the Securities Act, of the new notes
you will receive in the exchange offer; or
o you are a participating broker-dealer.
37
We do not intend to request the SEC to consider, and the SEC has not
considered, the exchange offer in the context of a similar no action letter.
As a result, we cannot guarantee that the staff of the SEC would make a
similar determination with respect to the exchange offer as in the
circumstances described in the no action letters discussed above. Each holder,
other than a broker-dealer, must acknowledge that it is not engaged in, and
does not intend to engage in, a distribution of new notes and has no
arrangement or understanding to participate in a distribution of new notes. If
you are our affiliate, are engaged in or intend to engage in a distribution of
the new notes or have any arrangement or understanding with respect to the
distribution of the new notes you will receive in the exchange offer, you may
not rely on the applicable interpretations of the staff of the SEC and you
must comply with the registration and prospectus delivery requirements of the
Securities Act in connection with any resale transaction involving the new
notes. If you are a participating broker-dealer, you must acknowledge that you
will deliver a prospectus in connection with any resale of the new notes. In
addition, to comply with state securities laws, you may not offer or sell the
new notes in any state unless they have been registered or qualified for sale
in that state or an exemption from registration or qualification is available
and is complied with. The offer and sale of the new notes to "qualified
institutional buyers" (as defined in Rule 144A of the Securities Act) is
generally exempt from registration or qualification under state securities
laws. We do not plan to register or qualify the sale of the new notes in any
state where an exemption from registration or qualification is required and
not available.
38
DESCRIPTION OF OTHER INDEBTEDNESS AND ARRANGEMENTS
NEW REVOLVING CREDIT FACILITY
Concurrent with the consummation of the issuance of the old notes, we
entered into a new five-year secured Credit Agreement dated as of August 16,
2004, among us, certain financial institutions party thereto, and Deutsche
Bank AG, New York Branch, as administrative agent, in a principal amount of
$220.0 million, which we refer to as the new Revolving Credit Facility,
including a $120.0 million revolving loan facility and a $100.0 million
credit-linked facility. The following is a summary description of the
principal terms and conditions of the new Revolving Credit Facility. This
description is not intended to be exhaustive and is qualified in its entirety
by reference to the provisions contained in the definitive agreements.
Capitalized terms used but not defined in this section have the meanings
assigned to them in the new Revolving Credit Facility.
Security. The Revolving Credit Facility is guaranteed by the Subsidiary
Guarantors and is secured by (i) a pledge of all of the stock and other equity
interests owned by us and the Subsidiary Guarantors (limited to 65% of the
voting stock of first-tier foreign subsidiaries), (ii) a lien on substantially
all other tangible and intangible personal property and assets of us and the
Subsidiary Guarantors, and (iii) mortgages on certain material owned real
estate.
Interest. Unpaid amounts outstanding under the Revolving Credit Facility
bear interest at a rate per annum equal to, in the case of Loans maintained as
(I) Eurodollar Loans, Eurodollar Rate plus an Applicable Margin then in
effect, and (II) Base Rate Loans, Base Rate (as defined in the Credit
Agreement) as in effect from time to time plus an Applicable Margin then in
effect. The Applicable Margin is based on our Leverage Ratio, as defined in
the Credit Agreement. The interest rate under the New Revolving Credit
Facility was 5.29% as of November 30, 2004, at which time we had no
outstanding borrowings under this facility.
Covenants. The Revolving Credit Facility contains affirmative and negative
covenants customary for a transaction of this type which, among other things,
require us to meet certain financial tests. The new Revolving Credit Facility
also contains a minimum interest coverage ratio and a maximum leverage ratio,
which are both tested on a consolidated basis. The interest coverage ratio,
which is tested on the last day of each fiscal quarter, initially requires an
interest coverage ratio of at least 2.15 to 1.00 and gradually steps up over
time until September 30, 2007, when the requirement is 3.25 to 1:00. The
maximum leverage ratio is initially set at 5.25 to 1.00, and steps down over
time until it levels out at 3.00 to 1.00 on March 31, 2008. If the Borrower
fails to meet such covenant levels, the lenders may, among other remedies,
accelerate the loans or enforce their rights as secured lenders. As of the
date of this prospectus, we were in compliance with the financial covenants of
the Revolving Credit Facility. The Revolving Credit Facility also contains
covenants which, among other things, limit our ability to:
o incur additional indebtedness;
o pay dividends in excess of specified amounts and make other restricted
payments;
o make certain investments;
o create or permit certain liens;
o issue or sell capital stock of restricted subsidiaries;
o create or permit restrictions on the ability of our restricted
subsidiaries to pay dividends or make other distributions to us;
o enter into transactions with affiliates;
o engage in certain business activities;
39
o consolidate or merge or sell all or substantially all of our assets; and
o engage in other matters customarily restricted in such agreements.
OTHER CREDIT ARRANGEMENTS
We also have arrangements with various banks for lines of credit for our
international subsidiaries aggregating $26.3 million in 2003 and $28.0 million
in 2002, of which $3.7 million (at an interest rate of 4.9%) and $4.7 million
(at an interest rate of 4.4%) were outstanding at December 31, 2003 and 2002,
respectively.
DEBT SECURITIES
6.125% SENIOR NOTES DUE 2006
The 6.125% Senior Notes are our unsecured, unguaranteed obligations, in an
initial aggregate principal amount of $150.0 million. The 6.125% Senior Notes
mature on February 1, 2006. The carrying amount on the 6.125% Senior Notes at
September 30, 2004 was $9.8 million, following the completion of a tender
offer and consent solicitation as a part of the Refinancing. The 6.125% Senior
Notes were issued under an indenture with Chase Manhattan Bank, N.A., as
Initial Trustee, and Fleet National Bank of Connecticut, as Note Trustee. The
6.125% Senior Notes bear interest at a rate of 6.125% per annum, with interest
payable semi-annually on February 1 and August 1 of each year. They are not
redeemable prior to maturity and are not subject to any sinking fund.
We may seek to acquire the remaining 6.125% Senior Notes by means of open
market purchases, privately negotiated transactions, one or more additional
tender offers, or otherwise.
DEBENTURES
We currently have two series of debentures: 7.75% Debentures due 2023, and
6.875% Debentures due 2026.
The 7.75% Debentures are our unsecured, unguaranteed obligations, in an
aggregate principal amount of $110.0 million. The 7.75% Debentures mature on
April 1, 2023. The carrying amount on the 7.75% Debentures at September 30,
2004 was $108.6 million. The 7.75% Debentures were issued under an indenture
with Chase Manhattan Bank, N.A., as Initial Trustee. The 7.75% Debentures bear
interest at a rate of 7.75% per annum, with interest payable semi-annually on
April 1 and October 1.
We may redeem the 7.75% Debentures in whole or in part on at least 30 but
not more than 60 days prior notice, at declining redemption prices beginning
in 2003 with annual adjustments to 101.378% in 2012. The 7.75% Debentures are
not subject to any sinking fund.
The 6.875% Debentures are our unsecured, unguaranteed obligations, in an
aggregate principal amount of $150.0 million. The 6.875% Debentures mature on
February 1, 2026. The carrying amount on the 6.875% Debentures at September
30, 2004 was $127.5 million. The 6.875% Debentures were issued under an
indenture with Chase Manhattan Bank, N.A., as Initial Trustee, and Fleet
National Bank of Connecticut, as Note Trustee. The 6.875% Debentures bear
interest at a rate of 6.875% per annum, with interest payable semi-annually on
February 1 and August 1 of each year. They are not redeemable prior to
maturity and are not subject to any sinking fund.
The indenture governing the 7.75% Debentures and the 6.875% Debentures
contains customary covenant provisions that include a limitation on our
ability to incur debt, grant liens, and enter into sale leaseback
transactions. The indenture does not contain any provisions limiting our
ability to incur unsecured indebtedness, including in a highly leveraged
transaction.
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The indenture governing the 7.75% Debentures and the 6.875% Debentures
includes a provision whereby if we incur indebtedness secured by assets
representing in excess of a specific percentage of our assets, we are
obligated to secure the Debentures on an equal and ratable basis with such
secured indebtedness. Our new Revolving Credit Facility is secured by assets
in excess of the threshold, and as a result of the Refinancing, the Debentures
became secured on an equal and ratable basis with the new Revolving Credit
Facility with respect to obligations thereunder in excess of such threshold.
The trustee for the 7.75% Debentures is Wells Fargo Bank, National
Association.
RECEIVABLES SECURITIZATION FACILITIES
We have entered into a receivables securitization facility (the "Receivables
Securitization"), which provides for the sale, on a 364-day basis, of up to
$150.0 million of our domestic accounts receivable. Under the terms of the
Receivables Securitization, the originators retain collection and
administrative responsibilities for the receivables in the pool. Amounts sold
under the Receivables Securitization were $106.1 million, $136.5 million,
$132.0 million, and $176.3 million as of December 31, 2003, December 31, 2002,
December 31, 2001, and December 31, 2000, respectively. Amounts sold under
this program were $100.0 million and $121.9 million as of September 30, 2004
and 2003, respectively. On April 15, 2004, the Receivables Securitization was
reduced to $115.0 million of our domestic accounts receivable. As part of the
Refinancing, the Receivables Securitization has been restructured to provide
three years of committed funding for up to $125.0 million of our domestic
accounts receivable, which represents an increase of $10.0 million from our
previous ability to sell up to $115.0 million of domestic accounts receivable.
In addition, our European subsidiaries have a separate program to sell their
eligible accounts receivable to agent banks. International accounts receivable
sold under this program were $93.3 million, $101.0 million, $105.6 million,
and $42.0 million as of December 31, 2003, December 31, 2002, December 31,
2001, and December 31, 2000, respectively. Amounts sold under this program
were $101.3 million and $96.8 million as of September 30, 2004 and September
30, 2003, respectively.
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DESCRIPTION OF THE NEW NOTES
The Company will issue $375,000,000 aggregate principal amount of 9 7/8%
Senior Notes due 2012 (the "Fixed Rate Notes"), and $225,000,000 aggregate
principal amount of Senior Floating Rate Notes due 2010 (the "Floating Rate
Notes" and, together with the Fixed Rate Notes, the "New Notes"), in each case
under an indenture (each, individually, an "Indenture" and, collectively, the
"Indentures"), among itself, the Guarantors and Wells Fargo Bank, National
Association, as Trustee (each, individually, a "Trustee," and, collectively,
the "Trustees"). These are the same indentures under which the Old Notes were
issued.
The following is a summary of the material provisions of each Indenture. It
does not include all of the provisions of the Indentures. We urge you to read
the Indentures because they define your rights. The terms of each series of
Notes include those stated in the applicable Indenture and those made part of
such Indenture by reference to the Trust Indenture Act of 1939, as amended
(the "TIA"). Copies of the forms of the Indentures may be obtained from us at
the address and phone number listed on the inside front cover of this
prospectus. You can find definitions of certain capitalized terms used in this
description under "-- Certain Definitions." Terms as used in this description
may differ in their meanings from similar terms used elsewhere in this
prospectus. For purposes of this section, references to the "Company" include
only Crompton Corporation, and not its Subsidiaries. The term "notes" or
"Notes," as used in this description, includes the Old Notes and the New
Notes.
The Notes are senior unsecured obligations of the Company, ranking equal in
right of payment with all other senior unsecured obligations of the Company.
The Notes are effectively subordinated to all existing and future secured debt
of the Company and the Guarantors to the extent of the assets securing such
debt. The Notes also are effectively subordinated to any debt, preferred stock
obligations and other liabilities of the Company's Subsidiaries that are not
Guarantors. As of September 30, 2004, the Company and the Guarantors had
approximately $260.0 million of secured debt outstanding, no borrowings under
our new Revolving Credit Facility, approximately $69.7 million of outstanding
letters of credit, and approximately $602.1 million of unsecured debt
outstanding. The Company's Subsidiaries that are not Guarantors had
approximately $4.2 million of debt outstanding. As of and for the year ended
December 31, 2003, our non-guarantor subsidiaries represented 46% of our total
assets before eliminations.
The Company will issue the Notes in fully registered form in denominations
of $1,000 and integral multiples thereof. Deutsche Bank Trust Company Americas
will initially act as Paying Agent and Registrar for the Notes. The Notes may
be presented for registration or transfer and exchange at the offices of the
Registrar. The Company may change any Paying Agent and Registrar without
notice to holders of the Notes (the "Holders"). The Company will pay principal
(and premium, if any) on the Notes at the Trustees' corporate trust office. At
the Company's option, interest may be paid at the Trustees' corporate trust
office or by check mailed to the registered address of Holders. The old notes
of any series that remain outstanding after the completion of the exchange
offer, together with the applicable new notes issued in connection with such
exchange offer, will be treated as a single class of securities under the
applicable Indenture under which such old notes and new notes were issued.
NEW NOTES VERSUS THE OLD NOTES
The new notes are substantially identical to the old notes, except that the
transfer restrictions and registration rights relating to the old notes do not
apply to the new notes.
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PRINCIPAL, MATURITY AND INTEREST
$600.0 million in aggregate principal amount of Notes will be issued in this
offering. Additional Notes of each series may be issued from time to time
without notice or the consent of holders of Notes, subject to the limitations
set forth under "-- Certain Covenants -- Limitation on Incurrence of
Additional Indebtedness."
The Notes will not be entitled to the benefit of any mandatory sinking fund.
FIXED RATE NOTES. The Fixed Rate Notes will mature on August 1, 2012 at
their principal amount, plus accrued and unpaid interest to, but not
including, the maturity date. Interest on the Fixed Rate Notes will accrue at
the rate of 9 7/8% per annum and will be payable semi-annually in arrears on
August 1 and February 1, commencing on August 1, 2005. The Company will make
each interest payment to the holders of record of the Fixed Rate Notes on the
immediately preceding July 15 and January 15. Interest on the Fixed Rate Notes
will accrue from the most recent date to which interest has been paid or, if
no interest has been paid, from and including the Issue Date of the Old Notes
and will be computed on the basis of a 360-day year comprised of twelve 30-day
months.
FLOATING RATE NOTES. The Floating Rate Notes will mature on August 1, 2010
at their principal amount, plus accrued and unpaid interest to, but not
including, the maturity date. The Floating Rate Notes will bear interest at a
rate per annum, reset quarterly, equal to LIBOR plus 5.75%, as determined by
the calculation agent (the "Calculation Agent"), which shall initially be the
Trustee for the Floating Rate Notes. Interest on the Floating Rate Notes will
be payable in arrears on August 1 and February 1, commencing on August 1, 2005.
The Company will make each interest payment to the holders of record of the
Floating Rate Notes on the immediately preceding July 15 and January 15.
Interest on the Floating Rate Notes will accrue from the most recent date to
which interest has been paid or, if no interest has been paid, from and
including the Issue Date of the Old Notes. Interest on the Floating Rate Notes
will be computed on the basis of a 360-day year for the actual number of days
elapsed.
Set forth below is a summary of certain of the defined terms used in the
Indenture relating solely to the Floating Rate Notes.
"LIBOR," with respect to an Interest Period, will be the rate (expressed as
a percentage per annum) for deposits in United States dollars for a six-month
period beginning on the second London Banking Day after the Determination Date
that appears on Telerate Page 3750 as of 11:00 a.m., London time, on the
Determination Date. If Telerate Page 3750 does not include such a rate or is
unavailable on a Determination Date, the Calculation Agent will request the
principal London office of each of four major banks in the London interbank
market, as selected by the Calculation Agent, to provide such bank's offered
quotation (expressed as a percentage per annum), as of approximately 11:00
a.m., London time, on such Determination Date, to prime banks in the London
interbank market for deposits in a Representative Amount in United States
dollars for a six-month period beginning on the second London Banking Day
after the Determination Date. If at least two such offered quotations are so
provided, LIBOR for the Interest Period will be the arithmetic mean of such
quotations. If fewer than two such quotations are so provided, the Calculation
Agent will request each of three major banks in New York City, as selected by
the Calculation Agent, to provide such bank's rate (expressed as a percentage
per annum), as of approximately 11:00 a.m., New York City time, on such
Determination Date, for loans in a Representative Amount in United States
dollars to leading European banks for a six-month period beginning on the
second London Banking Day after the Determination Date. If at least two such
rates are so provided, LIBOR for the Interest Period will be the arithmetic
mean of such rates. If fewer than two such rates are so provided, then LIBOR
for the Interest Period will be LIBOR in effect with respect to the
immediately preceding Interest Period.
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"Interest Period" means the period commencing on and including an interest
payment date and ending on and including the day immediately preceding the
next succeeding interest payment date, with the exception that the first
Interest Period shall commence on and include the Issue Date and end on and
include January 31, 2005.
"Determination Date," with respect to an Interest Period, will be the second
London Banking Day preceding the first day of the Interest Period.
"London Banking Day" is any day in which dealings in United States dollars
are transacted or, with respect to any future date, are expected to be
transacted in the London interbank market.
"Representative Amount" means a principal amount of not less than
U.S.$1,000,000 for a single transaction in the relevant market at the relevant
time.
"Telerate Page 3750" means the display designated as "Page 3750" on the
Moneyline Telerate service (or such other page as may replace Page 3750 on
that service).
The amount of interest for each day that the Floating Rate Notes are
outstanding (the "Daily Interest Amount") will be calculated by dividing the
interest rate in effect for such day by 360 and multiplying the result by the
principal amount of the Floating Rate Notes. The amount of interest to be paid
on the Floating Rate Notes for each Interest Period will be calculated by
adding the Daily Interest Amounts for each day in the Interest Period.
All percentages resulting from any of the above calculations will be
rounded, if necessary, to the nearest one hundred-thousandth of a percentage
point, with five one-millionths of a percentage point being rounded upwards
(e.g., 9.876545% (or .09876545) being rounded to 9.87655% (or .0987655)) and
all dollar amounts used in or resulting from such calculations will be rounded
to the nearest cent (with one-half cent being rounded upwards).
The interest rate on the Floating Rate Notes will in no event be higher than
the maximum rate permitted by New York law as the same may be modified by
United States law of general application.
REDEMPTION
Prior to (i) August 1, 2008, the Company may redeem all or a part of the
Fixed Rate Notes, and (ii) prior to August 1, 2007, the Company may redeem all
or a part of the Floating Rate Notes, in each case, upon not less than 30 nor
more than 60 days' notice, at a redemption price equal to the greater of:
o 100% of the principal amount of such series of Notes thereof; or
o the present value, as determined by an Independent Investment Banker, of
(a) 104.938% of the principal amount of such Fixed Rate Note or 103.500%
of such Floating Rate Note, as applicable, being redeemed as of (i) August
1, 2008 with respect to the Fixed Rate Notes, and (ii) August 1, 2007, with
respect to the Floating Rate Notes (assuming a 360-day year consisting of
twelve 30-day months), plus
(b) all required interest payments due on the applicable series of Notes
through (i) August 1, 2008 with respect to the Fixed Rate Notes, and (ii)
August 1, 2007 with respect to the Floating Rate Notes (assuming that the
rate of interest on the Floating Rate Notes for the period from the
redemption date through August 1, 2007 will be equal to the rate of interest
on the Floating Rate Notes in effect on the redemption date), in each case,
(excluding accrued interest), discounted to the redemption date on a semi-
annual basis (assuming a 360-day year consisting of twelve 30-day months) at
the Adjusted Treasury Rate, plus in each case, accrued interest to the
redemption date.
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"Adjusted Treasury Rate" means with respect to the applicable redemption
date, the rate per annum equal to the semi-annual equivalent yield to maturity
of the Comparable Treasury Issue, assuming a price for the Comparable Treasury
Issue (expressed as a percentage of its principal amount) equal to the
Comparable Treasury Price for such redemption date, plus 0.50%.
"Comparable Treasury Issue" means the United States Treasury security
selected by a Reference Treasury Dealer as having a maturity comparable to the
Stated Maturity of the principal of the Fixed Rate Notes or the Floating Rate
Notes, as applicable, that would be utilized at the time of selection and in
accordance with customary financial practices in pricing new issues of
corporate debt securities of comparable maturity to the remaining life of such
series of Notes.
"Comparable Treasury Price" means, with respect to any redemption date, (i)
the average of the bid and asked prices for the applicable Comparable Treasury
Issue (expressed in each case as a percentage of its principal amount) on the
third business day preceding such date of redemption or purchase, as set forth
in the daily statistical release (or any successor release) published by the
Federal Reserve Bank of New York and designated "Composite 3:30 p.m.
Quotations for U.S. Government Securities"; or (ii) if such release (or any
successor release) is not published or does not contain such prices on such
business day, the average of the Reference Treasury Dealer Quotations.
"Independent Investment Banker" means any Reference Treasury Dealer
appointed by the Trustee after consultation with the Company.
"Reference Treasury Dealer" means each of (1) Deutsche Bank Securities Inc.
or any successor (or, if the foregoing shall not be a primary U.S. Government
securities dealer in New York City (a "Primary Treasury Dealer"), the Company
shall substitute therefor another Primary Treasury Dealer) and (2) any Primary
Treasury Dealer selected by the Company.
"Reference Treasury Dealer Quotations" means, with respect to any Reference
Treasury Dealer on any redemption date, the average, as determined by the
Trustee, of the bid and asked prices for the applicable Comparable Treasury
Issue (expressed in each case as a percentage of its principal amount) quoted
in writing to the Trustee by such Reference Treasury Dealer at 5:00 p.m. on
the third business day preceding such redemption date.
Optional Redemption.
FIXED RATE NOTES. Except as set forth below, the Fixed Rate Notes are not
redeemable prior to August 1, 2008. Thereafter, the Company may redeem the
Fixed Rate Notes at its option, in whole or in part, upon not less than 30 nor
more than 60 days' notice, at the following redemption prices (expressed as
percentages of the principal amount thereof) if redeemed during the twelve-
month period commencing on August 1 of the year set forth below:
OPTIONAL
YEAR REDEMPTION PRICE
---- ----------------
2008........................................................ 104.938%
2009........................................................ 102.469%
2010 and thereafter......................................... 100.000%
In addition, the Company must pay accrued and unpaid interest on the Notes
redeemed to, but not including, the date of redemption.
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FLOATING RATE NOTES. Except as set forth below, the Floating Rate Notes are
not redeemable prior to August 1, 2007. Thereafter, the Company may redeem the
Floating Rate Notes its option, in whole or in part, upon not less than 30 nor
more than 60 days' notice, at the following redemption prices (expressed as
percentages of the principal amount thereof) if redeemed during the twelve-
month period commencing on August 1 of the year set forth below:
OPTIONAL
YEAR REDEMPTION PRICE
---- ----------------
2007........................................................ 103.500%
2008........................................................ 101.500%
2009 and thereafter......................................... 100.000%
In addition, the Company must pay accrued and unpaid interest on the Notes
redeemed to, but not including, the date of redemption.
Optional Redemption Upon Equity Offerings. Notwithstanding the foregoing,
(i) at any time prior to August 1, 2007, the Company may redeem up to 35% of
the aggregate principal amount of the Fixed Rate Notes outstanding at a
redemption price equal to 109.875% of the principal amount of thereof, and
(ii) at any time prior to August 1, 2007, the Company may redeem up to 35% of
the aggregate principal amount of the Floating Rate Notes outstanding at a
redemption price equal to 100% of the principal amount of thereof plus a
premium equal to the rate per annum on the Floating Rate Notes applicable on
the date on which notice of redemption is given, in each case on the
redemption date, together with accrued and unpaid interest, if any to, but not
including, such redemption date, with the net cash proceeds of one or more
Equity Offerings (as defined below); provided that
(1) at least 65% of the principal amount of Notes of the series being
redeemed remains outstanding immediately after any such redemption; and
(2) the Company makes such redemption not more than 180 days after the
consummation of any such Equity Offering.
"Equity Offering" means any public or private issuance or sale of Qualified
Capital Stock of the Company.
SELECTION AND NOTICE OF REDEMPTION
In the event that the Company chooses to redeem less than all of any series
of the Notes, selection of the Notes of such series for redemption will be
made by the applicable Trustee either
(1) in compliance with the requirements of the principal national
securities exchange, if any, on which such Notes are listed; or,
(2) on a pro rata basis, by lot or by such method as the applicable
Trustee shall deem fair and appropriate.
No Notes of a principal amount of $1,000 or less shall be redeemed in part.
If a partial redemption is made with the proceeds of an Equity Offering, the
applicable Trustee will select the Notes of such series only on a pro rata
basis or on as nearly a pro rata basis as is practicable (subject to DTC
procedures). Notice of redemption will be mailed by first-class mail at least
30 but not more than 60 days before the redemption date to each Holder of
Notes to be redeemed at its registered address. If any Note is to be redeemed
in part only, then the notice of redemption that relates to such Note must
state the portion of the principal amount thereof to be redeemed. A new Note
in a principal amount equal to the unredeemed portion thereof will be issued
in the name of the Holder thereof upon cancellation of the original Note. On
and after the redemption date, interest will cease to accrue on Notes or
portions thereof called for redemption as long as the Company has deposited
with the Paying Agent funds in satisfaction of the applicable redemption
price.
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GUARANTEES
The Guarantors will jointly and severally and unconditionally guarantee the
Company's obligations under the Indentures and the Notes on a senior unsecured
basis. The obligations of each Guarantor under its Guarantee will be limited
as necessary to prevent the Guarantee from constituting a fraudulent
conveyance or fraudulent transfer under applicable law.
Each Guarantor may consolidate with or merge into or sell its assets to the
Company or another Guarantor that is a Wholly Owned Restricted Subsidiary of
the Company without limitation, or with other Persons upon the terms and
conditions set forth in the Indentures. See "-- Certain Covenants -- Merger,
Consolidation and Sale of Assets." In the event all of the Capital Stock of a
Guarantor is sold by the Company and the sale complies with the provisions set
forth in "-- Certain Covenants -- Limitation on Asset Sales," the Guarantor's
Guarantee will be released. In addition, if the Company designates any
Restricted Subsidiary that is a Guarantor as an Unrestricted Subsidiary in
accordance with the provisions of the applicable Indenture, the Guarantee of
such Guarantor will be released. Furthermore, a Guarantor will be released
from its Guarantee upon the legal or covenant defeasance of the Notes as
described under Legal Defeasance and Covenant Defeasance.
CHANGE OF CONTROL
Upon the occurrence of a Change of Control, each Holder will have the right
to require that the Company purchase all or a portion of such Holder's Notes
pursuant to the offer described below (the "Change of Control Offer"), at a
purchase price equal to 101% of the principal amount thereof plus accrued
interest to, but not including, the date of purchase.
Within 30 days following the date upon which the Change of Control occurred,
the Company must send, by first class mail, a notice to each Holder, with a
copy to each Trustee, which notice shall govern the terms of the Change of
Control Offer. Such notice shall state, among other things, the purchase date,
which must be no earlier than 30 days nor later than 60 days from the date
such notice is mailed, other than as may be required by law (the "Change of
Control Payment Date"). Holders electing to have a Note purchased pursuant to
a Change of Control Offer will be required to surrender the Note, with the
form entitled "Option of Holder to Elect Purchase" on the reverse of the Note
completed, to the Paying Agent at the address specified in the notice prior to
the close of business on the third business day prior to the Change of Control
Payment Date.
The Company will not be required to make a Change of Control Offer upon a
Change of Control if a third party makes the Change of Control Offer in the
manner, at the times and otherwise in compliance with the requirements set
forth in the Indentures applicable to a Change of Control Offer made by the
Company and purchases all Notes validly tendered and not withdrawn under such
Change of Control Offer.
If a Change of Control Offer is made, there can be no assurance that the
Company will have available funds sufficient to pay the Change of Control
purchase price for all the Notes that might be delivered by Holders seeking to
accept the Change of Control Offer. In the event the Company is required to
purchase outstanding Notes pursuant to a Change of Control Offer, the Company
expects that it would seek third party financing to the extent it does not
have available funds to meet its purchase obligations. However, there can be
no assurance that the Company would be able to obtain such financing.
In addition, the Credit Agreement prohibits the Company from making the
Change of Control Offer. There can be no assurance that the Company will
obtain the consents necessary to consummate a Change of Control Offer from the
lenders under the Credit Agreement or other agreements governing outstanding
Indebtedness which may in the future prohibit the Change of Control Offer.
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Neither the Board of Directors of the Company nor the Trustees may waive the
covenant relating to a Holder's right to redemption upon a Change of Control.
Restrictions in the Indentures described herein on the ability of the Company
and its Restricted Subsidiaries to incur additional Indebtedness, to grant
liens on its property, to make Restricted Payments and to make Asset Sales may
also make more difficult or discourage a takeover of the Company, whether
favored or opposed by the management of the Company. Consummation of any such
transaction in certain circumstances may require redemption or repurchase of
the Notes, and there can be no assurance that the Company or the acquiring
party will have sufficient financial resources to effect such redemption or
repurchase. Such restrictions and the restrictions on transactions with
Affiliates may, in certain circumstances, make more difficult or discourage
any leveraged buyout of the Company or any of its Subsidiaries by the
management of the Company. While such restrictions cover a wide variety of
arrangements which have traditionally been used to effect highly leveraged
transactions, the Indentures may not afford the Holders protection in all
circumstances from the adverse aspects of a highly leveraged transaction,
reorganization, restructuring, merger or similar transaction.
The Company will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with the
repurchase of Notes pursuant to a Change of Control Offer. To the extent that
the provisions of any securities laws or regulations conflict with the "Change
of Control" provisions of the Indentures, the Company shall comply with the
applicable securities laws and regulations and shall not be deemed to have
breached its obligations under the "Change of Control" provisions of the
Indentures by virtue thereof.
The "Change of Control" provisions described above will apply during any
Suspension Period.
COVENANT SUSPENSION; COVENANT FALLAWAY
During any period of time (a "Suspension Period") that (i) the ratings
assigned to a series of Notes issued under an Indenture by the Rating Agencies
are Investment Grade Ratings and (ii) no Default or Event of Default has
occurred and is continuing under such Indenture, the Company and its
Restricted Subsidiaries shall not be subject to the terms of the covenants of
such Indenture described under "Limitations on Incurrence of Additional
Indebtedness," "Limitations on Restricted Payments," "Limitations on Dividend
and Other Payment Restrictions Affecting Restricted Subsidiaries,"
"Limitations on Transactions with Affiliates," "Limitations on Asset Sales",
and clause (2) of the first paragraph under "Limitations on Mergers,
Consolidations, Etc." (collectively, the "Affected Covenants"). In the event
that the Company and its Restricted Subsidiaries are not subject to the
Affected Covenants with respect to a series of Notes for any period of time as
a result of the preceding sentence and, subsequently, the applicable Rating
Agency has in effect, withdrawn or downgraded the ratings assigned to such
Notes below the required Investment Grade Ratings, then for such Notes the
Company and its Restricted Subsidiaries will thereafter again be subject to
the Affected Covenants and compliance with respect to Restricted Payments made
after the time of such withdrawal or downgrade will be calculated in
accordance with the provisions of the covenant described under "-- Limitations
on Restricted Payments" as if such covenant had been in effect since the date
of the execution of the applicable Indenture. For purposes of the "--
Limitation on Asset Sales" covenant, upon the reversion of any Suspension
Period, the unutilized Net Proceeds Offer amount will be reset to zero.
CERTAIN COVENANTS
The Indentures will contain, among others, the following covenants:
Limitation on Incurrence of Additional Indebtedness. (a) The Company will
not, and will not permit any of its Restricted Subsidiaries to, directly or
indirectly, create, incur, assume,
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guarantee, acquire, become liable, contingently or otherwise, with respect to,
or otherwise become responsible for payment of (collectively, "incur") any
Indebtedness (other than Permitted Indebtedness); provided, however, that if
no Default or Event of Default shall have occurred and be continuing at the
time of or as a consequence of the incurrence of any such Indebtedness, the
Company or any of its Restricted Subsidiaries that is or, upon such
incurrence, becomes a Guarantor may incur Indebtedness (including, without
limitation, Acquired Indebtedness) and any Restricted Subsidiary of the
Company that is not or will not, upon such incurrence, become a Guarantor may
incur Acquired Indebtedness, in each case if on the date of the incurrence of
such Indebtedness, after giving effect to the incurrence thereof, the
Consolidated Fixed Charge Coverage Ratio of the Company would have been
greater than 2.0 to 1.0.
(b) The Company will not, and will not permit any Guarantor to, directly or
indirectly, incur any Indebtedness which by its terms (or by the terms of any
agreement governing such Indebtedness) is expressly subordinated in right of
payment to any other Indebtedness of the Company or such Guarantor, as the
case may be, unless such Indebtedness is also by its terms (or by the terms of
any agreement governing such Indebtedness) made expressly subordinate to the
Notes or the applicable Guarantee, as the case may be, to the same extent and
in the same manner as such Indebtedness is subordinated to other Indebtedness
of the Company or such Guarantor, as the case may be. For purposes of the
foregoing, no Indebtedness will be deemed to be subordinated in right of
payment to any other Indebtedness of the Company or any Guarantor solely by
virtue of such Indebtedness being unsecured or by virtue of the fact that the
holders of such Indebtedness have entered into one or more intercreditor
agreements giving one or more of such holders priority over the other holders
in the collateral held by them.
Limitation on Restricted Payments. The Company will not, and will not cause
or permit any of its Restricted Subsidiaries to, directly or indirectly:
(1) declare or pay any dividend or make any distribution (other than
dividends or distributions payable in Qualified Capital Stock of the
Company) on or in respect of shares of the Company's Capital Stock to
holders of such Capital Stock;
(2) purchase, redeem or otherwise acquire or retire for value any Capital
Stock of the Company;
(3) make any principal payment on, purchase, defease, redeem, prepay,
decrease or otherwise acquire or retire for value, prior to any scheduled
final maturity, scheduled repayment or scheduled sinking fund payment, any
Subordinated Indebtedness (other than the purchase, repurchase or other
acquisition of Subordinated Indebtedness in anticipation of satisfaction of
a sinking fund payment or final maturity, in each case within six months of
the due date of such sinking fund obligation or final maturity); or
(4) make any Investment (other than Permitted Investments) (each of the
foregoing actions set forth in clauses (1), (2), (3) and (4) being referred
to as a "Restricted Payment");
if at the time of such Restricted Payment or immediately after giving effect
thereto,
(i) a Default or an Event of Default shall have occurred and be
continuing; or
(ii) the Company is not able to incur at least $1.00 of additional
Indebtedness (other than Permitted Indebtedness) in compliance with the
"Limitation on Incurrence of Additional Indebtedness" covenant; or
(iii) the aggregate amount of Restricted Payments (including such
proposed Restricted Payment) made subsequent to the Issue Date (the amount
expended for such purposes, if other than in cash, being the fair market
value of such property as determined in good faith by the Board of Directors
of the Company) shall exceed the sum of
49
(w) 50% of the cumulative Consolidated Net Income (or if cumulative
Consolidated Net Income shall be a loss, minus 100% of such loss) of the
Company earned beginning in the quarter during which the Issue Date
occurs to the end of the Company's most recently ended fiscal quarter for
which financial statements have been made available to the Trustee (the
"Reference Date") (treating such period as a single accounting period);
plus
(x) 100% of the aggregate net cash proceeds received by the Company
from any Person (other than a Subsidiary of the Company) from the
issuance and sale subsequent to the Issue Date and on or prior to the
Reference Date of Qualified Capital Stock of the Company or warrants,
options or other rights to acquire Qualified Capital Stock of the Company
(including the cash paid on exercise of such warrants, options, or rights
but excluding any debt security that is convertible into, or exchangeable
for, Qualified Capital Stock); plus
(y) without duplication of any amounts included in clause (iii)(x)
above, 100% of the aggregate net cash proceeds of any equity contribution
received by the Company from a holder of the Company's Capital Stock
subsequent to the Issue Date and on or prior to the Reference Date
(excluding, in the case of clauses (iii)(x) and (y), any net cash
proceeds from an Equity Offering to the extent used to redeem the Notes
in compliance with the provisions set forth under "Redemption -- Optional
Redemption Upon Equity Offerings."); plus
(z) without duplication, the sum of:
(1) the aggregate amount returned in cash on or with respect to
Investments (other than Permitted Investments) made subsequent to the
Issue Date whether through interest payments, principal payments,
dividends or other distributions or payments;
(2) the net cash proceeds received by the Company or any of its
Restricted Subsidiaries from the disposition of all or any portion of
such Investments (other than to a Subsidiary of the Company); and
(3) upon redesignation of an Unrestricted Subsidiary as a
Restricted Subsidiary, the fair market value of such Subsidiary;
provided, however, that the sum of clauses (1), (2) and (3) above
shall not exceed the aggregate amount of all such Investments made
subsequent to the Issue Date.
Notwithstanding the foregoing, the provisions set forth in the immediately
preceding paragraph do not prohibit:
(1) the payment of any dividend within 60 days after the date of
declaration of such dividend if the dividend would have been permitted on
the date of declaration;
(2) the acquisition of any shares of Capital Stock of the Company, either
(i) solely in exchange for shares of Qualified Capital Stock of the Company
or (ii) through the application of net proceeds of a substantially
concurrent sale for cash (other than to a Subsidiary of the Company) of
shares of Qualified Capital Stock of the Company;
(3) the acquisition of any Subordinated Indebtedness either (i) solely in
exchange for shares of Qualified Capital Stock of the Company, or (ii)
through the application of net proceeds of a substantially concurrent sale
for cash (other than to a Subsidiary of the Company) of (a) Qualified
Capital Stock of the Company or (b) Refinancing Indebtedness;
(4) so long as no Default or Event of Default shall have occurred and be
continuing, repurchases by the Company of Common Stock (or options, warrants
or other rights to purchase Common Stock) of the Company from officers,
directors and employees of the Company or any of its Subsidiaries (in each
case, current or former) or their authorized
50
representatives upon the death, disability or termination of employment of
such employees or termination of their seat on the board of the Company in
an aggregate amount not to exceed $2.5 million in any calendar year;
(5) so long as no Default or Event of Default shall have occurred and be
continuing, payments of a quarterly dividend on the Common Stock of the
Company not to exceed $0.05 per share;
(6) the repurchase of Capital Stock deemed to occur upon the exercise of
stock options to the extent such Capital Stock represents a portion of the
exercise price of the stock options;
(7) make cash payments in lieu of the issuance of fractional shares in an
aggregate amount not to exceed $100,000 in the aggregate;
(8) satisfaction of Change of Control obligations on Subordinated
Obligations once the Company has fulfilled its obligations relating to a
Change of Control under the Indentures; and
(9) Restricted Payments which, when taken together with all other
Restricted Payments pursuant to this clause (9), do not exceed $20 million.
In determining the aggregate amount of Restricted Payments made subsequent
to the Issue Date in accordance with clause (iii) of the immediately preceding
paragraph, amounts expended pursuant to clauses (1), (2) (ii), (3)(ii)(a),
(4), (5), (7) and (9) shall be included in such calculation.
Limitation on Asset Sales. The Company will not, and will not permit any of
its Restricted Subsidiaries to, consummate an Asset Sale unless
(1) the Company or the applicable Restricted Subsidiary, as the case may
be, receives consideration at the time of such Asset Sale at least equal to
the fair market value of the assets sold or otherwise disposed of (as
determined in good faith by the Company's Board of Directors);
(2) at least 75% of the consideration received by the Company or the
Restricted Subsidiary, as the case may be, from such Asset Sale shall be in
the form of cash, Cash Equivalents, Additional Assets and/or Replacement
Assets (as defined) and is received at the time of such disposition;
provided that the amount of any liabilities (as shown on the Company's or
such Restricted Subsidiary's most recent balance sheet) of the Company or
any such Restricted Subsidiary (other than liabilities that are by their
terms subordinated to the Notes or any Guarantee of a Guarantor) that are
assumed by the transferee of any such assets shall be deemed to be cash for
purposes of this provision; and
(3) upon the consummation of an Asset Sale (other than an Excluded Asset
Sale, the proceeds of which may be used as set forth in (c) below), the
Company shall apply, or cause such Restricted Subsidiary to apply, the Net
Cash Proceeds relating to such Asset Sale within 365 days of receipt thereof
either
(a) to permanently reduce senior secured Indebtedness of the Company
or any Restricted Subsidiary; and, in the case of any such outstanding
Indebtedness under any revolving credit facility, effect a permanent
reduction in the availability under such revolving credit facility;
(b) to make a capital expenditure or investment in properties and
assets that replace the properties and assets that were the subject of
such Asset Sale or in properties and assets (including Capital Stock)
that will be used in the business of the Company and its Restricted
Subsidiaries as existing on the Issue Date or in businesses reasonably
related thereto ("Replacement Assets");
51
(c) to the payment (i) of all criminal and civil judgments rendered
against, and all civil and criminal settlements entered into by, the
Company or any of its Subsidiaries in connection with antitrust
investigations and related matters and all costs and expenses related
thereto ("Antitrust Liabilities") and (ii) after the Board of Directors
of the Company shall have delivered a certified resolution to the Trustee
to the effect that the Company is not required, under the rules and
regulations of the SEC under the 1934 Act, to state in its annual report
that the Antitrust Liabilities could have a material adverse effect on
the Company's financial condition, results of operation and prospects, of
pension and environmental liabilities of the Company or any of its
Restricted Subsidiaries, in each case only with respect to the Net Cash
Proceeds from Excluded Asset Sales; and/or
(d) a combination of prepayment and investment permitted by the
foregoing clauses (3)(a) and (3)(b).
Pending the final application of such Net Cash Proceeds, the Company may (a)
temporarily reduce borrowings under the Credit Agreement or any other
revolving credit facility and (b) with respect to Net Cash Proceeds from
Excluded Asset Sales, retain such Net Cash Proceeds in a blocked account
pending application as set forth in clause 3(c) above; provided that upon a
determination made by the Board of Directors of the Company that such Net Cash
Proceeds are no longer needed for such purpose, such Net Cash Proceeds will
then be applied as set forth in clauses 3(a), 3(b) and/or 3(d) of the
preceding sentence. On the 366th day after an Asset Sale or such earlier date,
if any, as the Board of Directors of the Company or of such Restricted
Subsidiary determines not to apply the Net Cash Proceeds relating to such
Asset Sale as set forth in clauses (3)(a), (3)(b) and (3)(d) of the preceding
paragraph (each, a "Net Proceeds Offer Trigger Date"), such aggregate amount
of Net Cash Proceeds which have not been applied on or before such Net
Proceeds Offer Trigger Date as permitted in clauses (3)(a), (3)(b) and (3)(d)
of the preceding paragraph (each a "Net Proceeds Offer Amount") shall be
applied by the Company or such Restricted Subsidiary to make an offer to
purchase (the "Net Proceeds Offer") to all Holders and, to the extent required
by the terms of any Pari Passu Indebtedness, to all holders of such Pari Passu
Indebtedness, on a date (the "Net Proceeds Offer Payment Date") not less than
30 nor more than 60 days following the applicable Net Proceeds Offer Trigger
Date, from all Holders (and holders of any such Pari Passu Indebtedness) on a
pro rata basis, that amount of Notes (and Pari Passu Indebtedness) equal to
the Net Proceeds Offer Amount at a price equal to 100% of the principal amount
of the Notes (and Pari Passu Indebtedness) to be purchased, plus accrued and
unpaid interest thereon, if any, to the date of purchase; provided, however,
that if at any time any non-cash consideration received by the Company or any
Restricted Subsidiary of the Company, as the case may be, in connection with
any Asset Sale is converted into or sold or otherwise disposed of for cash
(other than interest received with respect to any such non-cash
consideration), then such conversion or disposition shall be deemed to
constitute an Asset Sale hereunder and the Net Cash Proceeds thereof shall be
applied in accordance with this covenant.
The Company may defer the Net Proceeds Offer until there is an aggregate
unutilized Net Proceeds Offer Amount equal to or in excess of $10.0 million
resulting from one or more Asset Sales (at which time, the entire unutilized
Net Proceeds Offer Amount, and not just the amount in excess of $10.0 million,
shall be applied as required pursuant to this paragraph).
In the event of the transfer of substantially all (but not all) of the
property and assets of the Company and its Restricted Subsidiaries as an
entirety to a Person in a transaction permitted under "-- Merger,
Consolidation and Sale of Assets", which transaction does not constitute a
Change of Control, the successor corporation shall be deemed to have sold the
properties and assets of the Company and its Restricted Subsidiaries not so
transferred for purposes of this covenant, and shall comply with the
provisions of this covenant with respect to such deemed sale as if it were an
Asset Sale. In addition, the fair market value of such
52
properties and assets of the Company or its Restricted Subsidiaries deemed to
be sold shall be deemed to be Net Cash Proceeds for purposes of this covenant.
