ITEM 1. BUSINESS
The Company
The Company was formed in 1918 and was renamed Hoechst Celanese Corporation in February 1987. The Company manufactures and sells, principally to industrial customers, a diversified line of products including textile and technical fibers; acetate cigarette filter tow; specialty and bulk chemicals and pharmaceuticals; prescription drugs; crop protection products; veterinary pharmaceuticals and animal-feed additives; engineering plastics; polyethylene; presensitized offset printing plates; dyes and pigments; and polyester film. The Company's operations are currently segmented as follows: Chemicals; Fibers and Film; Specialties and Advanced Materials (comprised of the Advanced Materials Group and Specialty Chemicals Group); Life Sciences and Advanced Technology.
The Company is wholly owned by Hoechst Corporation, which in turn is wholly owned by Hoechst Aktiengesellschaft ("Hoechst AG"), a large chemical company headquartered in Frankfurt, Federal Republic of Germany. Hoechst AG and its consolidated entities (the "Hoechst Group") consist of over 320 companies. The Hoechst Group operates in more than 120 countries. The Hoechst Group's sales in 1994 were approximately $30.6 billion. See "Certain Relationships and Related Transactions." The Hoechst Group is one of the largest manufacturers of prescription drugs and one of the four largest producers and marketers of chemicals and chemical-related products in the world.
Effective January 1, 1994. Hoechst AG and Schering Berlin Inc. ("Schering") formed a worldwide joint venture to manufacture and sell agricultural chemicals. In North America a joint venture was formed, AgrEvo USA Company ("AgrEvo"), through Agri-Vet Inc., a wholly owned subsidiary of the Company, and NOR-AM Chemical Company. a wholly owned subsidiary of Schering. The Company's contribution to the joint venture consisted of its former United States and Hoechst Canada Inc.'s ("HCI") former crop protection business in exchange for a 60% interest. Schering's contribution consisted of its former United States crop protection business in exchange for a 40% interest.
Also effective January 1, 1994, Hoechst Corporation agreed to increase its investment in the Company by contributing the shares of HCI to the Company. HCI is involved in various industries including industrial chemicals, colorants, pharmaceutical production and crop protection. As discussed above, HCI's crop protection business was contributed to the AgrEvo joint venture. The Company consolidated the remainder of HCI, after the contribution of its crop protection business to AgrEvo.
In November 1993, the Company acquired 52.96% of the outstanding shares of Copley Pharmaceutical, Inc. ("Copley"), a generic drug manufacturer, in a tender offer for an aggregate purchase price of $546 million.
The Company's principal executive offices are located at 1041 Route 202- 206, Bridgewater, New Jersey 08807; its mailing address is Route 202-206, Post Office Box 2500, Somerville, New Jersey 08876-1258; and its telephone number is (908) 231 -2000.
Description of Business Segments
Chemicals Segment
This segment consists of Hoechst Celanese Chemical Group, Inc. ("HCCGI"), the chemical operations of Celanese Mexicana, S.A. ("Celmex") which effective January 1, 1995 has changed its name to Grupo Celanese S.A. and the chemical operations of Celanese Canada Inc. ("Celanese Canada"), approximately 56% owned by the Company. The Company entered the petrochemical field in the United States in 1945, primarily to obtain supplies of
acetic acid and related chemical raw materials for its fibers operations. As its internal chemical usage expanded and additional products were developed, the segment began selling chemicals to others. This segment employs approximately 3,900 people and produces more than 60 different chemicals.
The segment produces chemicals by upgrading hydrocarbons such as ethylene, propylene, natural gas and butane. The hydrocarbon raw materials are purchased on the open market, principally under long-term contracts.
The major chemicals produced fall into two broad product groups: (1) methyl chemicals, oxo-alcohols and solvents; and (2) acetyl chemicals, monomers and ethylene oxide/glycol. Methyl chemicals are principally used in plastics, polyesters, adhesives, solvents, synthetic lubricants, fuel additives and coatings. Ethylene oxide/glycol, oxo-alcohols and solvents are principally used in surfactants, coatings, rocket propellants, antifreeze, herbicides and polyesters. Monomers and acetyl chemicals are primarily used in water-based paints, adhesives, textile finishes, paper coatings, manufactured fibers, pharmaceuticals, herbicides and plastics.
With respect to substantially all of its major products, this segment is either the largest or second largest United States merchant market supplier. Other major United States producers are: of methyl chemicals, Borden, Inc., duPont de Nemours & Co., Inc. ("duPont"), Georgia-Pacific Corporation and Hercules Incorporated; of alcohols, duPont, Eastman Chemical Products, Inc. ("Eastman"), Shell Oil Company and Union Carbide Corporation; and of monomers and acetyl chemicals, BASF, duPont, Eastman, Quantum Chemical Corporation, Rohm and Haas Co. and Union Carbide Corporation.