Each Net Proceeds Offer will be mailed to the record Holders as shown on the
register of Holders within 30 days following the Net Proceeds Offer Trigger
Date, with a copy to the Trustees, and shall comply with the procedures set
forth in the Indentures. Upon receiving notice of the Net Proceeds Offer,
Holders may elect to tender their Notes in whole or in part in integral
multiples of $1,000 in exchange for cash. To the extent Holders properly
tender Notes and holders of Pari Passu Indebtedness properly tender such Pari
Passu Indebtedness in an amount exceeding the Net Proceeds Offer Amount, the
tendered Notes and Pari Passu Indebtedness will be purchased on a pro rata
basis based on the aggregate amounts of Notes and Pari Passu Indebtedness
tendered (and the applicable Trustee shall select the tendered Notes of
tendering Holders on a pro rata basis based on the amount of Notes tendered).
A Net Proceeds Offer shall remain open for a period of 20 business days or
such longer period as may be required by law. If any Net Cash Proceeds remain
after the consummation of any Net Proceeds Offer, the Company may use those
Net Cash Proceeds for any purpose not otherwise prohibited by the Indentures.
Upon completion of each Net Proceeds Offer, the amount of Net Cash Proceeds
will be reset at zero.
The Company will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with the
repurchase of Notes pursuant to a Net Proceeds Offer. To the extent that the
provisions of any securities laws or regulations conflict with the "Asset
Sale" provisions of the Indentures, the Company shall comply with the
applicable securities laws and regulations and shall not be deemed to have
breached its obligations under the "-- Limitations on Asset Sales" provisions
of the Indentures by virtue thereof.
Limitation on Dividend and Other Payment Restrictions Affecting Restricted
Subsidiaries. The Company will not, and will not cause or permit any of its
Restricted Subsidiaries to, directly or indirectly, create or otherwise cause
or permit to exist or become effective any encumbrance or restriction on the
ability of any Restricted Subsidiary of the Company to
(1) pay dividends or make any other distributions on or in respect of its
Capital Stock;
(2) make loans or advances to the Company or any other Restricted
Subsidiary or to pay any Indebtedness or other obligation owed to the
Company or any other Restricted Subsidiary of the Company; or
(3) transfer any of its property or assets to the Company or any other
Restricted Subsidiary of the Company, except in each case for such
encumbrances or restrictions existing under or by reason of
(a) applicable law, rules, regulations or orders;
(b) the Indentures, the Notes and the Guarantees by the Guarantors;
(c) customary non-assignment provisions of any contract or any lease
governing a leasehold interest of any Restricted Subsidiary of the
Company;
(d) any agreement or instrument governing Acquired Indebtedness, which
encumbrance or restriction is not applicable to any Person, or the
properties or assets of any Person, other than the Person or the
properties or assets of the Person or any Subsidiary of such Person so
acquired;
(e) agreements existing on the Issue Date to the extent and in the
manner such agreements are in effect on the Issue Date and any
amendments, modifications, restatements, renewals, or supplements
thereof, provided that such amendment, modification, restatement, renewal
or supplement does not contain provisions relating
53
to such encumbrance or restriction that are less favorable to the Company
in any material respect as determined by the Board of Directors of the
Company in their reasonable and good faith judgment than the provisions
relating to such encumbrance or restriction in the agreement existing on
the Issue Date;
(f) the Credit Agreement;
(g) restrictions on the transfer of assets subject to any Lien
permitted under the Indentures imposed by the holder of such Lien;
(h) restrictions imposed by any agreement to sell assets or Capital
Stock permitted under the Indentures to any Person pending the closing of
such sale;
(i) customary provisions in joint venture agreements and other similar
agreements (in each case relating solely to the respective joint venture
or similar entity or the equity interests therein) entered into in the
ordinary course of business;
(j) an agreement governing Indebtedness incurred to Refinance the
Indebtedness issued, assumed or incurred pursuant to an agreement
referred to in clauses (b), (d), (e) and (g) above; provided, however,
that the provisions relating to such encumbrance or restriction contained
in any such Indebtedness are no less favorable to the Company in any
material respect as determined by the Board of Directors of the Company
in their reasonable and good faith judgment than the provisions relating
to such encumbrance or restriction contained in agreements referred to in
such clauses (b), (d), (e) and (g);
(k) Indebtedness or other contractual requirements of a Securitization
Entity in connection with a Qualified Securitization Transaction;
provided that such restrictions apply only to such Securitization Entity.
(l) restrictions on cash or other deposits of net worth imposed by
contracts entered into in the ordinary course of business;
(m) encumbrances on property that exist at the time the property was
acquired by the Company or a Restricted Subsidiary; and
(n) encumbrances contained in Permitted Foreign Subsidiary
Indebtedness that are no less favorable to the Company in any material
respect as determined by the Board of Directors of the Company in their
reasonable and good faith judgment than the restrictions contained in the
Credit Agreement as in effect on the date hereof.
Limitation on Preferred Stock of Restricted Subsidiaries. The Company will
not permit any of its Restricted Subsidiaries to issue any Preferred Stock
(other than to the Company or to a Restricted Subsidiary) or permit any Person
(other than the Company or a Restricted Subsidiary) to own any Preferred Stock
of any Restricted Subsidiary of the Company.
Limitation on Liens. The Company will not, and will not cause or permit any
of its Restricted Subsidiaries to, directly or indirectly, create, incur,
assume or permit or suffer to exist any Liens of any kind against or upon any
property or assets of the Company or any of its Restricted Subsidiaries
whether owned on the Issue Date or acquired after the Issue Date, or any
proceeds therefrom, or assign or otherwise convey any right to receive income
or profits therefrom unless:
(1) in the case of Liens securing Subordinated Indebtedness, the Notes or
the Guarantee of such Guarantor, as the case may be, are secured by a Lien
on such property, assets or proceeds that is senior in priority to such
Liens; and
(2) in all other cases, the Notes or the Guarantee of such Guarantor, as
the case may be, are equally and ratably secured, except for:
54
(a) Liens existing as of the Issue Date to the extent and in the
manner such Liens are in effect on the Issue Date;
(b) Liens securing obligations under the Credit Agreement incurred
pursuant to clauses (2) and (14) of the definition of "Permitted
Indebtedness" and Liens securing obligations under clauses (18) and (19)
of the definition of Permitted Indebtedness;
(c) Liens securing the Notes and the Guarantees;
(d) Liens securing the Existing Securities incurred pursuant to the
Existing Indentures;
(e) Liens securing Indebtedness for borrowed money (including secured
reimbursement obligations under letters of credit (and similar
instruments) and related fees) if, after giving effect to the granting of
any such Lien, the Secured Leverage Ratio of the Company and its
Restricted Subsidiaries is no more than 1.5 to 1.0;
(f) Liens in favor of the Company or a Restricted Subsidiary of the
Company on assets of any Restricted Subsidiary of the Company;
(g) Liens securing Refinancing Indebtedness which is incurred to
Refinance any Indebtedness which has been secured by a Lien permitted
under the Indentures and which has been incurred in accordance with the
provisions of the Indentures; provided, however, that such Liens: (i) are
not materially less favorable to the Holders and are not materially more
favorable to the lienholders with respect to such Liens than the Liens in
respect of the Indebtedness being Refinanced (in each case as determined
in the good faith judgment of the Board of Directors of the Company); and
(ii) do not extend to or cover any property or assets of the Company or
any of its Restricted Subsidiaries not securing the Indebtedness so
Refinanced; and
(h) Permitted Liens.
Merger, Consolidation and Sale of Assets. The Company will not, in a single
transaction or series of related transactions, consolidate or merge with or
into any Person, or sell, assign, transfer, lease, convey or otherwise dispose
of (or cause or permit any Restricted Subsidiary of the Company to sell,
assign, transfer, lease, convey or otherwise dispose of) all or substantially
all of the Company's assets (determined on a consolidated basis for the
Company and the Company's Restricted Subsidiaries) whether as an entirety or
substantially as an entirety to any Person unless:
(1) either:
(a) the Company shall be the surviving or continuing corporation; or
(b) the Person (if other than the Company) formed by such
consolidation or into which the Company is merged or the Person which
acquires by sale, assignment, transfer, lease, conveyance or other
disposition the properties and assets of the Company and of the Company's
Restricted Subsidiaries substantially as an entirety (the "Surviving
Entity");
(x) shall be a corporation organized or existing under the laws of
the United States or any State thereof or the District of Columbia;
and
(y) shall expressly assume, by supplemental indenture (in form and
substance satisfactory to the applicable Trustee), executed and
delivered to the applicable Trustee, the punctual payment of the
principal of, and premium, if any, and interest on all of the
applicable Notes and the performance of every covenant of the
applicable Notes, the applicable Indenture and the applicable
Registration Rights Agreement on the part of the Company to be
performed or observed;
55
(2) immediately after giving effect to such transaction and the
assumption contemplated by clause (1)(b)(y) above (including giving effect
to any Indebtedness and Acquired Indebtedness incurred or anticipated to be
incurred in connection with or in respect of such transaction), the Company
or such Surviving Entity, as the case may be, shall be able to incur at
least $1.00 of additional Indebtedness (other than Permitted Indebtedness)
pursuant to the "-- Limitation on Incurrence of Additional Indebtedness"
covenant;
(3) immediately after giving effect to such transaction and the
assumption contemplated by clause (1)(b)(y) above (including, without
limitation, giving effect to any Indebtedness and Acquired Indebtedness
incurred or anticipated to be incurred and any Lien granted in connection
with or in respect of the transaction), no Default or Event of Default shall
have occurred or be continuing; and
(4) the Company or the Surviving Entity shall have delivered to the
Trustee an officers' certificate and an opinion of counsel, each stating
that such consolidation, merger, sale, assignment, transfer, lease,
conveyance or other disposition and, if a supplemental indenture is required
in connection with such transaction, such supplemental indenture comply with
the applicable provisions of the applicable Indenture and that all
conditions precedent in the applicable Indenture relating to such
transaction have been satisfied.
For purposes of the foregoing, the transfer (by lease, assignment, sale or
otherwise, in a single transaction or series of transactions) of all or
substantially all of the properties or assets of one or more Restricted
Subsidiaries of the Company, the Capital Stock of which constitutes all or
substantially all of the properties and assets of the Company, shall be deemed
to be the transfer of all or substantially all of the properties and assets of
the Company.
Notwithstanding the foregoing clauses (1), (2) and (3), the Company may (x)
merge with an Affiliate that is a Person that has no material assets or
liabilities and which was organized solely for the purpose of reorganizing the
Company in another jurisdiction and (y) merge with or into a Wholly Owned
Domestic Restricted Subsidiary, and as to (y) need not comply with paragraph
(2) above.
The Indentures will provide that upon any consolidation, combination or
merger or any transfer of all or substantially all of the assets of the
Company in accordance with the foregoing in which the Company is not the
continuing corporation, the successor Person formed by such consolidation or
into which the Company is merged or to which such conveyance, lease or
transfer is made shall succeed to, and be substituted for, and may exercise
every right and power of, the Company under the Indentures and the Notes with
the same effect as if such surviving entity had been named as such.
Each Guarantor (other than any Guarantor whose Guarantee is to be released
in accordance with the terms of the Guarantee and the Indentures in connection
with any transaction complying with the provisions of "-- Limitation on Asset
Sales") will not, and the Company will not cause or permit any Guarantor to,
consolidate with or merge with or into any Person other than the Company or
any other Guarantor unless:
(1) the entity formed by or surviving any such consolidation or merger
(if other than the Guarantor) or to which such sale, lease, conveyance or
other disposition shall have been made is a corporation organized and
existing under the laws of the United States or any State thereof or the
District of Columbia;
(2) such entity assumes by supplemental indentures all of the obligations
of the Guarantor on the Guarantee;
(3) immediately after giving effect to such transaction, no Default or
Event of Default shall have occurred and be continuing; and
56
(4) immediately after giving effect to such transaction and the use of
any net proceeds therefrom on a pro forma basis, the Company could satisfy
the provisions of clause (2) of the first paragraph of this covenant.
Any merger or consolidation of a Guarantor with and into the Company (with
the Company being the surviving entity) or another Guarantor that is a Wholly
Owned Restricted Subsidiary of the Company need only comply with clause (4) of
the first paragraph of this covenant.
Limitations on Transactions with Affiliates. (a) The Company will not, and
will not permit any of its Restricted Subsidiaries to, directly or indirectly,
enter into or permit to exist any transaction or series of related
transactions (including, without limitation, the purchase, sale, lease or
exchange of any property or the rendering of any service) with, or for the
benefit of, any of its Affiliates (each an "Affiliate Transaction"), other
than (x) Affiliate Transactions permitted under paragraph (b) below and (y)
Affiliate Transactions on terms that are no less favorable than those that
might reasonably have been obtained in a comparable transaction at such time
on an arm's-length basis from a Person that is not an Affiliate of the Company
or such Restricted Subsidiary.
All Affiliate Transactions (and each series of related Affiliate
Transactions which are similar or part of a common plan) involving aggregate
payments or other property with a fair market value in excess of $15.0 million
shall be approved by the Board of Directors of the Company or such Restricted
Subsidiary, as the case may be, such approval to be evidenced by a Board
Resolution stating that such Board of Directors has determined that such
transaction complies with the foregoing provisions. If the Company or any
Restricted Subsidiary of the Company enters into an Affiliate Transaction (or
a series of related Affiliate Transactions related to a common plan) that
involves an aggregate fair market value of more than $30.0 million, the
Company or such Restricted Subsidiary, as the case may be, shall, prior to the
consummation thereof, obtain a favorable opinion as to the fairness of such
transaction or series of related transactions to the Company or the relevant
Restricted Subsidiary, as the case may be, from a financial point of view,
from an Independent Financial Advisor and file the same with the Trustees.
(b) The restrictions set forth in this covenant shall not apply to:
(1) reasonable fees and compensation paid to and indemnity provided on
behalf of, officers, directors, employees or consultants of the Company or
any Restricted Subsidiary of the Company as determined in good faith by the
Company's Board of Directors or senior management;
(2) transactions exclusively between or among the Company and any of its
Restricted Subsidiaries or exclusively between or among such Restricted
Subsidiaries, provided that such transactions are not otherwise prohibited
by the Indentures;
(3) any agreement as in effect as of the Issue Date or any amendment
thereto or any transaction contemplated thereby (including pursuant to any
amendment thereto) in any replacement agreement thereto so long as any such
amendment or replacement agreement is not materially more disadvantageous to
the Holders than the original agreement as in effect on the Issue Date (as
determined in the good faith judgment of the Board of Directors of the
Company);
(4) Restricted Payments permitted by the Indentures and Permitted
Investments;
(5) transactions between any of the Company, any of its Restricted
Subsidiaries and any Securitization Entity in connection with a Qualified
Securitization Transaction; provided, in each case, that such transactions
are not otherwise prohibited by the Indentures;
57
(6) if such Affiliate Transaction is with any Person solely in its
capacity as a holder of Indebtedness or Capital Stock of the Company or any
of its Restricted Subsidiaries, if such Person is treated no more favorably
than any other holder of such Indebtedness or Capital Stock of the Company
or any of its Restricted Subsidiaries which other holder is not an Affiliate
of the Company or an Affiliate of an Affiliate of the Company;
(7) sales or purchases of products or materials or the providing of
services in the ordinary course of business and on terms at least as
favorable as might have been reasonably obtained from a third party, in the
reasonable judgment of senior management; and
(8) any issuance of Qualified Capital Stock of the Company to Affiliates
of the Company and the granting or performance of registration rights.
Additional Subsidiary Guarantees. If the Company or any of its Restricted
Subsidiaries, other than a Securitization Entity, transfers or causes to be
transferred, in one transaction or a series of related transactions in excess
of $500,000, any property to any Domestic Restricted Subsidiary that is not a
Guarantor, or if the Company or any of its Restricted Subsidiaries shall
organize, acquire or otherwise invest in another Domestic Restricted
Subsidiary having total assets with a fair market value in excess of $500,000,
then such transferee or acquired or other Restricted Subsidiary shall:
(1) execute and deliver, within 30 business days, to each Trustee a
supplemental indenture in form reasonably satisfactory to such Trustee
pursuant to which such Restricted Subsidiary shall unconditionally guarantee
all of the Company's obligations under the Notes issued under each Indenture
and each Indenture on the terms set forth in such Indenture; and
(2) deliver to each Trustee an opinion of counsel that such supplemental
indenture has been duly authorized, executed and delivered by such
Restricted Subsidiary and constitutes a legal, valid, binding and
enforceable obligation of such Restricted Subsidiary.
Thereafter, such Restricted Subsidiary shall be a Guarantor for all purposes
of the Indentures. In no event will (a) Assured Insurance Company be a
Guarantor unless such entity either ceases to transact substantially all of
its business as an insurance entity or guarantees any other Indebtedness of
the Company or a Restricted Subsidiary of the Company, (b) Crompton
International Corp. be a Guarantor unless such entity engages in any business
other than acting as a holding company for the Company's foreign equity
investments or guarantees any other Indebtedness of the Company or a
Restricted Subsidiary of the Company, or (c) Crompton & Knowles Receivables
Corporation be a Guarantor.
Conduct of Business. The Company and its Restricted Subsidiaries will not
engage in any businesses which are not the same, similar, ancillary or
reasonably related to or constitutes a reasonable extension or expansion of
the businesses in which the Company and its Restricted Subsidiaries are
engaged on the Issue Date.
Payments for Consent. The Company will not, and will not permit any of its
Restricted Subsidiaries to, directly or indirectly, pay or cause to be paid
any consideration to or for the benefit of any Holder of Notes for or as an
inducement to any consent, waiver or amendment of any of the terms or
provisions of the Indentures or the Notes unless such consideration is offered
to be paid and is paid to all Holders of the Notes that consent, waive or
agree to amend in the time frame set forth in the solicitation documents
relating to such consent, waiver or agreement.
Reports to Holders. The Indentures will provide that, whether or not
required by the rules and regulations of the Commission, so long as any Notes
are outstanding, the Company will furnish the Holders of Notes
58
(1) all quarterly and annual financial information that would be required
to be contained in a filing with the Commission on Forms 10-Q and 10-K if
the Company were required to file such Forms, including a "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
that describes the financial condition and results of operations of the
Company and its consolidated Subsidiaries (if the Company has designated any
Unrestricted Subsidiaries and such Unrestricted Subsidiaries would,
individually or in the aggregate, if a Restricted Subsidiary or Restricted
Subsidiaries, as the case may be, of the Company constitute a Significant
Subsidiary, showing in reasonable detail, either on the face of the
financial statements or in the footnotes thereto and in Management's
Discussion and Analysis of Financial Condition and Results of Operations,
the financial condition and results of operations of the Company and its
Restricted Subsidiaries separate from the financial condition and results of
operations of such Unrestricted Subsidiaries of the Company) and, with
respect to the annual information only, a report thereon by the Company's
certified independent accounts; and
(2) all current reports that would be required to be filed with the
Commission on Form 8-K if the Company were required to file such reports, in
each case within the time periods specified in the Commission's rules and
regulations.
In addition, following the consummation of the exchange offer contemplated
by the Registration Rights Agreement, whether or not required by the rules and
regulations of the Commission, the Company will file a copy of all such
information and reports with the Commission for public availability within the
time periods specified in the Commission's rules and regulations (unless the
Commission will not accept such a filing) and make such information available
to securities analysts and prospective investors upon request. In addition,
the Company has agreed that, for so long as any Notes remain outstanding, it
will furnish to the Holders and to securities analysts and prospective
investors, upon their request, the information required to be delivered
pursuant to Rule 144A(d)(4) under the Securities Act.
EVENTS OF DEFAULT
The following events are defined in each Indenture as "Events of Default":
(1) the failure to pay interest on any Notes issued thereunder when the
same becomes due and payable and the default continues for a period of 30
days;
(2) the failure to pay the principal on any Notes issued thereunder, when
such principal becomes due and payable, at maturity, upon redemption or
otherwise (including the failure to make a payment to purchase such Notes
tendered pursuant to a Change of Control Offer or a Net Proceeds Offer);
(3) a default in the observance or performance of any other covenant or
agreement contained in such Indenture which default continues for a period
of 30 days after the Company receives written notice specifying the default
(and demanding that such default be remedied) from the Trustee under such
Indenture or the Holders of at least 25% of the outstanding principal amount
of the Notes under such Indenture (except in the case of a default with
respect to the "Merger, Consolidation and Sale of Assets" covenant, which
will constitute an Event of Default with such notice requirement but without
such passage of time requirement);
(4) the failure to pay at final stated maturity (giving effect to any
applicable grace periods and any extensions thereof) the stated principal
amount of any Indebtedness of the Company or any Restricted Subsidiary of
the Company, or the acceleration of the final stated maturity of any such
Indebtedness (which acceleration is not rescinded, annulled or otherwise
cured within 20 days of receipt by the Company or such Restricted Subsidiary
of notice of any such acceleration) if the aggregate principal amount of
such Indebtedness, together with the principal amount of any other such
Indebtedness in
59
default for failure to pay principal at final stated maturity or which has
been accelerated (in each case with respect to which the 20-day period
described above has elapsed), aggregates $25.0 million or more at any time;
(5) one or more judgments in an aggregate amount in excess of
$25.0 million shall have been rendered against the Company or any of its
Restricted Subsidiaries and such judgments remain undischarged, unpaid or
unstayed or subject to a negotiated settlement or offer agreement to pay the
judgment over time for a period of 60 days after such judgment or judgments
become final, non-appealable and payable;
(6) certain events of bankruptcy affecting the Company or any of its
Significant Subsidiaries; or
(7) any Guarantee of a Significant Subsidiary ceases to be in full force
and effect or any Guarantee of a Significant Subsidiary is declared to be
null and void and unenforceable or any Guarantee of a Significant Subsidiary
is found to be invalid or any Guarantor that is a Significant Subsidiary
denies its liability under its Guarantee (other than by reason of release of
a Guarantor in accordance with the terms of such Indenture).
If an Event of Default under an Indenture (other than an Event of Default
specified in clause (6) above with respect to the Company) shall occur and be
continuing, the applicable Trustee or the Holders of at least 25% in principal
amount of outstanding Notes then outstanding under such Indenture may declare
the principal of and accrued interest on all such Notes to be due and payable
by notice in writing to the Company and the applicable Trustee specifying the
respective Event of Default and that it is a "notice of acceleration", and the
same shall become immediately due and payable.
If an Event of Default specified in clause (6) above with respect to the
Company occurs and is continuing, then all unpaid principal of, and premium,
if any, and accrued and unpaid interest on all of the outstanding Notes shall
ipso facto become and be immediately due and payable without any declaration
or other act on the part of any Trustee or any Holder.
Each Indenture will provide that, at any time after a declaration of
acceleration with respect to the Notes issued under such Indenture as
described in the preceding paragraph, the Holders of a majority in principal
amount of such Notes may rescind and cancel such declaration and its
consequences with respect to such series.
(1) if the rescission would not conflict with any judgment or decree;
(2) if all existing Events of Default have been cured or waived except
nonpayment of principal or interest that has become due solely because of
the acceleration;
(3) to the extent the payment of such interest is lawful, interest on
overdue installments of interest and overdue principal, which has become due
otherwise than by such declaration of acceleration, has been paid;
(4) if the Company has paid the applicable Trustee its reasonable
compensation and reimbursed such Trustee for its expenses, disbursements and
advances; and
(5) in the event of the cure or waiver of an Event of Default of the type
described in clause (6) of the description above of Events of Default, the
applicable Trustee shall have received an officers' certificate and an
opinion of counsel that such Event of Default has been cured or waived. No
such rescission shall affect any subsequent Default or impair any right
consequent thereto.
The Holders of a majority in principal amount of Notes under an Indenture
may waive any existing Default or Event of Default under such Indenture, and
its consequences, except a default in the payment of the principal of or
interest on such Notes.
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Holders of the Notes under an Indenture may not enforce the Indenture
relating to such or such Notes except as provided in such Indenture and under
the TIA. Subject to the provisions of such applicable Indenture relating to
the duties of the applicable Trustee, such Trustee is under no obligation to
exercise any of its rights or powers under such Indenture at the request,
order or direction of any of the Holders, unless such Holders have offered to
the Trustee reasonable indemnity. Subject to all provisions of the applicable
Indenture and applicable law, the Holders of a majority in aggregate principal
amount of the then outstanding Notes under such Indenture have the right to
direct the time, method and place of conducting any proceeding for any remedy
available to applicable Trustee or exercising any trust or power conferred on
such Trustee.
Under each Indenture, the Company is required to provide an officers'
certificate to the applicable Trustee promptly upon any such officer obtaining
knowledge of any Default or Event of Default which has not been cured at the
time the officer obtained knowledge under an applicable Indenture (provided
that such officers shall provide such certification at least annually whether
or not they know of any such Default or Event of Default) that has occurred
and, if applicable, describe such Default or Event of Default and the status
thereof.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Company may, at its option and at any time, elect to have its
obligations and the obligations of the Guarantors discharged with respect to
the outstanding Notes under an Indenture ("Legal Defeasance"). Such Legal
Defeasance means that the Company shall be deemed to have paid and discharged
the entire indebtedness represented by such Notes, except for
(1) the rights of Holders of Notes outstanding under such Indenture to
receive payments in respect of the principal of, premium, if any, and
interest on such Notes when such payments are due;
(2) the Company's obligations with respect to such Notes concerning
issuing temporary Notes, registration of Notes, mutilated, destroyed, lost
or stolen Notes and the maintenance of an office or agency for payments;
(3) the rights, powers, trust, duties and immunities of the applicable
Trustee and the Company's obligations in connection therewith; and
(4) the Legal Defeasance provisions of such Indenture.
In addition, the Company may, at its option and at any time, elect to have
the obligations of the Company released with respect to certain covenants that
are described in an Indenture ("Covenant Defeasance") and thereafter any
omission to comply with such obligations shall not constitute a Default or
Event of Default with respect to the Notes. In the event Covenant Defeasance
occurs under an Indenture, certain events (not including non-payment,
bankruptcy, receivership, reorganization and insolvency events) described
under "Events of Default" will no longer constitute an Event of Default with
respect to the Notes outstanding under such Indenture.
In order to exercise either Legal Defeasance or Covenant Defeasance under an
Indenture:
(1) the Company must irrevocably deposit with the applicable Trustee, in
trust, for the benefit of the Holders of the Notes issued under such
Indenture cash in U.S. dollars, non-callable U.S. government obligations, or
a combination thereof, in such amounts as will be sufficient, in the opinion
of a nationally recognized firm of independent public accountants, to pay
the principal of, premium, if any, and interest on the Notes outstanding
under such Indenture on the stated date for payment thereof or on the
applicable redemption date, as the case may be;
61
(2) in the case of Legal Defeasance, the Company shall have delivered to
the applicable Trustee an opinion of counsel in the United States reasonably
acceptable to such Trustee confirming that:
(a) the Company has received from, or there has been published by, the
Internal Revenue Service a ruling; or
(b) since the date of such Indenture, there has been a change in the
applicable federal income tax law,
in either case to the effect that, and based thereon such opinion of counsel
shall confirm that, the Holders of the Notes issued under such Indenture will
not recognize income, gain or loss for federal income tax purposes as a result
of such Legal Defeasance and will be subject to federal income tax on the same
amounts, in the same manner and at the same times as would have been the case
if such Legal Defeasance had not occurred;
(3) in the case of Covenant Defeasance, the Company shall have delivered
to the applicable Trustee an opinion of counsel in the United States
reasonably acceptable to such Trustee confirming that the Holders of the
Notes issued under such Indenture will not recognize income, gain or loss
for federal income tax purposes as a result of such Covenant Defeasance and
will be subject to federal income tax on the same amounts, in the same
manner and at the same times as would have been the case if such Covenant
Defeasance had not occurred;
(4) no Default or Event of Default shall have occurred and be continuing
on the date of such deposit (other than a Default or an Event of Default
resulting from the borrowing of funds to be applied to such deposit and the
grant of any Lien securing such borrowings);
(5) such Legal Defeasance or Covenant Defeasance shall not result in a
breach or violation of, or constitute a default under such Indenture (other
than a Default or an Event of Default resulting from the borrowing of funds
to be applied to such deposit and the grant of any Lien securing such
borrowings) or any other material agreement or instrument to which the
Company or any of its Subsidiaries is a party or by which the Company or any
of its Subsidiaries is bound;
(6) the Company shall have delivered to the applicable Trustee an
officers' certificate stating that the deposit was not made by the Company
with the intent of preferring the Holders of Notes issued under such
Indenture over any other creditors of the Company or with the intent of
defeating, hindering, delaying or defrauding any other creditors of the
Company or others;
(7) the Company shall have delivered to the applicable Trustee an
officers' certificate and an opinion of counsel, each stating that all
conditions precedent provided for or relating to the Legal Defeasance or the
Covenant Defeasance have been complied with;
(8) the Company shall have delivered to the applicable Trustee an opinion
of counsel to the effect that assuming no intervening bankruptcy of the
Company between the date of deposit and the 91st day following the date of
deposit and that no Holder is an insider of the Company, after the 91st day
following the date of deposit, the trust funds will not be subject to the
effect of any applicable bankruptcy, insolvency, reorganization or similar
laws affecting creditors' rights generally; and
(9) certain other customary conditions precedent are satisfied.
Notwithstanding the foregoing, the opinion of counsel required by clause (2)
above with respect to a Legal Defeasance need not be delivered if all Notes
issued under such Indenture not theretofore delivered to the applicable
Trustee for cancellation (1) have become due and payable or (2) will become
due and payable on the maturity date or redemption date within
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one year under arrangements satisfactory to such Trustee for the giving of
notice of redemption by such Trustee in the name, and at the expense, of the
Company.
SATISFACTION AND DISCHARGE
The Indenture as to a particular series of Notes will be discharged and will
cease to be of further effect (except as to surviving rights or registration
of transfer or exchange of the Notes, as expressly provided for in such
Indenture) as to all outstanding Notes issued under such Indenture when
(1) either:
(a) all such Notes theretofore authenticated and delivered (except
lost, stolen or destroyed Notes which have been replaced or paid and
Notes for whose payment money has theretofore been deposited in trust or
segregated and held in trust by the Company and thereafter repaid to the
Company or discharged from such trust) have been delivered to the
applicable Trustee for cancellation; or
(b) all such not theretofore delivered to the applicable Trustee for
cancellation (1) have become due and payable or (2) will become due and
payable within one year, or are to be called for redemption within one
year, under arrangements reasonably satisfactory to such Trustee for the
giving of notice of redemption by such Trustee in the name, and at the
expense, of the Company, and the Company has irrevocably deposited or
caused to be deposited with such Trustee funds in an amount sufficient to
pay and discharge the entire Indebtedness on the Notes not theretofore
delivered to such Trustee for cancellation, for principal of, premium, if
any, and interest on the Notes to the date of maturity or redemption, as
the case may be, together with irrevocable instructions from the Company
directing such Trustee to apply such funds to the payment thereof at
maturity or redemption, as the case may be;
(2) the Company has paid all other sums payable under such Indenture by
the Company; and
(3) the Company has delivered to the applicable Trustee an officers'
certificate and an opinion of counsel stating that all conditions precedent
under such Indenture relating to the satisfaction and discharge of such
Indenture have been complied with.
MODIFICATION OF AN INDENTURE
From time to time, the Company, the Guarantors and the Trustee under an
Indenture, without the consent of the Holders outstanding under such
Indenture, may amend such Indenture for certain specified purposes, including
curing ambiguities, mistakes, defects or inconsistencies, so long as such
change does not, in the opinion of such Trustee, adversely affect the rights
of any of such Holders in any material respect, taken as a whole. In
formulating its opinion on such matters, such Trustee will be entitled to rely
on such evidence as it deems appropriate, including, without limitation,
solely on an opinion of counsel. Other modifications and amendments of such
Indenture may be made with the consent of the Holders of a majority in
principal amount of the then outstanding Notes issued under such Indenture,
except that, without the consent of each Holder of Notes issued under such
Indenture affected thereby, no amendment may
(1) reduce the amount of such Notes whose Holders must consent to an
amendment;
(2) reduce the rate of or change or have the effect of changing the time
for payment of interest, including defaulted interest, on any Notes;
63
(3) reduce the principal of or change or have the effect of changing the
fixed maturity of any such Notes, or change the date on which such Notes may
be subject to redemption or reduce the redemption price therefor;
(4) make any such Notes payable in money other than that stated in such
Notes;
(5) make any change in provisions of such Indenture protecting the right
of each Holder to receive payment of principal of and interest on such Note
on or after the due date thereof or to bring suit to enforce such payment,
or permitting Holders of a majority in principal amount of such Notes to
waive Defaults or Events of Default;
(6) after the Company's obligation to purchase such Notes arises
thereunder, amend, change or modify in any material respect the obligation
of the Company to make and consummate a Change of Control Offer in the event
of a Change of Control or make and consummate a Net Proceeds Offer with
respect to any Asset Sale that has been consummated or, after such Change of
Control has occurred or such Asset Sale has been consummated, modify any of
the provisions or definitions with respect thereto; or
(7) modify or change any provision of such Indenture or the related
definitions affecting the ranking of such Notes or any Guarantee of such
Notes in a manner which adversely affects the Holders; or
(8) release any Guarantor of Notes issued under such Indenture that is a
Significant Subsidiary from any of its obligations under its Guarantee of
Notes issued under such Indenture or such Indenture otherwise than in
accordance with the terms of such Indenture.
GOVERNING LAW
The Indentures will provide that they, the Notes and the Guarantees will be
governed by, and construed in accordance with, the laws of the State of New
York but without giving effect to applicable principles of conflicts of law to
the extent that the application of the law of another jurisdiction would be
required thereby.
THE TRUSTEES
Each Indenture will provide that, except during the continuance of an Event
of Default under such Indenture, the applicable Trustee will perform only such
duties as are specifically set forth in such Indenture. During the existence
of an Event of Default under such Indenture, such Trustee will exercise such
rights and powers vested in it by such Indenture, and use the same degree of
care and skill in its exercise as a prudent man would exercise or use under
the circumstances in the conduct of his own affairs.
Each Indenture and the provisions of the TIA contain certain limitations on
the rights of the applicable Trustee, should it become a creditor of the
Company, to obtain payments of claims in certain cases or to realize on
certain property received in respect of any such claim as security or
otherwise. Subject to the TIA, each Trustee will be permitted to engage in
other transactions; provided that if a Trustee acquires any conflicting
interest as described in the TIA, it must eliminate such conflict or resign.
CERTAIN DEFINITIONS
Set forth below is a summary of certain of the defined terms used in the
Indentures. Reference is made to each Indenture for the full definition of all
such terms, as well as any other terms used herein for which no definition is
provided.
"Acquired Indebtedness" means Indebtedness of a Person or any of its
Subsidiaries existing at the time such Person becomes a Restricted Subsidiary
of the Company or at the time it merges or consolidates with or into the
Company or any of its Restricted Subsidiaries
64
or assumed in connection with the acquisition of assets from such Person and
in each case not incurred by such Person in connection with, or in
anticipation or contemplation of, such Person becoming a Restricted Subsidiary
of the Company or such acquisition, merger or consolidation.
"Affiliate" means, with respect to any specified Person, any other Person
who directly or indirectly through one or more intermediaries controls, or is
controlled by, or is under common control with, such specified Person. The
term "control" means the possession, directly or indirectly, of the power to
direct or cause the direction of the management and policies of a Person,
whether through the ownership of voting securities, by contract or otherwise;
and the terms "controlling" and "controlled" have meanings correlative of the
foregoing.
"Additional Assets" means (a) any properties or assets to be owned by the
Company or any Restricted Subsidiary and to be used in the business of the
Company and its Restricted Subsidiaries as existing on the Issue Date or in
businesses reasonably related thereto; or (b) Capital Stock of a Person that
becomes a Restricted Subsidiary as a result of the acquisition of such Capital
Stock by the Company or another Restricted Subsidiary.
"Asset Acquisition" means (1) an Investment by the Company or any Restricted
Subsidiary of the Company in any other Person pursuant to which such Person
shall become a Restricted Subsidiary of the Company or any Restricted
Subsidiary of the Company, or shall be merged with or into the Company or any
Restricted Subsidiary of the Company, or (2) the acquisition by the Company or
any Restricted Subsidiary of the Company of the assets of any Person (other
than a Restricted Subsidiary of the Company) which constitute all or
substantially all of the assets of such Person or comprises any division or
line of business of such Person or any other properties or assets of such
Person other than in the ordinary course of business.
"Asset Sale" means any direct or indirect sale, issuance, conveyance,
transfer, lease (other than operating leases entered into in the ordinary
course of business), assignment or other transfer for value by the Company or
any of its Restricted Subsidiaries (including any Sale and Leaseback
Transaction) to any Person other than the Company or a Restricted Subsidiary
of the Company of: (1) any Capital Stock of any Restricted Subsidiary of the
Company (other than director's qualifying shares or shares required by
applicable law to be held by a Person other than the Company or a Restricted
Subsidiary); or (2) any other property or assets of the Company or any
Restricted Subsidiary of the Company other than in the ordinary course of
business; provided, however, that asset sales or other dispositions shall not
include: (a) a transaction or series of related transactions for which the
Company or its Restricted Subsidiaries receive aggregate consideration of less
than $5.0 million; (b) the sale, lease, conveyance, disposition or other
transfer of all or substantially all of the assets of the Company as permitted
under "Merger, Consolidation and Sale of Assets;" (c) any Restricted Payment
permitted by the "Limitation on Restricted Payments" covenants or that
constitutes a Permitted Investment; (d) the sale or discount, in each case
without recourse, of accounts receivable arising in the ordinary course of
business, but only in connection with the compromise or collection thereof;
(e) disposals or replacements of obsolete or worn out equipment, (f) sales of
accounts receivable and related assets (including contract rights) of the type
specified in the definition of "Qualified Securitization Transaction" to a
Securitization Entity for the fair market value thereof; (g) the surrender or
waiver of contract rights or the settlement, release, or surrender of
contract, tort or other claims; (h) the granting of Liens not otherwise
prohibited by the Indenture; and (i) sales of accounts receivable from
European subsidiaries to a factoring entity for value equivalent to the face
value of the receivable.
"Board of Directors" means, as to any Person, the board of directors (or
similar governing body) of such Person or any duly authorized committee
thereof.
"Board Resolution" means, with respect to any Person, a copy of a resolution
certified by the Secretary or an Assistant Secretary of such Person to have
been duly adopted by the
65
Board of Directors of such Person and to be in full force and effect on the
date of such certification, and delivered to the Trustees.
"Brazilian Program" means the existing program, or a successor thereto,
pursuant to which the Company guarantees loans made in Brazil to distributors
of the Company's products to facilitate payments to the Company or its
Restricted Subsidiaries.
"Capital Stock" means
(1) with respect to any Person that is a corporation, any and all shares,
interests, participations or other equivalents (however designated and
whether or not voting) of corporate stock, including each class of Common
Stock and Preferred Stock of such Person, and all options, warrants or other
rights to purchase or acquire any of the foregoing; and
(2) with respect to any Person that is not a corporation, any and all
partnership, membership or other equity interests of such Person, and all
options, warrants or other rights to purchase or acquire any of the
foregoing.
"Capitalized Lease Obligation" means, as to any Person, the obligations of
such Person under a lease that are required to be classified and accounted for
as capital lease obligations under GAAP and, for purposes of this definition,
the amount of such obligations at any date shall be the capitalized amount of
such obligations at such date, determined in accordance with GAAP.
"Cash Equivalents" means:
(1) marketable direct obligations issued by, or unconditionally
guaranteed by, the United States Government or issued by any agency thereof
and backed by the full faith and credit of the United States, in each case
maturing within one year from the date of acquisition thereof;
(2) marketable direct obligations issued by any state of the United
States of America or any political subdivision of any such state or any
public instrumentality thereof maturing within one year from the date of
acquisition thereof and, at the time of acquisition, having one of the two
highest ratings obtainable from either S&P or Moody's;
(3) commercial paper and other debt securities maturing no more than one
year from the date of creation thereof and, at the time of acquisition,
having a rating of at least A-1 from S&P or at least P-1 from Moody's;
(4) certificates of deposit or bankers' acceptances maturing within one
year from the date of acquisition thereof issued by any bank organized under
the laws of the United States of America or any state thereof or the
District of Columbia or any U.S. branch of a foreign bank having at the date
of acquisition thereof combined capital and surplus of not less than
$250.0 million;
(5) repurchase obligations with a term of not more than seven days for
underlying securities of the types described in clause (1) above entered
into with any bank meeting the qualifications specified in clause (4) above;
(6) investments in money market funds which invest substantially all
their assets in securities of the types described in clauses (1) through (5)
above; and
(7) with respect to a Foreign Subsidiary, obligations of foreign obligors
(including foreign sovereign nations) correlative in type, maturity and
rating to those set forth in clauses (1) through (5) above.
"Change of Control" means the occurrence of one or more of the following
events:
66
(1) any sale, lease, exchange or other transfer (in one transaction or a
series of related transactions) of all or substantially all of the assets of
the Company and its Restricted Subsidiaries taken as a whole to any Person
or group of related Persons for purposes of Section 13(d) of the Exchange
Act (a "Group"), together with any Affiliates thereof (whether or not
otherwise in compliance with the provisions of the Indentures);
(2) the approval by the holders of Capital Stock of the Company of any
plan or proposal for the liquidation or dissolution of the Company (whether
or not otherwise in compliance with the provisions of the Indentures);
(3) any Person or Group (other than any entity formed for the purpose of
owning Capital Stock of the Company) shall become the owner, directly or
indirectly, beneficially or of record, of shares representing more than 50%
of the aggregate ordinary voting power represented by the issued and
outstanding Capital Stock of the Company; or
(4) the replacement of a majority of the Board of Directors of the
Company over a two-year period from the directors who constituted the Board
of Directors of the Company at the beginning of such period, and such
replacement shall not have been approved by a vote of at least a majority of
the Board of Directors of the Company then still in office who either were
members of such Board of Directors at the beginning of such period or whose
election as a member of such Board of Directors was previously so approved.
"Common Stock" of any Person means any and all shares, interests or other
participations in, and other equivalents (however designated and whether
voting or non-voting) of such Person's common stock, whether outstanding on
the Issue Date or issued after the Issue Date, and includes, without
limitation, all series and classes of such common stock.
"Consolidated EBITDA" means, with respect to any Person, for any period, the
sum (without duplication) of:
(1) Consolidated Net Income; and
(2) to the extent Consolidated Net Income has been reduced thereby,
(a) all income taxes of such Person and its Restricted Subsidiaries,
paid or accrued in accordance with GAAP for such period (other than
income taxes attributable to extraordinary, unusual or nonrecurring gains
or losses or taxes attributable to sales or dispositions outside the
ordinary course of business);
(b) Consolidated Interest Expense; and
(c) Consolidated Non-cash Charges less any non-cash items increasing
Consolidated Net Income for such period, all as determined on a
consolidated basis for such Person and its Restricted Subsidiaries in
accordance with GAAP.
"Consolidated Fixed Charge Coverage Ratio" means, with respect to any
Person, the ratio of Consolidated EBITDA of such Person during the four full
fiscal quarters (the "Four Quarter Period") ending prior to the date of the
transaction giving rise to the need to calculate the Consolidated Fixed Charge
Coverage Ratio for which financial statements are available (the "Transaction
Date") to Consolidated Fixed Charges of such Person for the Four Quarter
Period. In addition to and without limitation of the foregoing, for purposes
of this definition, "Consolidated EBITDA" and "Consolidated Fixed Charges"
shall be calculated after giving effect on a pro forma basis for the period of
such calculation to:
(1) the incurrence or repayment of any Indebtedness of such Person or any
of its Restricted Subsidiaries (and the application of the proceeds thereof)
giving rise to the need to make such calculation and any incurrence or
repayment of other Indebtedness (and the application of the proceeds
thereof), other than the incurrence or repayment of Indebtedness in the
ordinary course of business for working capital purposes pursuant to working
capital facilities, occurring during the Four Quarter Period or at any time
67
subsequent to the last day of the Four Quarter Period and on or prior to the
Transaction Date, as if such incurrence or repayment, as the case may be
(and the application of the proceeds thereof), occurred on the first day of
the Four Quarter Period; and
(2) any asset sales or other dispositions or Asset Acquisitions
(including, without limitation, any Asset Acquisition giving rise to the
need to make such calculation as a result of such Person or one of its
Restricted Subsidiaries (including any Person who becomes a Restricted
Subsidiary as a result of the Asset Acquisition) incurring, assuming or
otherwise being liable for Acquired Indebtedness and also including any
Consolidated EBITDA (including any pro forma expense and cost reductions
calculated on a basis consistent with Regulation S-X under the Exchange Act)
attributable to the assets which are the subject of the Asset Acquisition or
asset sale or other disposition during the Four Quarter Period) occurring
during the Four Quarter Period or at any time subsequent to the last day of
the Four Quarter Period and on or prior to the Transaction Date, as if such
asset sale or other disposition or Asset Acquisition (including the
incurrence, assumption or liability for any such Acquired Indebtedness)
occurred on the first day of the Four Quarter Period. If such Person or any
of its Restricted Subsidiaries directly or indirectly guarantees
Indebtedness of a third Person, the preceding sentence shall give effect to
the incurrence of such guaranteed Indebtedness as if such Person or any
Restricted Subsidiary of such Person had directly incurred or otherwise
assumed such guaranteed Indebtedness.
Furthermore, in calculating "Consolidated Fixed Charges" for purposes of
determining the denominator (but not the numerator) of this "Consolidated
Fixed Charge Coverage Ratio":
(1) interest on outstanding Indebtedness determined on a fluctuating
basis as of the Transaction Date and which will continue to be so determined
thereafter shall be deemed to have accrued at a fixed rate per annum equal
to the rate of interest on such Indebtedness in effect on the Transaction
Date; and
(2) notwithstanding clause (1) above, interest on Indebtedness determined
on a fluctuating basis, to the extent such interest is covered by agreements
relating to Interest Swap Obligations, shall be deemed to accrue at the rate
per annum resulting after giving effect to the operation of such agreements.
"Consolidated Fixed Charges" means, with respect to any Person for any
period, the sum, without duplication, of:
(1) Consolidated Interest Expense; plus
(2) the product of (x) the amount of all dividend payments on any series
of Preferred Stock of such Person (other than dividends paid in Qualified
Capital Stock) paid, accrued or scheduled to be paid or accrued during such
period times (y) a fraction, the numerator of which is one and the
denominator of which is one minus the then current effective consolidated
federal, state and local income tax rate of such Person, expressed as a
decimal.
"Consolidated Interest Expense" means, with respect to any Person for any
period, the sum of, without duplication:
(1) the aggregate of the interest expense of such Person and its
Restricted Subsidiaries for such period determined on a consolidated basis
in accordance with GAAP, including without limitation: (a) any amortization
of debt discount and amortization or write-off of deferred financing costs;
(b) the net costs under Interest Swap Obligations; (c) all capitalized
interest; and (d) the interest portion of any deferred payment obligation;
and
68
(2) the interest component of Capitalized Lease Obligations paid, accrued
and/or scheduled to be paid or accrued by such Person and its Restricted
Subsidiaries during such period as determined on a consolidated basis in
accordance with GAAP.
"Consolidated Net Income" means, with respect to any Person, for any period,
the aggregate net income (or loss) of such Person and its Restricted
Subsidiaries for such period on a consolidated basis, determined in accordance
with GAAP; provided that there shall be excluded therefrom
(1) after-tax gains or losses from Asset Sales (without regard to the
$2.5 million limitation set forth in the definition thereof) or abandonments
or reserves relating thereto;
(2) after-tax items classified as extraordinary or nonrecurring gains or
losses;
(3) the net income (but not loss) of any Restricted Subsidiary of the
referent Person to the extent (and up to the amount) that the declaration of
dividends or similar distributions by that Restricted Subsidiary of that
income is restricted by a contract, operation of law or otherwise, which
restriction has not been waived;
(4) the net income of any Person, other than a Restricted Subsidiary of
the referent Person, except to the extent of cash dividends or distributions
paid to the referent Person or to a Restricted Subsidiary of the referent
Person by such Person;
(5) any restoration to income of any contingency reserve, except to the
extent that provision for such reserve was made out of Consolidated Net
Income accrued at any time following the Issue Date;
(6) income or loss attributable to discontinued operations (including,
without limitation, operations disposed of during such period whether or not
such operations were classified as discontinued); and
(7) in the case of a successor to the referent Person by consolidation or
merger or as a transferee of the referent Person's assets, any earnings of
the successor corporation prior to such consolidation, merger or transfer of
assets.
For the purposes of this definition of Consolidated Net Income,
"nonrecurring" means any gain or loss as of any date that is not reasonably
likely to recur within the two years following such date; provided that if
there was a gain or loss similar to such gain or loss within the two years
preceding such date, such gain or loss shall not be deemed nonrecurring.
"Consolidated Non-cash Charges" means, with respect to any Person, for any
period, the aggregate depreciation, amortization and other non-cash expenses
of such Person and its Restricted Subsidiaries reducing Consolidated Net
Income of such Person and its Restricted Subsidiaries for such period,
determined on a consolidated basis in accordance with GAAP (excluding any such
charges constituting an extraordinary item or loss or any such charge which
requires an accrual of or a reserve for cash charges for any future period).
"Consolidated Tangible Assets" means total consolidated assets of the
Company and its Restricted Subsidiaries, less the following:
(1) all depreciation and valuation reserves and all other reserves
(except reserves for contingencies which have not been allocated to any
particular purpose) of the Company and its Restricted Subsidiaries;
(2) the net book amount of all intangible assets of the Company and its
Restricted Subsidiaries, including, but without limitation, the unamortized
portions of such items as good will, trademarks, trade names, patents and
debt discount and expense less debt premium; and
(3) appropriate adjustments on account of minority interests of other
Persons holding stock in Restricted Subsidiaries.
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"Credit Agreement" means the Credit Agreement dated on or about the Issue
Date by and among the Company, the lenders party thereto in their capacities
as lenders thereunder and Deutsche Bank AG New York Branch, as administrative
agent, together with the related documents thereto (including, without
limitation, any guarantee agreements, security documents and pre-funded
revolving loan and letter of credit or similar facility), in each case as such
agreements may be amended (including any amendment and restatement thereof),
supplemented or otherwise modified from time to time, including one or more
credit agreements, loan agreements, indentures or similar agreements extending
the maturity of, refinancing, replacing or otherwise restructuring (including
increasing the amount of available borrowings thereunder or adding Restricted
Subsidiaries of the Company as additional borrowers or guarantors thereunder)
all or any portion of the Indebtedness under such agreement or agreements or
any successor or replacement agreement or agreements and whether by the same
or any other agent, lender or group of lenders, whether such refinancing or
replacement is under one or more debt facilities or commercial paper
facilities, indentures or other agreements, in each case with banks or other
institutional lenders or trustees or investors providing for revolving credit
loans, term loans, notes or letters of credit, together with related documents
thereto.
"Currency Agreement" means any foreign exchange contract, currency swap
agreement or other similar agreement or arrangement designed to protect the
Company or any Restricted Subsidiary of the Company against fluctuations in
currency values.
"Default" means an event or condition the occurrence of which is, or with
the lapse of time or the giving of notice or both would be, an Event of
Default.
"Disqualified Capital Stock" means that portion of any Capital Stock which,
by its terms (or by the terms of any security into which it is convertible or
for which it is exchangeable at the option of the holder thereof), or upon the
happening of any event (other than an event which would constitute a Change of
Control), matures or is mandatorily redeemable, pursuant to a sinking fund
obligation or otherwise, or is redeemable at the sole option of the holder
thereof (except, in each case, upon the occurrence of a Change of Control) on
or prior to the final maturity date of the Notes.
"Domestic Restricted Subsidiary" means a Restricted Subsidiary incorporated
or otherwise organized or existing under the laws of the United States or any
state thereof.
"Exchange Act" means the Securities Exchange Act of 1934, as amended, or any
successor statute or statutes thereto.
"Excluded Asset Sale" means an Asset Sale consisting of a separate business
segment, division or line of business which, together with any other Excluded
Asset Sale, does not comprise assets or properties that generated operating
cash flow of more than an aggregate of 6.5% of Operating Cash Flow of the
Company, calculated based on, in each case, a percentage of Operating Cash
Flow for the most recent four full fiscal quarters for which financial
statements are available, and, if such Asset Sale consists of assets or
properties that are classified as a discontinued operations, calculated, with
respect to the Company, including such discontinued operation in Operating
Cash Flow; provided, that the total fair market value for all Excluded Asset
Sales shall not exceed $150.0 million.
"Existing Indenture" means the Indenture dated as of February 1, 1993, as
supplemented by the First Supplemental Indenture dated as of February 1, 1996,
each as in effect on the Issue Date.
"Existing Securities" means the 7.75% Debentures due April 11, 2023, the 6
1/8% Notes due 2006 and the 6 7/8% Debentures due 2026.
"fair market value" means, with respect to any asset or property, the price
which could be negotiated in an arm's-length, free market transaction, for
cash, between a willing seller and a
70
willing and able buyer, neither of whom is under undue pressure or compulsion
to complete the transaction. Except as otherwise noted, fair market value
shall be determined by the Board of Directors of the Company acting reasonably
and in good faith and shall be evidenced by a Board Resolution of the Board of
Directors of the Company and delivered to the Trustees.
"Foreign Subsidiary" means any Restricted Subsidiary other than a Domestic
Restricted Subsidiary.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as may be approved by a significant segment of the accounting
profession of the United States, which are in effect as of the Issue Date.
"Guarantee" means a guarantee of the Notes by a Guarantor.
"Guarantor" means (1) each of Crompton Manufacturing Company, Inc.; Uniroyal
Chemical Company Inc.; Crompton Holding Corporation; Crompton Colors
Incorporated; Kem Manufacturing Corporation; Uniroyal Chemical Company Limited
(Delaware); GT Seed Treatment Inc.; Uniroyal Chemical Export Limited; Naugatuck
Treatment Company; CNK Chemical Realty Corporation; Uniroyal Chemical Leasing
Company, Inc.; Weber City Road LLC; Monochem, Inc.; Crompton Monochem, Inc.;
Davis-Standard Corporation; Crompton Europe Financial Services Company, and (2)
each of the Company's Restricted Subsidiaries that in the future executes a
supplemental indenture in which such Restricted Subsidiary agrees to be bound by
the terms of each Indenture as a Guarantor; provided that any Person
constituting a Guarantor as described above shall cease to constitute a
Guarantor when its respective Guarantee is released in accordance with the terms
of such Indenture.
"Indebtedness" means with respect to any Person, without duplication,
(1) all indebtedness of such Person for borrowed money;
(2) all indebtedness of such Person evidenced by bonds, debentures, notes
or other similar instruments;
(3) all Capitalized Lease Obligations of such Person;
(4) all Obligations of such Person issued or assumed as the deferred
purchase price of property, all conditional sale obligations and all
Obligations under any title retention agreement (but excluding trade
accounts payable and other accrued liabilities arising in the ordinary
course of business that are not overdue by 90 days or more or are being
contested in good faith by appropriate proceedings promptly instituted and
diligently conducted);
(5) all Obligations for the reimbursement of any obligor on any letter of
credit, banker's acceptance or similar credit transaction;
(6) guarantees and other contingent obligations in respect of
Indebtedness referred to in clauses (1) through (5) above and clause (8)
below;
(7) all Obligations of any other Person of the type referred to in
clauses (1) through (6) which are secured by any lien on any property or
asset of such Person, the amount of such Obligation being deemed to be the
lesser of the fair market value of such property or asset or the amount of
the Obligation so secured;
(8) all Obligations under currency agreements and interest swap
agreements of such Person; and
71
(9) all Disqualified Capital Stock issued by such Person with the amount
of Indebtedness represented by such Disqualified Capital Stock being equal
to the greater of its voluntary or involuntary liquidation preference and
its maximum fixed repurchase price, but excluding accrued dividends, if any.
For purposes hereof, the "maximum fixed repurchase price" of any
Disqualified Capital Stock which does not have a fixed repurchase price shall
be calculated in accordance with the terms of such Disqualified Capital Stock
as if such Disqualified Capital Stock were purchased on any date on which
Indebtedness shall be required to be determined pursuant to the Indentures,
and if such price is based upon, or measured by, the fair market value of such
Disqualified Capital Stock, such fair market value shall be determined
reasonably and in good faith by the Board of Directors of the issuer of such
Disqualified Capital Stock.
"Independent Financial Advisor" means a firm which, in the judgment of the
Board of Directors of the Company, is independent and qualified to perform the
task for which it is to be engaged.
"Interest Swap Obligations" means the obligations of any Person pursuant to
any arrangement with any other Person, whereby, directly or indirectly, such
Person is entitled to receive from time to time periodic payments calculated
by applying either a floating or a fixed rate of interest on a stated notional
amount in exchange for periodic payments made by such other Person calculated
by applying a fixed or a floating rate of interest on the same notional amount
and shall include, without limitation, interest rate swaps, caps, floors,
collars and similar agreements.
"Investment" means, with respect to any Person, any direct or indirect loan
or other extension of credit (including, without limitation, a guarantee) or
capital contribution to (by means of any transfer of cash or other property to
others or any payment for property or services for the account or use of
others), or any purchase or acquisition by such Person of any Capital Stock,
bonds, notes, debentures or other securities or evidences of Indebtedness
issued by, any other Person. "Investment" shall exclude extensions of trade
credit by the Company and its Restricted Subsidiaries in the ordinary course
of business and on commercially reasonable terms. If the Company or any
Restricted Subsidiary of the Company sells or otherwise disposes of any Common
Stock of any direct or indirect Restricted Subsidiary of the Company such
that, after giving effect to any such sale or disposition, the Company no
longer owns, directly or indirectly, greater than 50% of the outstanding
Common Stock of such Restricted Subsidiary, the Company shall be deemed to
have made an Investment on the date of any such sale or disposition equal to
the fair market value of the Common Stock of such Restricted Subsidiary not
sold or disposed of.
"Investment Grade Rating" means (i) with respect to Moody's, a rating equal
to or higher than Baa3 (or the equivalent), and (ii) with respect to S&P, a
rating equal to or higher than BBB- (or the equivalent).
"Issue Date" means the date of original issuance of the Old Notes.
"Lien" means any lien, mortgage, deed of trust, pledge, security interest,
charge or encumbrance of any kind (including any conditional sale or other
title retention agreement, any lease in the nature thereof and any agreement
to give any security interest) but not including any interests in accounts
receivable and related assets conveyed by the Company or any of its Restricted
Subsidiaries in connection with any Qualified Securitization Transaction.
"Moody's" means Moody's Investors Service, Inc. (or any successor to the
rating agency business thereof).
"Net Cash Proceeds" means, with respect to any Asset Sale, the proceeds in
the form of cash or Cash Equivalents including payments in respect of deferred
payment obligations when received in the form of cash or Cash Equivalents
(other than the portion of any such deferred
72
payment constituting interest) received by the Company or any of its
Restricted Subsidiaries from such Asset Sale net of:
(1) reasonable out-of-pocket expenses and fees relating to such Asset
Sale (including, without limitation, legal, accounting and investment
banking fees and sales commissions);
(2) taxes paid or payable after taking into account any reduction in
consolidated tax liability due to available tax credits or deductions and
any tax sharing arrangements;
(3) repayment of Indebtedness and any accrued interest or premium that is
secured by the property or assets that are the subject of such Asset Sale;
and
(4) appropriate amounts to be provided by the Company or any Restricted
Subsidiary, as the case may be, as a reserve, in accordance with GAAP,
against any liabilities associated with such Asset Sale and retained by the
Company or any Restricted Subsidiary, as the case may be, after such Asset
Sale, including, without limitation, pension and other post-employment
benefit liabilities, liabilities related to environmental matters and
liabilities under any indemnification obligations associated with such Asset
Sale.
"Obligations" means all obligations for principal, premium, interest,
penalties, fees, indemnifications, reimbursements, damages and other
liabilities payable under the documentation governing any Indebtedness.
"Operating Cash Flow" means the sum of operating profit and depreciation and
amortization.
"Pari Passu Indebtedness" means any Indebtedness of the Company or any
Guarantor that ranks pari passu in right of payment with the Notes or the
Guarantee of such Guarantor, as applicable.
"Permitted Indebtedness" means, without duplication, each of the following:
(1) Indebtedness under the Notes issued on the Issue Date in an aggregate
principal amount not to exceed $600.0 million and the Exchange Notes (as
defined in the Registration Rights Agreement) and the Guarantees thereof;
(2) Indebtedness incurred pursuant to the Credit Agreement in an
aggregate principal amount at any time outstanding not to exceed
$300.0 million less the amount of any payments made under the Credit
Agreement pursuant to clause 3(a) of the first sentence of "-- Limitation on
Asset Sales."
(3) other Indebtedness of the Company and its Restricted Subsidiaries
outstanding on the Issue Date reduced by the amount of any scheduled
amortization payments or permanent prepayments when actually paid or
permanent reductions thereon;
(4) Interest Swap Obligations of the Company or any Restricted Subsidiary
of the Company covering Indebtedness of the Company or any of its Restricted
Subsidiaries; provided, however, that such Interest Swap Obligations are
entered into to protect the Company and its Restricted Subsidiaries from
fluctuations in interest rates on its outstanding Indebtedness to the extent
the notional principal amount of such Interest Swap Obligation does not, at
the time of the incurrence thereof, exceed the principal amount of the
Indebtedness to which such Interest Swap Obligation relates;
(5) Indebtedness under Currency Agreements; provided that in the case of
Currency Agreements which relate to Indebtedness, such Currency Agreements
do not increase the Indebtedness of the Company and its Restricted
Subsidiaries outstanding other than as a result of fluctuations in foreign
currency exchange rates or by reason of fees, indemnities and compensation
payable thereunder;
73
(6) Indebtedness of a Restricted Subsidiary of the Company to the Company
or to a Restricted Subsidiary of the Company for so long as such
Indebtedness is held by the Company or a Restricted Subsidiary of the
Company or the holder of a Lien permitted under the Indentures, in each case
subject to no Lien held by a Person other than the Company or a Restricted
Subsidiary of the Company or the holder of a Lien permitted under the
Indentures; provided that if as of any date any Person other than the
Company or a Restricted Subsidiary of the Company or the holder of a Lien
permitted under the Indentures owns or holds any such Indebtedness or holds
a Lien in respect of such Indebtedness, such date shall be deemed the
incurrence of Indebtedness not constituting Permitted Indebtedness under
this clause (6) by the issuer of such Indebtedness;
(7) Indebtedness of the Company to a Restricted Subsidiary of the Company
for so long as such Indebtedness is held by a Restricted Subsidiary of the
Company or the holder of a Lien permitted under the Indenture, in each case
subject to no Lien other than a Lien permitted under the Indentures;
provided that (a) any Indebtedness of the Company to any Restricted
Subsidiary of the Company that is not a Guarantor is unsecured and
subordinated, pursuant to a written agreement, to the Company's obligations
under the Indentures and the Notes and (b) if as of any date any Person
other than a Restricted Subsidiary of the Company or the holder of a Lien
permitted under the Indentures owns or holds any such Indebtedness or any
Person holds a Lien in respect of such Indebtedness, such date shall be
deemed the incurrence of Indebtedness not constituting Permitted
Indebtedness under this clause (7) by the Company;
(8) Indebtedness arising from the honoring by a bank or other financial
institution of a check, draft or similar instrument inadvertently (except in
the case of daylight overdrafts) drawn against insufficient funds in the
ordinary course of business; provided, however, that such Indebtedness is
extinguished within five business days of incurrence;
(9) Indebtedness of the Company or any of its Restricted Subsidiaries in
respect of performance bonds, bankers' acceptances, workers' compensation
claims, surety or appeal bonds, payment obligations in connection with self-
insurance or similar obligations, and bank overdrafts (and letters of credit
in respect thereof) in the ordinary course of business;
(10) Indebtedness represented by Capitalized Lease Obligations and
Purchase Money Indebtedness of the Company and its Restricted Subsidiaries
incurred in the ordinary course of business not to exceed the greater of (a)
$20.0 million or (b) 1% of Consolidated Tangible Assets of the Company, at
any one time outstanding;
(11) Refinancing Indebtedness;
(12) Indebtedness represented by guarantees by the Company or its
Restricted Subsidiaries of Indebtedness otherwise permitted to be incurred
under the Indentures;
(13) Indebtedness of the Company or any Restricted Subsidiary consisting
of guarantees, indemnities or obligations in respect of purchase price
adjustments in connection with the acquisition or disposition of assets;
(14) additional Indebtedness of the Company and its Restricted
Subsidiaries in an aggregate principal amount not to exceed $50.0 million at
any one time outstanding (which amount may, but need not, be incurred in
whole or in part under the Credit Agreement);
(15) the incurrence by a Securitization Entity of Indebtedness in a
Qualified Securitization Transaction that is not recourse to the Company or
any Restricted Subsidiary (except for Standard Securitization Undertakings);
(16) Indebtedness incurred during any Suspension Period;
74
(17) guarantees made in connection with the Brazilian Program not to
exceed $5.0 million at any one time outstanding;
(18) Indebtedness incurred to refinance attributed indebtedness (and to
pay reasonable fees, expenses or premiums) associated with a Securitization
Entity incurred in the ordinary course of business and refinancings thereof;
and
(19) Indebtedness of Restricted Subsidiaries that are not Domestic
Subsidiaries in an aggregate principal amount not to exceed $25.0 million at
any one time outstanding (which amount may, but need not, be incurred in
whole or in part under the Credit Agreement) ("Permitted Foreign Subsidiary
Indebtedness").
For purposes of determining compliance with the "Limitation on Incurrence of
Additional Indebtedness" covenant, in the event that an item of Indebtedness
meets the criteria of more than one of the categories of Permitted
Indebtedness described in clauses (1) through (19) above or is entitled to be
incurred pursuant to the Consolidated Fixed Charge Coverage Ratio provisions
of such covenant, the Company shall, in its sole discretion, classify (or
later reclassify) such item of Indebtedness in any manner that complies with
this covenant; provided that all secured Indebtedness outstanding under the
Credit Agreement up to the maximum amount permitted under clause (2) above
shall be deemed to have been incurred pursuant to clause (2). Accrual of
interest, accretion or amortization of original issue discount, fluctuations
in currency exchange rates, the payment of interest on any Indebtedness in the
form of additional Indebtedness with the same terms, and the payment of
dividends on Disqualified Capital Stock in the form of additional shares of
the same class of Disqualified Capital Stock will not be deemed to be an
incurrence of Indebtedness or an issuance of Disqualified Capital Stock for
purposes of the "Limitations on Incurrence of Additional Indebtedness"
covenant.
"Permitted Investments" means
(1) Investments by the Company or any Restricted Subsidiary of the
Company in any Person that is or will become immediately after such
Investment a Restricted Subsidiary of the Company or that will merge or
consolidate into the Company or a Restricted Subsidiary of the Company;
provided, however, that this clause (1) shall not permit any investment by
the Company or a Domestic Restricted Subsidiary in a Foreign Subsidiary
other than cash or Cash Equivalents and transfers of other property in the
ordinary course of business;
(2) Investments in the Company by any Restricted Subsidiary of the
Company; provided that any Indebtedness evidencing such Investment and held
by a Restricted Subsidiary that is not a Guarantor is unsecured and
subordinated, pursuant to a written agreement, to the Company's obligations
under the Notes and the Indenture;
(3) investments in cash and Cash Equivalents;
(4) loans and advances to employees, directors and officers of the
Company and its Restricted Subsidiaries in the ordinary course of business
for bona fide business purposes not in excess of $2.0 million at any one
time outstanding;
(5) Currency Agreements and Interest Swap Obligations entered into in the
ordinary course of the Company's or its Restricted Subsidiaries' businesses
and otherwise in compliance with the Indentures;
(6) additional Investments not to exceed $35.0 million at any one time
outstanding;
(7) Investments in securities of trade creditors or customers received
pursuant to any plan of reorganization or similar arrangement upon the
bankruptcy or insolvency of such trade creditors or customers or in good
faith settlement of delinquent obligations of such trade creditors or
customers;
75
(8) Investments made by the Company or its Restricted Subsidiaries as a
result of consideration received in connection with an Asset Sale made in
compliance with the "Limitation on Asset Sales" covenant;
(9) Investments represented by guarantees that are otherwise permitted
under the Indentures;
(10) Investments the payment for which is Qualified Capital Stock of the
Company;
(11) any Indebtedness of the Company to any of its subsidiaries incurred
in connection with the purchase of accounts receivable and related assets by
the Company from any such subsidiary which assets are subsequently conveyed
by the Company to a Securitization Entity in a Qualified Securitization
Transaction;
(12) Investments relating to purchase or acquisition of products or
services from vendors, manufacturers or suppliers in the ordinary course of
business;
(13) Deposits required by government agencies or public utilities
(including pertaining to taxes or other charges) in the ordinary course of
business;
(14) any assets, Capital Stock or other securities to the extent acquired
in exchange for shares of Qualified Capital Stock;
(15) any Investment made in joint ventures of the Company or its
Restricted Subsidiaries in existence on the Issue Date and pursuant to
documentation as in effect on the Issue Date, not to exceed $4.0 million in
any fiscal year (other than any modifications which merely extend the term
of such Investment);
(16) Investments made during any Suspension Period;
(17) Investments consisting of guarantees made pursuant to clause (17) of
the definition of Permitted Indebtedness; and
(18) the acquisition by the Company of obligations of one or more
officers, directors or employees of the Company or any of its Subsidiaries
in connection with such officers', directors' or employees' acquisition of
shares of capital stock of the Company so long as no cash is paid by the
Company or any of its Subsidiaries to such officers, directors or employees
in connection with the acquisition of any such obligations.
"Permitted Liens" means the following types of Liens:
(1) Liens for taxes, assessments or governmental charges or claims either
(a) not delinquent or (b) contested in good faith by appropriate proceedings
and as to which the Company or its Restricted Subsidiaries shall have set
aside on its books such reserves as may be required pursuant to GAAP;
(2) statutory Liens of landlords and Liens of carriers, warehousemen,
mechanics, suppliers, materialmen, repairmen and other Liens imposed by law
incurred in the ordinary course of business for sums not yet delinquent or
being contested in good faith, if a reserve or other appropriate provision,
if any, as required by GAAP shall have been made in respect thereof;
(3) Liens incurred or deposits made in the ordinary course of business in
connection with workers' compensation, unemployment insurance and other
types of social security, including any Lien securing letters of credit
issued in the ordinary course of business consistent with past practice in
connection therewith, or to secure the performance of tenders, statutory
obligations, surety and appeal bonds, bids, leases, government contracts,
performance and return-of-money bonds and other similar obligations
(exclusive of obligations for the payment of borrowed money);
76
(4) judgment Liens not giving rise to an Event of Default so long as such
Lien is adequately bonded and any appropriate legal proceedings which may
have been duly initiated for the review of such judgment shall not have been
finally terminated or the period within which such proceedings may be
initiated shall not have expired;
(5) easements, rights-of-way, zoning restrictions and other similar
charges or encumbrances in respect of real property not interfering in any
material respect with the ordinary conduct of the business of the Company or
any of its Restricted Subsidiaries;
(6) any interest or title of a lessor under any Capitalized Lease
Obligation; provided that such Liens do not extend to any property or assets
which is not leased property subject to such Capitalized Lease Obligation;
(7) Liens securing Purchase Money Indebtedness incurred in the ordinary
course of business; provided, however, that (a) such Purchase Money
Indebtedness shall not exceed the purchase price or other cost of such
property or equipment and shall not be secured by any property or equipment
of the Company or any Restricted Subsidiary of the Company other than the
property and equipment so acquired and (b) the Lien securing such Purchase
Money Indebtedness shall be created within 120 days of such acquisition;
(8) Liens upon specific items of inventory or other goods and proceeds of
any Person securing such Person's obligations in respect of bankers'
acceptances issued or created for the account of such Person to facilitate
the purchase, shipment or storage of such inventory or other goods;
(9) Liens securing reimbursement obligations with respect to commercial
letters of credit which encumber documents and other property relating to
such letters of credit and products and proceeds thereof;
(10) Liens encumbering deposits made to secure obligations arising from
statutory, regulatory, contractual, or warranty requirements of the Company
or any of its Restricted Subsidiaries, including rights of offset and set-
off;
(11) Liens securing Interest Swap Obligations which Interest Swap
Obligations relate to Indebtedness that is otherwise permitted under the
Indentures;
(12) Liens securing Indebtedness under Currency Agreements;
(13) Liens securing Acquired Indebtedness incurred in accordance with the
"Limitation on Incurrence of Additional Indebtedness" covenant; provided
that
(a) such Liens secured such Acquired Indebtedness at the time of and
prior to the incurrence of such Acquired Indebtedness by the Company or a
Restricted Subsidiary of the Company and were not granted in connection
with, or in anticipation of, the incurrence of such Acquired Indebtedness
by the Company or a Restricted Subsidiary of the Company; and
(b) such Liens do not extend to or cover any property or assets of the
Company or of any of its Restricted Subsidiaries other than the property
or assets that secured the Acquired Indebtedness prior to the time such
Indebtedness became Acquired Indebtedness of the Company or a Restricted
Subsidiary of the Company and are no more favorable to the lienholders in
any material respect as determined by the Board of Directors of the
Company than those securing the Acquired Indebtedness prior to the
incurrence of such Acquired Indebtedness by the Company or a Restricted
Subsidiary of the Company;
(14) Liens on assets of a Restricted Subsidiary of the Company that is
not a Guarantor to secure Indebtedness of such Restricted Subsidiary that is
otherwise permitted under the Indentures;
77
(15) leases, subleases, licenses and sublicenses granted to others that
do not materially interfere with the ordinary cause of business of the
Company and its Restricted Subsidiaries;
(16) banker's Liens, rights of setoff and similar Liens with respect to
cash and Cash Equivalents on deposit in one or more bank accounts in the
ordinary course of business;
(17) Liens arising from filing Uniform Commercial Code financing
statements regarding leases;
(18) Liens in favor of customs and revenue authorities arising as a
matter of law to secure payments of custom duties in connection with the
importation of goods; and
(19) Liens incurred in the ordinary course of business of the Company or
any Restricted Subsidiary of the Company with respect to obligations that do
not exceed $2.5 million in an aggregate principal amount at any one time
outstanding.
"Person" means an individual, partnership, corporation, unincorporated
organization, trust or joint venture, or a governmental agency or political
subdivision thereof.
"Preferred Stock" of any Person means any Capital Stock of such Person that
has preferential rights to any other Capital Stock of such Person with respect
to dividends or redemptions or upon liquidation.
"Purchase Money Indebtedness" means Indebtedness of the Company and its
Restricted Subsidiaries incurred in the normal course of business for the
purpose of financing all or any part of the purchase price, or the cost of
installation, construction or improvement, of property or equipment (including
Capital Stock).
"Qualified Capital Stock" means any Capital Stock that is not Disqualified
Capital Stock.
"Qualified Securitization Transaction" means any transaction or series of
transactions that may be entered into by the Company or any of its Restricted
Subsidiaries pursuant to which the Company or any of its Restricted
Subsidiaries may sell, convey or otherwise transfer pursuant to customary
terms to:
(1) a Securitization Entity or to the Company, which subsequently
transfers to a Securitization Entity (in the case of a transfer by the
Company or any of its Restricted Subsidiaries); and
(2) any other person (in the case of transfer by a Securitization
Entity),
or may grant a security interest in any accounts receivable (whether now
existing or arising or acquired in the future) of the Company or any of its
Restricted Subsidiaries, and any assets related thereto including, without
limitation, all collateral securing such accounts receivable, all contracts
and contract rights and all guarantees or other obligations in respect of such
accounts receivable, proceeds of such accounts receivable and other assets
(including contract rights) which are customarily transferred or in respect of
which security interests are customarily granted in connection with asset
securitization transactions involving accounts receivable.
"Rating Agencies" means Moody's and S&P.
"Refinance" means, in respect of any security or Indebtedness, to refinance,
extend, renew, refund, repay, prepay, redeem, defease or retire, or to issue a
security or Indebtedness in exchange or replacement for, such security or
Indebtedness in whole or in part. "Refinanced" and "Refinancing" shall have
correlative meanings.
"Refinancing Indebtedness" means any Refinancing by the Company or any
Restricted Subsidiary of the Company of Indebtedness incurred in accordance
with the "Limitation on Incurrence of Additional Indebtedness" covenant (other
than pursuant to clauses (2), (4), (5),
78
(6), (7), (8), (9), (10), (12), (13), (14), (15), (17), (18) or (19) of the
definition of Permitted Indebtedness), in each case that does not:
(1) result in an increase in the aggregate principal amount of
Indebtedness of such Person as of the date of such proposed Refinancing
(plus the amount of any premium required to be paid under the terms of the
instrument governing such Indebtedness and plus the amount of reasonable
fees and expenses incurred by the Company in connection with such
Refinancing); or
(2) create Indebtedness with: (a) a Weighted Average Life to Maturity
that is less than the Weighted Average Life to Maturity of the Indebtedness
being Refinanced; or (b) a final maturity earlier than the final maturity of
the Indebtedness being Refinanced; provided that (x) if such Indebtedness
being Refinanced is Indebtedness solely of the Company (and is not otherwise
guaranteed by a Restricted Subsidiary of the Company), then such Refinancing
Indebtedness shall be Indebtedness solely of the Company and (y) if such
Indebtedness being Refinanced is subordinate or junior to the Notes or any
Guarantee, then such Refinancing Indebtedness shall be subordinate to the
Notes or such Guarantee, as the case may be, at least to the same extent and
in the same manner as the Indebtedness being Refinanced.
"Restricted Subsidiary" of any Person means any Subsidiary of such Person
which at the time of determination is not an Unrestricted Subsidiary.
"S&P" means Standard & Poor's Ratings Service, a division of McGraw Hill,
Inc. (or any successor to the rating agency business thereof).
"Sale and Leaseback Transaction" means any direct or indirect arrangement
with any Person or to which any such Person is a party, providing for the
leasing to the Company or a Restricted Subsidiary of any property, whether
owned by the Company or any Restricted Subsidiary at the Issue Date or later
acquired, which has been or is to be sold or transferred by the Company or
such Restricted Subsidiary to such Person or to any other Person from whom
funds have been or are to be advanced by such Person on the security of such
Property.
"Secured Leverage Ratio" means the ratio of (i) outstanding secured
Indebtedness of the Company and its Restricted Subsidiaries (including
indebtedness attributed to any Securitization Entity) to (ii) Consolidated
EBITDA of the Company and its Restricted Subsidiaries for the four full fiscal
quarters ending prior to the date of the transaction giving rise to the need
to calculate the Secured Leverage Ratio for which financial statements are
available, calculated on the same basis as the calculation of Consolidated
EBITDA used in the definition of Consolidated Fixed Charge Coverage Ratio.
"Securitization Entity" means a Wholly Owned Subsidiary of the Company or
another person in which the Company or any Restricted Subsidiary of the
Company makes an Investment and to which the Company or any Restricted
Subsidiary of the Company transfers accounts receivable which engages in no
activities other than in connection with the financing of accounts receivable
and which is designated by the Board of Directors of the Company (as provided
below) as a Securitization Entity:
(1) no portion of the Indebtedness or any other Obligations (contingent
or otherwise) of which:
(i) is guaranteed by the Company or any Restricted Subsidiary of the
Company (other than the Securitization Entity) (excluding guarantees of
Obligations (other than the principal of, and interest on, Indebtedness))
pursuant to Standard Securitization Undertakings;
79
(ii) is recourse to or obligates the Company or any Restricted
Subsidiary of the Company (other than the Securitization Entity) in any
way other than pursuant to Standard Securitization Undertakings; or
(iii) subjects any property or asset of the Company or any Restricted
Subsidiary of the Company (other than the Securitization Entity),
directly or indirectly, contingently or otherwise, to the satisfaction
thereof, other than pursuant to Standard Securitization Undertakings and
other than any interest in the accounts receivable and related assets
being financed (whether in the form of an equity interest in such assets
or subordinated indebtedness payable primarily from such financed assets)
retained or acquired by the Company or any Restricted Subsidiary of the
Company,
(2) with which neither the Company nor any Restricted Subsidiary of the
Company has any material contract, agreement, arrangement or understanding
other than on terms no less favorable to the Company or such Restricted
Subsidiary than those that might be obtained at the time from persons that
are not Affiliates of the Company, other than fees payable in the ordinary
course of business in connection with servicing receivables of such entity,
and
(3) to which neither the Company nor any Restricted Subsidiary of the
Company has any obligation to maintain or preserve such entity's financial
condition or cause such entity to achieve certain levels of operating
results. Any such designation by the Board of Directors of the Company shall
be evidenced to the trustees by filing with the Trustees a certified copy of
the resolution of the Board of Directors of the Company giving effect to
such designation and an officers' certificate certifying that such
designation complied with the foregoing conditions.
"Significant Subsidiary", with respect to any Person, means any Restricted
Subsidiary of such Person that satisfies the criteria for a "significant
subsidiary" set forth in Rule 1.02(w) of Regulation S-X under the Exchange
Act.
"Subordinated Indebtedness" means Indebtedness of the Company or any
Guarantor that is subordinated or junior in right of payment to the Notes or
the Guarantee of such Guarantor, as the case may be.
"Subsidiary", with respect to any Person, means:
(1) any corporation of which the outstanding Capital Stock having at
least a majority of the votes entitled to be cast in the election of
directors under ordinary circumstances shall at the time be owned, directly
or indirectly, by such Person; or
(2) any other Person of which at least a majority of the voting interest
under ordinary circumstances is at the time, directly or indirectly, owned
by such Person.
"Standard Securitization Undertakings" means representations, warranties,
covenants, and indemnities entered into by the Company or any Restricted
Subsidiary of the Company which are reasonably customary in an accounts
receivable securitization transaction.
"Unrestricted Subsidiary" of any Person means:
(1) any Subsidiary of such Person that at the time of determination shall
be or continue to be designated an Unrestricted Subsidiary by the Board of
Directors of such Person in the manner provided below; and
(2) any Subsidiary of an Unrestricted Subsidiary.
The Board of Directors may designate any Subsidiary (including any newly
acquired or newly formed Subsidiary) to be an Unrestricted Subsidiary unless
such Subsidiary owns any Capital Stock of, or owns or holds any Lien on any
property of, the Company or any other
80
Subsidiary of the Company that is not a Subsidiary of the Subsidiary to be so
designated; provided that:
(1) the Company certifies to the Trustees that such designation complies
with the "Limitation on Restricted Payments" covenant; and
(2) each Subsidiary to be so designated and each of its Subsidiaries has
not at the time of designation, and does not thereafter, create, incur,
issue, assume, guarantee or otherwise become directly or indirectly liable
with respect to any Indebtedness pursuant to which the lender has recourse
to any of the assets of the Company or any of its Restricted Subsidiaries.
For purposes of making the determination of whether any such designation of
a Subsidiary as an Unrestricted Subsidiary complies with the "Limitation on
Restricted Payments" covenant, the portion of the fair market value of the net
assets of such Subsidiary of the Company at the time that such Subsidiary is
designated as an Unrestricted Subsidiary that is represented by the interest
of the Company and its Restricted Subsidiaries in such Subsidiary, as
determined in good faith by the Board of Directors of the Company, shall be
deemed to be an Investment. Such designation will be permitted only if such
Investment would be permitted at such time under the "Limitation on Restricted
Payments" covenant.
The Board of Directors may designate any Unrestricted Subsidiary to be a
Restricted Subsidiary only if:
(1) immediately after giving effect to such designation, the Company is
able to incur at least $1.00 of additional Indebtedness (other than
Permitted Indebtedness) in compliance with the "Limitation on Incurrence of
Additional Indebtedness" covenant; and
(2) immediately before and immediately after giving effect to such
designation, no Default or Event of Default shall have occurred and be
continuing. Any such designation by the Board of Directors shall be
evidenced to the Trustees by promptly filing with the Trustees a copy of the
Board Resolution giving effect to such designation and an officers'
certificate certifying that such designation complied with the foregoing
provisions.
"Weighted Average Life to Maturity" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing (a) the then outstanding
aggregate principal amount of such Indebtedness into (b) the sum of the total
of the products obtained by multiplying (i) the amount of each then remaining
installment, sinking fund, serial maturity or other required payment of
principal, including payment at final maturity, in respect thereof, by (ii)
the number of years (calculated to the nearest one-twelfth) which will elapse
between such date and the making of such payment.
"Wholly Owned Restricted Subsidiary" of any Person means any Wholly Owned
Subsidiary of such Person which at the time of determination is a Restricted
Subsidiary of such Person.
"Wholly Owned Subsidiary" of any Person means any Subsidiary of such Person
of which all the outstanding voting securities (other than in the case of a
Subsidiary, directors' qualifying shares or an immaterial amount of shares
required to be owned by other Persons pursuant to applicable law) are owned by
such Person or any Wholly Owned Subsidiary of such Person.
81
BOOK-ENTRY DELIVERY AND FORM
Except as described below, the notes will be initially represented by one or
more global notes in fully registered form without interest coupons. The notes
will be deposited with the Trustee as custodian for DTC, and DTC or its
nominee will initially be the sole registered holder of the notes for all
purposes under the applicable Indenture. We expect that pursuant to procedures
established by DTC (i) upon the issuance of the global notes, DTC or its
custodian will credit, on its internal system, the principal amount at
maturity of the individual beneficial interests represented by such global
notes to the respective accounts of persons who have accounts with such
depositary, and (ii) ownership of beneficial interests in the global notes
will be shown on, and the transfer of such ownership will be effected only
through, records maintained by DTC or its nominee (with respect to interests
of participants) and the records of participants (with respect to interests of
persons other than participants). Ownership of beneficial interests in the
global notes will be limited to persons who have accounts with DTC
("participants") or persons who hold interests through participants. Holders
may hold their interests in the global notes directly through DTC if they are
participants in such system, or indirectly through organizations which are
participants in such system.
So long as DTC, or its nominee, is the registered owner or holder of the
notes, DTC or such nominee, as the case may be, will be considered the sole
owner or holder of the notes represented by such global notes for all purposes
under the applicable Indenture. No beneficial owner of an interest in the
global notes will be able to transfer that interest except in accordance with
DTC's procedures, in addition to those provided for under the Indenture with
respect to the notes.
Payments of the principal of, premium (if any), and interest on the global
notes will be made to DTC or its nominee, as the case may be, as the
registered owner thereof. None of the Company, the Trustee, or any Paying
Agent will have any responsibility or liability for any aspect of the records
relating to or payments made on account of beneficial ownership interests in
the global notes or for maintaining, supervising or reviewing any records
relating to such beneficial ownership interest.
We expect that DTC or its nominee, upon receipt of any payment of principal,
premium, if any, interest on the global notes, will credit participants'
accounts with payments in amounts proportionate to their respective beneficial
interests in the principal amount of the global notes as shown on the records
of DTC or its nominee. We also expect that payments by participants to owners
of beneficial interests in the global notes held through such participants
will be governed by standing instructions and customary practice, as is now
the case with securities held for the accounts of customers registered in the
names of nominees for such customers. Such payments will be the responsibility
of such participants.
Transfers between participants in DTC will be effected in the ordinary way
through DTC's same-day funds system in accordance with DTC rules and will be
settled in same day funds. If a holder requires physical delivery of their
certificates for any reason, including to sell notes to persons in states
which require physical delivery of the notes, or to pledge such securities,
such holder must transfer its interest in a global note, in accordance with
the normal procedures of DTC and with the procedures set forth in the
applicable Indenture.
So long as DTC or its nominee is the registered owner or holder of such
global note, DTC or such nominee, as the case may be, will be considered the
sole owner or holder of the notes represented by such global note for the
purposes of receiving payment on the notes, receiving notices and for all
other purposes under the applicable Indenture and the notes. Beneficial
interests in the notes will be evidenced only by, and transfers thereof will
be effected only through, records maintained by DTC and its participants.
Except as provided below, owners of beneficial interests in a global note will
not be entitled to receive physical delivery of certificated notes in
definitive form and will not be considered the holders of such global note for
any purposes under the applicable Indenture. Accordingly, each person owning a
82
beneficial interest in a global note must rely on the procedures of DTC and,
if such person is not a participant, on the procedures of the participant
through which such person owns its interest, to exercise any rights of a
holder under the applicable Indenture. The Company understands that under
existing industry practices, in the event that the Company requests any action
of holders or that an owner of a beneficial interest in a global note desires
to give or take any action that a holder is entitled to give or take under the
applicable Indenture, DTC would authorize the participants holding the
relevant beneficial interest to give or take such action, and such
participants would authorize beneficial owners owning through such
participants to give or take such action or would otherwise act upon the
instructions of beneficial owners owning through them.
DTC has advised us that it will take any action permitted to be taken by a
holder of notes only at the direction of one or more participants to whose
account the DTC interests in the global notes are credited and only in respect
of such portion of the aggregate principal amount of notes as to which such
participant or participants has or have given such direction.
DTC has advised us as follows: DTC is a limited purpose trust company
organized under the laws of the State of New York, a member of the Federal
Reserve System, a "clearing corporation" within the meaning of the Uniform
Commercial Code and a "Clearing Agency" registered pursuant to the provisions
of Section 17A of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). DTC was created to hold securities for its participants and
facilitate the clearance and settlement of securities transactions between
participants through electronic book-entry changes in accounts of its
participants, thereby eliminating the need for physical movement of
certificates. Participants include securities brokers and dealers, banks,
trust companies, and clearing corporations and certain other organizations.
Indirect access to the DTC system is available to others such as banks,
brokers, dealers, and trust companies that clear through or maintain a
custodial relationship with a participant, either directly or indirectly
("indirect participants").
Although DTC has agreed to the foregoing procedures in order to facilitate
transfers of interests in the global note among participants of DTC, it is
under no obligation to perform such procedures, and such procedures may be
discontinued at any time. Neither us nor the Trustee will have any
responsibility for the performance by DTC or its participants or indirect
participants of their respective obligations under the rules and procedures
governing their operations.