Celmex is the sole or a major Mexican producer of a variety of products including vinyl acetate, acetic acid, acetic anhydride, acrylates, and phthalic anhydride. A substantial portion of the chemical production of Celmex is sold in the export market, in competition with world producers.
Celanese Canada is the sole or a major Canadian producer of acetic acid, acetic anhydride, formaldehyde, pentaerythritol and vinyl acetate monomer. A substantial portion of the chemical production of Celanese Canada is sold in the export market, in competition with world producers. Celanese Canada operates a world scale methanol unit at its Edmonton plant site in Alberta. The methanol operation is owned by Celanese Canada and the Company. Methanex Corporation is the dominant Canadian producer of methanol.
As of December 1, 1994, Valero Energy Corp. and HCCGI have formed a 50/50 joint venture to restart the Clear Lake methanol unit which has been idle for several years. Operations are expected to commence by late 1995.
Utilizing both acquired and internally developed technology, the segment is continually working to upgrade its chemical processes to improve energy, raw material and capital utilization. By producing a number of its major chemicals at different plant locations, the segment attempts to avoid or minimize the effect of production disruptions at any one location.
Fibers and Film Segments
This segment is comprised of the following business areas: Textile Fibers, Technical Fibers and Polyester Resins and Films. The Fibers and Film segment employs approximately 16,400 people and operates plants in the United States and abroad. The major product lines include: polyester staple, filament, resins, monofilament, spunbond and film; acetate filament and tow; purified terephthalic acid ("PTA"); dimethylterephthalate ("DMT") and polybenzimidazole ("PBI"). The Company is one of the largest producers of manufactured fibers in the United States. It is also one of the leading producers of polyester film. The Company conducts research and development, manufactures, markets and sells a combination of branded and unbranded resins, fibers and film products for a wide variety of end uses. The Company sells most of its fibers and yarns directly to textile mills, tire manufacturers, cigarette makers and other intermediate processors. Among the internationally registered trademarks are: Trevira(R), Celebrate!(R), Hostaphan(R) and Trespaphan(R).
Polyester staple and filament, commonly recognized by their Trevira(R) trademark, are principally used in wearing apparel, upholstery, floor coverings, home furnishings, and woven and non-woven fabrics. Polyester staple and filament are also used in tires, belts, hoses, thread and plastic reinforcements.
The Company is one of the largest producers in the United States of cellulose acetate products. Cellulose acetate flake is produced for sale or conversion to acetate tow for use in cigarette filters and to filament used in apparel and industrial applications. Polyester monofilament is used in zippers, conveyor belting and dryer and forming screen applications in the paper industry. Roofing and geotextile applications are the primary end uses for polyester spunbond. Polyester resins are primarily used in beverage, pharmaceutical and other containers and for the manufacture of polyester fibers.
Hostaphan(R) polyester film, manufactured by the Company, is used in many consumer products including audio, video and computer tape; food packaging; solar window film; labels and decals; graphic arts film; photoresist; and other electronics applications. Trespaphan(R) polypropylene film is imported for resale from other companies in the Hoechst Group and is used in packaging, capacitors, pressure sensitive tape and electric motor insulators.
The key raw materials used by the Fibers and Film segment in production are either supplied internally or purchased on the open market, generally under long-term contracts. Polyester fibers are produced from PTA or DMT, which are either purchased from other suppliers or produced by the Company, and ethylene glycol which is purchased from other suppliers and is also produced by the Company. Acetate fibers are made principally from acetic anhydride produced mainly by the Company and from wood pulp purchased by the Company. See "Raw Materials and Energy."
Major manufactured polyester and acetate fibers competitors include: Allied-Signal, Inc., duPont. Eastman. ICI Americas, Inc. ("ICI"), Rhodia AG and Wellman, Inc.
Major United States and foreign polyester film producers include: duPont, ICI, Toray Industries (America), Inc. and Teijin America, Inc. Competing producers of PTA and DMT in the United States are Amoco Chemicals Corporation and duPont, respectively.
Celmex is the sole or a major Mexican producer of a variety of products including polyester high denier industrial yarn, industrial staple, textile filament, polyester staple, textile nylon filament, industrial nylon filament, cellulose acetate flake, yarn, cigarette filter tow, polyester bottle resin, laminated and printed film and bioriented polypropylene. Celanese Canada is the sole or a major Canadian producer of a variety of products including polyester, textile staple, carpet staple, cellulose acetate filament yarn, cellulose acetate flake and cigarette filter tow. A substantial portion of the fibers production of both Celmex and Celanese Canada is sold in export markets in competition with world producers.
The Company (owning approximately a 30% interest) and China National Tobacco Company are involved in a joint venture that manufactures cellulose acetate flake and tow for cigarette filters. Two more joint venture manufacturing sites for cellulose acetate tow are under construction and are expected to come on stream in late 1995 and early 1996. They are located at Kunming and Zhuhai, People's Republic of China.