CERTIFICATED SECURITIES
New notes in physical, certificated form shall be issued and delivered to
each person that DTC identitifes as a beneficial owner of the related new
notes only if (i) DTC is at any time unwilling or unable to continue as a
depositary for the global notes and a successor depositary is not appointed by
us within 90 days or (ii) we, at our sole discretion, notify the relevant
Trustee in writing that we elect to cause the issuance of certificated notes
under the applicable Indenture.
83
PLAN OF DISTRIBUTION
Each broker-dealer that receives new notes for its own account pursuant to
the exchange offer must acknowledge that it will deliver a prospectus in
connection with any resale of the new notes. This prospectus, as it may be
amended or supplemented from time to time, may be used by a broker-dealer in
connection with resales of new notes received in exchange for old notes where
the old notes were acquired as a result of market-making activities or other
trading activities. We have agreed that, for 90 days after the expiration date
of the exchange offer, we will make this prospectus, as amended or
supplemented, available to any broker-dealer for use in connection with any
resale. In addition, until March 5, 2005, all dealers effecting transactions in
the new notes may be required to deliver a prospectus.
We will not receive any proceeds from any sale of new notes by broker-
dealers. New notes received by broker-dealers for their own account pursuant
to the exchange offer may be sold from time to time in one or more
transactions in the over-the-counter market, in negotiated transactions,
through the writing of options on the new notes or a combination of these
methods of resale. These resales may be made at market prices prevailing at
the time of resale, at prices related to these prevailing market prices or
negotiated prices. Any resale may be made directly to purchasers or to or
through brokers or dealers who may receive compensation in the form of
commissions or concessions from any broker-dealer and/or the purchasers of any
of the new notes. Any broker-dealer that resells new notes that were received
by it for its own account pursuant to the exchange offer and any broker or
dealer that participates in a distribution of the new notes may be deemed to
be an "underwriter" within the meaning of the Securities Act, and any profit
on the resale of new notes and any commission or concessions received by those
persons may be deemed to be underwriting compensation under the Securities
Act. Any such broker-dealer must comply with the registration and prospectus
delivery requirements of the Securities Act in connection with any resale
transaction, including the delivery of a prospectus that contains information
with respect to any selling holder required by the Securities Act in
connection with any resale of the new notes. This prospectus may be used, to
the extent permitted by the applicable policies and regulations of the SEC, by
all persons subject to the prospectus delivery requirements of the Securities
Act, including, to the extent permitted by the applicable policies and
regulations of the SEC, all broker-dealers that are the "beneficial owners"
(as defined in Rule 13d-3 under the Exchange Act) of new notes received by
such broker-dealer in the exchange offer. By delivering a prospectus, however,
a broker-dealer will not be deemed to admit that it is an underwriter within
the meaning of the Securities Act.
Furthermore, any broker-dealer that acquired any of its old notes directly
from us:
o may not rely on the applicable interpretation of the staff of the SEC's
position contained in Exxon Capital Holdings Corp., SEC no-action letter
(April 13, 1988), Morgan, Stanley & Co. Inc., SEC no-action letter (June
5, 1991) and Shearman & Sterling, SEC no-action letter (July 2, 1993);
and
o must also be named as a selling noteholder in connection with the
registration and prospectus delivery requirements of the Securities Act
relating to any resale transaction.
For 90 days after the expiration date of the exchange offer, we will
promptly send additional copies of this prospectus and any amendment or
supplement to this prospectus to any broker-dealer that requests these
documents. We have agreed to pay all expenses incident to the performance of
our obligations in relation to the exchange offer (including the expenses of
one counsel for the holder of the original notes) other than commissions or
concessions of any brokers or dealers. We will indemnify the holders of the
new notes, including any broker-dealers, against various liabilities,
including liabilities under the Securities Act.
84
MATERIAL UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following is a general discussion of the material United States federal
income tax consequences of the exchange offer. The summary is based on the
Internal Revenue Code of 1986, as amended (the "Code"), Treasury Regulations,
judicial decisions, published positions of the Internal Revenue Service
("IRS"), and other applicable authorities, all as in effect as of the date
hereof and all of which are subject to change or differing interpretations
(possibly with retroactive effect). The discussion does not address all of the
tax consequences that may be relevant to a particular person or to persons
subject to special treatment under United States federal income tax laws (such
as financial institutions, broker-dealers, insurance companies, expatriates,
tax-exempt organizations, or persons that are, or hold their notes through,
partnerships or other pass-through entities), or to persons who hold the new
notes as part of a straddle, hedge, conversion, synthetic security, or
constructive sale transaction for United States federal income tax purposes,
all of whom may be subject to tax rules that differ from those summarized
below. This summary deals only with persons who hold the new notes as capital
assets within the meaning of Section 1221 of the Code (generally, property
held for investment). No opinion of counsel or IRS ruling has been or will be
sought regarding any matter discussed herein. No assurance can be given that
the IRS would not assert, or that a court would not sustain, a position
contrary to any of those set forth below. HOLDERS SHOULD CONSULT THEIR TAX
ADVISORS AS TO THE PARTICULAR UNITED STATES FEDERAL TAX CONSEQUENCES TO THEM
OF THE OFFER, AS WELL AS THE EFFECTS OF STATE, LOCAL AND NON-UNITED STATES TAX
LAWS.
The exchange of new notes for old notes pursuant to the exchange offer will
not be treated as a taxable event for U.S. federal income tax purposes.
Rather, the new notes received by a holder will be treated as a continuation
of the old notes in the hands of such holder. Accordingly, the exchanging
holder will have the same tax basis, holding period and interest income in
respect of the new notes as it would have had in respect of the old notes
surrendered in the exchange.
85
LEGAL MATTERS
The validity of the new notes offered hereby will be passed upon for us by
Skadden, Arps, Slate, Meagher & Flom LLP, New York, New York. The validity and
enforceability of the subsidiary guarantees to be offered by the Subsidiary
Guarantors incorporated or formed outside of the State of Delaware will be
passed upon for us by Lynn A. Schefsky, Senior Vice President and General
Counsel of Crompton Corporation. Mr. Schefsky owns common stock of Crompton
Corporation and options to purchase common stock of Crompton Corporation.
EXPERTS
The consolidated financial statements of Crompton Corporation and its
consolidated subsidiaries as of December 31, 2003 and 2002 and for each of the
years ended December 31, 2003, 2002, and 2001, have been included herein and
in the registration statement in reliance upon the report of KPMG LLP,
independent registered public accounting firm, appearing elsewhere herein, and
upon the authority of said firm as experts in accounting and auditing. The
audit report contains an explanatory paragraph that we adopted the provisions
of Statement of Financial Accounting Standards No. 143 in 2003 and Statement
of Financial Accounting Standards No. 142 in 2002.
AVAILABLE INFORMATION
We are subject to the information requirements of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"). Accordingly, we file annual,
quarterly and current reports, proxy statements and other information with the
SEC. We also furnish to our stockholders annual reports, which include
financial statements audited by our independent certified public accountants
and other reports that the law requires us to send to our stockholders. The
public may read and copy any reports, proxy statements or other information
that we file at the SEC's public reference room at Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549. The public may obtain information on the
public reference room by calling the SEC at 1-800-SEC-0330. Our SEC filings
are also available to the public from commercial document retrieval services
and at the web site maintained by the SEC at "http://www.sec.gov." You may
obtain a copy of any of these documents, at no cost, by writing or telephoning
us at the following address:
Crompton Corporation
199 Benson Road
Middlebury, Connecticut 06749
Attention: Corporate Communications
Phone: (203) 573-2000
Our common stock is listed on the NYSE under the symbol "CK." You can
inspect and copy reports, proxy statements and other information about us at
the NYSE's offices at 20 Broad Street, New York, New York 10005.
IN ORDER TO OBTAIN TIMELY DELIVERY, YOU MUST REQUEST THE INFORMATION NO
LATER THAN FIVE BUSINESS DAYS BEFORE YOU MUST MAKE YOUR INVESTMENT DECISION.
INCORPORATION BY REFERENCE
We are incorporating by reference certain information that we file with the
SEC under the informational requirements of the Exchange Act. The information
contained in the documents we are incorporating by reference is considered to
be part of this prospectus. We are incorporating by reference:
o Our annual report on Form 10-K for the fiscal year ended December 31,
2003;
86
o Our quarterly reports on Form 10-Q for the quarterly periods ended March
31, 2004, June 30, 2004 and September 30, 2004;
o Our current reports on Form 8-K dated January 12, 2004, March 15, 2004,
March 22, 2004, March 31, 2004, April 28, 2004, May 3, 2004, July 1,
2004, July 20, 2004, July 21, 2004 (as to information filed under Item 5
only), August 4, 2004, August 11, 2004, August 17, 2004, August 20, 2004,
September 15, 2004, November 10, 2004, November 29, 2004, November
30, 2004, January 4, 2005, and January 11, 2005; and
o Our definitive proxy statement on Form 14A, dated March 29, 2004.
All documents that we subsequently file pursuant to Section 13(a), 13(c), 14
or 15(d) of the Exchange Act prior to the termination of this exchange offer
will be deemed to be incorporated by reference into this prospectus from the
date of filing of such documents. These documents are or will be available for
inspection or copying at the locations identified above under the caption
"Available Information."
Any statement contained in a document incorporated or considered to be
incorporated by reference in this prospectus shall be considered to be
modified or superseded for purposes of this prospectus to the extent that a
statement in this prospectus or in any subsequently filed document that is or
is considered to be incorporated by reference modifies or supersedes such
statement. Any statement that is modified or superseded shall not, except as
so modified or superseded, constitute a part of this prospectus.
87
INDEX TO FINANCIAL STATEMENTS
PAGE
----
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm ................. F-2
Consolidated Statements of Operations for each of the years ended
December 31, 2003, 2002 and 2001....................................... F-3
Consolidated Balance Sheets as of December 31, 2003 and 2002 ............ F-4
Consolidated Statements of Cash Flows for each of the years ended
December 31, 2003, 2002 and 2001....................................... F-5
Consolidated Statements of Stockholders' Equity for each of the fiscal
years ended
2003, 2002 and 2001................................................... F-6
Notes to Consolidated Financial Statements .............................. F-7
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm ................. F-56
Condensed Consolidated Statements of Operations (Unaudited) for the
third quarter and nine months ended September 30, 2004 and 2003........ F-57
Condensed Consolidated Balance Sheets as of September 30, 2004
(Unaudited) and
December 31, 2003...................................................... F-58
Condensed Consolidated Statements of Cash Flows (Unaudited) nine months
ended September 30, 2004 and 2003...................................... F-59
Notes to Unaudited Condensed Consolidated Financial Statements .......... F-60
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Crompton Corporation:
We have audited the accompanying consolidated balance sheets of Crompton
Corporation and subsidiaries (the "Company") as of December 31, 2003 and 2002,
and the related consolidated statements of operations, stockholders' equity
and cash flows for each of the years in the three-year period ended December
31, 2003. These consolidated financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards 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. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of the
Company as of December 31, 2003 and 2002, and the results of their operations
and their cash flows for each of the years in the three-year period ended
December 31, 2003, in conformity with U.S. generally accepted accounting
principles.
As discussed in the Asset Retirement Obligations note to the consolidated
financial statements, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 143, "Asset Retirement Obligations" on
January 1, 2003. As discussed in the Accounting Policies note to the
consolidated financial statements, the Company adopted the provisions of
Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets" on January 1, 2002.
/s/ KPMG LLP
Stamford, Connecticut
January 30, 2004, except as to the "Antitrust Investigations and Related
Matters" note, which is as of March 15, 2004, and except as to the "Guarantor
Condensed Consolidating Financial Data" note, which is as of October 5, 2004
F-2
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)
2003 2002 2001
---------- ---------- ----------
NET SALES................................................................................. $2,185,043 $2,090,271 $2,286,543
COSTS AND EXPENSES
Cost of products sold..................................................................... 1,616,092 1,468,268 1,626,667
Selling, general and administrative....................................................... 353,026 354,559 378,916
Depreciation and amortization............................................................. 115,369 111,426 150,830
Research and development.................................................................. 51,467 54,285 56,030
Equity income............................................................................. (13,169) (7,917) (9,278)
Facility closures, severance and related costs 19,560 17,969 101,512
Antitrust costs........................................................................... 77,716 6,306 --
Impairment of long-lived assets........................................................... -- -- 80,366
---------- ---------- ----------
OPERATING PROFIT (LOSS)................................................................... (35,018) 85,375 (98,500)
Interest expense.......................................................................... 89,653 101,704 109,877
Loss on early extinguishment of debt...................................................... 24,699 -- --
Other expense, net........................................................................ 5,383 38,021 27,265
---------- ---------- ----------
EARNINGS (LOSS)
Loss from continuing operations before income taxes and cumulative effect of accounting
change.................................................................................. (154,753) (54,350) (235,642)
Income tax benefit........................................................................ (36,102) (18,904) (79,883)
---------- ---------- ----------
Loss from continuing operations before cumulative effect of accounting change............. (118,651) (35,446) (155,759)
Earnings from discontinued operations..................................................... 26,314 50,920 31,815
Gain on sale of discontinued operations................................................... 111,692 -- --
Cumulative effect of accounting change.................................................... (401) (298,981) --
---------- ---------- ----------
NET EARNINGS (LOSS)....................................................................... $ 18,954 $ (283,507) $ (123,944)
========== ========== ==========
BASIC AND DILUTED EARNINGS (LOSS) PER COMMON SHARE
Loss from continuing operations before cumulative effect of accounting change............. $ (1.05) $ (0.31) $ (1.38)
Earnings from discontinued operations..................................................... 0.23 0.44 0.28
Gain on sale of discontinued operations................................................... 0.99 -- --
Cumulative effect of accounting change.................................................... -- (2.63) --
---------- ---------- ----------
NET EARNINGS (LOSS)....................................................................... $ 0.17 $ (2.50) $ (1.10)
========== ========== ==========
See accompanying Notes to Consolidated Financial Statements.
F-3
CONSOLIDATED BALANCE SHEETS
YEARS ENDED DECEMBER 31, 2003 AND 2002
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)
2003 2002
---------- ----------
ASSETS
CURRENT ASSETS
Cash ................................................ $ 39,213 $ 16,941
Accounts receivable ................................. 210,190 183,329
Inventories ......................................... 390,199 353,556
Other current assets ................................ 170,852 112,950
Assets held for sale ................................ -- 392,887
---------- ----------
TOTAL CURRENT ASSETS ................................ 810,454 1,059,663
---------- ----------
NON-CURRENT ASSETS
Property, plant and equipment ....................... 774,612 695,962
Cost in excess of acquired net assets ............... 418,607 584,633
Other assets ........................................ 525,509 500,557
---------- ----------
$2,529,182 $2,840,815
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term borrowings ............................... $ 60,695 $ 3,694
Accounts payable .................................... 232,127 268,593
Accrued expenses .................................... 267,472 260,718
Income taxes payable ................................ 130,284 116,111
Other current liabilities ........................... 10,667 15,670
Liabilities held for sale ........................... -- 29,273
---------- ----------
TOTAL CURRENT LIABILITIES ........................... 701,245 694,059
========== ==========
NON-CURRENT LIABILITIES
Long-term debt ...................................... 754,018 1,253,149
Pension and post-retirement health care liabilities . 566,966 510,235
Other liabilities ................................... 204,244 183,489
STOCKHOLDERS' EQUITY
Common stock - $.01 par value ....................... 1,192 1,192
Additional paid-in capital .......................... 1,034,027 1,048,304
Accumulated deficit ................................. (590,157) (586,555)
Accumulated other comprehensive loss ................ (96,463) (200,426)
Treasury stock at cost .............................. (45,890) (62,632)
---------- ----------
TOTAL STOCKHOLDERS' EQUITY .......................... 302,709 199,883
---------- ----------
$2,529,182 $2,840,815
========== ==========
See accompanying Notes to Consolidated Financial Statements.
F-4
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
(IN THOUSANDS OF DOLLARS)
INCREASE (DECREASE) IN CASH
--------------------------- 2003 2002 2001
--------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings (loss).......................................................................... $ 18,954 $(283,507) $(123,944)
Adjustments to reconcile net earnings (loss) to net cash (used in) provided by operations:
Cumulative effect of accounting change...................................................... 401 298,981 --
Impairment of long-lived assets............................................................. -- -- 80,366
Gain on sale of discontinued operations..................................................... (111,692) -- --
Loss on sale of business units.............................................................. -- 34,705 19,121
Loss on early extinguishment of debt........................................................ 24,699 -- --
Depreciation and amortization............................................................... 136,087 146,550 185,570
Equity income............................................................................... (13,169) (7,917) (9,278)
Deferred taxes.............................................................................. (76,968) (38,431) (84,820)
Changes in assets and liabilities, net:
Accounts receivable....................................................................... 75,407 7,858 93,053
Accounts receivable - securitization...................................................... (38,051) (157) 19,358
Inventories............................................................................... 39,421 22,683 29,906
Other current assets...................................................................... 3,742 (95) (10,736)
Other assets.............................................................................. 31,318 13,683 33,585
Accounts payable.......................................................................... (82,220) 28,945 12,594
Accrued expenses.......................................................................... (54,477) (48,914) (601)
Income taxes payable...................................................................... 28,423 57,053 (12,770)
Other current liabilities................................................................. (6,026) (4,531) 2,567
Pension and post-retirement health care liabilities....................................... (20,191) (10,811) (4,042)
Other liabilities......................................................................... 28,528 (10,442) (27,760)
Other..................................................................................... 984 (3,899) 2,838
--------- --------- ---------
Net cash (used in) provided by operations.................................................... (14,830) 201,754 205,007
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Net proceeds from sale of businesses......................................................... 633,427 80,000 35,061
Capital expenditures......................................................................... (87,591) (100,309) (136,642)
Other investing activities................................................................... 1,707 (1,526) 933
--------- --------- ---------
Net cash provided by (used in) investing activities.......................................... 547,543 (21,835) (100,648)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on long-term notes.................................................................. (478,380) (11,742) (169)
Proceeds from long-term notes................................................................ -- -- 2,003
Proceeds (payments) on domestic credit facility.............................................. 32,000 (130,000) (105,000)
Payments on short-term borrowings............................................................ (1,824) (27,186) (672)
Premium paid on early extinguishment of debt................................................. (23,804) -- --
Dividends paid............................................................................... (22,556) (22,698) (22,542)
Proceeds from interest rate swap contract.................................................... -- -- 21,870
Common shares acquired....................................................................... (22,080) -- --
Other financing activities................................................................... 2,323 6,415 1,555
--------- --------- ---------
Net cash used in financing activities........................................................ (514,321) (185,211) (102,955)
--------- --------- ---------
CASH
Effect of exchange rates on cash............................................................. 3,880 727 (675)
--------- --------- ---------
Change in cash............................................................................... 22,272 (4,565) 729
Cash at beginning of period.................................................................. 16,941 21,506 20,777
--------- --------- ---------
Cash at end of period........................................................................ $ 39,213 $ 16,941 $ 21,506
========= ========= =========
See accompanying Notes to Consolidated Financial Statements.
F-5
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FISCAL YEARS ENDED 2003, 2002 AND 2001
(IN THOUSANDS, EXCEPT PER SHARE DATA)
ACCUMULATED
COMMON ADDITIONAL OTHER
SHARES TREASURY COMMON PAID-IN ACCUMULATED COMPREHENSIVE TREASURY
ISSUED SHARES STOCK CAPITAL DEFICIT LOSS STOCK TOTAL
------- -------- ------ ---------- ----------- ------------- -------- ---------
BALANCE, DECEMBER 31, 2000 .... 119,372 6,597 $1,194 $1,051,371 $(133,864) $ (86,221) $(78,504) $ 753,976
Comprehensive loss:
Net loss ...................... (123,944) (123,944)
Equity adjustment for
translation of foreign
currencies ................... (22,038) (22,038)
Minimum pension liability
adjustment (net of deferred
tax benefit of $24,237) ...... (37,576) (37,576)
Other ......................... (6,004) (6,004)
---------
Total comprehensive loss ...... (189,562)
Cash dividends ($0.20 per
share) ....................... (22,542) (22,542)
Stock options and other
issuances .................... (467) (116) 5,785 5,669
Merger share adjustment ....... (185) (2) 2 --
------- ------ ------ ---------- --------- --------- -------- ---------
BALANCE, DECEMBER 31, 2001 .... 119,187 6,130 1,192 1,051,257 (280,350) (151,839) (72,719) 547,541
Comprehensive loss:
Net loss ...................... (283,507) (283,507)
Equity adjustment for
translation of foreign
currencies ................... 30,038 30,038
Minimum pension liability
adjustment (net of deferred
tax benefit of $49,370) ...... (78,463) (78,463)
Other ......................... (162) (162)
---------
Total comprehensive loss ...... (332,094)
Cash dividends ($0.20 per
share) ....................... (22,698) (22,698)
Stock options and other
issuances .................... (832) (2,953) 10,087 7,134
Merger share adjustment ....... (35) -- -- --
------- ------ ------ ---------- --------- --------- -------- ---------
BALANCE, DECEMBER 31, 2002 .... 119,152 5,298 1,192 1,048,304 (586,555) (200,426) (62,632) 199,883
Comprehensive income:
Net earnings .................. 18,954 18,954
Equity adjustment for
translation of foreign
currencies ................... 125,438 125,438
Minimum pension liability
adjustment (net of deferred
tax benefit of $18,534) ...... (24,887) (24,887)
Other ......................... 3,412 3,412
---------
Total comprehensive income. ... 122,917
Cash dividends ($0.20 per
share). ...................... (22,556) (22,556)
Stock options and other
issuances (638) (3,664) 7,313 3,649
Common shares acquired. ....... 3,200 (22,080) (22,080)
Issued for pension funding. (3,200) (10,613) 31,509 20,896
------- ------ ------ ---------- --------- --------- -------- ---------
BALANCE, DECEMBER 31, 2003 .... 119,152 4,660 $1,192 $1,034,027 $(590,157) $ (96,463) $(45,890) $ 302,709
======= ====== ====== ========== ========= ========= ======== =========
See accompanying Notes to Consolidated Financial Statements.
F-6
CROMPTON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
all majority-owned subsidiaries. Other affiliates in which Crompton
Corporation (the "Company") has a 20% to 50% ownership are accounted for in
accordance with the equity method. All significant intercompany balances and
transactions have been eliminated in consolidation.
The consolidated financial statements have been prepared in conformity with
accounting principles generally accepted in the United States of America,
which require the Company to make estimates and assumptions that affect the
amounts and disclosures reported in the consolidated financial statements and
accompanying notes. Actual results could differ from these estimates.
Certain prior year amounts have been reclassified to conform to the current
year's presentation. These changes did not have a material impact on
previously reported results of operations or financial position.
DISCONTINUED OPERATIONS
On April 24, 2003, the Company entered into an agreement to sell certain
assets and assign certain liabilities of the OrganoSilicones business unit to
the Specialty Materials division of General Electric Company (GE) and to
acquire GE's Specialty Chemicals business. The transaction closed on July 31,
2003. As a result, the accompanying financial statements reflect the
OrganoSilicones business unit as a discontinued operation for all periods
presented. The operations of the OrganoSilicones business unit have been
classified as earnings from discontinued operations (net of tax) in the
consolidated statements of operations and the estimated carrying amount of the
assets sold and the liabilities assumed have been reflected as assets and
liabilities held for sale in the consolidated balance sheets for all prior
periods presented. The consolidated statements of cash flows have not been
adjusted to reflect the discontinued operations and thus include the cash
flows of the OrganoSilicones business through July 31, 2003. Refer to the
Discontinued Operations footnote for further information.
ACCOUNTING DEVELOPMENTS
In January 2003, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 46, "Consolidation of Variable Interest Entities."
Interpretation No. 46 requires existing unconsolidated variable interest
entities (VIEs) to be consolidated by their primary beneficiaries if the
entities do not effectively disperse risks among the parties involved.
Interpretation No. 46 applies immediately to VIE's created after January 31,
2003 and to VIEs in which an enterprise holds a variable interest that was
acquired before February 1, 2003, the Interpretation applies for periods
beginning after June 15, 2003. In December 2003, the FASB reissued
Interpretation No. 46 with certain modifications and clarifications for
certain VIEs. The Company has no unconsolidated VIEs and therefore its
consolidated financial statements are in compliance with the requirements of
Interpretation No. 46 at December 1, 2003.
In April 2003, the FASB issued Statement No. 149, "Amendment of Statement
No. 133 on Derivative Instruments and Hedging Activities." Statement No. 149
amends and clarifies accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities under Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities." Statement No. 149 is effective for
contracts entered into or modified, and for hedging relationships designated,
after June 30, 2003. The
F-7
CROMPTON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ACCOUNTING POLICIES -- (CONTINUED)
Company has applied the provisions of Statement No. 149, which has not had a
material impact on its earnings or financial position.
In May 2003, the FASB issued Statement No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity."
Statement No. 150 establishes standards for how an issuer classifies and
measures certain financial instruments with characteristics of both
liabilities and equity. It requires that an issuer classify a financial
instrument that is within its scope as a liability (or an asset in some
circumstances). The guidance in Statement No. 150 is generally effective for
all financial instruments entered into or modified after May 31, 2003.
Otherwise, it is effective at the beginning of the first interim period
beginning after June 15, 2003. The Company has applied the provisions of
Statement No. 150, which has not had a material impact on its earnings or
financial position.
REVENUE RECOGNITION
Substantially all of the Company's revenues are derived from the sale of
products. Approximately 94% of the Company's revenue is recognized when risk
of loss of, and title to, the product is transferred to the customer, which
usually occurs at the time shipment is made. Substantially all of the
Company's products are sold FOB ("free on board") shipping point or on an
equivalent basis. The Company's standard terms of delivery are included on its
sales invoices and order confirmation documents. The remaining 6% of revenue,
which represents a substantial portion of the revenue of the polymer
processing equipment reporting segment, is recognized in accordance with the
completed contract method of accounting.
CUSTOMER REBATES
The Company accrues for the estimated cost of customer rebates as a
reduction of sales. Customer rebates are primarily based on customers
achieving defined sales targets over a specified period of time. The Company
estimates the cost of these rebates based on the likelihood of the rebate
being achieved and recognizes the cost as a deduction from sales when such
sales are recognized. Rebate programs are monitored on a regular basis and
adjusted as required. The Company's accruals for customer rebates were
$27.4 million and $21.8 million at December 31, 2003 and December 31, 2002,
respectively.
OPERATING COSTS AND EXPENSES
Cost of products sold includes all costs incurred in manufacturing products,
including raw materials, direct manufacturing costs and manufacturing
overhead. Cost of products sold also includes warehousing, distribution,
engineering (other than polymer processing equipment design engineering),
purchasing, and environmental, health and safety functions. Selling, general
and administrative expenses (SG&A) include costs and expenses related to the
following functions and activities: selling, advertising, customer service,
polymer processing equipment design engineering, shipping costs for out-bound
product shipments, information technology, legal, provision for doubtful
accounts, corporate facilities and corporate administration. SG&A also
includes accounting, finance and human resources, excluding direct support in
manufacturing operations, which is included as cost of products sold. Research
and development expenses (R&D) include basic and applied research and
development activities of a technical and non-routine nature. R&D costs are
expensed as incurred. Costs of products sold, research and development, and
SG&A expenses exclude depreciation and amortization expenses, which are
presented on a separate line in the consolidated statements of operations.
F-8
CROMPTON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ACCOUNTING POLICIES -- (CONTINUED)
Included in SG&A are shipping costs of $80.5 million, $72.4 million and
$78.3 million in 2003, 2002 and 2001, respectively.
EQUITY INVESTMENTS
Included among the Company's equity investments are a 50% ownership in
Gustafson LLC and a 50% ownership in Gustafson Partnership. The Company
accounts for these investments in accordance with the equity method. The
combined assets and liabilities of these two investments were $93.4 million
and $38.3 million, respectively, as of December 31, 2003 and were $74.0 million
and $26.3 million, respectively, as of December 31, 2002. The combined pre-tax
income of the two investments for the years ended December 31, 2003, 2002 and
2001 were $25.3 million, $15.6 million and $24.7 million, respectively, of
which the Company has included its proportionate share in equity income in its
consolidated statements of operations.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
Included in accounts receivable are allowances for doubtful accounts in the
amount of $17.8 million in 2003 and $16.3 million in 2002.
INVENTORY VALUATION
Inventories are valued at the lower of cost or market. Cost is determined
using the first-in, first-out (FIFO) method.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are carried at cost, less accumulated
depreciation. Depreciation expense ($100.8 million in 2003, $99.9 million in
2002 and $119 million in 2001) is computed on the straight-line method using
the following ranges of asset lives: land improvements 3 to 20 years;
buildings and improvements 10 to 40 years; machinery and equipment 10 to 25
years; information systems equipment 5 to 10 years; and furniture, fixtures
and other 3 to 10 years.
Renewals and improvements that extend the useful lives of the assets are
capitalized. Capitalized leased assets and leasehold improvements are
depreciated over the shorter of their useful lives or the remaining lease
term. Expenditures for maintenance and repairs are charged to expense as
incurred.
INTANGIBLE ASSETS
Prior to January 1, 2002, the excess cost over the fair value of net assets
of businesses acquired (goodwill) was being amortized on a straight-line basis
over 20 to 40 years. Effective January 1, 2002, in accordance with FASB
Statement No. 142, the Company discontinued the amortization of goodwill.
Goodwill amortization expense was $20.2 million in 2001.
Patents, trademarks and other intangibles are being amortized principally on
a straight-line basis using the following ranges for their estimated useful
lives: patents 10 to 15 years; trademarks 10 to 40 years; and other
intangibles primarily 5 to 19 years. Further information is provided in the
Goodwill and Intangible Assets footnote included herein.
F-9
CROMPTON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ACCOUNTING POLICIES -- (CONTINUED)
RECOVERABILITY OF LONG-LIVED ASSETS AND GOODWILL
The Company evaluates the recoverability of the carrying value of long-lived
assets, excluding goodwill, whenever events or changes in circumstances
indicate that the carrying value may not be recoverable. Under such
circumstances, the Company assesses whether the projected undiscounted cash
flows of its businesses are sufficient to recover the existing unamortized
cost of its long-lived assets. If the undiscounted projected cash flows are
not sufficient, the Company calculates the impairment amount by discounting
the projected cash flows using its weighted-average cost of capital. The
amount of the impairment is written-off against earnings in the period in
which the impairment is determined.
The Company evaluates the recoverability of the carrying value of goodwill
on an annual basis as of July 31, or sooner if events occur or circumstances
change, in accordance with FASB Statement No. 142. See the Goodwill and
Intangible Assets footnote included herein for further details.
ENVIRONMENTAL LIABILITIES
Accruals for environmental remediation, and operation and management costs
directly related to remediation, are recorded when it is probable that a
liability has been incurred and the amount of the liability can be reasonably
estimated based on current laws and existing technologies. Each quarter, the
Company evaluates and reviews estimates for future remediation and related
costs to determine appropriate environmental reserve amounts. At December 31,
2003, environmental liabilities of $17.2 million have been included in accrued
expenses and $103.5 million have been included in other liabilities. At
December 31, 2002, environmental liabilities of $21.8 million have been
included in accrued expenses and $107 million have been included in other
liabilities. See the Contingencies and Environmental Matters footnote included
herein for further details.
STOCK-BASED COMPENSATION
As permitted under FASB Statement No. 123, "Accounting for Stock-Based
Compensation" and Statement No. 148, "Accounting for Stock-Based Compensation-
Transition and Disclosure," the Company elected to continue its historical
method of accounting for stock-based compensation in accordance with APB
Opinion (APB) No. 25, "Accounting for Stock Issued to Employees." Under APB
25, compensation expense for fixed plans is recognized based on the difference
between the exercise price and the stock price on the date of grant. Since the
Company's fixed-plan awards have been granted with an exercise price equal to
the stock price on the date of grant, no compensation expense has been
recognized in the consolidated statements of operations for these awards.
However, compensation expense has been recognized for the restricted awards
under the Company's long-term incentive programs in accordance with the
provisions of APB 25, which would be unchanged under FASB Statements No. 123
and No. 148. The following table illustrates the effect on net earnings (loss)
and earnings (loss) per share if the Company had applied the fair value
recognition provisions of Statements No. 123 and No. 148 to all stock-based
employee compensation awards:
F-10
CROMPTON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ACCOUNTING POLICIES -- (CONTINUED)
2003 2002 2001
------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE
DATA)
Net earnings (loss), as reported....................................................... $18,954 $(283,507) $(123,944)
Stock-based employee compensation expense (income) included in net earnings (loss), net
of tax................................................................................ (1,359) 4,944 2,371
Total stock-based employee compensation determined under fair value based accounting
method for all awards, net of tax..................................................... (2,770) (10,863) (11,598)
------- --------- ---------
Pro forma net earnings (loss).......................................................... $14,825 $(289,426) $(133,171)
======= ========= =========
Earnings (loss) per share:
Basic and diluted -- as reported...................................................... $ 0.17 $ (2.50) $ (1.10)
Basic and diluted -- pro forma........................................................ $ 0.13 $ (2.55) $ (1.18)
FINANCIAL AND DERIVATIVE INSTRUMENTS
Financial and derivative instruments are presented in the accompanying
consolidated financial statements at either cost or fair value as required by
accounting principles generally accepted in the United States of America.
Further information is provided in the Financial Instruments and Derivative
Instruments and Hedging Activities footnotes included herein.
TRANSLATION OF FOREIGN CURRENCIES
Balance sheet accounts denominated in foreign currencies are translated at
the current rate of exchange as of the balance sheet date, while revenues and
expenses are translated at average rates of exchange during the periods
presented. The cumulative foreign currency adjustments resulting from such
translation are included in accumulated other comprehensive loss.
STATEMENTS OF CASH FLOWS
Cash includes bank term deposits with original maturities of three months or
less. Cash payments included interest payments of $95.8 million in 2003,
$105.4 million in 2002 and $119.3 million in 2001. Cash payments also included
net income tax payments of $21.4 million in 2003, net income tax refunds of
$26.4 million in 2002 and net income tax payments of $31.3 million in 2001.
The net income tax refund in 2002 included a $50 million federal income tax
refund resulting from a change in tax legislation. Included in the Company's
cash balance at December 31, 2003, is approximately $13 million of restricted
cash that is required to be on deposit to support certain letters of credit
and performance guarantees, the majority of which will be settled within one
year.
F-11
CROMPTON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FACILITY CLOSURES, SEVERANCE AND RELATED COSTS
In July 2003, the Company announced a new cost reduction program to
eliminate, at a minimum, overhead expenses previously absorbed by the
OrganoSilicones business. In order to achieve this goal, the Company expects
to reduce its global workforce by approximately 375 positions, of which
approximately 305 positions had been eliminated as of December 31, 2003. In
2003, the Company recorded a pre-tax charge of $14 million for facility
closures, severance and related costs in the consolidated statements of
operations. A summary of this charge is as follows:
SEVERANCE OTHER
AND FACILITY
RELATED ASSET CLOSURE
COSTS WRITE-OFFS COSTS TOTAL
--------- ---------- -------- -------
(IN THOUSANDS)
2003 charge. ...................................................................... $12,585 $ 396 $ 988 $13,969
Cash payments. .................................................................... (2,859) -- (383) (3,242)
Non-cash charges .................................................................. -- (396) -- (396)
------- ----- ----- -------
BALANCE AT DECEMBER 31, 2003 ...................................................... $ 9,726 $ -- $ 605 $10,331
======= ===== ===== =======
In July 2001, the Company announced a cost reduction initiative expected to
lower annual operating costs through a program of facility consolidation,
workforce reduction, and improvements in procurement and working capital
control. In 2002, the Company announced the relocation of its corporate
headquarters from Greenwich, CT to Middlebury, CT. The 2001 initiative and the
corporate relocation have been substantially completed as of December 31, 2003
and the Company does not expect future costs to be significant. As a result of
the cost reduction initiative and the corporate relocation, the Company
recorded pre-tax charges for facility closures, severance and related costs of
$5.6 million, $17.4 million and $109 million (of which $7.5 million is in cost
of products sold) in 2003, 2002 and 2001, respectively. These charges are
summarized as follows:
ASSET
SEVERANCE WRITE-OFFS OTHER
AND AND FACILITY
RELATED IMPAIRMENTS CLOSURE
COSTS (A) (B) COSTS (C) TOTAL
--------- ----------- --------- ---------
(IN THOUSANDS)
2001 charge:
Continuing operations ........................................................ $ 41,196 $ 41,847 $ 25,986 $ 109,029
Discontinued operations ...................................................... 4,270 -- 734 5,004
Cash payments ................................................................. (8,526) -- (2,022) (10,548)
Non-cash charges .............................................................. (6,706) (41,847) (13,866) (62,419)
-------- -------- -------- ---------
Balance at December 31, 2001 .................................................. 30,234 -- 10,832 41,066
2002 charge:
Continuing operations ........................................................ 7,211 4,918 5,240 17,369
Discontinued operations ...................................................... 4,256 -- 1,092 5,348
Cash payments ................................................................. (16,480) -- (6,285) (22,765)
Non-cash charges .............................................................. (988) (4,918) 459 (5,447)
-------- -------- -------- ---------
Balance at December 31, 2002 .................................................. 24,233 -- 11,338 35,571
2003 charge:
Continuing operations ........................................................ 2,711 183 2,697 5,591
Discontinued operations ...................................................... 15 -- 15 30
Cash payments ................................................................. (17,457) -- (9,695) (27,152)
Non-cash charges .............................................................. (1,110) (183) (280) (1,573)
-------- -------- -------- ---------
BALANCE AT DECEMBER 31, 2003 .................................................. $ 8,392 $ -- $ 4,075 $ 12,467
======== ======== ======== =========
F-12
CROMPTON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FACILITY CLOSURES, SEVERANCE AND RELATED COSTS -- (CONTINUED)
---------------
(a) Includes severance at various sites, including severance resulting from the
corporate relocation, and pension curtailments related to closed sites.
(b) Includes primarily asset write-offs related to closed sites and the write-
down of an equity investment relating to the impairment of assets of an
affiliate.
(c) Includes primarily demolition, decontamination and decommissioning costs
and inventory charges related to closed sites.
In December 2000, the Company closed its manufacturing facility in Freeport,
Grand Bahama Island. In connection with the facility closure, the Company
incurred a pre-tax charge of $23.1 million in 2000 (of which $3.0 million was
included in cost of products sold). This charge included $15.5 million for the
write-off of long-lived assets, $6.2 million for facility closure and
maintenance costs and $1.4 million for severance and other costs. The Company
made payments of $0.5 million and $4 million in 2002 and 2001, respectively.
In 2002, due to changes in the original estimate, the Company recorded a pre-
tax charge of $0.6 million for additional facility closure and maintenance
costs. During 2003, the Company made payments of $0.4 million related to this
closure and had a remaining accrual of $0.2 million at December 31, 2003.
Effective January 1, 2003, the Company adopted the provisions of FASB
Statement No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities." Statement No. 146 requires companies to record exit or disposal
costs when they are incurred and to initially measure these costs at fair
value. Statement No. 146 also requires that recorded liabilities be adjusted
in future periods to reflect changes in timing or estimated cash flows. The
provisions of Statement No. 146 are effective for exit or disposal activities
initiated after December 31, 2002. The adoption of Statement No. 146 has not
had a material impact on the Company's accounting for facility closures,
severance and related costs as of December 31, 2003.
The Company's accruals for facility closures, severance and related costs
are included in accrued expenses in its consolidated balance sheets.
DISCONTINUED OPERATIONS
On April 24, 2003, the Company entered into an agreement to sell certain
assets and assign certain liabilities of the OrganoSilicones business unit to
the Specialty Materials division of GE and to acquire GE's Specialty Chemicals
business. The transaction closed on July 31, 2003 and resulted in a gain of
$111.7 million (net of income taxes of $175.3 million). The gain includes the
write-off of certain other assets associated with the OrganoSilicones business
unit, principally goodwill, with carrying amounts of $220 million at July 31,
2003. The Company received net cash proceeds of $633.4 million, which includes
proceeds from its first quarterly earn-out payment of $8.75 million less
certain transaction-related fees of $18.4 million. The consideration that the
Company received is subject to adjustment based on the change and/or
adjustment to certain net assets of the OrganoSilicones business unit and the
GE Specialty Chemicals business between December 31, 2002 and the closing
date. In addition, as a result of the transaction, the Company acquired GE's
Specialty Chemicals business valued at $160 million. The Company will continue
to receive quarterly earn-out payments through September of 2006 based on the
combined performance of GE's existing Silicones business and the
OrganoSilicones business that GE acquired from the Company. The total of such
payments will be a minimum of $105 million and a maximum of $250 million.
During the fourth quarter of 2003, the Company received its first minimum
quarterly earn-out payment of $8.75 million. Based on the performance of GE's
Silicones business during the fourth quarter of 2003, the Company will receive
an additional $4.5 million of earn-out
F-13
CROMPTON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DISCONTINUED OPERATIONS -- (CONTINUED)
proceeds in the first quarter of 2004. The recognition of this additional gain
is contingent upon the continued favorable future performance of GE's
Silicones business, which the Company will assess on a quarterly basis.
The Company has used proceeds from this transaction primarily to reduce
indebtedness. On July 31, 2003, the Company reduced the borrowings under its
domestic credit facility from $294 million to zero and in August of 2003, the
Company repurchased $250 million of its 8.5% notes and paid down the
$61.3 million balance of its EURIBOR based bank loans.
The agreement provided for the sale of assets and assignment of liabilities
of the OrganoSilicones business unit with carrying amounts as follows:
JULY 31, DECEMBER 31,
2003 2002
-------- ------------
(IN THOUSANDS)
Inventory ........................................... $102,420 $106,560
Other current assets ................................ 2,356 3,798
Property, plant and equipment, net. ................. 229,328 246,554
Other assets ........................................ 33,909 35,975
-------- --------
TOTAL ASSETS HELD FOR SALE ......................... $368,013 $392,887
======== ========
Notes payable ....................................... $ 2,204 $ 2,033
Accounts payable and accrued expenses ............... 13,262 14,671
Long-term debt ...................................... 7,728 8,698
Other liabilities ................................... 4,193 3,871
-------- --------
TOTAL LIABILITIES HELD FOR SALE .................... $ 27,387 $ 29,273
======== ========
The sales and earnings from discontinued operations for all periods
presented are as follows:
2003 2002 2001
-------- -------- --------
(IN THOUSANDS)
Net sales ................................................................................. $273,387 $456,601 $432,255
======== ======== ========
Pre-tax earnings from discontinued operations. ............................................ $ 35,278 $ 63,634 $ 47,036
Income taxes .............................................................................. (8,964) (12,714) (15,221)
-------- -------- --------
Earnings from discontinued operations ..................................................... $ 26,314 $ 50,920 $ 31,815
======== ======== ========
F-14
CROMPTON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DISCONTINUED OPERATIONS -- (CONTINUED)
The Company's consolidated statement of operations for the year ended
December 31, 2003 reflects the results of operations of the acquired GE
Specialty Chemicals business for the months of August through December 2003.
The $160 million purchase price was allocated to the assets acquired and
liabilities assumed based on the fair value of such assets and liabilities.
The Company engaged an independent appraiser to determine the fair value of
certain assets. As a result of the independent valuation that was performed,
certain adjustments were made to the purchase price allocation subsequent to
the date of acquisition through December 31, 2003. The purchase price
allocation as of December 31, 2003 is as follows:
PURCHASE
PRICE
ALLOCATION
--------------
(IN THOUSANDS)
Accounts receivable........................................... $ 13,789
Inventory..................................................... 28,878
Other current assets.......................................... 1,670
Property, plant and equipment, net............................ 50,992
Cost in excess of acquired net assets (goodwill).............. 42,345
Other assets.................................................. 43,691
Accounts payable and accrued expenses......................... (15,865)
Post-retirement health care liability......................... (5,500)
--------
TOTAL PURCHASE PRICE.......................................... $160,000
========
F-15
CROMPTON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
PRO FORMA FINANCIAL INFORMATION (UNAUDITED)
The following pro forma results of operations for the years ended December
31, 2003, 2002, and 2001 assume the divestiture of the OrganoSilicones
business unit and the acquisition of the GE Specialty Chemicals business had
been consummated as of the beginning of each respective period:
2003 2002 2001
---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net sales......................................................................... $2,276,962 $2,259,219 $2,449,866
========== ========== ==========
Earnings (loss) from continuing operations before cumulative effect of accounting
change........................................................................... $ (101,854) $ 2,424 $ (113,491)
========== ========== ==========
Net earnings (loss) (a)........................................................... $ 9,437 $ (296,557) $ (113,491)
========== ========== ==========
Basic earnings (loss) per common share:
Earnings (loss) before cumulative effect of accounting change.................... $ (0.91) $ 0.02 $ (1.00)
========== ========== ==========
Net earnings (loss)............................................................... $ 0.08 $ (2.61) $ (1.00)
========== ========== ==========
Diluted earnings (loss) per common share:
Earnings (loss) before cumulative effect of accounting change..................... $ (0.91) $ 0.02 $ (1.00)
========== ========== ==========
Net earnings (loss)............................................................... $ 0.08 $ (2.56) $ (1.00)
========== ========== ==========
Weighted average shares outstanding:
Basic............................................................................ 112,531 113,568 113,061
========== ========== ==========
Diluted.......................................................................... 112,531 115,656 113,061
========== ========== ==========
---------------
(a) The pro forma net earnings (loss) for the year ended December 31, 2003
includes a gain on the sale of discontinued operations of $111,692. In
addition, the pro forma net earnings (loss) for the years ended December
31, 2003 and 2002 include charges for cumulative effect of accounting
changes of $401 and $298,981, respectively.
The pro forma information above has been prepared for comparative purposes
only and does not purport to be indicative of the results of operations that
would have occurred had the divestiture of the OrganoSilicones business unit
and the acquisition of the GE Specialty Chemicals business been consummated at
the beginning of the respective periods.
F-16
CROMPTON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DIVESTITURES
In June 2002, the Company sold its industrial specialties business unit
(excluding retained accounts receivable and accounts payable valued at
approximately $10 million) for $95 million, including cash proceeds of
$80 million and a note receivable of $15 million due February 2003. The note
receivable, net of adjustments made to the value of certain assets sold, was
paid by the buyer. The industrial specialties assets sold consisted of
inventory of $24.9 million, property, plant and equipment, net, of
$80.2 million and intangible assets of $2.0 million. In addition, other assets
(primarily intangible assets) of $11.5 million were written off. After
transaction fees and related costs, the Company recorded a pre-tax loss of
$34.7 million in 2002 (included in other expense, net). During the fourth
quarter of 2003, the Company resolved certain transaction-related matters with
the buyer and accordingly recorded a $2.6 million credit adjustment to the
pre-tax loss in other expense, net. Prior to the sale, the industrial
specialties business unit was included in the Other reporting segment.
In December 2001, the Company sold its industrial colors business unit for
$32 million, which resulted in a pre-tax loss of $17.3 million (included in
other expense, net).
In December 2001, the Company sold its equity interest in the nitrile rubber
joint venture for $3.1 million. The sale resulted in a pre-tax loss of
$1.8 million (included in other expense, net).
In March 2001, the Company sold its equity interest in Yorkshire Group PLC
for $7 million. The sale resulted in a pre-tax loss of $1.5 million (included
in other expense, net).
ASSET IMPAIRMENTS
During the fourth quarter of 2001, as a result of changes in the
marketplace, the Company evaluated the recoverability of the long-lived assets
of its rubber chemicals and trilene businesses. The rubber additives business
(included in the Polymer Additives reporting segment) had experienced
industry-wide overcapacity, customer consolidation and low cost regional
competition, which led to deteriorating pricing and marginally profitable
long-term prospects. For the trilene business (which represents less than
$4 million of net sales included in the Polymers reporting segment), the issue
was a lack of demand with little prospect for improvement. Based on the
projected cash flows, the Company determined that the carrying values of the
long-lived assets of these businesses were impaired and recorded impairment
charges of $66.7 million and $13.7 million related to the rubber chemicals and
trilene businesses, respectively. These amounts were charged to operating
profit in the fourth quarter of 2001 with an offsetting reduction to the long-
lived assets of the businesses, primarily property, plant and equipment.
F-17
CROMPTON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
MERGER ACCRUALS
On September 1, 1999, Crompton and Knowles Corporation (C&K) merged with
Witco Corporation (Witco) in a tax-free stock-for-stock merger (the "Merger").
As a result of the Merger, the Company recorded various merger related
accruals in 1999 as a component of cost in excess of acquired net assets
(goodwill). The changes to these accruals for the periods presented in the
Company's consolidated financial statements are as follows:
SEVERANCE OTHER MERGER
AND RELATED RELATED
COSTS COSTS TOTAL
----------- ------------ --------
(IN THOUSANDS)
Balance at December 31, 2000............................................................. $ 17,678 $ 7,606 $ 25,284
Cash payments............................................................................ (3,019) (2,836) (5,855)
Non-cash charges......................................................................... (983) (862) (1,845)
-------- ------- --------
Balance at December 31, 2001............................................................. 13,676 3,908 17,584
Cash payments............................................................................ (764) (1,226) (1,990)
Non-cash charges......................................................................... -- (157) (157)
Reserve adjustment (a)................................................................... (12,571) (536) (13,107)
-------- ------- --------
Balance at December 31, 2002............................................................. 341 1,989 2,330
Cash payments............................................................................ (115) (283) (398)
Reserve adjustment (a)................................................................... -- (797) (797)
-------- ------- --------
BALANCE AT DECEMBER 31, 2003............................................................. $ 226 $ 909 $ 1,135
======== ======= ========
---------------
(a) Represents the reversal of reserves no longer deemed necessary, of which
$12.6 million in 2002 was a reduction of goodwill.
Also, as a result of the Merger, the Company recorded additional accruals in
1999 as a component of operating profit (loss). The changes to these accruals
for the periods presented in the Company's consolidated financial statements
are summarized as follows:
SEVERANCE FACILITY OTHER
AND CLOSURE AND MERGER
RELATED MAINTENANCE RELATED
COSTS COSTS COSTS TOTAL
--------- ----------- ------- -------
(IN THOUSANDS)
Balance at December 31, 2000 ...................................................... $1,347 $ 4,796 $ 922 $ 7,065
Cash payments ..................................................................... (297) (1,187) (613) (2,097)
Non-cash charges .................................................................. (684) (1,758) 126 (2,316)
------ ------- ----- -------
Balance at December 31, 2001 ...................................................... 366 1,851 435 2,652
Cash payments ..................................................................... (325) (1,564) (42) (1,931)
Non-cash charges .................................................................. 50 (287) (250) (487)
------ ------- ----- -------
Balance at December 31, 2002 ...................................................... 91 -- 143 234
Cash payments ..................................................................... -- -- (44) (44)
Reserve adjustment ................................................................ (91) -- 91 --
------ ------- ----- -------
BALANCE AT DECEMBER 31, 2003 ...................................................... $ -- $ -- $ 190 $ 190
====== ======= ===== =======
ACCOUNTS RECEIVABLE SECURITIZATION PROGRAMS
The Company has an accounts receivable securitization program to sell up to
$150 million of domestic accounts receivable to agent banks. At December 31,
2003, $106.1 million had been sold at an average cost of approximately 1.89%.
At December 31, 2002, $136.5 million had been sold at an average cost of
approximately 2.19%. In addition, the Company's
F-18
CROMPTON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ACCOUNTS RECEIVABLE SECURITIZATION PROGRAMS -- (CONTINUED)
European subsidiaries have a separate program to sell their eligible accounts
receivable to agent banks. At December 31, 2003, $93.3 million of
international accounts receivable had been sold at an average cost of
approximately 3.37%. At December 31, 2002, $101 million of international
accounts receivable had been sold at an average cost of approximately 3.94%.
The total costs associated with these programs of $7.8 million and $9.1 million
as of December 31, 2003 and 2002, respectively, are included in other expense,
net in the consolidated statements of operations. The decrease in accounts
receivable sold under these programs in 2003 was primarily due to a reduction
in eligible receivables resulting from the sale of the OrganoSilicones
business unit.
Under the domestic program, certain subsidiaries of the Company sell their
receivables to a special purpose entity (SPE) that has been created as a
separate legal entity for the purpose of acquiring such receivables and
selling an undivided interest therein to agent banks. In accordance with the
domestic sale agreement, the agent banks purchase an undivided ownership
interest in the accounts receivable owned by the SPE. The amount of such
undivided ownership interest will vary based on the level of eligible accounts
receivable as defined in the agreement. In addition, the agent banks retain a
security interest in the unsold receivable balance owned by the SPE, which was
$43.3 million and $27.4 million as of December 31, 2003 and 2002,
respectively. The balance of the unsold receivables owned by the SPE is
included in the Company's accounts receivable balance on its consolidated
balance sheets. Under the international programs, certain foreign subsidiaries
of the Company sell eligible accounts receivable directly to agent banks.
During the period, the Company had an obligation to service the accounts
receivable sold under its domestic and international programs. The Company has
treated the transfer of receivables under its domestic and international
receivable programs as a sale of accounts receivable.
INVENTORIES
2003 2002
-------- --------
(IN THOUSANDS)
Finished goods .......................................... $293,846 $264,078
Work in process ......................................... 20,175 21,158
Raw materials and supplies .............................. 76,178 68,320
-------- --------
$390,199 $353,556
======== ========
PROPERTY, PLANT AND EQUIPMENT
2003 2002
---------- ----------
(IN THOUSANDS)
Land and improvements. .............................. $ 47,953 $ 44,737
Buildings and improvements .......................... 236,325 172,359
Machinery and equipment ............................. 1,088,383 978,155
Information systems equipment ....................... 124,951 118,039
Furniture, fixtures and other ....................... 25,619 23,212
Construction in progress ............................ 79,386 82,725
---------- ----------
1,602,617 1,419,227
Less accumulated depreciation ....................... 828,005 723,265
---------- ----------
$ 774,612 $ 695,962
========== ==========
F-19
CROMPTON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
GOODWILL AND INTANGIBLE ASSETS
Effective January 1, 2002, the Company adopted FASB Statement No. 141,
"Business Combinations" and FASB Statement No. 142, "Goodwill and Other
Intangible Assets." Statement No. 141 requires that all business combinations
initiated after June 30, 2001 be accounted for using the purchase method of
accounting. It also specifies criteria that must be met for intangible assets
acquired in a purchase combination to be recognized apart from goodwill.
Statement No. 142 requires that the useful lives of all existing intangible
assets be reviewed and adjusted if necessary. It also requires that goodwill
and intangible assets with indefinite lives no longer be amortized, but rather
be tested for impairment at least annually. Other intangible assets will
continue to be amortized over their useful lives and reviewed for impairment
in accordance with FASB Statement No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets."
In accordance with Statement No. 142, the Company discontinued the
amortization of goodwill effective January 1, 2002. The following is a
reconciliation to adjust previously reported annual financial information to
exclude goodwill amortization expense:
2001
-----------------------------
NET EARNINGS
(LOSS) PER SHARE
----------------
LOSS BASIC DILUTED
--------- ------ -------
(IN THOUSANDS, EXCEPT PER
SHARE DATA)
Net loss, as reported............................................................................. $(123,944) $(1.10) $(1.10)
Goodwill amortization expense -- continuing operations 20,179 0.18 0.18
Goodwill amortization expense -- discontinued operations.......................................... 5,877 0.05 0.05
--------- ------ ------
ADJUSTED NET LOSS................................................................................. $ (97,888) $(0.87) $(0.87)
========= ====== ======
The Company's intangible assets (excluding goodwill) are included in "other
assets" on the consolidated balance sheets and comprise the following:
DECEMBER 31, 2003 DECEMBER 31, 2002
----------------------- -----------------------
GROSS ACCUMULATED GROSS ACCUMULATED
COST AMORTIZATION COST AMORTIZATION
-------- ------------ -------- ------------
(IN THOUSANDS)
Patents ..................................................................... $ 60,824 $(18,877) $ 45,440 $(15,335)
Trademarks .................................................................. 83,718 (31,334) 69,547 (27,932)
Other ....................................................................... 89,364 (37,444) 64,327 (31,325)
-------- -------- -------- --------
$233,906 $(87,655) $179,314 $(74,592)
======== ======== ======== ========
The gross cost of the Company's intangible assets increased $54.6 million
during 2003 primarily due to $43.6 million of intangibles acquired with the
acquisition of the GE Specialty Chemicals business, the capitalization of fees
associated with the renewal of patents, trademarks and registrations, and
higher foreign currency translation. The estimated fair value of intangible
assets associated with the GE Specialty Chemicals acquisition was based on an
independent valuation and includes $13.2 million for trademarks with a 40-year
useful life, $23.1 million for acquired customer lists/relationships with a
weighted-average useful life of 6.3 years, and $7.3 million for patents with a
10-year useful life.
Amortization expense related to intangible assets (excluding goodwill)
amounted to $14.5 million in 2003, $11.6 million in 2002 and $11.6 in 2001.
Estimated amortization expense for the next five fiscal years is as follows:
$17.1 million (2004); $16.3 million (2005); $16.1 million (2006); $15.9 million
(2007); and $15.4 million (2008).
F-20
CROMPTON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
GOODWILL AND INTANGIBLE ASSETS -- (CONTINUED)
During the first quarter of 2002, in accordance with the goodwill impairment
provisions of Statement No. 142, the Company allocated its assets and
liabilities, including goodwill, to its reporting units. Much of the goodwill
relates to the Merger and, accordingly, has been allocated to the former Witco
business units. During the second quarter of 2002, the Company completed its
reporting unit fair value calculations by discounting the projected cash flows
of each of its reporting units using its weighted-average cost of capital. As
a result, the Company recorded a charge of $299 million, or $2.63 per share,
retroactive to January 1, 2002. The charge is reflected in 2002 as a
cumulative effect of accounting change. Of the $299 million charge, $84 million
relates to the divested industrial specialties business and represents 100
percent of the goodwill attributed to that business. A further $65 million
relates to 100 percent of the goodwill attributed to the refined products
business and the remaining $150 million of the charge represents 43 percent of
the goodwill attributed to the plastic additives business.
Goodwill by reportable segment is as follows:
DECEMBER 31, DECEMBER 31,
2003 2002
------------ ------------
(IN THOUSANDS)
Polymer Products
Polymer Additives. ............................. $310,785 $266,105
Polymers ....................................... 17,299 17,299
Polymer Processing Equipment ................... 34,637 31,870
------------ ------------
362,721 315,274
-------- --------
Specialty Products
OrganoSilicones ................................ -- 213,980
Crop Protection ................................ 55,886 55,379
-------- --------
55,886 269,359
-------- --------
$418,607 $584,633
======== ========
During 2003, goodwill decreased $166 million primarily due to the write-off
of $214 million of goodwill related to the OrganoSilicones business, partially
offset by $42.3 million of goodwill associated with the acquisition of the GE
Specialty Chemicals business (included in the Polymer Additives segment) and
higher foreign currency translation of $5.6 million. The goodwill associated
with the OrganoSilicones business was written off as part of the gain on sale
of discontinued operations. All of the goodwill associated with the GE
Specialty Chemicals business is deductible for tax purposes.
The Company has elected to perform its annual goodwill impairment procedures
for all of its reporting units as of July 31. During the third quarter of
2003, the Company updated its carrying value calculations and fair value
estimates for each of its reporting units as of July 31, 2003. Based on the
comparison of the carrying values to the estimated fair values, the Company
has concluded that no additional goodwill impairment exists. The Company will
update its review as of July 31, 2004, or sooner, if events occur or
circumstances change that could reduce the fair value of a reporting unit
below its carrying value.
LEASES
At December 31, 2003, minimum rental commitments under non-cancelable
operating leases, net of sublease income, amounted to $17.9 million (2004),
$15.2 million (2005), $10.5 million (2006), $9.1 million (2007), $8.7 million
(2008) and $35.3 million (2009 and
F-21
CROMPTON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
LEASES -- (CONTINUED)
thereafter). Rental expenses under operating leases were $24.4 million (2003),
$27.8 million (2002) and $31.5 million (2001).
Real estate taxes, insurance and maintenance expenses generally are
obligations of the Company, and accordingly, are not included as part of
rental payments. It is expected that in the normal course of business, leases
that expire will be renewed or replaced by similar leases.
INDEBTEDNESS
The Company's long-term debt instruments are recorded at face value, net of
unamortized discounts. Such discounts will be amortized to interest expense
over the life of the related debt instruments. The Company's long-term debt is
summarized as follows:
LONG-TERM DEBT
2003 2002
-------- ----------
(IN THOUSANDS)
Domestic Credit Facility (a) .......................... $ -- $ 25,000
8.50% Notes due 2005, net of unamortized discount of
$850 in 2003 and $2,706 in 2002, with an effective
interest rate of 8.71%............................... 349,150 597,294
6.125% Notes due 2006, net of unamortized discount of
$4,966 in 2003 and $7,348 in 2002, with an effective
interest rate of 7.71%............................... 145,034 142,652
6.875% Debentures due 2026, net of unamortized
discount of $23,265 in 2003 and $24,319 in 2002, with
an effective interest rate of 7.58%.................. 126,735 125,681
7.75% Debentures due 2023, net of unamortized discount
of $1,405 in 2003 and $1,478 in 2002, with an
effective interest rate of 7.82%..................... 108,595 108,522
6.60% Notes due 2003, net of unamortized discount of
$442 in 2002, with an effective interest rate of
7.67%................................................ -- 164,558
EURIBOR-based Bank Loans due 2003 ..................... -- 57,051
Other ................................................. 24,504 32,391
-------- ----------
$754,018 $1,253,149
======== ==========
---------------
(a) The Company's domestic credit facility of $57 million at December 31, 2003
has been classified as short-term due to its maturity date of October 2004.
On April 1, 2003, the Company utilized its domestic credit facility to repay
its $165 million of 6.6% notes due in 2003. On July 31, 2003, the Company
completed its transaction with GE and used the proceeds from this transaction
primarily to reduce indebtedness. On July 31, 2003, the Company reduced the
borrowings under its domestic credit facility from $294 million to zero. In
August of 2003, the Company repaid the $61.3 million balance of its EURIBOR-
based bank loans and repurchased $250 million of its 8.5% notes. As a result
of the repurchase of the 8.5% notes, the Company recorded a loss on early
extinguishment of debt of $24.7 million as a component of net earnings (loss)
from continuing operations before taxes in accordance with FASB Statement No.
145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB
Statement No. 13, and Technical Corrections." Included in this loss is a
premium of $23.8 million and a write-off of $0.9 million related to the
unamortized discount and debt issuance costs related to the repurchased notes.
F-22
CROMPTON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INDEBTEDNESS -- (CONTINUED)
In March of 2000, the Company issued $600 million of notes due in 2005 with
a coupon rate of 8.5%, and entered into an interest rate swap contract to
convert $300 million of such notes into variable interest rate debt. On March
24, 2001, the Company terminated the $300 million variable interest rate swap
contract and received $21.9 million of cash proceeds from the settlement of
the contract, which represented the fair market value of the contract on the
date of termination. In accordance with FASB Statements No. 133 and No. 138,
as they relate to fair value hedge accounting, the $21.9 million was recorded
as an increase to long-term debt and is being amortized to earnings over the
life of the notes. The unamortized balance at December 31, 2003 and 2002 was
$6.6 million and $12.1 million, respectively.
CREDIT FACILITIES
At December 31, 2002, the Company had a $400 million five-year domestic
credit facility available through October 2004. Effective July 31, 2003, the
credit facility was amended to $300 million. Borrowings on this facility are
at various rate options determined on the date of borrowing. In addition, the
Company must pay a facility fee on the aggregate amount of the credit
facility, which was .50% and .38% at December 31, 2003 and 2002, respectively.
At December 31, 2003, borrowings under this credit facility were $57 million
with a weighted-average interest rate of 3.57%. At December 31, 2002,
borrowings under this credit facility were $25 million with a weighted-average
interest rate of 3.56%. Due to the October 2004 maturity date, borrowings
under this facility were classified as short-term at December 31, 2003.
The Company also has arrangements with various banks for lines of credit for
its international subsidiaries aggregating $26.3 million in 2003 and
$28 million in 2002, of which $3.7 million (at 4.9%) and $4.7 million (at
4.4%) were outstanding at December 31, 2003 and 2002, respectively.
DEBT COVENANTS
The Company's various debt agreements contain covenants that limit the
ability to create or assume mortgages or engage in mergers, consolidations,
and certain sales or leases of assets. The Company is required to report
compliance with certain financial covenants to its lenders on a quarterly
basis. Under these covenants, the Company is required to maintain a leverage
ratio (adjusted total debt to adjusted earnings before interest, taxes,
depreciation and amortization ("Bank EBITDA"), with adjustments to both debt
and earnings being made in accordance with the terms of the domestic credit
facility agreement) and an interest coverage ratio (Bank EBITDA to interest
expense). The Company also provides a security interest in certain domestic
personal property not to exceed 10% of consolidated net tangible assets. As a
result of the waiver and amendments to the domestic credit facility agreement
dated October 17, 2003 and November 10, 2003, the leverage and interest
coverage ratio covenants were modified to allow for more latitude beginning in
the third quarter of 2003. The Company was in compliance with the financial
covenants of its domestic credit facility at December 31, 2003. The Company's
five-year domestic credit facility and the amendments thereto have been filed
as exhibits to the Company's filings with the Securities and Exchange
Commission.
MATURITIES
At December 31, 2003, the scheduled maturities of long-term debt during the
next five fiscal years are: 2004 - $0; 2005 - $350 million; 2006 -
$150 million; 2007 - $0; and 2008 - $0.
F-23
CROMPTON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INCOME TAXES
The components of earnings (loss) from continuing operations before income
taxes and cumulative effect of accounting change, and the provision for income
taxes (benefit) are as follows:
2003 2002 2001
--------- --------- ---------
(IN THOUSANDS)
Pre-tax Earnings (Loss) from Continuing Operations:
Domestic.................................................................................... $(249,802) $(150,523) $(280,092)
Foreign..................................................................................... 95,049 96,173 44,450
--------- --------- ---------
$(154,753) $ (54,350) $(235,642)
========= ========= =========
Income Taxes (Benefits):
Domestic
Current................................................................................... $ 2,524 $ (1,749) $ 562
Deferred.................................................................................. (75,798) (55,435) (102,381)
--------- --------- ---------
(73,274) (57,184) (101,819)
Foreign
Current................................................................................... 47,057 33,991 19,596
Deferred.................................................................................. (9,885) 4,289 2,340
--------- --------- ---------
37,172 38,280 21,936
Total
Current................................................................................... 49,581 32,242 20,158
Deferred.................................................................................. (85,683) (51,146) (100,041)
--------- --------- ---------
$ (36,102) $ (18,904) $ (79,883)
========= ========= =========
The provision (benefit) for income taxes differs from the Federal statutory
rate for the following reasons:
2003 2002 2001
-------- -------- --------
(IN THOUSANDS)
Income tax benefit at statutory rate............................................................ $(54,164) $(19,023) $(82,475)
Antitrust fines................................................................................. 15,816 -- --
Goodwill amortization........................................................................... -- -- 7,210
Foreign income tax rate differential............................................................ 5,619 (389) 6,378
State income taxes, net of federal benefit...................................................... (7,433) (4,381) (9,192)
Tax audit settlements........................................................................... -- (900) (4,870)
Impact of valuation allowance................................................................... (1,714) 5,008 1,792
Exclusions and foreign income subject to U.S. taxation.......................................... 2,696 23 882
Non-deductible items............................................................................ 4,811 758 3,585
Other, net...................................................................................... (1,733) -- (3,193)
-------- -------- --------
Actual income tax benefit....................................................................... $(36,102) $(18,904) $(79,883)
======== ======== ========
F-24
CROMPTON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INCOME TAXES -- (CONTINUED)
Provisions have been made for deferred taxes based on differences between
the financial statement and the tax basis of assets and liabilities using
currently enacted tax rates and regulations. The components of the net
deferred tax assets and liabilities are as follows:
2003 2002
-------- --------
(IN THOUSANDS)
DEFERRED TAX ASSETS:
Pension and other post-retirement liabilities. ......... $172,487 $182,427
Net operating loss and tax credit carryforwards ........ 101,639 138,500
Accruals for environmental remediation ................. 41,596 44,430
Other accruals ......................................... 54,245 54,332
Inventories and other .................................. 24,695 19,407
Intercompany royalty ................................... -- 21,935
DEFERRED TAX LIABILITIES:
Property, plant and equipment .......................... (40,493) (69,316)
Earn-out receivable .................................... (35,786) --
Foreign basis differential ............................. (35,698) --
Financial instruments .................................. (11,793) (13,254)
Intangibles ............................................ (5,380) (12,453)
Other .................................................. (3,509) (5,829)
-------- --------
Net deferred tax asset before valuation allowance ....... 262,003 360,179
Valuation allowance ..................................... (18,356) (20,070)
-------- --------
Net deferred tax asset after valuation allowance ........ $243,647 $340,109
======== ========
Net deferred taxes of $64.9 million and $62.1 million are included in other
current assets and $178.8 million and $278 million are included in other
assets in 2003 and 2002, respectively. The Company believes that it is more
likely than not that the results of future operations will generate sufficient
taxable income to realize its deferred tax assets.
At December 31, 2003, the Company had an aggregate of $259.5 million of net
operating losses (NOLs) ($231.9 million generated domestically and
$27.6 million related to the Company's foreign subsidiaries) and $1.3 million
of excess foreign tax credits. The Company's NOL's are subject to certain
limitations and will begin to expire in 2008. The valuation allowance at
December 31, 2003 includes $12.8 million related to the NOL's ($4.4 million
for which subsequently recognized tax benefits will be applied to reduce
goodwill) and $5.6 million related to other foreign deferred tax assets.
At December 31, 2002, the Company had an aggregate of $350.4 million of
NOL's ($316.9 million generated domestically and $33.5 million related to the
Company's foreign subsidiaries) and $1.9 million of excess foreign tax
credits. The valuation allowance at December 31, 2002 included $14.5 million
related to the NOL's ($5.2 million for which subsequently recognized tax
benefits will be applied to reduce goodwill) and $5.6 million related to other
foreign deferred tax assets.
The Company has not made any provision for U.S. taxes which would be payable
if undistributed earnings of the foreign subsidiaries of approximately
$466 million at December 31, 2003 were distributed to the Company since
certain foreign countries limit the extent of repatriation of earnings while,
for others, the Company's intention is to permanently reinvest such foreign
earnings. A determination of the amount of the unrecognized deferred tax
liability related to undistributed earnings is not practicable.
F-25
CROMPTON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INCOME TAXES -- (CONTINUED)
In addition, the Company has not recognized a deferred tax liability for the
difference between the book basis and the tax basis of its investment in the
common stock of its subsidiaries. Such difference relates primarily to
$235 million of unremitted earnings earned by Witco's foreign subsidiaries
prior to the Merger on September 1, 1999. The Company does not expect this
difference in basis to become subject to tax at the parent level, as it is the
Company's intention to permanently reinvest such foreign earnings.
EARNINGS (LOSS) PER COMMON SHARE
The computation of basic earnings (loss) per common share is based on the
weighted-average number of common shares outstanding. Diluted earnings (loss)
per share is based on the weighted-average number of common and common share
equivalents outstanding. The computation of diluted earnings (loss) per share
equals the basic calculation since common stock equivalents were antidilutive
due to losses from continuing operations in each year. Common stock
equivalents amounted to 147,539 in 2003, 2,087,888 in 2002 and 2,442,685 in
2001.
2003 2002 2001
--------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE
DATA)
Loss from continuing operations before cumulative effect of accounting change................ $(118,651) $ (35,446) $(155,759)
Earnings from discontinued operations........................................................ 26,314 50,920 31,815
Gain on sale of discontinued operations...................................................... 111,692 -- --
Cumulative effect of accounting change....................................................... (401) (298,981) --
--------- --------- ---------
NET EARNINGS (LOSS).......................................................................... $ 18,954 $(283,507) $(123,944)
========= ========= =========
BASIC AND DILUTED
Weighted-average shares outstanding.......................................................... 112,531 113,568 113,061
========= ========= =========
Loss from continuing operations before cumulative effect of accounting change................ $ (1.05) $ (0.31) $ (1.38)
Earnings from discontinued operations........................................................ 0.23 0.44 0.28
Gain on sale of discontinued operations...................................................... 0.99 -- --
Cumulative effect of accounting change....................................................... -- (2.63) --
--------- --------- ---------
NET EARNINGS (LOSS).......................................................................... $ 0.17 $ (2.50) $ (1.10)
========= ========= =========
CAPITAL STOCK
The Company is authorized to issue 500 million shares of $.01 par value
common stock. There were 119,152,254 shares issued at year-end 2003 and 2002,
of which 4,660,158 and 5,297,885 shares were held as treasury stock in 2003
and 2002, respectively.
The Company is authorized to issue 250,000 shares of preferred stock without
par value, none of which are outstanding. On September 3, 1999, the Company
declared a dividend distribution of one Preferred Share Purchase Right
(Rights) on each outstanding share of common stock. These Rights entitle
stockholders to purchase one one-hundredth of a share of a new series of
junior participating preferred stock at an exercise price of $100. The Rights
are only exercisable if a person or group acquires 15% or more of the
Company's common stock or announces a tender offer which, if successful, would
result in ownership of 15% or more of the Company's common stock.
F-26
CROMPTON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
COMPREHENSIVE LOSS
Components of accumulated other comprehensive loss are as follows:
2003 2002
--------- ----------
(IN THOUSANDS)
Foreign currency translation adjustment .............. $ 49,605 $ (75,833)
Minimum pension liability adjustment ................. (142,753) (117,866)
Other ................................................ (3,315) (6,727)
--------- ----------
ACCUMULATED OTHER COMPREHENSIVE LOSS ................. $ (96,463) $(200,426)
========= ==========
Reclassification adjustments during 2003, 2002 and 2001 aggregated
$4.9 million, $6.6 million, and $2.2 million, respectively. Of these amounts,
$3.8 million in 2003, $6.0 million in 2002 and $2.0 million in 2001 relate to
amortization from other comprehensive income to earnings in connection with
the Company's equity option contracts, which expired in May 2003. These
amounts have been disclosed in the Derivative Instruments and Hedging
Activities footnote. The remaining $1.1 million in 2003, $0.6 million in 2002
and $0.2 million in 2001 were also reclassified from other comprehensive
income to earnings and relate to the Company's interest rate swap contracts
accounted for as cash flow hedges, which expired in July 2003 concurrent with
the maturity of the underlying debt.
STOCK INCENTIVE PLANS
The 1988 Long-Term Incentive Plan (1988 Plan), as amended, authorized the
Board of Directors (Board) to grant stock options, stock appreciation rights,
restricted stock and long-term performance awards covering up to 10 million
shares to the officers and other key employees of C&K over a period of ten
years through October 1998. Non-qualified and incentive stock options were
granted under the 1988 plan at prices not less than 100% of the fair market
value of the underlying common shares on the date of the grant. All
outstanding options will expire not more than ten years and one month from the
date of grant.
The 1993 Stock Option Plan for Non-Employee Directors, as amended in 1996,
authorized 200,000 options to be granted to non-employee directors. The
options vest over a two-year period and are exercisable over a ten-year period
from the date of grant, at a price equal to the fair market value of the
underlying common shares on the date of grant.
The 1998 Long-Term Incentive Plan (1998 Plan) was approved by the
shareholders of C&K in 1999. This plan authorizes the Board to grant stock
options, stock appreciation rights, restricted stock and long-term performance
awards to eligible employees and non-qualified stock options to non-employee
directors over a ten-year period. During 2003, 2002 and 2001, non-qualified
and incentive stock options were granted under the 1998 Plan at prices not
less than 100% of the fair market value of the underlying common shares on the
date of grant. All outstanding options will expire not more than ten years and
one month from the date of grant. The 1998 Plan authorizes the Company to
grant shares and options for shares of common stock equal to the sum of (i)
the shares available for award under the 1988 Plan and the 1993 Stock Option
Plan For Non-Employee Directors as of October 18, 1998 and (ii) the shares
awarded under prior plans of C&K which were forfeited, expired, lapsed, not
earned or tendered to pay the exercise price of options or withholding taxes.
In 1999, the number of common shares reserved for issuance under the 1998 plan
was increased by 2.8 million shares and, pursuant to the Merger, increased by
an additional 5 million shares. Under the terms of the Merger, the
shareholders also approved the conversion of all outstanding Witco options
into options to purchase the Company's common stock. These 4.7 million
converted options expired 30 days after the Merger and became available for
grant under the 1998 Plan.
F-27
CROMPTON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
STOCK INCENTIVE PLANS -- (CONTINUED)
In October 2001, the Board of Directors approved the 2001 Employee Stock
Option Plan (2001 Plan). The 2001 Plan authorizes the Board to grant up to
1 million non-qualified stock options to key non-officer employees. Options
under the 2001 plan will be granted at prices not less than 100% of the fair
market value of the underlying common shares on the date of grant and will
expire not more than 10 years and one month from the date of grant.
In October 1999, the Company granted long-term incentive awards in the
amount of 2,175,000 shares of restricted stock from the 1998 Plan. In
connection with the Merger, vesting requirements relating to 300,000 shares of
restricted stock were waived. The remaining 1,875,000 shares were earned as of
December 31, 2000 based upon the achievement of certain financial criteria and
vested over a three-year period, which ended on January 1, 2003. Compensation
expense relating to these shares was accrued over a three-year period.
In January 2000, the Company granted long-term incentive awards under the
1998 Plan for a maximum of 2,707,250 shares to be earned at the end of 2002 if
certain financial criteria were met. In January 2001, the January 2000 awards
were cancelled and awards were granted for a maximum of 2,343,367 shares to be
earned if certain vesting and financial criteria were met at the end of 2002.
In January 2002, the Company granted long-term incentive awards under the 1998
Plan for a maximum of 1,052,000 shares to be earned at the end of 2004 if
certain financial criteria are met for 2002 through 2004. In conjunction with
this award, the remaining outstanding performance-based portion of the awards
(1,655,000 shares) granted in January 2001 were cancelled. In accordance with
the terms of the January 2002 grant, the maximum number of shares to be earned
under this award has been reduced to 381,000.
In January 2003, the Board of Directors approved the grant of options
covering 1,270,458 shares at the fair market value of the underlying common
stock at the date of grant. In October 2003, the Board of Directors approved
the grant of options covering 898,000 shares at the fair market value of the
underlying common stock at the date of grant. These options will vest over a
three-year period.
In January 2004, the Board of Directors granted long-term incentive awards
in the amount of 430,000 shares of restricted stock, which will vest over a
three-year period. In addition, in connection with the employment of the
Company's new President and Chief Executive Officer in January 2004, the Board
of Directors approved an employment contract authorizing the grant of options
covering 500,000 shares, at the fair market value of the underlying common
stock at the date of grant, and the grant of a long-term incentive award for
200,000 shares of restricted stock. The options will vest ratably over a two-
year period and the restricted stock will vest ratably over a three-year
period.
As permitted under FASB Statement No. 123 and FASB Statement No. 148, the
Company elected to continue its historical method of accounting for stock-
based compensation in accordance with Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees." Accordingly, compensation
expense has not been recognized for stock-based compensation plans other than
restricted stock awards under the Company's long-term incentive programs.
F-28
CROMPTON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
STOCK INCENTIVE PLANS -- (CONTINUED)
The following table summarizes the effect on net earnings (loss) and
earnings (loss) per common share if the Company had applied the fair value
recognition provisions of FASB Statement No. 123 to all stock-based employee
compensation awards, the estimated fair value of options granted using the
Black-Scholes model and the assumptions utilized in the model:
2003 2002 2001
------- --------- ---------
(IN THOUSANDS)
Net earnings (loss), as reported............................................................... $18,954 $(283,507) $(123,944)
Pro forma net earnings (loss).................................................................. $14,825 $(289,426) $(133,171)
Earnings (loss) per share:
Basic and diluted -- as reported.............................................................. $ 0.17 $ (2.50) $ (1.10)
Basic and diluted -- pro forma................................................................ $ 0.13 $ (2.55) $ (1.18)
Average fair value of options granted.......................................................... $ 2.67 $ 3.08 $ 3.97
Assumptions:
Dividend yield................................................................................ 2.6% 2.5% 2.0%
Expected volatility........................................................................... 49% 48% 52%
Risk-free interest rate....................................................................... 4.0% 3.5% 5.0%
Expected life (in years)...................................................................... 8 8 8
Changes during 2003, 2002 and 2001 in shares under option are summarized as
follows:
PRICE PER SHARE
---------------------
RANGE AVERAGE SHARES
----------- ------- ----------
Outstanding at 12/31/00..................................................................... $3.13-26.41 $11.98 11,771,322
Granted..................................................................................... 7.92-10.81 7.93 1,760,866
Exercised................................................................................... 3.13-8.34 5.20 (111,759)
Lapsed...................................................................................... 8.16-26.41 15.75 (346,142)
----------- ------ ----------
Outstanding at 12/31/01..................................................................... 5.22-26.41 11.39 13,074,287
Granted..................................................................................... 7.25 7.25 1,272,430
Exercised................................................................................... 5.22-8.34 7.59 (436,149)
Lapsed...................................................................................... 7.92-26.41 16.95 (771,165)
----------- ------ ----------
Outstanding at 12/31/02..................................................................... 5.22-26.41 10.79 13,139,403
Granted..................................................................................... 5.85-6.38 6.16 2,168,458
Exercised................................................................................... 5.22 5.22 (8,525)
Lapsed...................................................................................... 5.22-26.41 10.77 (1,511,244)
----------- ------ ----------
OUTSTANDING AT 12/31/03..................................................................... $5.85-26.41 $10.07 13,788,092
=========== ====== ==========
Exercisable at 12/31/01..................................................................... $5.22-26.41 $12.78 9,073,974
Exercisable at 12/31/02..................................................................... $5.22-26.41 $11.52 10,699,627
Exercisable at 12/31/03..................................................................... $7.25-26.41 $11.04 10,847,565
Shares available for grant at year-end 2003 and 2002 were 6,876,664and
6,148,135, respectively.
F-29
CROMPTON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
STOCK INCENTIVE PLANS -- (CONTINUED)
The following table summarizes information concerning currently outstanding
and exercisable options:
WEIGHTED
RANGE OF NUMBER AVERAGE WEIGHTED NUMBER WEIGHTED
EXERCISE OUTSTANDING REMAINING AVERAGE EXERCISABLE AVERAGE
PRICES AT END OF CONTRACTUAL EXERCISE AT END OF EXERCISE
------- 2003 LIFE PRICE 2003 PRICE
----------- ----------- -------- ----------- --------
$5.85-7.92...................................................... 4,866,589 8.6 $ 6.99 1,927,729 $ 7.74
$8.16-8.35...................................................... 5,031,485 5.7 $ 8.27 5,031,485 $ 8.27
$10.81-14.35.................................................... 1,313,345 3.7 $14.04 1,311,678 $14.05
$14.50-26.41.................................................... 2,576,673 2.7 $17.37 2,576,673 $17.37
--------- --- ------ ---------- ------
13,788,092. 6.0 $10.07 10,847,565 $11.04
========= === ====== ========== ======
The Company has an Employee Stock Ownership Plan that is offered to eligible
employees of the Company and certain of its subsidiaries. The Company makes
contributions equivalent to a stated percentage of employee contributions. The
Company's contributions were $2.5 million in 2003, $2.8 million in 2002 and
$3.6 million in 2001.
Effective June 1, 2001, the Company established an Employee Stock Purchase
Plan. This plan permits eligible employees to annually elect to have up to 10%
of their compensation withheld for the purchase of shares of the Company's
common stock at 85% of the average of the high and low sale prices on the date
of purchase, up to a maximum of $25,000. As of December 31, 2003, 1,577,237
shares of common stock are available for future issuance under this plan.
PENSION AND OTHER POST-RETIREMENT BENEFIT PLANS
The Company has several defined benefit and defined contribution pension
plans covering substantially all of its domestic employees and certain
international employees. Benefits under the defined benefit plans are
primarily based on the employees' years of service and compensation during
employment. The Company's funding policy for the defined benefit plans is
based on contributions at the minimum annual amounts required by law plus such
amounts as the Company may deem appropriate. Contributions for the defined
contribution plans are determined as a percentage of the covered employees'
salary. Plan assets consist of publicly traded securities and investments in
commingled funds administered by independent investment advisors.
Employees of international locations are covered by various pension benefit
arrangements, some of which are considered to be defined benefit plans for
financial reporting purposes. Assets of these plans are comprised primarily of
insurance contracts and financial securities. Benefits under these plans are
primarily based upon levels of compensation. Funding policies are based on
legal requirements, tax considerations and local practices.
The Company also provides health and life insurance benefits for certain
retired and active employees and their beneficiaries and covered dependents
for substantially all of its domestic employees and certain international
employees. These plans are generally not pre-funded and are paid by the
Company as incurred, except for certain inactive government-related plans.
The Company uses a measurement date of December 31 for substantially all of
its pension and other post-retirement benefit plans.
F-30
CROMPTON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
PENSION AND OTHER POST-RETIREMENT BENEFIT PLANS -- (CONTINUED)
BENEFIT OBLIGATIONS
DEFINED BENEFIT PLANS
------------------------------------------
QUALIFIED INTERNATIONAL AND POST-RETIREMENT
DOMESTIC PLANS NON-QUALIFIED PLANS HEALTH CARE PLANS
------------------- ------------------- -------------------
2003 2002 2003 2002 2003 2002
-------- -------- -------- -------- -------- --------
(IN THOUSANDS)
Change in projected benefit obligation:
Projected benefit obligation at beginning of year ............ $648,121 $619,981 $226,553 $184,773 $224,078 $216,511
Service cost ................................................. 6,518 6,705 6,678 6,537 1,294 1,604
Interest cost ................................................ 40,896 42,245 13,729 11,796 14,533 14,497
Plan participants' contributions ............................. -- -- 915 938 963 734
Plan amendments .............................................. -- 98 (1,553) (83) (2,405) --
Actuarial losses ............................................. 40,467 27,300 23,362 16,639 17,397 8,510
Foreign currency exchange rate changes ....................... -- -- 34,171 20,310 1,684 61
Divestitures ................................................. -- -- (17,061) -- (4,248) --
Benefits paid ................................................ (46,679) (46,788) (8,549) (13,564) (19,786) (17,839)
Curtailments ................................................. (16,543) (1,420) (1,204) -- -- --
Settlements .................................................. -- -- (637) (793) -- --
-------- -------- -------- -------- -------- --------
Projected benefit obligation at end of year .................. $672,780 $648,121 $276,404 $226,553 $233,510 $224,078
======== ======== ======== ======== ======== ========
Accumulated benefit obligation at end of year ................ $661,055 $621,445 $259,573 $201,283 $233,510 $224,078
======== ======== ======== ======== ======== ========
Weighted-average year-end assumptions used to determine
benefit obligations:
Discount rate ................................................ 6.00% 6.75% 5.54% 5.96% 6.00% 6.75%
Rate of compensation increase ................................ 4.00% 4.00% 3.17% 3.25% -- --
An 8.9% average annual rate of increase in the per capita cost of covered
health care benefits was assumed for 2003. The rate was assumed to decrease
gradually to 5% for 2011 and remain at that level thereafter. Assumed health
care cost trend rates have a significant effect on the post-retirement benefit
obligation reported for the health care plans. A one-percentage-point increase
in assumed health care cost trend rates would increase the accumulated post-
retirement benefit obligation by $13.6 million for health care benefits as of
December 31, 2003. A one-percentage-point decrease in assumed health care cost
trend rates would decrease the accumulated post-retirement benefit obligation
by $11.9 million for health care benefits as of December 31, 2003.
F-31
CROMPTON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
PENSION AND OTHER POST-RETIREMENT BENEFIT PLANS -- (CONTINUED)
PLAN ASSETS
DEFINED BENEFIT PLANS
------------------------------------------
QUALIFIED INTERNATIONAL AND POST-RETIREMENT
DOMESTIC PLANS NON-QUALIFIED PLANS HEALTH CARE PLANS
------------------- ------------------- -------------------
2003 2002 2003 2002 2003 2002
-------- -------- -------- -------- -------- --------
(IN THOUSANDS)
Change in plan assets:
Fair value of plan assets at
beginning of year.......................................... $458,328 $539,294 $ 82,431 $ 80,725 $ 30,423 $ 34,580
Actual return on plan assets ................................. 75,222 (41,058) 5,658 (4,425) 2,678 (1,832)
Foreign currency exchange rate changes ....................... -- -- 14,523 8,834 -- --
Employer contributions ....................................... 30,877 6,880 10,500 10,716 16,371 14,780
Plan participants' contributions ............................. -- -- 915 938 963 734
Divestitures ................................................. -- -- (10,714) -- -- --
Benefits paid ................................................ (46,679) (46,788) (8,549) (13,564) (19,786) (17,839)
Settlements .................................................. -- -- (151) (793) -- --
-------- -------- -------- -------- -------- --------
FAIR VALUE OF PLAN ASSETS AT END OF YEAR ..................... $517,748 $458,328 $ 94,613 $ 82,431 $ 30,649 $ 30,423
======== ======== ======== ======== ======== ========
The asset allocation for the Company's pension plans at the end of 2003 and
2002, and the target allocation for 2004, by asset category are as follows:
PERCENTAGE OF PLAN ASSETS
TARGET ALLOCATION -- 2004 AT DECEMBER 31,
--------------------------- --------------------------
INTERNATIONAL
QUALIFIED AND NON-
DOMESTIC QUALIFIED
QUALIFIED INTERNATIONAL PLANS PLANS
DOMESTIC AND NON- ------------- ------------
ASSET CATEGORY: PLANS QUALIFIED PLANS 2003 2002 2003 2002
--------------- --------- --------------- ---- ---- ---- ----
Equity securities .................................................... 60% 45% 58% 47% 45% 44%
Fixed income securities .............................................. 40% 53% 42% 53% 53% 54%
Other ................................................................ -- 2% -- -- 2% 2%
--- --- --- --- --- ---
TOTAL ................................................................ 100% 100% 100% 100% 100% 100%
=== === === === === ===
During 2003, a special contribution of $20.9 million of the Company's common
stock was made to various domestic pension plans. The value of this common
stock is $22.9 million (4% of total domestic plan assets) at the end of 2003.
There was no Company common stock included within equity securities at the end
of 2002.
Estimated funding requirements for the domestic pension plans are
$4.6 million for 2004 and $6.8 million for 2005 compared to $30.9 million
contributed in 2003. The Company funds the domestic pension plans based on the
minimum amounts required by law plus such amounts the Company deems
appropriate. The funding estimates for 2004 and 2005 are based upon actual
December 31, 2003 asset values and the assumption that the Company would
contribute the minimum required contributions. The funding estimates also
assume pension funding relief legislation will be extended and no other
significant changes with regards to demographics, legislation, plan
provisions, or actuarial assumptions or methods to determine the estimated
funding requirements.
The Company's pension plan assets are managed by outside investment
managers; assets are monitored monthly to ensure they are within the range of
parameters as set forth by the Company. The Company's investment strategy with
respect to pension assets is to achieve the expected rate of return within an
acceptable or appropriate level of risk. The Company's
F-32
CROMPTON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
PENSION AND OTHER POST-RETIREMENT BENEFIT PLANS -- (CONTINUED)
investment strategy is designed to promote diversification to moderate
volatility and attempt to balance the expected return with risk levels.
The asset allocation for the post-retirement health care plans at the end of
2003 and 2002, and target allocation for 2004, by asset category are as
follows:
PERCENTAGE
OF PLAN
ASSETS AT
DECEMBER 31,
------------
TARGET
ASSET CATEGORY: ALLOCATION
--------------- 2004 2003 2002
---------- ---- ----
Equity securities ........................................ 60% 55% 51%
Fixed income securities .................................. 40% 45% 47%
Other .................................................... -- -- 2%
--- --- ---
TOTAL .................................................... 100% 100% 100%
=== === ===
The Company's post-retirement health care plan assets relating to certain
inactive government plans are managed by outside investment managers. The
Company will review these assets at least quarterly to ensure they are within
the range of parameters as set forth by the Company. The Company's investment
strategy with respect to post-retirement health care assets is to achieve the
expected rate of return within an acceptable or appropriate level of risk. The
Company's investment strategy is designed to promote diversification to
moderate volatility and attempt to balance the expected return with risk
levels.
FUNDED STATUS
The funded status of the plans reconciled to the amount reported on the
consolidated financial statements is as follows:
DEFINED BENEFIT PLANS
----------------------------------------------
QUALIFIED INTERNATIONAL AND POST-RETIREMENT
DOMESTIC PLANS NON-QUALIFIED PLANS HEALTH CARE PLANS
--------------------- --------------------- ---------------------
2003 2002 2003 2002 2003 2002
--------- --------- --------- --------- --------- ---------
(IN THOUSANDS)
Funded status at the end of year:
Funded status .......................................... $(155,032) $(189,793) $(181,791) $(144,122) $(202,861) $(193,655)
Unrecognized transition asset .......................... (40) (47) 1,533 1,759 -- --
Unrecognized actuarial loss ............................ 208,152 206,464 62,583 32,145 11,564 4,276
Unrecognized prior service costs ....................... 285 348 30 2,479 (1,638) (4,617)
--------- --------- --------- --------- --------- ---------
NET AMOUNT RECOGNIZED .................................. $ 53,365 $ 16,972 $(117,645) $(107,739) $(192,935) $(193,996)
========= ========= ========= ========= ========= =========
Amounts recognized in the consolidated balance sheets
at the end of year consist of:
Prepaid benefit costs .................................. $ 57,353 $ 24,271 $ 5,782 $ 4,971 $ -- $ --
Accrued benefit liabilities ............................ (200,659) (183,315) (173,372) (132,924) (192,935) (193,996)
Intangible assets ...................................... 286 258 3,395 3,340 -- --
Accumulated other comprehensive loss ................... 196,385 175,758 46,550 16,874 -- --
--------- --------- --------- --------- --------- ---------
NET AMOUNT RECOGNIZED .................................. $ 53,365 $ 16,972 $(117,645) $(107,739) $(192,935) $(193,996)
========= ========= ========= ========= ========= =========
The Company's prepaid benefit costs and intangible assets are included in
other assets in the consolidated balance sheets, while the accrued pension
benefit liabilities are included in other liabilities in the consolidated
balance sheets.
F-33
CROMPTON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
PENSION AND OTHER POST-RETIREMENT BENEFIT PLANS -- (CONTINUED)
For pension plans with a projected and accumulated benefit obligation in
excess of plan assets and post-retirement health care plan obligation in
excess of plan assets, the projected benefit obligation, accumulated benefit
obligation and fair value of plan assets at the end of 2003 and 2002 were as
follows:
ACCUMULATED POST-
PROJECTED AND RETIREMENT
ACCUMULATED HEALTH CARE
BENEFIT OBLIGATION OBLIGATION
EXCEEDS EXCEEDS THE FAIR
THE FAIR VALUE OF VALUE OF
PLAN ASSETS PLAN ASSETS
------------------- -------------------
2003 2002 2003 2002
-------- -------- -------- --------
(IN THOUSANDS)
End of year:
Projected benefit obligation ........................................................ $949,141 $866,008 $ -- $ --
Accumulated benefit obligation ...................................................... 920,588 814,066 208,487 199,814
Fair value of plan assets ........................................................... 612,156 529,674 -- --
NET PERIODIC COST
DEFINED BENEFIT PLANS
---------------------------------------------------------------
QUALIFIED INTERNATIONAL AND POST-RETIREMENT
DOMESTIC PLANS NON-QUALIFIED PLANS HEALTH CARE PLANS
------------------------------- ----------------------------- ----------------------------
2003 2002 2001 2003 2002 2001 2003 2002 2001
-------- -------- -------- ------- ------- -------- ------- ------- -------
(IN THOUSANDS)
Components of net periodic
benefit cost (credit):
Service cost.................... $ 6,518 $ 6,705 $ 6,819 $ 6,678 $ 6,537 $ 5,936 $ 1,294 $ 1,604 $ 1,539
Interest cost................... 40,896 42,245 43,185 13,729 11,796 11,021 14,533 14,497 15,148
Expected return on plan assets.. (54,154) (56,244) (56,141) (6,857) (6,228) (6,094) (2,707) (3,179) (3,668)
Amortization of prior service
cost.......................... 62 63 414 858 955 978 (3,078) (2,838) (4,176)
Amortization of unrecognized
transition obligation......... (6) (6) (3) 218 189 190 -- -- --
Recognized actuarial (gains)
losses........................ 1,386 164 (29) 735 161 (207) (469) (936) (1,447)
Curtailment (gain) loss
recognized.................... -- 1,154 7,045 (243) -- (13,101) (2,287) -- (1,055)
Settlement (gain) loss
recognized.................... -- -- 873 (3,580) 330 7,095 -- -- --
-------- -------- -------- ------- ------- -------- ------- ------- -------
NET PERIODIC BENEFIT COST
(CREDIT)...................... $ (5,298) $ (5,919) $ 2,163 $11,538 $13,740 $ 5,818 $ 7,286 $ 9,148 $ 6,341
======== ======== ======== ======= ======= ======== ======= ======= =======
DEFINED BENEFIT PLANS
-----------------------------------------
QUALIFIED INTERNATIONAL AND POST-RETIREMENT
DOMESTIC PLANS NON-QUALIFIED PLANS HEALTH CARE PLANS
------------------- ------------------- -------------------
2003 2002 2001 2003 2002 2001 2003 2002 2001
---- ---- ---- ---- ---- ---- ---- ---- ----
(IN THOUSANDS)
Weighted-average assumptions used to determine net cost:
Discount rate.................................................. 6.75% 7.00% 7.56% 5.96% 5.91% 6.52% 6.75% 7.00% 7.55%
Expected return on plan assets................................. 9.50% 9.50% 9.50% 7.04% 6.99% 7.22% 9.50% 9.50% 9.50%
Rate of compensation increase.................................. 4.00% 4.00% 4.25% 3.25% 3.35% 3.45% -- -- --
The 9.5% expected rate of return on plan assets for the qualified domestic
pension plans for 2003 was based on an assumed long-term inflation rate of 3%.
The domestic expected rate of return on plan assets is derived by applying the
expected returns on the various asset
F-34
CROMPTON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
PENSION AND OTHER POST-RETIREMENT BENEFIT PLANS -- (CONTINUED)
classes to the Company's assumed asset allocation. The expected returns are
based on the expected performance of the various asset classes and the
expected benefit from active fund management. They are further supported by
historical investment returns for various asset classes. The Company has
assumed that normative investment returns on long-term bonds will be 350 basis
points above inflation, or 6.5%. The assumed premiums for domestic and
international equity investments over long-term bonds are 400 and 450 basis
points, respectively. In addition, the Company has assumed an overall 50 basis
point benefit from active fund management. Actual returns for qualified
domestic plans for the year ended December 31, 2003 were 20.8%.
During 2003, the Company re-evaluated its investment strategy for domestic
plans. As a result of that review and the Company's assumption of future
returns, the Company will decrease its expected return on asset assumption for
2004 to 9.0%. The adjusted domestic expected long-term rate of return of 9.0%
for 2004 is based on an assumed long-term inflation rate of 2.6%. The Company
has adjusted the normative investment returns on long-term bonds to 370 basis
points above inflation or 6.3%. The assumed premiums for domestic and
international equity investments over long-term bonds have been adjusted to
340 and 420 basis points, respectively. The Company has assumed that the
active fund management benefit will remain at 50 basis points. The target
asset allocation is 60% equity securities and 40% fixed income securities.
The Company currently utilizes a 7.04% weighted average expected long-term
rate of return on its international plan assets. This international rate is
developed primarily based on the same factors considered in developing the
domestic long-term rate of return.
Assumed health care cost trend rates have a significant effect on the
service and interest cost components reported for the health care plans. A
one-percentage-point increase in assumed health care cost trend rates increase
the service and interest cost components of net periodic post-retirement
health care benefit cost by $1.1 million for 2003. A one-percentage-point
decrease in assumed health care cost trend rates decrease the service and
interest cost components of net periodic post-retirement health care benefit
cost by $0.9 million for 2003.
The Company's cost of its defined contribution plans was $15.4 million,
$15.8 million, and $15.2 million in 2003, 2002 and 2001, respectively.
On December 8, 2003, the Medicare Prescription Drug, Improvement and
Modernization Act of 2003 (the Act) was signed into law. Through the Act,
companies that sponsor retiree health plans that cover prescription drugs are
entitled to a federal subsidy beginning in 2006 which is equal to 28% of
certain costs paid by both the employee and the Company for prescription
drugs. The three possible approaches to recognize the subsidy are as follows:
immediate recognition of all expected future subsidies when the Act is
initially recognized; amortize recognition through actuarial gains and losses;
or recognition of subsidies as received beginning in 2006. As a result of the
uncertainty regarding the possible accounting treatment, the Company has
elected to defer accounting for the effect of the Act until guidance is
issued.
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The Company's activities expose its earnings, cash flows and financial
position to a variety of market risks, including the effects of changes in
foreign currency exchange rates and interest rates. The Company maintains a
risk-management strategy that uses derivative instruments as needed to
mitigate risk against foreign currency movements and to manage
F-35
CROMPTON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES -- (CONTINUED)
interest rate volatility. In accordance with FASB Statement No. 133,
"Accounting for Derivative Instruments and Hedging Activities," and FASB
Statement No. 138, "Accounting for Certain Derivative Instruments and Certain
Hedging Activities," the Company recognizes in earnings changes in the fair
value of all derivatives designated as fair value hedging instruments that are
highly effective and recognizes in accumulated other comprehensive loss (AOCL)
changes in the fair value of all derivatives designated as cash flow hedging
instruments that are highly effective. The Company does not enter into
derivative instruments for trading or speculative purposes.
The Company used interest rate swap contracts, which expired in July 2003
concurrent with the maturity of the underlying debt securities, as cash flow
hedges to convert its Euro denominated variable rate debt to fixed rate debt.
Each interest rate swap contract was designated with the principal balance and
the term of the specific debt obligation. These contracts involved the
exchange of interest payments over the life of the contract without an
exchange of the notional amount upon which the payments were based. The
differential to be paid or received as interest rates changed was recognized
as an adjustment to interest expense.
The Company also had equity option contracts covering 3.2 million shares of
the Company's common stock to hedge the expense variability associated with
its obligations under its long-term incentive plans (LTIP). In February 2003,
the Company settled its existing equity option contracts for $35.1 million, of
which $33.8 million had been included in accrued expenses at December 31,
2002, and entered into a new equity option contract. The new contract
consisted of a sold put option contract with a strike price of $5.66 and a
purchased call option contract with a strike price of $5.75. The Company had
designated a portion of the equity option contract as a cash flow hedge of the
risk associated with the unvested, unpaid awards under its LTIP. Changes in
market value related to the portion of the option contract designated and
effective as a hedge were recorded as a component of AOCL. The amount included
in AOCL was subject to changes in the stock price and was being amortized
ratably to selling, general and administrative expense (SG&A) over the
remaining service periods of the hedged LTIP. Changes in market value related
to the remaining portion of the option contract were recognized in SG&A.
During the second quarter of 2003, the Company determined that one of its LTIP
programs was not achievable and accordingly amortized $3 million from AOCL to
SG&A, which represented the unamortized balance of the deferred loss on the
portion of the option contract that related to this plan. On May 11, 2003 the
option contract expired and resulted in a favorable net cash settlement of
$3.7 million. As of June 30, 2003, all of the deferred losses relating to
these contracts had been amortized to SG&A.
In prior years, the Company used an interest rate swap contract as a fair
value hedge to convert $300 million of its fixed rate 8.5% notes into variable
rate debt. On March 24, 2001, the swap contract was terminated and the Company
received cash proceeds of $21.9 million in settlement of the contract, which
represented the market value of the contract on the date of termination. In
accordance with FASB Statements No. 133 and 138, as they relate to fair value
hedge accounting, the $21.9 million was recorded as an increase to long-term
debt and is being amortized to interest expense over the life of the notes.
The unamortized balance at December 31, 2003 and 2002 was $6.6 million and
$12.1 million, respectively.
The Company also has exposure to changes in foreign currency exchange rates
resulting from transactions entered into by the Company and its foreign
subsidiaries in currencies other than their local currency (primarily trade
payables and receivables). The Company is also exposed to currency risk on
intercompany transactions (including intercompany loans). The
F-36
CROMPTON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES -- (CONTINUED)
Company manages these transactional currency risks on a consolidated basis,
which allows it to net its trade payable and receivable exposure. The Company
purchases foreign currency forward contracts, primarily denominated in Euros,
Canadian dollars, Hong Kong dollars, Swiss francs and Singapore dollars, to
hedge its transaction exposure. The aggregate notional amount of these
contracts at December 31, 2003 and 2002 was approximately $474 million and
$536 million, respectively. These contracts are generally settled on a monthly
basis. Realized and unrealized gains and losses on foreign currency forward
contracts are recognized in other expense, net to offset the impact of valuing
recorded foreign currency trade payables, receivables and intercompany
transactions. The Company has not designated these derivatives as hedges,
although it believes these instruments reduce the Company's exposure to
foreign currency risk. The net effect of the realized and unrealized gains and
losses on these derivatives and the underlying transactions is not significant
at December 31, 2003.
The following table summarizes the (gains)/losses resulting from changes in
the market value of the Company's fair value and cash flow hedging instruments
and the amortization of (gains)/losses related to certain cash flow hedges for
the years ended December 31, 2003 and 2002:
2003 2002
------- -------
(IN THOUSANDS)
Fair value hedges (in other expense, net) ................. $ 38 $ (2)
======= =======
Cash flow hedges (in AOCL):
Balance at beginning of year .............................. $ 2,838 $ 2,546
Interest rate swap contracts ............................. (883) (313)
Equity option contracts-change in market value ........... 1,836 6,558
Equity option contracts-amortization to SG&A ............. (3,791) (5,953)
------- -------
BALANCE AT END OF YEAR .................................... $ -- $ 2,838
======= =======
FINANCIAL INSTRUMENTS
As discussed in the Derivative Instruments and Hedging Activities note
above, the Company enters into interest rate swap contracts to modify the
interest characteristics of some of its outstanding debt and purchases foreign
currency forward contracts to mitigate its exposure to changes in foreign
currency exchange rates of recorded transactions (principally foreign currency
trade receivables and payables and intercompany transactions).
At December 31, 2003, the Company had outstanding foreign currency forward
contracts with an aggregate notional amount of approximately $474 million to
hedge foreign currency risk on foreign currency accounts receivable and
payable and intercompany loans. These forward contracts are generally
outstanding for one month and are primarily denominated in Euros, Canadian
dollars, Hong Kong dollars, Swiss francs and Singapore dollars. At December
31, 2002, the Company had outstanding foreign currency forward contracts with
an aggregate notional amount of approximately $536 million.
At December 31, 2002, the Company had outstanding interest rate swap
contracts with an aggregate notional amounts of $57.1 million. These contracts
were used to convert the Company's variable rate Euro denominated debt to
fixed rate debt. These contracts expired in July 2003.
All contracts have been entered into with major financial institutions. The
risk associated with these transactions is the cost of replacing these
agreements at current market rates, in
F-37
CROMPTON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FINANCIAL INSTRUMENTS -- (CONTINUED)
the event of default by the counterparties. Management believes the risk of
incurring such losses is remote.
The carrying amounts for cash, accounts receivable, other current assets,
accounts payable and other current liabilities approximate their fair value
because of the short-term maturities of these instruments. The fair value of
long-term debt is based primarily on quoted market values. For long-term debt
that has no quoted market value, the fair value is estimated by discounting
projected future cash flows using the Company's incremental borrowing rate.
The fair value of interest rate swap and foreign currency forward contracts is
the amount at which the contracts could be settled based on quotes provided by
investment banking firms.
The following table presents the carrying amounts and estimated fair values
of material financial instruments used by the Company in the normal course of
its business. The carrying amounts of the interest rate swap contracts and
foreign currency forward contracts are included in either other assets or
other liabilities.
2003 2002
--------------------- -------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
--------- --------- ----------- -----------
(IN THOUSANDS)
Long-term debt .............................................................. $(754,018) $(791,660) $(1,253,149) $(1,216,443)
Interest rate swap contracts ................................................ $ -- $ -- $ (884) $ (884)
Foreign currency forward contracts .......................................... $ -- $ -- $ 38 $ 38
ASSET RETIREMENT OBLIGATIONS
In June 2001, the FASB issued Statement No. 143, "Accounting for Asset
Retirement Obligations." Statement No. 143 requires companies to record a
liability for asset retirement obligations in the period in which a legal
obligation is created. Such liabilities are recorded at fair value, with an
offsetting increase to the carrying value of the related long-lived assets. In
future periods, the liability is accreted to its present value and the
capitalized cost is depreciated over the useful life of the related asset.
Companies are also required to adjust the liability for changes resulting from
the passage of time and/or revisions to the timing or the amount of the
original estimate. Upon retirement of the long-lived asset, the Company either
settles the obligation for its recorded amount or incurs a gain or loss. The
provisions of Statement No. 143 are effective for fiscal years beginning after
June 15, 2002. Effective January 1, 2003, the Company adopted the provisions
of Statement No. 143. As a result of the implementation of this Statement, the
Company recorded an after-tax charge of $0.4 million ($0.7 million pre-tax) as
a cumulative effect of accounting change. The Company's asset retirement
obligations are primarily the result of the legal obligation to remove
leasehold improvements upon termination of leases or sale of property at
several of its facilities. The initial measurement of such obligations has
been recorded at fair value, which the Company estimated by discounting
projected cash flows using a rate of 8.5%. The fair value of any future
obligations will be measured utilizing the Company's credit-adjusted risk-free
rate applicable at that time. During 2003, the Company recorded pre-tax
accretion expense of $0.3 million and has an asset retirement obligation
liability of $0.7 million at December 31, 2003.
F-38
CROMPTON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ANTITRUST INVESTIGATION AND RELATED MATTERS
On March 15, 2004, the Company entered into a plea agreement with the United
States of America with respect to a criminal antitrust investigation of the
Company by the Department of Justice (the "DOJ"). Under the terms of the
agreement, the Company agreed to plead guilty to a one-count information
charging the Company with participating in a combination and conspiracy to
suppress and eliminate competition by maintaining and increasing the price of
certain rubber chemicals sold in the United States during the period 1995 to
2001. The DOJ and the Company will jointly recommend that the court impose a
sentence requiring the Company to pay a fine of $50 million, payable in six
annual installments, without interest, beginning in 2004. If the court accepts
the joint recommendation at a hearing expected to occur in the next several
months, the DOJ's investigation of the Company with respect to rubber
chemicals will be resolved.
The Company also reached agreement with the Commissioner of Competition and
the Attorney General (the "Attorney General") of Canada on March 15, 2004,
regarding a criminal antitrust investigation of the Company. The Company has
agreed to plead guilty to one count of conspiring to lessen competition unduly
in the sale and marketing of certain rubber chemicals in Canada. The Attorney
General and the Company will jointly recommend that the court impose a
sentence requiring the Company to pay a fine of $9 million Canadian (U.S.
$7 million), payable in six annual installments, without interest, beginning
in 2004. If the court accepts the joint recommendation at a hearing expected
to occur in the next several months, the Canadian investigation of the Company
with respect to rubber chemicals will be resolved.
Expected cash payments for U.S. and Canadian fines total $2.3 million in
2004; $2.3 million in 2005; $6.5 million in 2006; $11.2 million in 2007;
$16.2 million in 2008; and $18.5 million in 2009.
The Company and certain of its subsidiaries continue to be the subject of a
coordinated civil investigation by the European Commission (the "EC") with
respect to the sale and marketing of rubber chemicals. At this time, the
Company cannot predict the timing or outcome of that investigation, including
the amount of any fine that may be imposed by the EC.
The Company and certain of its subsidiaries are subjects of, and continue to
cooperate in coordinated criminal and civil investigations being conducted by
the DOJ, Canadian Competition Bureau and the EC (collectively, the
"Governmental Authorities") with respect to possible antitrust violations
relating to the sale and marketing of certain other products, including
ethylene propylene diene monomer (EPDM); heat stabilizers, including tin-based
stabilizers and precursors, mixed metal stabilizers and epoxidized soybean oil
(ESBO); nitrile rubber; and urethanes and urethane chemicals. The Company and
its affiliates that are subject to the investigations have received from each
of the Governmental Authorities verbal or written assurances of conditional
amnesty from prosecution and fines.
The Company recorded pre-tax charges of $77.7 million for antitrust costs in
its consolidated statement of operations at December 31, 2003. This includes a
$45.2 million charge to reserve for the payment of U.S. and Canadian fines,
which represents the present value of the expected payments of $57 million.
The Company also incurred pre-tax antitrust costs of $32.5 million associated
with antitrust investigations and related civil lawsuits. The Company expects
to continue to incur substantial costs until all antitrust investigations are
concluded and civil claims are resolved.
The Company and certain of its subsidiaries, together with other companies,
are defendants in certain federal direct purchaser and state direct and
indirect purchaser class
F-39
CROMPTON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ANTITRUST INVESTIGATION AND RELATED MATTERS -- (CONTINUED)
action lawsuits principally alleging that the defendants conspired to fix,
raise, maintain or stabilize prices for rubber chemicals, EPDM, plastic
additives, including impact modifiers and processing aids, and nitrile rubber
in violation of federal and state law. The Company and certain of its officers
and directors are also defendants in federal securities class action lawsuits
principally alleging that the defendants caused the Company's shares to trade
at artificially inflated levels through the issuance of false and misleading
financial statements in violation of federal securities laws by inflating
profits as result of engaging in an illegal price fixing conspiracy with
respect to rubber chemicals. In addition, the Company and its board of
directors are defendants in a shareholder derivative lawsuit principally
alleging that the directors breached their fiduciary duties by causing the
Company's shares to trade at artificially inflated levels through the issuance
of false and misleading financial statements by inflating profits as a result
of engaging in an illegal price fixing conspiracy with respect to rubber
chemicals. These federal and state actions are in early procedural stages of
litigation and, accordingly, the Company cannot predict their outcome. The
Company and its defendant subsidiaries believe that they have substantial
defenses to these actions and intend to defend vigorously all such actions.
The Company has not recorded a charge for potential liabilities and expenses
in connection with the coordinated civil investigation by the EC or with the
civil claims, because it is not yet able to reasonably estimate a reserve for
such potential costs. The resolution of the coordinated civil investigation by
the EC and any civil claims now pending or hereafter asserted against the
Company or any of its subsidiaries could have a material adverse effect on the
Company's financial condition, results of operations and prospects.
CONTINGENCIES
ENVIRONMENTAL MATTERS
The Company is involved in claims, litigation, administrative proceedings
and investigations of various types in various jurisdictions. A number of such
matters involve claims for a material amount of damages and relate to or
allege environmental liabilities, including clean-up costs associated with
hazardous waste disposal sites, natural resource damages, property damage and
personal injury. The Company and some of its subsidiaries have been identified
by federal, state or local governmental agencies, and by other potentially
responsible parties (each a "PRP") under the Comprehensive Environmental
Response, Compensation and Liability Act of 1980, as amended, or comparable
state statutes, as a PRP with respect to costs associated with waste disposal
sites at various locations in the United States. In addition, the Company is
involved with environmental remediation and compliance activities at some of
its current and former sites in the United States and abroad.
Each quarter, the Company evaluates and reviews estimates for future
remediation, and operation and management costs directly related to
remediation, to determine appropriate environmental reserve amounts. For each
site, a determination is made of the specific measures that are believed to be
required to remediate the site, the estimated total cost to carry out the
remediation plan, the portion of the total remediation costs to be borne by
the Company and the anticipated time frame over which payments toward the
remediation plan will occur. The total amount accrued for such environmental
liabilities at December 31, 2003 was $120.7 million. The Company estimates its
potential environmental liability to range from $109 million to $133 million
at December 31, 2003. It is possible that the Company's estimates for
environmental remediation liabilities may change in the future should
additional sites be identified, further remediation measures be required or
undertaken, the interpretation of
F-40
CROMPTON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONTINGENCIES -- (CONTINUED)
current laws and regulations be modified or additional environmental laws and
regulations be enacted.
On May 21, 1997, the United States District Court, Eastern District of
Arkansas (the "Court"), entered an order finding that Uniroyal Chemical Co./
Cie (Uniroyal) (a wholly owned subsidiary of the Company) is jointly and
severally liable to the United States and Hercules Incorporated (Hercules) and
Uniroyal are liable to each other in contribution with respect to the
remediation of the Vertac Chemical Corporation site in Jacksonville, Arkansas.
On October 23, 1998, the Court entered an order granting the United State's
motion for summary judgment against Uniroyal and Hercules for removal and
remediation costs of $102.9 million at the Vertac site. On February 3, 2000,
after trial on the allocation of these costs, the Court entered an order
finding Uniroyal liable to the United States for approximately $2.3 million
and liable to Hercules in contribution for approximately $0.7 million. On
April 10, 2001, the United States Court of Appeals for the Eighth Circuit (the
"Appeals Court") (i) reversed a decision in favor of the United States and
against Hercules with regard to the issue of divisibility of harm and remanded
the case back to the Court for a trial on the issue; (ii) affirmed the finding
of arranger liability against Uniroyal; and (iii) set aside the findings of
contribution between Hercules and Uniroyal by the Court pending a decision
upon remand. The Appeals Court also deferred ruling on all constitutional
issues raised by Hercules and Uniroyal pending subsequent findings by the
Court. On June 6, 2001, the Appeals Court denied Uniroyal's petition for
rehearing by the full Appeals Court on the Appeals Court's finding of arranger
liability against Uniroyal and on December 10, 2001, Uniroyal's Writ of
Certiorari with the United States Supreme Court with regard to the issues of
its arranger liability was denied. On December 12, 2001, the Court concluded
hearings pursuant to the April 10, 2001 remand by the Appeals Court, and
briefing on the issue of divisibility was completed in January 2003. A
decision from the Court is expected during the second quarter of 2004.
The Company intends to assert all meritorious legal defenses and all other
equitable factors which are available to it with respect to the above matters.
The Company believes that the resolution of these matters will not have a
material adverse effect on its consolidated financial position. While the
Company believes it is unlikely, the resolution of these matters could have a
material adverse effect on its consolidated results of operations in any given
year if a significant number of these matters are resolved unfavorably.
GUARANTEES
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others." Interpretation No. 45 requires the
guarantor to recognize a liability for the non-contingent component of a
guarantee; that is, the obligation to stand ready to perform in the event that
specified triggering events or conditions occur. The initial measurement of
this liability is the fair value of the guarantee at its inception. The
initial recognition and measurement provisions apply to guarantees issued or
modified after December 31, 2002. The adoption of Interpretation No. 45 has
not had a material impact on the Company's results of operations or financial
condition.
The Company has standby letters of credit and guarantees with various
financial institutions. At December 31, 2003, the Company had $58.2 million of
outstanding letters of credit and guarantees primarily related to its
environmental remediation liabilities, insurance obligations, a potential tax
exposure, and a customer guarantee. Of these items, one of the
F-41
CROMPTON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONTINGENCIES -- (CONTINUED)
standby letters of credit and the customer guarantee fall within the scope of
Interpretation No. 45.
The standby letter of credit relates to a potential tax exposure that
existed prior to December 31, 2002. The amount of this letter of credit is
$15.7 million. At December 31, 2003, the Company had accrued $7.1 million of
this amount, which represents the Company's estimate of the probable outcome
of this tax exposure.
For the customer guarantee, the Company has contingently guaranteed certain
debt obligations for one of its customers. At December 31, 2003, the amount of
this guarantee is $4.6 million. Based on past experience and on the underlying
circumstances, the Company does not expect to have to perform under this
guarantee. The fair value of the Company's obligation to stand-ready to
perform for the term of the guarantee is not material.
The Company provides for the estimated cost of product warranties related to
its Polymer Processing Equipment segment. The Company warrants repair or
replacement to the equipment purchased by the original buyer for a one-year
period from date of shipment if the equipment is either defective in material
or workmanship. In the case of components or units purchased by the Company
from other suppliers, the obligation of the Company shall be limited to give
the buyer benefit of any warranty the Company may receive from the supplier of
such components or units. The product warranty liability at December 31, 2003
is $3.3 million.
In the ordinary course of business, the Company enters into contractual
arrangements under which the Company may agree to indemnify a third party to
such arrangement from any losses incurred relating to the services they
perform on behalf of the Company or for losses arising from certain events as
defined within the particular contract, which may include, for example,
litigation, claims or environmental matters relating to the Company's past
performance. For any losses that the Company believes are probable and which
are estimable, the Company has accrued for such amounts in its consolidated
balance sheets.
BUSINESS SEGMENT DATA
Pursuant to Financial Accounting Standards Board Statement No. 131,
"Disclosures about Segments of an Enterprise and Related Information," the
Company has defined its reporting segments into two major business categories,
"Polymer Products" and "Specialty Products." The accounting policies of the
operating segments are the same as those described in the Accounting Policies
footnote included in the Notes to Consolidated Financial Statements.
The Company evaluates a segment's performance based on several factors, of
which the primary factor is operating profit (loss). In computing operating
profit (loss) by segment, the following items have not been deducted: (1)
general corporate expense; (2) amortization; (3) unabsorbed overhead expense
from discontinued operations; (4) facility closures, severance and related
costs; (5) antitrust costs; and (6) impairment of long-lived assets. These
items have been excluded from the Company's presentation of segment operating
profit because they are not reported to the chief operating decision maker for
purposes of allocating resources among reporting segments or assessing segment
performance. General corporate expense includes costs and expenses that are of
a general corporate nature or managed on a corporate basis, including
amortization expense. These costs are primarily for corporate administration
services, costs related to corporate headquarters and management compensation
plan expenses related to executives and corporate managers. Unabsorbed
overhead expense from discontinued operations represents corporate costs that
were previously allocated to the
F-42
CROMPTON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
BUSINESS SEGMENT DATA -- (CONTINUED)
OrganoSilicones business unit. Facility closures, severance and related costs
are costs related to the Company's cost reduction initiatives that began in
2001 and 2003 and the relocation of the corporate headquarters that began in
2002. The antitrust costs are primarily for fines and legal costs associated
with antitrust investigations and related civil lawsuits. The impairment of
long-lived assets was related to the rubber additives and trilene businesses
and was the result of changes in the marketplace, which caused the carrying
amount of the long-lived assets of these businesses to be impaired. Corporate
assets are principally cash, intangible assets (including goodwill) and other
assets maintained for general corporate purposes.
The GE Specialty Chemicals business that was acquired on July 31, 2003 has
been added to the plastic additives business unit included in the Polymer
Additives reporting segment.
A summary of business data for the Company's reportable segments for the
years 2003, 2002 and 2001 is as follows:
INFORMATION BY BUSINESS SEGMENT
SALES 2003 2002 2001
---------- ---------- ----------
(IN THOUSANDS)
Polymer Products
Polymer Additives........................................................................ $1,232,022 $1,110,804 $1,125,910
Polymers................................................................................. 285,669 270,954 292,092
Polymer Processing Equipment............................................................. 166,539 172,702 202,653
Eliminations............................................................................. (13,302) (15,064) (13,805)
---------- ---------- ----------
1,670,928 1,539,396 1,606,850
---------- ---------- ----------
Specialty Products
Crop Protection.......................................................................... 270,870 240,142 245,562
Other.................................................................................... 243,245 310,733 434,131
---------- ---------- ----------
514,115 550,875 679,693
---------- ---------- ----------
$2,185,043 $2,090,271 $2,286,543
========== ========== ==========
OPERATING PROFIT (LOSS) 2003 2002 2001
---------- ---------- ----------
Polymer Products
Polymer Additives........................................................................ $ 24,392 $ 79,403 $ 55,723
Polymers................................................................................. 28,018 41,028 42,243
Polymer Processing Equipment............................................................. 5,164 (13,766) (15,647)
---------- ---------- ----------
57,574 106,665 82,319
---------- ---------- ----------
Specialty Products
Crop Protection.......................................................................... 64,963 60,241 79,186
Other.................................................................................... (3,283) 7,960 10,779
---------- ---------- ----------
61,680 68,201 89,965
---------- ---------- ----------
Corporate................................................................................. (34,030) (42,144) (46,277)
Amortization.............................................................................. (14,521) (11,557) (31,788)
Unabsorbed overhead expense from discontinued operations.................................. (8,445) (11,515) (10,841)
Facility closures, severance and related costs............................................ (19,560) (17,969) (101,512)
Antitrust costs........................................................................... (77,716) (6,306) --
Impairment of long-lived assets........................................................... -- -- (80,366)
---------- ---------- ----------
$ (35,018) $ 85,375 $ (98,500)
========== ========== ==========
F-43
CROMPTON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
BUSINESS SEGMENT DATA -- (CONTINUED)
DEPRECIATION AND AMORTIZATION 2003 2002 2001
---------- ---------- ----------
Polymer Products
Polymer Additives........................................................................ $ 63,572 $ 59,805 $ 58,765
Polymers................................................................................. 15,712 16,030 17,347
Polymer Processing Equipment............................................................. 2,059 2,584 2,765
---------- ---------- ----------
81,343 78,419 78,877
---------- ---------- ----------
Specialty Products
Crop Protection.......................................................................... 7,696 8,081 8,004
Other.................................................................................... 4,496 9,902 16,644
---------- ---------- ----------
12,192 17,983 24,648
---------- ---------- ----------
Corporate................................................................................. 21,834 15,024 47,305
---------- ---------- ----------
$ 115,369 $ 111,426 $ 150,830
========== ========== ==========
SEGMENT ASSETS 2003 2002 2001
---------- ---------- ----------
Polymer Products
Polymer Additives........................................................................ $ 879,047 $ 731,241 $ 728,640
Polymers................................................................................. 121,853 120,208 142,196
Polymer Processing Equipment............................................................. 84,330 89,343 101,498
---------- ---------- ----------
1,085,230 940,792 972,334
---------- ---------- ----------
Specialty Products
Crop Protection.......................................................................... 175,731 146,361 145,001
Other.................................................................................... 97,829 87,280 216,080
---------- ---------- ----------
273,560 233,641 361,081
---------- ---------- ----------
Assets held for sale...................................................................... -- 392,887 392,015
Corporate................................................................................. 1,170,392 1,273,495 1,506,758
---------- ---------- ----------
$2,529,182 $2,840,815 $3,232,188
========== ========== ==========
CAPITAL EXPENDITURES 2003 2002 2001
---------- ---------- ----------
Polymer Products
Polymer Additives........................................................................ $ 54,299 $ 42,755 $ 52,614
Polymers................................................................................. 4,355 5,584 8,987
Polymer Processing Equipment............................................................. 777 2,608 4,160
---------- ---------- ----------
59,431 50,947 65,761
---------- ---------- ----------
Specialty Products
Crop Protection.......................................................................... 3,404 5,950 8,825
Other.................................................................................... 5,114 6,950 11,742
---------- ---------- ----------
8,518 12,900 20,567
---------- ---------- ----------
Corporate................................................................................. 13,798 20,436 5,975
---------- ---------- ----------
$ 81,747 $ 84,283 $ 92,303
========== ========== ==========
F-44
CROMPTON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
BUSINESS SEGMENT DATA -- (CONTINUED)
EQUITY METHOD INVESTMENTS 2003 2002 2001
---------- ---------- ----------
Polymer Products
Polymer Additives........................................................................ $ 36,542 $ 40,267 $ 45,924
Polymers................................................................................. -- -- 1,134
Polymer Processing Equipment............................................................. -- -- --
---------- ---------- ----------
36,542 40,267 47,058
---------- ---------- ----------
Specialty Products
Crop Protection.......................................................................... 27,411 23,963 24,465
Other.................................................................................... -- -- 102
---------- ---------- ----------
27,411 23,963 24,567
---------- ---------- ----------
$ 63,953 $ 64,230 $ 71,625
========== ========== ==========
INFORMATION BY GEOGRAPHIC AREA
(IN THOUSANDS)
Sales are based on location of customer.
SALES 2003 2002 2001
---------- ---------- ----------
United States............................................................................. $1,081,344 $1,097,997 $1,228,264
Canada.................................................................................... 76,530 73,516 80,150
Latin America............................................................................. 155,579 140,674 155,697
Europe/Africa............................................................................. 597,132 539,529 562,158
Asia/Pacific.............................................................................. 274,458 238,555 260,274
---------- ---------- ----------
$2,185,043 $2,090,271 $2,286,543
========== ========== ==========
PROPERTY, PLANT AND EQUIPMENT 2003 2002 2001
---------- ---------- ----------
United States............................................................................. $ 463,757 $ 429,535 $ 524,022
Canada.................................................................................... 58,725 48,522 44,894
Latin America............................................................................. 9,686 8,329 9,488
Europe/Africa............................................................................. 221,204 194,182 170,598
Asia/Pacific.............................................................................. 21,240 15,394 15,970
---------- ---------- ----------
$ 774,612 $ 695,962 $ 764,972
========== ========== ==========
F-45
CROMPTON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
GUARANTOR CONDENSED CONSOLIDATING FINANCIAL DATA
The Company's 9 7/8% Senior Notes due 2012 and the Senior Floating Rate
Notes due 2010 (the "Senior Notes") are jointly and severally, fully and
unconditionally guaranteed by certain wholly-owned domestic subsidiaries of
the Company that guarantee the Company's new $220 million revolving credit
facility that was entered into in August 2004 (the "Guarantor Subsidiaries").
The Company's subsidiaries that do not guarantee the Senior Notes are referred
to as the "Non-Guarantor Subsidiaries". The Guarantor Condensed Consolidating
Financial Data presented below presents the statements of operations, balance
sheets and statements of cash flow data (i) for Crompton Corporation (the
"Parent Company"), the Guarantor Subsidiaries and the Non-Guarantor
Subsidiaries on a consolidated basis (which is derived from Crompton
Corporation's historical reported financial information); (ii) for the Parent
Company, alone (accounting for its Guarantor Subsidiaries and the Non-
Guarantor Subsidiaries on an equity basis under which the investments are
recorded by each entity owning a portion of another entity at cost, adjusted
for the applicable share of the subsidiary's cumulative results of operations,
capital contributions and distributions, and other equity changes); (iii) for
the Guarantor Subsidiaries alone; and (iv) for the Non-Guarantor Subsidiaries
alone.
F-46
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 2003
(IN THOUSANDS)
PARENT GUARANTOR NON-GUARANTOR
CONSOLIDATED ELIMINATIONS COMPANY SUBSIDIARIES SUBSIDIARIES
------------ ------------ --------- ------------ -------------
Net sales.............................................. $2,185,043 $(494,743) $ 644,617 $835,628 $1,199,541
Cost of products sold.................................. 1,616,092 (494,743) 545,295 614,517 951,023
Selling, general and administrative.................... 353,026 -- 116,380 104,301 132,345
Depreciation and amortization.......................... 115,369 -- 44,933 31,051 39,385
Research and development............................... 51,467 -- 12,861 18,165 20,441
Equity income.......................................... (13,169) -- (109) (10,199) (2,861)
Facility closures, severance and related costs......... 19,560 -- 8,837 6,800 3,923
Antitrust costs........................................ 77,716 -- -- 77,716 --
---------- --------- --------- -------- ----------
Operating profit (loss)................................ (35,018) -- (83,580) (6,723) 55,285
Interest expense....................................... 89,653 -- 81,425 8,990 (762)
Loss on early extinguishment of debt................... 24,699 -- 24,699 -- --
Other (income) expense, net............................ 5,383 -- 8,925 13,199 (16,741)
Equity in net (earnings) loss of subsidiaries.......... -- 41,209 (9,465) (32,200) 456
---------- --------- --------- -------- ----------
Earnings (loss) from continuing operations before
income taxes and cumulative effect of accounting
change............................................... (154,753) (41,209) (189,164) 3,288 72,332
Income tax expense (benefit)........................... (36,102) -- (70,513) 5,803 28,608
---------- --------- --------- -------- ----------
Earnings (loss) from continuing operations before
cumulative effect of accounting change............... (118,651) (41,209) (118,651) (2,515) 43,724
Earnings from discontinued operations.................. 26,314 -- 5,991 -- 20,323
Gain on sale of discontinued operations................ 111,692 -- (9,859) -- 121,551
Cumulative effect of accounting change................. (401) -- (401) -- --
---------- --------- --------- -------- ----------
NET EARNINGS (LOSS).................................... $ 18,954 $ (41,209) $(122,920) $ (2,515) $ 185,598
========== ========= ========= ======== ==========
F-47
CONDENSED CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 2003
(IN THOUSANDS)
PARENT GUARANTOR NON-GUARANTOR
CONSOLIDATED ELIMINATIONS COMPANY SUBSIDIARIES SUBSIDIARIES
------------ ------------ ---------- ------------ -------------
ASSETS
Current assets........................................ $ 810,454 $ -- $ 202,628 $ 147,401 $ 460,425
Intercompany receivables.............................. -- (7,614,816) 3,180,641 960,603 3,473,572
Investment in subsidiaries............................ -- (3,762,303) 752,573 1,175,815 1,833,915
Property, plant and equipment......................... 774,612 -- 299,321 179,541 295,750
Cost in excess of acquired net assets................. 418,607 -- 135,522 54,844 228,241
Other assets.......................................... 525,509 -- 277,078 183,008 65,423
---------- ------------ ---------- ---------- ----------
TOTAL ASSETS......................................... $2,529,182 $(11,377,119) $4,847,763 $2,701,212 $6,357,326
========== ============ ========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities................................... $ 701,245 $ -- $ 249,415 $ 221,213 $ 230,617
Intercompany payables................................. -- (7,668,705) 3,969,182 996,226 2,703,297
Long-term debt........................................ 754,018 -- 754,018 -- --
Other long-term liabilities 771,210 -- 337,335 255,274 178,601
---------- ------------ ---------- ---------- ----------
TOTAL LIABILITIES.................................... 2,226,473 (7,668,705) 5,309,950 1,472,713 3,112,515
Stockholders' equity.................................. 302,709 (3,708,414) (462,187) 1,228,499 3,244,811
---------- ------------ ---------- ---------- ----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY............................... $2,529,182 $(11,377,119) $4,847,763 $2,701,212 $6,357,326
========== ============ ========== ========== ==========
F-48
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 2003
(IN THOUSANDS)
PARENT GUARANTOR NON-GUARANTOR
INCREASE (DECREASE) IN CASH CONSOLIDATED ELIMINATIONS COMPANY SUBSIDIARIES SUBSIDIARIES
------------------------------------- ------------ ------------ --------- ------------ -------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings (loss).................................... $ 18,954 $(41,209) $(122,920) $ (2,515) $ 185,598
Adjustments to reconcile net earnings (loss) to net
cash (used in) provided by operations:
Cumulative effect of accounting change, net of tax.... 401 -- 401 -- --
(Gain) loss on sale of discontinued operations........ (111,692) -- 9,859 -- (121,551)
Loss on early extinguishment of debt.................. 24,699 -- 24,699 -- --
Depreciation and amortization......................... 136,087 -- 60,350 31,051 44,686
Equity income......................................... (13,169) -- (109) (10,199) (2,861)
Changes in assets and liabilities, net................ (70,110) 41,209 150,416 12,750 (274,485)
--------- -------- --------- -------- ---------
NET CASH (USED IN) PROVIDED BY OPERATIONS.............. (14,830) -- 122,696 31,087 (168,613)
--------- -------- --------- -------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Net proceeds from divestments.......................... 633,427 -- 413,984 -- 219,443
Capital expenditures................................... (87,591) -- (22,751) (26,046) (38,794)
Other investing activities............................. 1,707 -- 1,779 -- (72)
--------- -------- --------- -------- ---------
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES.... 547,543 -- 393,012 (26,046) 180,577
--------- -------- --------- -------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on long-term notes............................ (478,380) -- (476,315) -- (2,065)
Proceeds from domestic credit facility................. 32,000 -- 32,000 -- --
Payments on short-term borrowings...................... (1,824) -- -- -- (1,824)
Premium paid on early extinguishment of debt........... (23,804) -- (23,804) -- --
Dividends paid......................................... (22,556) -- (22,556) -- --
Common shares acquired................................. (22,080) -- (22,080) -- --
Other financing activities............................. 2,323 -- 2,350 -- (27)
--------- -------- --------- -------- ---------
NET CASH USED IN FINANCING ACTIVITIES.................. (514,321) -- (510,405) -- (3,916)
--------- -------- --------- -------- ---------
CASH
Effect of exchange rates on cash....................... 3,880 -- -- -- 3,880
--------- -------- --------- -------- ---------
Change in cash......................................... 22,272 -- 5,303 5,041 11,928
Cash at beginning of period............................ 16,941 -- (4,431) (2,984) 24,356
--------- -------- --------- -------- ---------
CASH AT END OF PERIOD.................................. $ 39,213 $ -- $ 872 $ 2,057 $ 36,284
========= ======== ========= ======== =========
F-49
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 2002
(IN THOUSANDS)
PARENT GUARANTOR NON-GUARANTOR
CONSOLIDATED ELIMINATIONS COMPANY SUBSIDIARIES SUBSIDIARIES
------------ ------------ --------- ------------ -------------
Net sales.............................................. $2,090,271 $(494,113) $ 642,955 $830,353 $1,111,076
Cost of products sold.................................. 1,468,268 (494,113) 504,323 612,410 845,648
Selling, general and administrative.................... 354,559 -- 133,531 105,982 115,046
Depreciation and amortization.......................... 111,426 -- 44,824 31,429 35,173
Research and development............................... 54,285 -- 14,523 21,958 17,804
Equity income.......................................... (7,917) -- (89) (6,248) (1,580)
Facility closures, severance and related costs......... 17,969 -- 9,169 5,792 3,008
Antitrust costs........................................ 6,306 -- -- 6,306 --
---------- --------- --------- -------- ----------
Operating profit (loss)................................ 85,375 -- (63,326) 52,724 95,977
Interest expense....................................... 101,704 -- 83,975 11,312 6,417
Other (income) expense, net............................ 38,021 -- 54,528 549 (17,056)
Equity in net (earnings) loss of subsidiaries.......... -- 116,272 (89,583) (26,689) --
---------- --------- --------- -------- ----------
Earnings (loss) from continuing operations before
income taxes and cumulative effect of accounting
change............................................... (54,350) (116,272) (112,246) 67,552 106,616
Income tax expense (benefit)........................... (18,904) -- (76,800) 15,396 42,500
---------- --------- --------- -------- ----------
Earnings (loss) from continuing operations before
cumulative effect of accounting change............... (35,446) (116,272) (35,446) 52,156 64,116
Earnings from discontinued operations.................. 50,920 -- 16,470 -- 34,450
Cumulative effect of accounting change................. (298,981) -- (190,268) (3,782) (104,931)
---------- --------- --------- -------- ----------
NET EARNINGS (LOSS).................................... $ (283,507) $(116,272) $(209,244) $ 48,374 $ (6,365)
========== ========= ========= ======== ==========
F-50
CONDENSED CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 2002
(IN THOUSANDS)
PARENT GUARANTOR NON-GUARANTOR
CONSOLIDATED ELIMINATIONS COMPANY SUBSIDIARIES SUBSIDIARIES
------------ ------------ ---------- ------------ -------------
ASSETS
Current assets........................................ $1,059,663 $ -- $ 323,066 $ 154,077 $ 582,520
Intercompany receivables.............................. -- (5,442,138) 2,769,835 519,240 2,153,063
Investment in subsidiaries............................ -- (3,161,177) 396,818 1,158,883 1,605,476
Property, plant and equipment......................... 695,962 -- 261,241 182,547 252,174
Cost in excess of acquired net assets................. 584,633 -- 116,088 54,843 413,702
Other assets.......................................... 500,557 -- 240,972 196,731 62,854
---------- ----------- ---------- ---------- ----------
TOTAL ASSETS......................................... $2,840,815 $(8,603,315) $4,108,020 $2,266,321 $5,069,789
========== =========== ========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities................................... $ 694,059 $ -- $ 254,556 $ 193,988 $ 245,515
Intercompany payables................................. -- (5,485,315) 2,639,941 1,274,263 1,571,111
Long-term debt........................................ 1,253,149 -- 1,250,707 -- 2,442
Other long-term liabilities........................... 693,724 -- 351,351 207,527 134,846
---------- ----------- ---------- ---------- ----------
TOTAL LIABILITIES.................................... 2,640,932 (5,485,315) 4,496,555 1,675,778 1,953,914
Stockholders' equity.................................. 199,883 (3,118,000) (388,535) 590,543 3,115,875
---------- ----------- ---------- ---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY............ $2,840,815 $(8,603,315) $4,108,020 $2,266,321 $5,069,789
========== =========== ========== ========== ==========
F-51
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 2002
(IN THOUSANDS)
INCREASE (DECREASE) IN CASH PARENT GUARANTOR NON-GUARANTOR
--------------------------- CONSOLIDATED ELIMINATIONS COMPANY SUBSIDIARIES SUBSIDIARIES
------------ ------------ --------- ------------ -------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings (loss).................................... $(283,507) $(116,272) $(209,244) $ 48,374 $ (6,365)
Adjustments to reconcile net earnings (loss)
to net cash provided by operations:
Cumulative effect of accounting change,
net of tax.......................................... 298,981 -- 190,268 3,782 104,931
Loss (gain) on sale of business units................. 34,705 -- 40,374 -- (5,669)
Depreciation and amortization......................... 146,550 -- 71,846 31,429 43,275
Equity income......................................... (7,917) -- (89) (6,248) (1,580)
Changes in assets and liabilities, net................ 12,942 116,272 35,095 (42,341) (96,084)
--------- --------- --------- -------- --------
Net cash provided by operations........................ 201,754 -- 128,250 34,996 38,508
--------- --------- --------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Net proceeds from divestments.......................... 80,000 -- 63,819 -- 16,181
Capital expenditures................................... (100,309) -- (29,954) (34,499) (35,856)
Other investing activities............................. (1,526) -- 2,497 -- (4,023)
--------- --------- --------- -------- --------
Net cash provided by (used in) investing
activities........................................... (21,835) -- 36,362 (34,499) (23,698)
--------- --------- --------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on long-term notes............................ (11,742) -- -- -- (11,742)
Payments on domestic credit facility................... (130,000) -- (130,000) -- --
Payments on short-term borrowings...................... (27,186) -- (25,880) -- (1,306)
Dividends paid......................................... (22,698) -- (22,698) -- --
Other financing activities............................. 6,415 -- 6,487 -- (72)
--------- --------- --------- -------- --------
Net cash used in financing activities.................. (185,211) -- (172,091) -- (13,120)
--------- --------- --------- -------- --------
CASH
Effect of exchange rates on cash....................... 727 -- -- -- 727
--------- --------- --------- -------- --------
Change in cash......................................... (4,565) -- (7,479) 497 2,417
Cash at beginning of period............................ 21,506 -- 3,048 (3,481) 21,939
--------- --------- --------- -------- --------
Cash at end of period.................................. $ 16,941 $ -- $ (4,431) $ (2,984) $ 24,356
========= ========= ========= ======== ========
F-52
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 2001
(IN THOUSANDS)
PARENT GUARANTOR NON-GUARANTOR
CONSOLIDATED ELIMINATIONS COMPANY SUBSIDIARIES SUBSIDIARIES
------------ ------------ --------- ------------ -------------
NET SALES.............................................. $2,286,543 $(500,392) $ 726,423 $ 948,919 $1,111,593
Cost of products sold.................................. 1,626,667 (500,392) 563,926 700,125 863,008
Selling, general and administrative.................... 378,916 -- 154,175 115,698 109,043
Depreciation and amortization.......................... 150,830 -- 61,147 45,683 44,000
Research and development............................... 56,030 -- 16,648 19,942 19,440
Equity income.......................................... (9,278) -- (103) (5,955) (3,220)
Facility closures, severance and related costs......... 101,512 -- 6,020 83,955 11,537
Impairment of long-lived assets........................ 80,366 -- -- 66,318 14,048
---------- --------- --------- --------- ----------
OPERATING PROFIT (LOSS)................................ (98,500) -- (75,390) (76,847) 53,737
Interest expense....................................... 109,877 -- 80,756 26,778 2,343
Other (income) expense, net............................ 27,265 -- 11,927 15,719 (381)
Equity in net (earnings) loss of subsidiaries.......... -- (47,155) 49,686 (2,531) --
---------- --------- --------- --------- ----------
Earnings (loss) from continuing operations
before income taxes.................................. (235,642) 47,155 (217,759) (116,813) 51,775
Income tax expense (benefit)........................... (79,883) -- (62,000) (43,721) 25,838
---------- --------- --------- --------- ----------
Earnings (loss) from continuing operations............. (155,759) 47,155 (155,759) (73,092) 25,937
Earnings from discontinued operations.................. 31,815 -- 14,935 -- 16,880
---------- --------- --------- --------- ----------
NET EARNINGS (LOSS).................................... $ (123,944) $ 47,155 $(140,824) $ (73,092) $ 42,817
========== ========= ========= ========= ==========
F-53
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 2001
(IN THOUSANDS)
INCREASE (DECREASE) IN CASH PARENT GUARANTOR NON-GUARANTOR
--------------------------- CONSOLIDATED ELIMINATIONS COMPANY SUBSIDIARIES SUBSIDIARIES
------------ ------------ --------- ------------ -------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings (loss).................................... $(123,944) $ 47,155 $(140,824) $(73,092) $ 42,817
Adjustments to reconcile net earnings (loss) to net
cash (used in) provided by operations:
Impairment of long-lived assets....................... 80,366 -- -- 66,318 14,048
Loss on sale of business units........................ 19,121 -- -- 19,121 --
Depreciation and amortization......................... 185,570 -- 84,000 45,683 55,887
Equity income......................................... (9,278) -- (103) (5,955) (3,220)
Changes in assets and liabilities, net................ 53,172 (47,155) 238,911 (59,852) (78,732)
--------- -------- --------- -------- --------
Net cash (used in) provided by operations............. 205,007 -- 181,984 (7,777) 30,800
--------- -------- --------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Net proceeds from divestments.......................... 35,061 -- -- 35,061 --
Capital expenditures................................... (136,642) -- (63,652) (25,008) (47,982)
Other investing activities............................. 933 -- (4,575) 7,038 (1,530)
--------- -------- --------- -------- --------
Net cash provided by (used in) investing
activities........................................... (100,648) -- (68,227) 17,091 (49,512)
--------- -------- --------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on long-term notes............................ (169) -- -- -- (169)
Proceeds from long-term notes.......................... 2,003 -- -- -- 2,003
Payments on domestic credit facility................... (105,000) -- (105,000) -- --
Payments on short-term borrowings...................... (672) -- 23 -- (695)
Dividends paid......................................... (22,542) -- (22,542) -- --
Proceeds from interest rate swap contract.............. 21,870 -- 21,870 -- --
Other financing activities............................. 1,555 -- 1,621 -- (66)
--------- -------- --------- -------- --------
Net cash (used in) provided by financing activities.... (102,955) -- (104,028) -- 1,073
--------- -------- --------- -------- --------
CASH
Effect of exchange rates on cash....................... (675) -- -- -- (675)
--------- -------- --------- -------- --------
Change in cash......................................... 729 -- 9,729 9,314 (18,314)
Cash at beginning of period............................ 20,777 -- (6,681) (12,795) 40,253
--------- -------- --------- -------- --------
Cash at end of period.................................. $ 21,506 $ -- $ 3,048 $ (3,481) $ 21,939
========= ======== ========= ======== ========
F-54
SUMMARIZED UNAUDITED QUARTERLY FINANCIAL DATA
2003
------------------------------------------
FIRST SECOND THIRD FOURTH
-------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net sales ........................................................................... $531,972 $532,901 $559,189 $560,981
Gross profit ........................................................................ $147,014 $138,264 $148,935 $134,738
Loss from continuing operations before cumulative effect of accounting change ....... $ (6,718) $(19,402) $(34,502) $(58,029)
Earnings from discontinued operations ............................................... 12,965 10,292 3,057 --
Gain on sale of discontinued operations ............................................. -- -- 111,692 --
Cumulative effect of accounting change .............................................. (401) -- -- --
-------- -------- -------- --------
NET EARNINGS (LOSS) ................................................................. $ 5,846 $ (9,110) $ 80,247 $(58,029)
======== ======== ======== ========
Basic and diluted per share data (a):
Loss from continuing operations before cumulative effect of accounting change ....... $ (0.06) $ (0.17) $ (0.31) $ (0.52)
Earnings from discontinued operations ............................................... 0.11 0.09 0.03 --
Gain on sale of discontinued operations ............................................. -- -- 1.00 --
Cumulative effect of accounting change .............................................. -- -- -- --
-------- -------- -------- --------
NET EARNINGS (LOSS) ................................................................. $ 0.05 $ (0.08) $ 0.72 $ (0.52)
======== ======== ======== ========
---------------
(a) The sum of the earnings per common share for the four quarters does not
equal the total earnings per common share for 2003 due to quarterly changes
in the average number of shares outstanding.
2002
-------------------------------------------
FIRST SECOND THIRD FOURTH
--------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net sales .......................................................................... $ 531,082 $571,489 $507,936 $479,764
Gross profit ....................................................................... $ 150,945 $173,392 $158,559 $139,107
Loss from continuing operations before cumulative effect of accounting change ...... $ (1,453) $(16,854) $ (2,300) $(14,839)
Earnings from discontinued operations 8,208 10,560 14,888 17,264
Cumulative effect of accounting change ............................................. (298,981) -- -- --
--------- -------- -------- --------
NET EARNINGS (LOSS)................................................................. $(292,226) $ (6,294) $ 12,588 $ 2,425
========= ======== ======== ========
Basic and diluted per share data:
Loss from continuing operations before cumulative effect of accounting change ..... $ (0.01) $ (0.15) $ (0.02) $ (0.13)
Earnings from discontinued operations ............................................. 0.07 0.09 0.13 0.15
Cumulative effect of accounting change ............................................ (2.63) -- -- --
--------- -------- -------- --------
NET EARNINGS (LOSS)................................................................ $ (2.57) $ (0.06) $ 0.11 $ 0.02
========= ======== ======== ========
F-55
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Crompton Corporation:
We have reviewed the condensed consolidated balance sheet of Crompton
Corporation and subsidiaries (the Company) as of September 30, 2004, the
related condensed consolidated statements of operations for the three and
nine-months periods ended September 30, 2004 and 2003, and the condensed
consolidated statements of cash flows for nine-month periods ended
September 30, 2004 and 2003. These condensed consolidated financial statements
are the responsibility of the Company's management.
We conducted our review in accordance with the standards of the Public Company
Accounting Oversight Board (United States). A review of interim financial
information consists principally of applying analytical procedures and making
inquiries of persons responsible for financial and accounting matters. It is
substantially less in scope than an audit conducted in accordance with the
standards of the Public Company Accounting Oversight Board (United States),
the objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the condensed consolidated financial statements referred to
above for them to be in conformity with U.S. generally accepted accounting
principles.
We have previously audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the consolidated balance
sheet of Crompton Corporation and subsidiaries as of December 31, 2003, and
the related consolidated statements of operations, stockholders' equity, and
cash flows for the year then ended (not presented herein); and in our report
dated January 30, 2004, except as to the "Antitrust Investigations and Related
Matters" note, which is as of March 15, 2004, and except as to the "Guarantor
Condensed Consolidating Financial Data" note, which is as of October 5, 2004,
we expressed an unqualified opinion on those consolidated financial
statements. In our opinion, the information set forth in the accompanying
condensed consolidated balance sheet as of December 31, 2003, is fairly
stated, in all material respects, in relation to the consolidated balance
sheet from which it has been derived.
As discussed in the Asset Retirement Obligations note to the consolidated
financial statements, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 143, "Asset Retirement Obligations" on
January 1, 2003.
/s/ KPMG LLP
KPMG LLP
Stamford, Connecticut
November 4, 2004
F-56
CROMPTON CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
THIRD QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)
THIRD QUARTER ENDED NINE MONTHS ENDED
------------------- -----------------------
2004 2003 2004 2003
-------- -------- ---------- ----------
Net sales ....................................................................... $639,397 $559,189 $1,910,484 $1,624,062
Cost of products sold ........................................................... 466,677 410,254 1,421,557 1,189,849
Selling, general and administrative ............................................. 92,785 91,504 281,384 263,604
Depreciation and amortization ................................................... 31,216 30,318 93,056 84,816
Research and development ........................................................ 12,593 12,767 37,455 37,553
Equity (income) loss ............................................................ (145) 1,073 (9,838) (6,769)
Facility closures, severance and related costs .................................. 40,376 10,566 46,065 14,071
Antitrust costs ................................................................. 8,426 5,385 16,829 26,260
-------- -------- ---------- ----------
Operating profit (loss) ......................................................... (12,531) (2,678) 23,976 14,678
Interest expense ................................................................ 20,579 20,664 55,666 72,938
Loss on early extinguishment of debt ............................................ 20,063 24,699 20,063 24,699
Other (income) expense, net ..................................................... 7,199 3,414 (82,613) 7,454
-------- -------- ---------- ----------
Earnings (loss) from continuing operations before income taxes and cumulative
effect of accounting change.................................................... (60,372) (51,455) 30,860 (90,413)
Income tax expense (benefit) .................................................... (17,520) (16,953) 11,675 (29,791)
-------- -------- ---------- ----------
Earnings (loss) from continuing operations before cumulative effect of
accounting change.............................................................. (42,852) (34,502) 19,185 (60,622)
Earnings from discontinued operations ........................................... -- 3,057 -- 26,314
Gain on sale of discontinued operations ......................................... 2,142 111,692 2,142 111,692
Cumulative effect of accounting change .......................................... -- -- -- (401)
-------- -------- ---------- ----------
NET EARNINGS (LOSS) ............................................................. $(40,710) $ 80,247 $ 21,327 $ 76,983
======== ======== ========== ==========
Basic and diluted earnings (loss) per common share:
Earnings (loss) from continuing operations before cumulative effect of
accounting change.............................................................. $ (0.37) $ (0.31) $ 0.17 $ (0.54)
Earnings from discontinued operations ........................................... -- 0.03 -- 0.23
Gain on sale of discontinued operations ......................................... 0.02 1.00 0.02 0.99
Cumulative effect of accounting change .......................................... -- -- -- --
-------- -------- ---------- ----------
NET EARNINGS (LOSS) ............................................................. $ (0.35) $ 0.72 $ 0.19 $ 0.68
======== ======== ========== ==========
See accompanying notes to condensed consolidated financial statements.
F-57
CROMPTON CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2004 (UNAUDITED) AND DECEMBER 31, 2003
(IN THOUSANDS OF DOLLARS)
SEPTEMBER 30, DECEMBER 31,
2004 2003
------------- ------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents ...................... $ 136,933 $ 39,213
Accounts receivable ............................ 212,198 210,190
Inventories .................................... 397,135 390,199
Other current assets ........................... 156,905 170,852
---------- ----------
TOTAL CURRENT ASSETS .......................... 903,171 810,454
---------- ----------
NON-CURRENT ASSETS
Property, plant and equipment .................. 722,517 774,612
Cost in excess of acquired net assets .......... 418,688 418,607
Other assets ................................... 497,259 525,509
---------- ----------
$2,541,635 $2,529,182
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term borrowings .......................... $ 3,496 $ 60,695
Accounts payable ............................... 202,634 232,127
Accrued expenses ............................... 267,040 267,472
Income taxes payable ........................... 132,106 130,284
Other current liabilities ...................... 17,533 10,667
---------- ----------
TOTAL CURRENT LIABILITIES ..................... 622,809 701,245
---------- ----------
NON-CURRENT LIABILITIES
Long-term debt ................................. 862,024 754,018
Pension and post-retirement health care
liabilities................................... 549,446 566,966
Other liabilities .............................. 195,974 204,244
STOCKHOLDERS' EQUITY
Common stock ................................... 1,192 1,192
Additional paid-in capital ..................... 1,033,139 1,034,027
Accumulated deficit ............................ (586,025) (590,157)
Accumulated other comprehensive loss ........... (93,753) (96,463)
Treasury stock at cost ......................... (43,171) (45,890)
---------- ----------
TOTAL STOCKHOLDERS' EQUITY .................... 311,382 302,709
---------- ----------
$2,541,635 $2,529,182
========== ==========
See accompanying notes to condensed consolidated financial statements.
F-58
CROMPTON CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
(IN THOUSANDS OF DOLLARS)
INCREASE (DECREASE) IN CASH 2004 2003
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings ......................................... $ 21,327 $ 76,983
Adjustments to reconcile net earnings to net cash
provided by (used in) operations:
Gain on sale of discontinued operations............. (2,142) (111,692)
Gain on sale of Gustafson joint venture............. (90,938) --
Loss on early extinguishment of debt................ 20,063 24,699
Cumulative effect of accounting change.............. -- 401
Depreciation and amortization....................... 93,056 105,534
Equity income....................................... (9,838) (6,769)
Changes in assets and liabilities, net:
Accounts receivable ............................... (7,162) 50,410
Accounts receivable - securitization .............. 1,859 (18,767)
Inventories ....................................... (9,911) 10,047
Accounts payable .................................. (28,724) (70,747)
Other ............................................. 18,767 (78,127)
--------- ---------
NET CASH PROVIDED BY (USED IN) OPERATIONS ............ 6,357 (18,028)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Net proceeds from divestments ........................ 142,270 643,115
Capital expenditures ................................. (43,983) (55,104)
Other investing activities ........................... 281 (250)
--------- ---------
Net cash provided by investing activities ............ 98,568 587,761
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on domestic credit facility ................. (57,000) --
(Payments to) proceeds from short-term borrowings .... (350,441) 961
Payments on long term borrowings ..................... (140,006) (477,627)
Proceeds from long term borrowings ................... 597,499 --
Premium paid on early extinguishment of debt ......... (19,044) (23,804)
Payments for debt issuance costs ..................... (22,106) --
Dividends paid ....................................... (17,192) (16,993)
Treasury stock acquired .............................. -- (22,080)
Other financing activities ........................... 1,276 1,137
--------- ---------
NET CASH USED IN FINANCING ACTIVITIES ................ (7,014) (538,406)
--------- ---------
CASH
Effect of exchange rates on cash ..................... (191) 1,516
--------- ---------
Change in cash ....................................... 97,720 32,843
Cash at beginning of period .......................... 39,213 16,941
--------- ---------
CASH AT END OF PERIOD ................................ $ 136,933 $ 49,784
========= =========
See accompanying notes to condensed consolidated financial statements.
F-59
CROMPTON CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
ACCOUNTING POLICIES
PRESENTATION OF CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The information in the foregoing condensed consolidated financial statements
for the third quarter and nine months ended September 30, 2004 and
September 30, 2003 is unaudited, but reflects all adjustments, which in the
opinion of management, are necessary for a fair presentation of the results of
operations for the interim periods presented. The foregoing condensed
consolidated financial statements include the accounts of Crompton Corporation
and its wholly-owned and majority owned subsidiaries, which are collectively
referred to as "the Company." Other affiliates in which the Company has a 20%
to 50% ownership are accounted for in accordance with the equity method.
On April 24, 2003, the Company entered into an agreement to sell certain
assets and assign certain liabilities of the OrganoSilicones business unit to
the Specialty Materials division of General Electric Company (GE) and to
acquire GE's Specialty Chemicals business. The transaction closed on July 31,
2003. As a result, the accompanying financial statements reflect the
OrganoSilicones business unit as a discontinued operation for the periods
ending prior to July 31, 2003. The operations of the OrganoSilicones business
unit have been classified as earnings from discontinued operations (net of
tax) in the condensed consolidated statements of operations. The condensed
consolidated statements of cash flows have not been adjusted to reflect the
discontinued operations and thus include the cash flows of the OrganoSilicones
business for the nine months ended September 30, 2003. Refer to the
Discontinued Operations footnote for further information.
Certain financial information and footnote disclosures included in the
annual financial statements have been condensed or omitted pursuant to the
rules and regulations of the Securities and Exchange Commission for reporting
on Form 10-Q. It is suggested that the interim consolidated financial
statements be read in conjunction with the consolidated financial statements
and notes included in the Company's 2003 Annual Report on Form 10-K. The
consolidated results of operations for the nine months ended September 30,
2004 are not necessarily indicative of the results expected for the full year.
OPERATING COSTS AND EXPENSES
Cost of products sold includes all costs incurred in manufacturing products,
including raw materials, direct manufacturing costs and manufacturing
overhead. Cost of products sold also includes warehousing, distribution,
customer service, engineering (other than polymer processing equipment design
engineering), purchasing, and environmental, health and safety functions.
Selling, general and administrative expenses (SG&A) include costs and expenses
related to the following functions and activities: selling, advertising,
polymer processing equipment design engineering, shipping costs for out-bound
product shipments, information technology, legal, provision for doubtful
accounts, corporate facilities and corporate administration. SG&A also
includes accounting, finance and human resources, excluding direct support in
manufacturing operations, which is included as cost of products sold. Research
and development expenses (R&D) include basic and applied research and
development activities of a technical and non-routine nature. R&D costs are
expensed as incurred. Costs of products sold, SG&A, and R&D expenses exclude
depreciation and amortization expenses, which are presented on a separate line
in the condensed consolidated statements of operations.
Included in SG&A are shipping costs of $22.0 million and $21.3 million for
the third quarters ended September 30, 2004 and September 30, 2003,
respectively, and $67.2 million
F-60
CROMPTON CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
ACCOUNTING POLICIES -- (CONTINUED)
and $61.2 million for the nine months ended September 30, 2004 and
September 30, 2003, respectively.
EQUITY INVESTMENTS
Included among the Company's equity investments at December 31, 2003 were a
50 percent ownership in Gustafson LLC and a 50 percent ownership in Gustafson
Partnership, which were sold on March 31, 2004. Refer to the Divestitures
footnote for further information. The Company accounted for these investments
in accordance with the equity method. The combined assets and liabilities of
these two investments were $93.4 million and $38.3 million, respectively, as
of December 31, 2003. The combined pre-tax income of the two investments for
the first quarter ended March 31, 2004 and nine months ended September 30,
2003 were $18 million and $12.9 million, respectively, of which the Company's
50 percent share is $9 million and $6.5 million, respectively.
OTHER
Included in the Company's condensed consolidated balance sheets at
September 30, 2004 and December 31, 2003, is approximately $20 million and
$13 million, respectively, of restricted cash that is required to be on
deposit to support certain letters of credit and performance guarantees, the
majority of which will be settled within one year.
Included in accounts receivable are allowances for doubtful accounts of
$19.6 million at September 30, 2004 and $17.8 million at December 31, 2003.
Accumulated depreciation amounted to $856.9 million at September 30, 2004
and $828.0 million at December 31, 2003.
INDEBTEDNESS AND REFINANCING
On August 16, 2004, the Company completed a multipart refinancing program
(the "Refinancing") totaling $945 million. The Refinancing included
$600 million aggregate principal amount of privately offered senior notes (the
"New Senior Notes"). The New Senior Notes are a combination of $375 million
aggregate principal amount of 9 7/8% Senior Notes due 2012 (with a yield to
maturity of 10.0%), and $225 million aggregate principal amount of Libor plus
5.75% Senior Floating Rate Notes due 2010 (with the interest rate resetting
quarterly). The Company has also replaced its domestic credit facility with a
new five-year $220 million credit facility consisting of a $120 million
revolving credit facility and a $100 million pre-funded letter of credit
facility. Also as a part of the Refinancing, the Company amended its domestic
accounts receivable securitization program to provide three-years of funding
for up to $125 million of domestic accounts receivable, which represents an
increase of $10 million from the Company's previous ability to sell up to
$115 million of domestic accounts receivable. There were no outstanding
borrowings under the Company's new revolving domestic credit facility at
September 30, 2004.
The Company used approximately $551.5 million of the Refinancing proceeds to
repay $46.5 million of outstanding borrowings under its previously existing
domestic credit facility and to retire all of its outstanding $350 million
aggregate principal amount of 8.5% Senior Notes due 2005 and $140 million of
its $150 million aggregate principal amount of 6.125% Senior Notes due 2006
(collectively the "Notes"). The purchase price to tender $261.3 million of the
8.5% Senior Notes was $1,025.88 per $1,000 principal amount, the purchased
price to call the remaining $88.7 million of the 8.5% Senior Notes was
$1,032.07 per $1,000 principal
F-61
CROMPTON CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
INDEBTEDNESS AND REFINANCING -- (CONTINUED)
amount, and the purchase price to tender $140 million of the 6.125% Senior
Notes was $1,038.35 per $1,000 principal. The Company also paid a consent
payment of $10.00 per $1,000 principal amount of each series of Notes to
certain tendering holders of the Notes, which amounted to $4 million. In
addition, the Company paid $14 million of accrued and unpaid interest on
validly tendered Notes and approximately $22 million of issuance costs related
to the New Senior Notes and new credit facility.
As a result of the tendering of the Notes, the Company recorded a loss on
early extinguishment of debt of $20.1 million during the third quarter of
2004. The loss primarily includes the premiums paid to repurchase the Notes,
the consent payments and the write-off of the unamortized discount and
deferred costs related to the Notes.
During the third quarter of 2003, the Company recorded a loss on early
extinguishment of debt of $24.7 million. This loss was the result of the
repurchase of $250 million of the Company's 8.5% Senior Notes in August 2003
utilizing the proceeds from the sale of the OrganoSilicones business unit to
GE. Included in this loss was a premium of $23.8 million and a write-off of
$0.9 million related to the unamortized discount and debt issuance costs
related to the notes repurchased.
STOCK-BASED COMPENSATION
As permitted under Financial Accounting Standards Board (FASB) Statements
No. 123, "Accounting for Stock-Based Compensation" and No. 148, "Accounting
for Stock-Based Compensation - Transition and Disclosure," the Company elected
to continue its historical method of accounting for stock-based compensation
in accordance with Accounting Principles Board Opinion (APB) No. 25,
"Accounting for Stock Issued to Employees." Under APB 25, compensation expense
for fixed plans is recognized based on the difference between the exercise
price and the stock price on the date of grant. Since the Company's fixed plan
awards have been granted with an exercise price equal to the stock price on
the date of grant, no compensation expense has been recognized in the
statement of operations for these awards. However, compensation expense has
been recognized for the restricted stock awards under the Company's long-term
incentive programs in accordance with the provisions of APB 25, which would be
unchanged under FASB Statements No. 123 and No. 148. The following table
illustrates the effect on net earnings (loss) and related per share amounts as
if the Company had applied the fair value recognition provisions of Statements
No. 123 and No. 148 to all stock-based employee compensation awards.
F-62
CROMPTON CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
STOCK-BASED COMPENSATION -- (CONTINUED)
THIRD QUARTER
ENDED NINE MONTHS ENDED
------------------ -----------------
(IN THOUSANDS, EXCEPT PER SHARE DATA) 2004 2003 2004 2003
-------- ------- ------- -------
Net earnings (loss), as reported ....................................................... $(40,710) $80,247 $21,327 $76,983
Stock-based employee compensation included in net earnings (loss), net of tax .......... 928 (54) 1,992 263
Total stock-based employee compensation determined under fair value based accounting
method for all awards, net of tax..................................................... (1,685) (693) (4,663) (3,634)
-------- ------- ------- -------
Pro forma net earnings (loss) .......................................................... $(41,467) $79,500 $18,656 $73,612
======== ======= ======= =======
Net earnings (loss) per share:
Basic and diluted - as reported ....................................................... $ (0.35) $ 0.72 $ 0.19 $ 0.68
Basic and diluted - pro forma ......................................................... $ (0.36) $ 0.71 $ 0.16 $ 0.65
FACILITY CLOSURES, SEVERANCE AND RELATED COSTS
The Company has nearly completed an activity-based restructuring initiative
intended to structure the Company's operations in a more efficient and cost
effective manner. On June 29, 2004, the Company offered a voluntary severance
program to certain U.S. based employees intended to facilitate the
implementation of the activity-based restructuring initiative by decreasing
the number of involuntary separations that may otherwise be required once the
organizational design phase of the initiative is completed. As a result of the
voluntary program, 138 U.S. based employees voluntarily elected to terminate
their employment. Based on the results of the voluntary program and on the
current status of the activity-based restructuring initiative, the Company
estimates that it will involuntarily terminate at least 10% of its 5,200
employee worldwide workforce over the next several months. During the third
quarter of 2004, the Company recorded pre-tax charges of $10.5 million for
severance costs related to the voluntary terminations, $28.4 million for the
estimated severance costs related to the involuntary terminations and
$1.3 million for consulting costs that have been incurred, which were directly
related to developing and implementing the activity-based restructuring
initiative. Voluntary severance payments of $1.4 million and consulting
payments of $0.4 million were made during the third quarter.
During the first quarter of 2004, the Company appointed a new President and
CEO, and the former President and CEO, Senior Vice President and CFO, and
certain other executives elected to retire. As a result of this
reorganization, during the second quarter of 2004, the Company completed the
separation agreements for the former Chairman, President and CEO, Senior Vice
President and CFO, and other executives and recorded a pre-tax charge of
$2.6 million for severance and related costs. Such costs are included in
facility closures, severance and related costs in the condensed consolidated
statements of operations. Payments and non-cash activity related to this
charge were $1 million during the third quarter of 2004. The remaining reserve
balance at September 30, 2004 was $1.6 million.
In July 2003, the Company announced a cost reduction program to further
eliminate overhead expenses. In order to achieve this goal, the Company
expects to reduce its global workforce by approximately 375 positions, of
which approximately 353 positions had been eliminated as of September 30,
2004. During the first nine months of 2004, the Company recorded an additional
pre-tax charge of $0.4 million for facility closures, severance and related
costs relating to the July 2003 program in the condensed consolidated
statements of operations. A summary of this charge is as follows:
F-63
CROMPTON CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
FACILITY CLOSURES, SEVERANCE AND RELATED COSTS -- (CONTINUED)
SEVERANCE AND ASSET OTHER FACILITY
(IN THOUSANDS) RELATED COSTS WRITE-OFFS CLOSURE COSTS TOTAL
------------- ---------- -------------- -------
2003 charge ............................................................. $12,585 $ 396 $ 988 $13,969
Cash payments ........................................................... (2,859) -- (383) (3,242)
Non-cash charges ........................................................ -- (396) -- (396)
------- ----- ----- -------
Balance at December 31, 2003 ............................................ 9,726 -- 605 10,331
2004 charge ............................................................. 389 -- (10) 379
Cash payments ........................................................... (7,367) -- (446) (7,813)
------- ----- ----- -------
Balance at September 30, 2004 ........................................... $ 2,748 $ -- $ 149 $ 2,897
======= ===== ===== =======
As a result of the cost reduction initiative that began in 2001 and the
relocation of the Company's corporate headquarters from Greenwich, CT to
Middlebury, CT that began in 2002, the Company recorded pre-tax charges of
$0.7 million and $3.6 million for facility closures, severance and related
costs for the nine months ended September 30, 2004 and September 30, 2003,
respectively. The related reserve activity is summarized as follows:
ASSET
SEVERANCE AND WRITE-OFFS AND OTHER FACILITY
(IN THOUSANDS) RELATED COSTS (A) IMPAIRMENTS (B) CLOSURE COSTS (C) TOTAL
----------------- --------------- ----------------- --------
Balance at December 31, 2002 ............................... $ 24,233 $ -- $11,338 $ 35,571
2003 charge:
Continuing operations ..................................... 2,711 183 2,697 5,591
Discontinued operations ................................... 15 -- 15 30
Cash payments .............................................. (17,457) -- (9,695) (27,152)
Non-cash charges ........................................... (1,110) (183) (280) (1,573)
-------- ----- ------- --------
Balance at December 31, 2003 ............................... 8,392 -- 4,075 12,467
2004 charge ................................................ 43 559 109 711
Cash payments .............................................. (4,440) -- (1,695) (6,135)
Non-cash charges ........................................... -- (559) -- (559)
-------- ----- ------- --------
Balance at September 30, 2004 .............................. $ 3,995 $ -- $ 2,489 $ 6,484
======== ===== ======= ========
---------------
(a) Includes severance at various sites, including severance resulting from the
corporate relocation, and pension curtailments related to closed sites.
(b) Includes the write-off of the net book value of assets at the Greenwich, CT
location that were disposed of.
(c) Includes primarily demolition, decontamination and decommissioning costs
and inventory charges related to closed sites.
In addition, during the first quarter of 2004, the Company completed the
sale of its manufacturing facility in Freeport, Grand Bahama Island and
recorded a $2.1 million facility closure charge primarily for asset write-
offs.
F-64
CROMPTON CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) --
(CONTINUED)
DISCONTINUED OPERATIONS
On July 31, 2003, the Company sold certain assets and assigned certain
liabilities of its OrganoSilicones business unit to the Specialty Materials
division of GE and acquired GE's Specialty Chemicals business. The transaction
resulted in a gain of $111.7 million (net of income taxes of $175.3 million).
The Company received net cash proceeds in 2003 of $633.4 million, which
included proceeds from its first quarterly earn-out payment of $8.75 million
less certain transaction-related fees of $18.4 million. In addition, the
Company acquired the GE Specialty Chemicals business with a value of
$160 million. The Company will continue to receive quarterly earn-out proceeds
through September 2006 based on the combined performance of GE's existing
Silicones business and the OrganoSilicones business that GE acquired from the
Company. The total of such earn-out proceeds will be a minimum of $105 million
and a maximum of $250 million. In addition to the earn-out proceeds received
in 2003, the Company received a total of $31.3 million of earn-out proceeds
for the nine months ended September 30, 2004, of which $5.1 million
represented additional earn-out proceeds related to the combined performance
of GE's existing Silicones business and the OrganoSilicones business that GE
acquired from the Company for the second quarter of 2004. The additional earn-
out proceeds have not been recognized in earnings as the recognition of this
additional gain is contingent upon the continued favorable future performance
of GE's Silicones business through September 2006. During the third quarter of
2004, the Company and GE settled various purchase price adjustments,
previously accrued for in the July 2003 gain on sale of discontinued
operations, which resulted in a $14 million payment to GE. As a result of this
settlement, the adjustment of indemnification and certain other reserves
related to the transaction and the resolution of certain tax matters related
to the transaction, the Company recorded a $2.1 million (after-tax) gain on
sale of discontinued operations in the third quarter of 2004.
PRO FORMA FINANCIAL INFORMATION
The following pro forma unaudited results of operations for the third
quarter and nine months ended September 30, 2003 assume that the divestiture
of the OrganoSilicones business unit and the acquisition of the GE Specialty
Chemicals business had been consummated as of the beginning of 2003:
THIRD QUARTER NINE MONTHS
(IN THOUSANDS, EXCEPT PER SHARE DATA) ENDED 2003 ENDED 2003
------------- -----------
Net sales ....................................... $570,541 $1,715,981
======== ==========
Loss from continuing operations before
cumulative effect of accounting change......... $(33,512) $ (44,846)
======== ==========
Net earnings (a) ................................ $ 78,180 $ 66,445
======== ==========
Basic and diluted earnings per common share:
Loss from continuing operations before
cumulative effect of accounting change........ $ (0.30) $ (0.40)
======== ==========
Net earnings ................................... $ 0.70 $ 0.59
======== ==========
Weighted average shares outstanding:
Basic and diluted .............................. 111,208 112,654
======== ==========
---------------
(a) The pro forma net earnings for the quarter and nine months ended
September 30, 2003 include a gain on the sale of discontinued operations of
$111,692.
F-65
CROMPTON CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
PRO FORMA FINANCIAL INFORMATION -- (CONTINUED)
The unaudited pro forma information above has been prepared for comparative
purposes only and does not purport to be indicative of the results of
operations that would have occurred had the divestiture of the OrganoSilicones
business unit and the acquisition of the GE Specialty Chemicals business been
consummated at the beginning of 2003.
DIVESTITURES
On March 22, 2004, the Company entered into an agreement with Bayer
CropScience LP in the U. S. and Bayer CropScience Inc. in Canada to sell its
50 percent interest in the Gustafson seed treatment joint venture for
$124 million, of which $2 million is contingent upon a licensing consent and
the execution of a related supply agreement, which the Company expects to
occur by the end of the year. In addition, the Company received a deferred
payment of approximately $4.9 million during the third quarter of 2004. The
transaction closed on March 31, 2004 and resulted in a pre-tax gain of
$90.9 million.
ACCOUNTS RECEIVABLE PROGRAMS
On April 15, 2004, the Company amended its receivables sale agreement to
reduce its domestic accounts receivable securitization program from
$150 million to $115 million. In connection with the Refinancing transaction
in August 2004 (see the Indebtedness and Refinancing note included herein),
the Company amended its domestic accounts receivable securitization program to
provide three years of funding for up to $125 million of domestic receivables.
Accounts receivable sold under this program were $100 million and
$106.1 million as of September 30, 2004 and December 31, 2003, respectively.
In addition, the Company's European subsidiaries have a separate program to
sell up to approximately $128 million of their eligible accounts receivable to
agent banks as of September 30, 2004. International accounts receivable sold
under this program were $101.3 million and $93.3 million as of September 30,
2004 and December 31, 2003, respectively. The total costs associated with
these programs of $6.9 million and $4.5 million for the nine months ended
September 30, 2004 and September 30, 2003, respectively, are included in other
(income) expense, net in the condensed consolidated statements of operations.
Under the domestic program, certain subsidiaries of the Company sell their
accounts receivable to a special purpose entity (SPE) that has been created as
a separate legal entity for the purpose of acquiring such receivables and
selling an undivided interest therein to agent banks. In accordance with the
domestic sale agreement, the agent banks purchase an undivided ownership
interest in the accounts receivable owned by the SPE. The amount of such
undivided ownership interest will vary based on the level of eligible accounts
receivable as defined in the agreement. In addition, the agent banks retain a
security interest in all of the receivables owned by the SPE, which was
$84 million and $43.3 million as of September 30, 2004 and December 31, 2003,
respectively. The balance of the unsold receivables owned by the SPE is
included in the Company's accounts receivable balance on the condensed
consolidated balance sheet. Under the international program, certain foreign
subsidiaries of the Company sell eligible accounts receivable directly to
agent banks. During the period, the Company had an obligation to service the
accounts receivable sold under its domestic and international programs. The
Company has treated the transfer of receivables under its domestic and
international receivable programs as a sale of accounts receivable.
F-66
CROMPTON CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
INVENTORIES
Components of inventories are as follows:
(UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
(IN THOUSANDS) 2004 2003
------------- ------------
Finished goods ................................. $285,583 $293,846
Work in process ................................ 23,683 20,175
Raw materials and supplies ..................... 87,869 76,178
-------- --------
$397,135 $390,199
======== ========
GOODWILL AND INTANGIBLE ASSETS
The Company's intangible assets (excluding goodwill) are included in other
assets on the balance sheet and comprise the following:
(UNAUDITED)
SEPTEMBER 30, 2004 DECEMBER 31, 2003
------------------------- -------------------------
ACCUMULATED ACCUMULATED
(IN THOUSANDS) GROSS COST AMORTIZATION GROSS COST AMORTIZATION
---------- ------------ ---------- ------------
Patents ................................................................. $ 67,559 $(23,131) $ 60,824 $(18,877)
Trademarks .............................................................. 84,991 (34,927) 83,718 (31,334)
Other ................................................................... 86,114 (40,678) 89,364 (37,444)
-------- -------- -------- --------
$238,664 $(98,736) $233,906 $(87,655)
======== ======== ======== ========
The gross cost of the Company's intangible assets increased $4.8 million
primarily due to the capitalization of fees associated with the renewal of
patents, trademarks and registrations of $7.5 million, partially offset by
asset retirements of $2.2 million and unfavorable foreign currency translation
of $0.5 million.
Amortization expense related to intangible assets amounted to $4.5 million
and $3.7 million for the third quarter ended September 30, 2004 and
September 30, 2003, respectively, and $13.5 million and $9.9 million for the
nine months ended September 30, 2004 and September 30, 2003, respectively.
Estimated amortization expense as of September 30, 2004 for the next five
fiscal years is as follows: $18.0 million (2004), $16.8 million (2005),
$16.6 million (2006), $16.4 million (2007) and $15.9 million (2008).
Goodwill by reportable segment is as follows:
(UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
(IN THOUSANDS) 2004 2003
------------- ------------
Polymer Products
Polymer Additives ............................. $311,066 $310,785
Polymers ...................................... 17,299 17,299
Polymer Processing Equipment .................. 34,615 34,637
-------- --------
362,980 362,721
-------- --------
Specialty Products
Crop Protection ............................... 55,708 55,886
-------- --------
$418,688 $418,607
======== ========
The Company has elected to perform its annual goodwill impairment procedures
for all of its reporting units in accordance with FASB Statement No. 142,
"Goodwill and Other
F-67
CROMPTON CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
GOODWILL AND INTANGIBLE ASSETS -- (CONTINUED)
Intangible Assets" as of July 31, or sooner, if events occur or circumstances
change that could reduce the fair value of a reporting unit below its carrying
value. During the third quarter, the Company completed its goodwill impairment
procedures, which were reviewed by an independent appraisal firm, and
concluded that no goodwill impairment exists as of September 30, 2004.
COMMON STOCK
The Company is authorized to issue 500 million shares of $.01 par value
common stock. There were 119,152,254 common shares issued at September 30,
2004 and December 31, 2003, of which 4,384,388 and 4,660,158 shares were held
as treasury stock at September 30, 2004 and December 31, 2003, respectively.
During the first nine months of 2004, the Company issued 275,770 treasury
shares, primarily pursuant to its compensation programs and long-term
incentive plans.
EARNINGS (LOSS) PER COMMON SHARE
The computation of basic earnings (loss) per common share is based on the
weighted average number of common shares outstanding. The computation of
diluted earnings (loss) per common share is based on the weighted average
number of common and common equivalent shares outstanding. The computation of
diluted earnings (loss) per common share equals the basic earnings (loss) per
common share for the nine months ended September 30, 2004 because the dilutive
stock options and other equivalents were not significant. The computation of
diluted earnings (loss) per common share equals the basic earnings (loss) per
common share for the third quarter ended September 30, 2004 and the third
quarter and nine months ended September 30, 2003 since common stock
equivalents were antidilutive. Common stock equivalents amounted to 42,539 for
the third quarter ended 2004, 187,764 for the third quarter ended 2003 and
172,985 for the nine months ended September 30, 2003.
The following is a reconciliation of the shares used in the computations:
THIRD QUARTER
ENDED NINE MONTHS ENDED
----------------- -----------------
(IN THOUSANDS) 2004 2003 2004 2003
------- ------- ------- -------
Weighted average common shares outstanding .............................................. 114,719 111,208 114,607 112,654
Effect of dilutive stock options and other equivalents .................................. -- -- 184 --
------- ------- ------- -------
Weighted average common shares adjusted for dilution .................................... 114,719 111,208 114,791 112,654
======= ======= ======= =======
F-68
CROMPTON CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
COMPREHENSIVE INCOME (LOSS)
An analysis of the Company's comprehensive income (loss) follows:
THIRD QUARTER
ENDED NINE MONTHS ENDED
------------------ ------------------
(IN THOUSANDS) 2004 2003 2004 2003
-------- ------- ------- --------
Net earnings (loss) ................................................................... $(40,710) $80,247 $21,327 $ 76,983
Other comprehensive income (loss):
Foreign currency translation adjustments ............................................. 23,339 (7,856) (8,181) 74,581
Minimum pension liability adjustments ................................................ -- -- 1,190 3,254
Change in fair value of derivatives .................................................. 2,434 23 6,902 2,838
Other ................................................................................ 2,777 36 2,799 136
-------- ------- ------- --------
Comprehensive income (loss) ........................................................... $(12,160) $72,450 $24,037 $157,792
======== ======= ======= ========
The components of accumulated other comprehensive loss at September 30, 2004
and December 31, 2003 are as follows:
(UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
(IN THOUSANDS) 2004 2003
------------- ------------
Foreign currency translation adjustment ........ $ 41,424 $ 49,605
Minimum pension liability adjustment ........... (141,563) (142,753)
Change in fair value of derivatives ............ 6,902 --
Other .......................................... (516) (3,315)
--------- ---------
Accumulated other comprehensive loss ........... $ (93,753) $ (96,463)
========= =========
PENSION AND OTHER POST-RETIREMENT BENEFIT PLANS
Components of net periodic benefit cost (credit) for the third quarter ended
September 30, 2004 and September 30, 2003 are as follows:
INTERNATIONAL AND
QUALIFIED DOMESTIC NON-QUALIFIED POST-RETIREMENT
DEFINED DEFINED BENEFIT HEALTH CARE
BENEFIT PLANS PLANS PLANS
------------------- ----------------- ---------------
THIRD QUARTER THIRD QUARTER
THIRD QUARTER ENDED ENDED ENDED
------------------- ----------------- ---------------
(IN THOUSANDS) 2004 2003 2004 2003 2004 2003
-------- -------- ------- ------- ------ ------
Service cost ....................................................... $ (230) $ 2,036 $ 1,904 $ 1,743 $ 296 $ 455
Interest cost ...................................................... 9,706 10,055 3,850 3,422 3,110 3,705
Expected return on plan assets ..................................... (12,726) (13,394) (1,870) (1,678) (612) (698)
Amortization of unrecognized transition obligation ................. (2) (2) 39 56 -- --
Amortization of prior service cost ................................. 19 19 150 227 (694) (701)
Amortization of net (gain) loss .................................... 1,225 204 470 136 (153) (65)
Curtailments ....................................................... -- -- (1,479)
Settlements ........................................................ -- -- 3,258 (3,580) -- --
-------- -------- ------- ------- ------ ------
Net periodic benefit cost (credit) ................................. $ (2,008) $ (1,082) $ 6,322 $ 326 $1,947 $2,696
======== ======== ======= ======= ====== ======
F-69
CROMPTON CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
PENSION AND OTHER POST-RETIREMENT BENEFIT PLANS -- (CONTINUED)
Components of net periodic benefit cost (credit) for the nine months ended
September 30, 2004 and September 30, 2003 are as follows:
INTERNATIONAL AND
QUALIFIED DOMESTIC NON-QUALIFIED
DEFINED DEFINED BENEFIT POST-RETIREMENT
BENEFIT PLANS PLANS HEALTH CARE PLANS
------------------- ----------------- -----------------
NINE MONTHS ENDED NINE MONTHS ENDED NINE MONTHS ENDED
------------------- ----------------- -----------------
(IN THOUSANDS) 2004 2003 2004 2003 2004 2003
-------- -------- ------- ------- ------- -------
Service cost ..................................................... $ 4,092 $ 6,688 $ 5,649 $ 5,547 $ 887 $ 1,359
Interest cost .................................................... 29,206 31,247 11,513 10,418 9,330 11,079
Expected return on plan assets ................................... (38,734) (40,860) (5,610) (5,226) (1,836) (2,094)
Amortization of unrecognized transition obligation ............... (6) (6) 118 168 -- --
Amortization of prior service cost ............................... 47 57 452 681 (2,081) (2,103)
Amortization of net (gain) loss .................................. 4,003 612 1,376 410 (459) (196)
Curtailments ..................................................... -- -- 4,410 -- -- --
Settlements ...................................................... -- -- 3,258 (3,580) -- --
-------- -------- ------- ------- ------- -------
Net periodic benefit cost (credit) ............................... $ (1,392) $ (2,262) $21,166 $ 8,418 $ 5,841 $ 8,045
======== ======== ======= ======= ======= =======
As a result of the Company's former Chairman, President and CEO, Senior Vice
President and CFO, and certain other executives electing to retire, the
Company expects to make lump sum payments under the provisions of its
supplemental executive retirement programs of approximately $24 million, of
which $17.4 million was paid in the third quarter of 2004 and the remainder of
which is expected to be paid in the fourth quarter of 2004 and first quarter
of 2005. For the nine month period ending September 30, 2004, the Company
recognized a $4.4 million curtailment loss and a $3.3 million settlement loss
related to this matter. The Company expects to recognize further settlement
losses of approximately $0.9 million in the fourth quarter of 2004 in
connection with the remaining lump sum payments.
The Company expects to contribute $3.3 million to its domestic pension plans
in 2004, of which $2.4 million was contributed to the plans as of September 30,
2004. The Company's funding assumptions assume pension funding relief and no
other significant changes with regards to demographics, legislation, plan
provisions, or actuarial assumption or methods to determine the estimated
funding requirements. The Pension Funding Equity Act of 2004 was signed into
law on April 10, 2004 and will provide the Company a two-year temporary
replacement of the benchmark interest rate for determining funding liabilities
and will establish temporary alternative minimum funding requirements for
certain underfunded pension plans.
On December 8, 2003, the Medicare Prescription Drug, Improvement and
Modernization Act of 2003 (the "Act") was signed into law. Through the Act,
companies that sponsor retiree health plans that cover prescription drugs are
entitled to a tax-free federal subsidy beginning in 2006 which is equal to 28%
of certain costs paid by both the employee and the Company for prescription
drugs. On May 19, 2004, the FASB issued FASB Staff Position (FSP) No. 106-2,
"Accounting and Disclosure Requirements Related to the Medicare Prescription
Drug, Improvement and Modernization Act of 2003." FSP No. 106-2 supersedes FSP
No. 106-1, "Accounting and Disclosure Requirements Related to the Medicare
Prescription Drug,
F-70
CROMPTON CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
PENSION AND OTHER POST-RETIREMENT BENEFIT PLANS -- (CONTINUED)
Improvement and Modernization Act of 2003." FSP No. 106-2 provides guidance on
the accounting for the effects of the Act for employers that sponsor post-
retirement health care plans that provide prescription drug benefits, and
requires employers to provide certain disclosures regarding the effect of the
federal subsidy provided by the Act. The Company has determined that most of
its post-retirement health care plans that provide prescription drug benefits
are actuarially equivalent to Medicare Part D based on a reasonable
interpretation of what the regulations will likely require and, therefore, the
Company will be eligible to receive the federal subsidy. As a result, the
Company adopted FSP No. 106-2 during the second quarter of 2004 and recorded a
reduction to the net periodic post-retirement benefit cost of $0.5 million and
$1.5 million for the third quarter and nine months ended September 30, 2004,
respectively.
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The Company's activities expose its earnings, cash flows and financial
position to a variety of market risks, including the effects of changes in
foreign currency exchange rates and interest rates. The Company maintains a
risk-management strategy that uses derivative instruments as needed to
mitigate risk against foreign currency movements and to manage interest rate
volatility and commodity price volatility. In accordance with FASB Statement
No. 133, "Accounting for Derivative Instruments and Hedging Activities," FASB
Statement No. 138, "Accounting for Certain Derivative Instruments and Certain
Hedging Activities," and FASB Statement No. 149, "Amendment of Statement
No. 133 on Derivative Instruments and Hedging Activities," the Company
recognizes in earnings changes in the fair value of all derivatives designated
as fair value hedging instruments that are highly effective and recognizes in
accumulated other comprehensive loss (AOCL) changes in the fair value of all
derivatives designated as cash flow hedging instruments that are highly
effective. The Company does not enter into derivative instruments for trading
or speculative purposes.
The Company uses price swap contracts as cash flow hedges to convert a
portion of its forecasted natural gas purchases from variable price to fixed
price purchases. In January 2004, these contracts were designated as hedges of
a portion of the Company's forecasted natural gas purchases. The Company's
hedge contracts cover a gradually decreasing percentage of its purchase
requirements over a rolling two-year period. These contracts involve the
exchange of payments over the life of the contracts without an exchange of the
notional amount upon which the payments are based. The differential paid or
received as natural gas prices change is recognized as an adjustment to cost
of products sold.
The Company used interest rate swap contracts, which expired in July 2003
concurrent with the maturity of the underlying debt securities, as cash flow
hedges to convert its Euro denominated variable rate debt to fixed rate debt.
Each interest rate swap contract was designated with the principal balance and
the term of the specific debt obligation. These contracts involved the
exchange of interest payments over the life of the contract without an
exchange of the notional amount upon which the payments were based. The
differential paid or received as interest rates changed was recognized as an
adjustment to interest expense.
In 2003, the Company also had equity option contracts covering 3.2 million
shares of the Company's common stock to hedge the expense variability
associated with its obligations under its long-term incentive plans (LTIP). In
February 2003, the Company settled its existing equity option contracts for
$35.1 million, of which $33.8 million had been included in accrued expenses at
December 31, 2002, and entered into a new equity option contract. The new
contract consisted of a sold put option contract with a strike price of $5.66
and a purchased
F-71
CROMPTON CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES -- (CONTINUED)
call option contract with a strike price of $5.75. The Company had designated
a portion of the equity option contract as a cash flow hedge of the risk
associated with the unvested, unpaid awards under its LTIP. Changes in market
value related to the portion of the option contract designated and effective
as a hedge were recorded as a component of AOCL. The amount included in AOCL
was subject to changes in the stock price and was being amortized ratably to
SG&A over the remaining service periods of the hedged LTIP. Changes in market
value related to the remaining portion of the option contract were recognized
in SG&A. During the second quarter of 2003, the Company determined that one of
its LTIP programs was not achievable and accordingly amortized $3 million from
AOCL to SG&A, which represented the unamortized balance of the deferred loss
on the portion of the option contract that related to this plan. On May 11,
2003, the option contract expired and resulted in a favorable net cash
settlement of $3.7 million. As of June 30, 2003, all of the deferred gains and
losses relating to these contracts had been amortized to SG&A.
The following table summarizes the (gains)/losses resulting from changes in
the market value of the Company's fair value and cash flow hedging instruments
and the amortization of (gains)/losses related to certain cash flow hedges for
the third quarter and nine months ended September 30, 2004 and September 30,
2003.
THIRD QUARTER
ENDED NINE MONTHS ENDED
-------------- -----------------
2004 2003 2004 2003
------- ---- ------- -------
(IN THOUSANDS)
Fair value hedges (in other (income) expense, net) ......................................... $ -- $108 $ -- $ 38
======= ==== ======= =======
Cash flow hedges (in AOCL):
Balance at beginning of period ............................................................. $(4,468) $ 23 $ -- $ 2,838
Price swap contracts ...................................................................... (2,434) -- (6,902) --
Interest rate swap contracts .............................................................. -- (23) -- (883)
Equity option contracts-change in market value ............................................ -- -- -- 1,836
Equity option contracts-amortization to SG&A .............................................. -- -- -- (3,791)
------- ---- ------- -------
Balance at end of period ................................................................... $(6,902) $ -- $(6,902) $ --
======= ==== ======= =======
ASSET RETIREMENT OBLIGATIONS
Effective January 1, 2003, the Company adopted the provisions of FASB
Statement No. 143, "Accounting for Asset Retirement Obligations." Statement
No. 143 requires companies to record a liability for asset retirement
obligations in the period in which a legal obligation is created. Such
liabilities are recorded at fair value, with an offsetting increase to the
carrying value of the related long-lived assets. In future periods, the
liability is accreted to its present value and the capitalized cost is
depreciated over the useful life of the related asset. Companies are also
required to adjust the liability for changes resulting from the passage of
time and/or revisions to the timing or the amount of the original estimate.
Upon retirement of the long-lived asset, the Company either settles the
obligation for its recorded amount or incurs a gain or loss. As a result of
the implementation of this Statement, the Company recorded an after-tax charge
of $0.4 million ($0.7 million pre-tax) as a cumulative effect of accounting
change. The Company's asset retirement obligations are primarily the result of
the legal obligation to remove leasehold improvements upon termination of
leases at several of its facilities. Such obligations have been recorded at
fair value, which the Company estimated by discounting projected cash flows
using a rate of 8.5%. The depreciation and accretion
F-72
CROMPTON CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
ASSET RETIREMENT OBLIGATIONS -- (CONTINUED)
expenses recorded for the third quarter and nine month periods ended
September 30, 2004 and September 30, 2003 were not significant.
ANTITRUST INVESTIGATION AND RELATED MATTERS
On May 27, 2004, the Company pled guilty to violation of the U.S. antitrust
laws in connection with the sale of certain rubber chemicals, and the court
imposed a fine of $50.0 million, payable in six annual installments, without
interest, beginning in 2004. On May 28, 2004, the Company pled guilty to
violation of the Canadian competition laws, and the court imposed a fine of
CDN $9.0 million (approximately U.S. $7.0 million), payable in six annual
installments, without interest, beginning in 2004. The Company recorded pre-
tax charges of $45.2 million in the Company's consolidated statements of
operations at December 31, 2003 to reserve for the payment of these U.S. and
Canadian fines, which represents the present value of the expected payments of
$57.0 million. Expected cash payments for U.S. and Canadian fines total
$2.3 million in 2004; $2.3 million in 2005; $6.5 million in 2006; $11.2 million
in 2007; $16.2 million in 2008; and $18.5 million in 2009.
The Company and certain of its subsidiaries continue to be the subject of a
coordinated civil investigation by the European Commission (the "EC") with
respect to the sale and marketing of rubber chemicals. At this time, the
Company cannot predict the timing or outcome of that investigation, including
the amount of any fine that may be imposed by the EC.
The Company and certain of its subsidiaries are subjects of, and continue to
cooperate in, coordinated criminal and civil investigations being conducted by
the U.S. Department of Justice, the Canadian Competition Bureau and the EC
(collectively, the "Governmental Authorities") with respect to possible
antitrust violations relating to the sale and marketing of certain other
products, including ethylene propylene diene monomer (EPDM); heat stabilizers,
including tin-based stabilizers and precursors, mixed metal stabilizers, and
epoxidized soybean oil (ESBO); nitrile rubber; and urethanes and urethane
chemicals. The Company and its subsidiaries that are subject to the
investigations have received from each of the Governmental Authorities verbal
or written assurances of conditional amnesty from prosecution and fines.
The Company and certain of its subsidiaries, together with other companies,
are defendants in certain U.S. federal direct purchaser and state direct and
indirect purchaser lawsuits principally alleging that the defendants conspired
to fix, raise, maintain, or stabilize prices for rubber chemicals, EPDM,
polychloroprene, plastic additives, including impact modifiers and processing
aids, nitrile rubber, and urethanes and urethane chemicals in violation of
federal and state law. In addition, two motions for authorization to commence
a class action were filed in May 2004, in the Superior Court of the District
of St. Francois and the Superior Court of the District of Montreal, in Quebec,
Canada, against the Company, its subsidiary Crompton Co./Cie (with respect to
the motion filed in the Superior Court of the District of St. Francois only)
and other companies. The motions principally allege that the Company conspired
with other defendants to restrain unduly competition in the sale of rubber
chemicals and to inflate artificially the sale price of the rubber chemicals
in violation of Canada's Competition Act. In addition, the Company, its
subsidiaries Crompton Canada Corporation, Crompton Co./Cie and Uniroyal
Chemical Company, Inc. and other companies are defendants in a Statement of
Claim filed in the Ontario Superior Court of Justice in London, Ontario in
Canada. The Statement of Claim principally alleges that the Company conspired
with other defendants to restrain unduly competition in the sale of EPDM and
to inflate
F-73
CROMPTON CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
ANTITRUST INVESTIGATION AND RELATED MATTERS -- (CONTINUED)
artificially the sale price of EPDM in violation of Canada's Competition Act.
The Company, certain of its former officers and directors and certain former
directors of the Company's predecessor Witco Corporation are also defendants
in a consolidated federal securities class action lawsuit principally alleging
that the Company and certain of its former officers and directors caused the
Company to issue false and misleading statements that violated the federal
securities laws by reporting inflated financial results resulting from an
alleged illegal, undisclosed price-fixing conspiracy. In addition, certain
current directors and one former director and officer of the Company are
defendants in a shareholder derivative lawsuit, nominally brought on behalf of
the Company, principally alleging that the individual defendants breached
their fiduciary duties by causing the Company to issue false and misleading
financial statements by inflating financial results as a result of engaging in
an illegal price-fixing conspiracy. These actions are in early procedural
stages of litigation and, accordingly, the Company cannot predict their
outcome. The Company will seek cost-effective resolutions to the various
pending and threatened legal proceedings and governmental investigations
regarding the Company's operations.
The Company's antitrust costs increased from $4.4 million (pre-tax) during
the immediately prior fiscal quarter ended June 30, 2004 to $8.4 million (pre-
tax) for the fiscal quarter ended September 30, 2004, as a result of the
Company's payment of $5.0 million in connection with the settlement of a
plastics additives class action lawsuit. For additional information regarding
this settlement, see "Item 1. Legal Proceedings" in "Part II. Other
Information." The Company expects to continue to incur substantial costs until
all antitrust investigations are concluded and civil claims are resolved.
The Company has not recorded a charge for potential liabilities and expenses
in connection with the coordinated civil investigation by the EC or with the
civil claims, because it is not yet able to reasonably estimate a reserve for
such potential costs. The resolution of the coordinated civil investigation by
the EC and any civil claims now pending or hereafter asserted against the
Company or any of its subsidiaries could have a material adverse effect on the
Company's financial condition, results of operations and prospects.
BUSINESS SEGMENT DATA
The Company evaluates a segment's performance based on several factors, of
which the primary factor is operating profit (loss). In computing operating
profit (loss) by segment, the following items have not been deducted: (1)
general corporate expense; (2) amortization; (3) unabsorbed overhead expense
from discontinued operations; (4) facility closures, severance and related
costs; and (5) antitrust costs. These items have been excluded from the
Company's presentation of segment operating profit (loss) because they are not
reported to the chief operating decision maker for purposes of allocating
resources among reporting segments or assessing segment performance.
General corporate expense includes costs and expenses that are of a general
corporate nature or managed on a corporate basis, including amortization
expense. These costs are primarily for corporate administration services,
costs related to corporate headquarters and management compensation plan
expenses related to executives and corporate managers. Unabsorbed overhead
expense from discontinued operations represents corporate costs that were
previously allocated to the OrganoSilicones business unit (sold on July 31,
2003). Facility closures, severance and related costs are costs related to the
Company's 2004 activity-based restructuring initiative, the cost reduction
initiatives that began in 2001 and 2003 and the
F-74
CROMPTON CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
BUSINESS SEGMENT DATA -- (CONTINUED)
relocation of the corporate headquarters that began in 2002. The antitrust
costs are primarily for fines and legal costs associated with antitrust
investigations and related civil lawsuits.
The GE Specialty Chemicals business that was acquired on July 31, 2003 has
been added to the plastic additives business unit included in the Polymer
Additives reporting segment.
THIRD QUARTER ENDED NINE MONTHS ENDED
------------------- -----------------------
2004 2003 2004 2003
-------- -------- ---------- ----------
(IN THOUSANDS)
Net Sales
Polymer Products
Polymer Additives .............................................................. $366,220 $311,204 $1,099,322 $ 907,340
Polymers ....................................................................... 81,886 74,685 246,281 213,150
Polymer Processing Equipment ................................................... 40,961 38,180 125,315 119,928
Eliminations ................................................................... (3,335) (3,316) (10,964) (10,492)
-------- -------- ---------- ----------
485,732 420,753 1,459,954 1,229,926
-------- -------- ---------- ----------
Specialty Products
Crop Protection ................................................................ 88,293 77,861 250,991 209,822
Refined Products ............................................................... 65,372 60,575 199,539 184,314
-------- -------- ---------- ----------
153,665 138,436 450,530 394,136
-------- -------- ---------- ----------
Total Net Sales............................................................... $639,397 $559,189 $1,910,484 $1,624,062
======== ======== ========== ==========
Operating Profit (Loss)
Polymer Products
Polymer Additives .............................................................. $ 13,011 $ 4,872 $ 29,856 $ 25,299
Polymers ....................................................................... 13,499 6,354 35,335 20,503
Polymer Processing Equipment ................................................... 357 (323) 101 1,737
-------- -------- ---------- ----------
26,867 10,903 65,292 47,539
-------- -------- ---------- ----------
Specialty Products
Crop Protection ................................................................ 26,140 16,979 75,910 50,833
Refined Products ............................................................... 1,369 (211) 163 (368)
-------- -------- ---------- ----------
27,509 16,768 76,073 50,465
-------- -------- ---------- ----------
General corporate expense, including amortization ............................... (18,105) (13,169) (54,495) (34,550)
Unabsorbed overhead expense from discontinued operations ........................ -- (1,229) -- (8,445)
Facility closures, severance and related costs .................................. (40,376) (10,566) (46,065) (14,071)
Antitrust costs ................................................................. (8,426) (5,385) (16,829) (26,260)
-------- -------- ---------- ----------
Total Operating Profit (Loss)................................................. $(12,531) $ (2,678) $ 23,976 $ 14,678
======== ======== ========== ==========
F-75
CROMPTON CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
GUARANTOR CONDENSED CONSOLIDATING FINANCIAL DATA
The Company's obligations under its 9 7/8% Senior Notes due 2012 and the
Senior Floating Rate Notes due 2010 (the "New Senior Notes") are jointly and
severally, fully and unconditionally guaranteed by certain wholly-owned
domestic subsidiaries of the Company that guarantee the Company's new
$220 million credit facility that was entered into in August 2004 (the
"Guarantor Subsidiaries"). The Company's subsidiaries that do not guarantee
the New Senior Notes are referred to as the "Non-Guarantor Subsidiaries". The
Guarantor Condensed Consolidating Financial Data presented below presents the
statements of operations, balance sheets and statements of cash flow data (i)
for Crompton Corporation (the "Parent Company"), the Guarantor Subsidiaries
and the Non-Guarantor Subsidiaries on a consolidated basis (which is derived
from Crompton Corporation's historical reported financial information); (ii)
for the Parent Company, alone (accounting for its Guarantor Subsidiaries and
the Non-Guarantor Subsidiaries on an equity basis under which the investments
are recorded by each entity owning a portion of another entity at cost,
adjusted for the applicable share of the subsidiary's cumulative results of
operations, capital contributions and distributions, and other equity
changes); (iii) for the Guarantor Subsidiaries alone; and (iv) for the Non-
Guarantor Subsidiaries alone.
F-76
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
THIRD QUARTER ENDED SEPTEMBER 30, 2004
(IN THOUSANDS)
NON-
PARENT GUARANTOR GUARANTOR
CONSOLIDATED ELIMINATIONS COMPANY SUBSIDIARIES SUBSIDIARIES
------------ ------------ -------- ------------ ------------
Net sales................................................ $639,397 $(137,905) $198,238 $236,066 $342,998
Cost of products sold.................................... 466,677 (137,905) 163,860 174,709 266,013
Selling, general and administrative...................... 92,785 -- 27,435 28,516 36,834
Depreciation and amortization............................ 31,216 -- 14,098 5,543 11,575
Research and development................................. 12,593 -- 2,366 4,941 5,286
Equity income............................................ (145) -- (25) (120) --
Facility closures, severance and related costs........... 40,376 -- 7,138 16,730 16,508
Antitrust costs.......................................... 8,426 -- -- 8,426 --
-------- --------- -------- -------- --------
Operating profit (loss).................................. (12,531) -- (16,634) (2,679) 6,782
Interest expense......................................... 20,579 -- 17,380 3,192 7
Loss on early extinguishment of debt..................... 20,063 -- 20,063 -- --
Other (income) expense, net.............................. 7,199 -- 6,033 6,117 (4,951)
Equity in net (earnings) loss of subsidiaries............ -- 7,923 (2,650) (5,472) 199
-------- --------- -------- -------- --------
Earnings (loss) from continuing operations before income
taxes.................................................. (60,372) (7,923) (57,460) (6,516) 11,527
Income tax expense (benefit)............................. (17,520) -- (14,606) (5,428) 2,514
-------- --------- -------- -------- --------
Earnings (loss) from continuing operations............... (42,852) (7,923) (42,854) (1,088) 9,013
Gain (loss) on sale of discontinued operations........... 2,142 -- (3,358) -- 5,500
-------- --------- -------- -------- --------
Net earnings (loss)...................................... $(40,710) $ (7,923) $(46,212) $ (1,088) $ 14,513
======== ========= ======== ======== ========
F-77
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 2004
(IN THOUSANDS)
NON-
PARENT GUARANTOR GUARANTOR
CONSOLIDATED ELIMINATIONS COMPANY SUBSIDIARIES SUBSIDIARIES
------------ ------------ --------- ------------ ------------
Net sales............................................... $1,910,484 $(438,579) $ 607,167 $692,003 $1,049,893
Cost of products sold................................... 1,421,557 (438,579) 532,856 508,420 818,860
Selling, general and administrative..................... 281,384 -- 82,438 83,154 115,792
Depreciation and amortization........................... 93,056 -- 39,028 21,009 33,019
Research and development................................ 37,455 -- 7,032 14,568 15,855
Equity income........................................... (9,838) -- (76) (7,605) (2,157)
Facility closures, severance and related costs.......... 46,065 -- 10,297 18,957 16,811
Antitrust costs......................................... 16,829 -- -- 16,829 --
---------- --------- --------- -------- ----------
Operating profit (loss)................................. 23,976 -- (64,408) 36,671 51,713
Interest expense........................................ 55,666 -- 53,536 1,757 373
Loss on early extinguishment of debt.................... 20,063 -- 20,063 -- --
Other (income) expense, net............................. (82,613) -- 6,547 (57,132) (32,028)
Equity in net (earnings) loss of subsidiaries........... -- 159,844 (107,403) (36,896) (15,545)
---------- --------- --------- -------- ----------
Earnings (loss) from continuing operations before income
taxes................................................. 30,860 (159,844) (37,151) 128,942 98,913
Income tax expense (benefit)............................ 11,675 -- (56,334) 43,063 24,946
---------- --------- --------- -------- ----------
Earnings (loss) from continuing operations.............. 19,185 (159,844) 19,183 85,879 73,967
Gain (loss) on sale of discontinued operations.......... 2,142 -- (3,358) -- 5,500
---------- --------- --------- -------- ----------
Net earnings (loss)..................................... $ 21,327 $(159,844) $ 15,825 $ 85,879 $ 79,467
========== ========= ========= ======== ==========
F-78
CONDENSED CONSOLIDATED BALANCE SHEET
AS OF SEPTEMBER 30, 2004
(IN THOUSANDS)
NON-
PARENT GUARANTOR GUARANTOR
CONSOLIDATED ELIMINATIONS COMPANY SUBSIDIARIES SUBSIDIARIES
------------ ------------ ---------- ------------ ------------
ASSETS
Current assets......................................... $ 903,171 $ -- $ 197,510 $ 106,452 $ 599,209
Intercompany receivables............................... -- (7,758,232) 3,344,857 1,293,479 3,119,896
Investment in subsidiaries............................. -- (3,848,874) 850,510 1,180,511 1,817,853
Property, plant and equipment.......................... 722,517 -- 269,618 155,283 297,616
Cost in excess of acquired net assets.................. 418,688 -- 135,195 54,847 228,646
Other assets........................................... 497,259 -- 318,191 164,386 14,682
---------- ------------ ---------- ---------- ----------
Total assets.......................................... $2,541,635 $(11,607,106) $5,115,881 $2,954,958 $6,077,902
========== ============ ========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities.................................... $ 622,809 $ -- $ 172,964 $ 202,565 $ 247,280
Intercompany payables.................................. -- (7,862,176) 4,255,315 1,227,279 2,379,582
Long-term debt......................................... 862,024 -- 861,415 449 160
Other long-term liabilities............................ 745,420 -- 315,062 251,076 179,282
---------- ------------ ---------- ---------- ----------
Total liabilities..................................... 2,230,253 (7,862,176) 5,604,756 1,681,369 2,806,304
Stockholders' equity................................... 311,382 (3,744,930) (488,875) 1,273,589 3,271,598
---------- ------------ ---------- ---------- ----------
Total liabilities and stockholders' equity............ $2,541,635 $(11,607,106) $5,115,881 $2,954,958 $6,077,902
========== ============ ========== ========== ==========
F-79
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2004
(IN THOUSANDS)
NON-
PARENT GUARANTOR GUARANTOR
CONSOLIDATED ELIMINATIONS COMPANY SUBSIDIARIES SUBSIDIARIES
------------ ------------ --------- ------------ ------------
Increase (decrease) to cash
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings (loss)..................................... $ 21,327 $(159,844) $ 15,825 $ 85,879 $ 79,467
Adjustments to reconcile net earnings (loss) to net cash
provided by (used in) operations:
(Gain) loss on sale of discontinued operations....... (2,142) -- 3,358 -- (5,500)
Gain on sale of Gustafson joint venture.............. (90,938) -- -- (72,707) (18,231)
Loss on early extinguishment of debt................. 20,063 -- 20,063 -- --
Depreciation and amortization........................ 93,056 -- 39,028 21,009 33,019
Equity income........................................ (9,838) -- (76) (7,605) (2,157)
Changes in assets and liabilities, net............... (25,171) 159,844 (64,587) (121,608) 1,180
--------- --------- --------- --------- --------
Net cash provided by (used in) operations.............. 6,357 -- 13,611 (95,032) 87,778
--------- --------- --------- --------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Net proceeds from divestments.......................... 142,270 -- 15,918 105,272 21,080
Capital expenditures................................... (43,983) -- (11,547) (14,975) (17,461)
Other investing activities............................. 281 -- 335 -- (54)
--------- --------- --------- --------- --------
Net cash provided by investing activities.............. 98,568 -- 4,706 90,297 3,565
--------- --------- --------- --------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on domestic credit facility................... (57,000) -- (57,000) -- --
Payments on short-term borrowings...................... (350,441) -- (350,000) -- (441)
Payments on long-term borrowings....................... (140,006) -- (140,006) -- --
Proceeds from long-term borrowings..................... 597,499 -- 597,499 -- --
Premium paid on early extinguishment of debt........... (19,044) -- (19,044) -- --
Payments for debt issuance costs....................... (22,106) -- (22,106) -- --
Dividends paid......................................... (17,192) -- (17,192) -- --
Other financing activities............................. 1,276 -- 411 661 204
--------- --------- --------- --------- --------
Net cash (used in) provided by financing activities.... (7,014) -- (7,438) 661 (237)
--------- --------- --------- --------- --------
CASH
Effect of exchange rates on cash....................... (191) -- -- -- (191)
--------- --------- --------- --------- --------
Change in cash......................................... 97,720 -- 10,879 (4,074) 90,915
Cash at beginning of period............................ 39,213 -- 872 2,057 36,284
--------- --------- --------- --------- --------
Cash at end of period.................................. $ 136,933 $ -- $ 11,751 $ (2,017) $127,199
========= ========= ========= ========= ========
F-80
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
THIRD QUARTER ENDED SEPTEMBER 30, 2003
(IN THOUSANDS)
NON-
PARENT GUARANTOR GUARANTOR
CONSOLIDATED ELIMINATIONS COMPANY SUBSIDIARIES SUBSIDIARIES
------------ ------------ -------- ------------ ------------
Net sales................................................ $559,189 $(117,974) $165,493 $212,405 $299,265
Cost of products sold.................................... 410,254 (117,974) 137,879 154,301 236,048
Selling, general and administrative...................... 91,504 -- 30,624 26,950 33,930
Depreciation and amortization............................ 30,318 -- 11,837 8,036 10,445
Research and development................................. 12,767 -- 3,307 4,598 4,862
Equity (income) loss..................................... 1,073 -- (25) 626 472
Facility closures, severance and related costs........... 10,566 -- 3,834 3,870 2,862
Antitrust costs.......................................... 5,385 -- -- 5,385 --
-------- --------- -------- -------- --------
Operating profit (loss).................................. (2,678) -- (21,963) 8,639 10,646
Interest expense......................................... 20,664 -- 20,324 50 290
Loss on early extinguishment of debt..................... 24,699 -- 24,699 -- --
Other (income) expense, net.............................. 3,414 -- (3,721) 3,502 3,633
Equity in net (earnings) loss of subsidiaries............ -- 30,436 (13,684) (12,435) (4,317)
-------- --------- -------- -------- --------
Earnings (loss) from continuing operations before income
taxes.................................................. (51,455) (30,436) (49,581) 17,522 11,040
Income tax expense (benefit)............................. (16,953) -- (21,689) 1,816 2,920
-------- --------- -------- -------- --------
Earnings (loss) from continuing operations............... (34,502) (30,436) (27,892) 15,706 8,120
Earnings (loss) from discontinued operations............. 3,057 -- (273) -- 3,330
Gain (loss) on sale of discontinued operations........... 111,692 -- (9,859) -- 121,551
-------- --------- -------- -------- --------
Net earnings (loss)...................................... $ 80,247 $ (30,436) $(38,024) $ 15,706 $133,001
======== ========= ======== ======== ========
F-81
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 2003
(IN THOUSANDS)
NON-
PARENT GUARANTOR GUARANTOR
CONSOLIDATED ELIMINATIONS COMPANY SUBSIDIARIES SUBSIDIARIES
------------ ------------ --------- ------------ ------------
Net sales............................................... $1,624,062 $(377,567) $ 475,654 $641,096 $884,879
Cost of products sold................................... 1,189,849 (377,567) 395,613 463,306 708,497
Selling, general and administrative..................... 263,604 -- 89,388 76,882 97,334
Depreciation and amortization........................... 84,816 -- 31,538 23,450 29,828
Research and development................................ 37,553 -- 9,292 13,363 14,898
Equity income........................................... (6,769) -- (83) (4,249) (2,437)
Facility closures, severance and related costs.......... 14,071 -- 7,248 4,251 2,572
Antitrust costs......................................... 26,260 -- -- 26,260 --
---------- --------- --------- -------- --------
Operating profit (loss)................................. 14,678 -- (57,342) 37,833 34,187
Interest expense........................................ 72,938 -- 65,084 8,974 (1,120)
Loss on early extinguishment of debt.................... 24,699 -- 24,699 -- --
Other (income) expense, net............................. 7,454 -- 7,923 (308) (161)
Equity in net (earnings) loss of subsidiaries........... -- 80,186 (46,706) (24,220) (9,260)
---------- --------- --------- -------- --------
Earnings (loss) from continuing operations before income
taxes and cumulative effect of accounting change...... (90,413) (80,186) (108,342) 53,387 44,728
Income tax expense (benefit)............................ (29,791) -- (54,330) 10,427 14,112
---------- --------- --------- -------- --------
Earnings (loss) from continuing operations.............. (60,622) (80,186) (54,012) 42,960 30,616
Earnings from discontinued operations................... 26,314 -- 5,991 -- 20,323
Gain (loss) on sale of discontinued operations.......... 111,692 -- (9,859) -- 121,551
Cumulative effect of accounting change.................. (401) -- (401) -- --
---------- --------- --------- -------- --------
Net earnings (loss)..................................... $ 76,983 $ (80,186) $ (58,281) $ 42,960 $172,490
========== ========= ========= ======== ========
F-82
CONDENSED CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 2003
(IN THOUSANDS)
NON-
PARENT GUARANTOR GUARANTOR
CONSOLIDATED ELIMINATIONS COMPANY SUBSIDIARIES SUBSIDIARIES
------------ ------------ ---------- ------------ ------------
ASSETS
Current assets......................................... $ 810,454 $ -- $ 202,628 $ 147,401 $ 460,425
Intercompany receivables............................... -- (7,614,816) 3,180,641 960,603 3,473,572
Investment in subsidiaries............................. -- (3,762,303) 752,573 1,175,815 1,833,915
Property, plant and equipment.......................... 774,612 -- 299,321 179,541 295,750
Cost in excess of acquired net assets.................. 418,607 -- 135,522 54,844 228,241
Other assets........................................... 525,509 -- 277,078 183,008 65,423
---------- ------------ ---------- ---------- ----------
Total assets.......................................... $2,529,182 $(11,377,119) $4,847,763 $2,701,212 $6,357,326
========== ============ ========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities.................................... $ 701,245 $ -- $ 249,415 $ 221,213 $ 230,617
Intercompany payables.................................. -- (7,668,705) 3,969,182 996,226 2,703,297
Long-term debt......................................... 754,018 -- 754,018 -- --
Other long-term liabilities............................ 771,210 -- 337,335 255,274 178,601
---------- ------------ ---------- ---------- ----------
Total liabilities..................................... 2,226,473 (7,668,705) 5,309,950 1,472,713 3,112,515
Stockholders' equity................................... 302,709 (3,708,414) (462,187) 1,228,499 3,244,811
---------- ------------ ---------- ---------- ----------
Total liabilities and stockholders' equity............ $2,529,182 $(11,377,119) $4,847,763 $2,701,212 $6,357,326
========== ============ ========== ========== ==========
F-83
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2003
(IN THOUSANDS)
NON-
PARENT GUARANTOR GUARANTOR
CONSOLIDATED ELIMINATIONS COMPANY SUBSIDIARIES SUBSIDIARIES
------------ ------------ --------- ------------ ------------
Increase (decrease) to cash
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings (loss)..................................... $ 76,983 $(80,186) $ (58,281) $ 42,960 $ 172,490
Adjustments to reconcile net earnings (loss) to net cash
(used in) provided by operations:
Gain on sale of discontinued operations................. (111,692) -- 9,859 -- (121,551)
Loss on early extinguishment of debt.................... 24,699 -- 24,699 -- --
Cumulative effect of accounting change, net of tax...... 401 -- 401 -- --
Depreciation and amortization........................... 105,534 -- 46,946 23,450 35,138
Equity income........................................... (6,769) -- (83) (4,249) (2,437)
Changes in assets and liabilities, net.................. (107,184) 80,186 56,120 (37,618) (205,872)
--------- -------- --------- -------- ---------
Net cash (used in) provided by operations.............. (18,028) -- 79,661 24,543 (122,232)
--------- -------- --------- -------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Net proceeds from divestments.......................... 643,115 -- 423,672 -- 219,443
Capital expenditures................................... (55,104) -- (13,365) (16,627) (25,112)
Other investing activities............................. (250) -- (182) -- (68)
--------- -------- --------- -------- ---------
Net cash provided by (used in) investing activities.... 587,761 -- 410,125 (16,627) 194,263
--------- -------- --------- -------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from short-term borrowings.................... 961 -- -- -- 961
Payments on long-term borrowings....................... (477,627) -- (415,000) -- (62,627)
Premium paid on early extinguishment of debt........... (23,804) -- (23,804) -- --
Dividends paid......................................... (16,993) -- (16,993) -- --
Common shares acquired................................. (22,080) -- (22,080) -- --
Other financing activities............................. 1,137 -- 1,164 -- (27)
--------- -------- --------- -------- ---------
Net cash used in financing activities.................. (538,406) -- (476,713) -- (61,693)
--------- -------- --------- -------- ---------
CASH
Effect of exchange rates on cash....................... 1,516 -- -- -- 1,516
--------- -------- --------- -------- ---------
Change in cash......................................... 32,843 -- 13,073 7,916 11,854
Cash at beginning of period............................ 16,941 -- (4,431) (2,984) 24,356
--------- -------- --------- -------- ---------
Cash at end of period.................................. $ 49,784 $ -- $ 8,642 $ 4,932 $ 36,210
========= ======== ========= ======== =========
F-84
OFFER TO EXCHANGE
$375,000,000 AGGREGATE PRINCIPAL AMOUNT OF
9 7/8% SENIOR NOTES DUE 2012
AND THE RELATED SUBSIDIARY GUARANTEES
AND
$225,000,000 AGGREGATE PRINCIPAL AMOUNT OF
SENIOR FLOATING RATE NOTES DUE 2010
AND THE RELATED SUBSIDIARY GUARANTEES
THAT HAVE BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933
FOR
OUTSTANDING 9 7/8% SENIOR NOTES DUE 2012
AND THE RELATED SUBSIDIARY GUARANTEES
AND
SENIOR FLOATING RATE NOTES DUE 2010
AND THE RELATED SUBSIDIARY GUARANTEES
OF
CROMPTON CORPORATION
PROSPECTUS
Dated January 24, 2005