Specialties and Advanced Materials Segment
This segment consists of the Advanced Materials Group and Specialty Chemicals Group. This segment employs approximately 4,000 people and produces, imports and sells a wide variety of specialty products.
Advanced Materials Group. The Advanced Materials Group produces a variety of high-performance engineering thermoplastics, including acetal copolymer sold under the trademarks Celcon(R) and Hostaform(R), Celanese(R) nylon 6/6 resins, thermoplastic polyester sold under the trademarks Celanex(R) and Impet(R), liquid crystal polymers sold under the trademark Vectra(R), long fiber- reinforced thermoplastics sold under the trademark Celstran(R) and thermoplastic alloys sold under the trademark Vandar(R), as replacements for metals and other plastics in a wide variety of
end uses. The Group's product lines also include Hostalen(R) GUR, ultra high molecular weight polyethylene. The Company produces the basic raw materials for Celcon(R), Celanex(R), Impet(R) and Vandar(R) resins and purchases them for Celanese(R) nylon 6/6 and Vectra(R) and Celstran(R) resins. Other major United States producers of one or more similar engineering thermoplastics are duPont, General Electric Company and BASF. The Group also resells and compounds Hostaflon(R) fluoropolymers manufactured by Hoechst AG through its wholly owned subsidiary Custom Compounding, Inc. The Company participates in Fortron Industries, a joint venture (with a 50% interest; Kureha Chemical Industry Co., Ltd. ("Kureha") having a 50% interest). The joint venture operates a plant to manufacture Fortron(R) polyphenylene sulfide. Since 1987, the Company has marketed Fortron(R) which is manufactured by Kureha in Japan and by Fortron Industries in the United States.
The Company participates in Polyplastics Co., Ltd. (with a 45% interest; Daicel Chemical Industries, Ltd. having a 55% interest) which produces and sells acetal copolymer, thermoplastic polyester resins and other polymeric products.
Specialty Chemicals Group. This Group's product lines include: textile dyes, organic pigments, colorant and additive masterbatches, resins, sodium hydrosulfite, surfactants, and other specialty chemicals which are mainly used in the textile, ink, pulp and paper, paint, coatings, plastics, personal care, detergent and food processing industries; organic intermediates used for synthesis of dyes, pigments, pharmaceuticals, cosmetics, agricultural chemicals, photochemicals, plastics, adhesives, and other chemical products; inorganic chemicals sold for broad industrial use, including pharmaceuticals, electrical and battery equipment and oil drilling; superabsorbent polymers used in personal care products; waxes and lubricants used for polish and plastics processing applications; a complete range of color proofing and printing-plate systems for the graphic arts industry; and liquid photoresists and ancillaries used in the manufacture of microchips for computers and other electronic devices. Among internationally registered trademarks are: Remazol(R) dyes; Genapol(R) and Hostapon(R) surfactants; Sanwet(R) superabsorbent polymers (a registered trademark of Sanyo Chemical Industries, Ltd. licensed to the Company); and AZ(R) liquid photoresist.
Life Sciences Segment
This segment consists of Hoechst-Roussel Pharmaceuticals Inc. ("HRPI"), Copley, Bulk Pharmaceuticals and Intermediates ("BPI") which includes the Pharmaceutical Production Division ("PPD"), Hoechst-Roussel Agri-Vet Company ("HRAVC"), and AgrEvo. This segment employs approximately 3,500 people. Its operations encompass the research and development, production and marketing of branded and generic prescription drugs, bulk pharmaceutical chemicals, veterinary pharmaceutical products, animal-feed additives and crop protection products.
HRPI. The Company's prescription drug business is conducted through HRPI, a majority-owned subsidiary. HRPI has two classes of common stock: Class R and Class H Common Stock. Class R Common Stock has 20% of the total voting rights and is owned entirely by Roussel-Uclaf, S. A. ("RU"), a French pharmaceutical company which is majority owned by Hoechst AG. Class H Common Stock has 80% of the total voting rights and is owned entirely by the Company.
The major products of HRPI are prescription drugs which are promoted by its field sales force to health professionals in physicians' offices, pharmacies, hospitals, group purchasing organizations and managed care organizations. Major products include: Altace/TM/ (ramipril), Claforan(R) (cefotaxime sodium), DiaBeta(R) (glyburide), Lasix(R) (furosemide), Loprox(R) (ciclopirox olamine), Topicort(R) (desoximetasone), Dermatop(R) (prednicarbate) and Trental(R) (pentoxifylline).
Altace/TM/ is an ACE-inhibitor antihypertensive. Claforan(R) is an antibiotic used in the treatment of serious infectious diseases. DiaBeta(R) is an oral antidiabetic. Lasix(R) is a diuretic used for the mobilization of edema of varied origin. Loprox(R) is a topical antifungal. Topicort(R) is a high potency topical corticosteriod anti-inflammatory. Dermatop(R) is a mid-potency topical corticosteroid anti-inflammatory. Trental(R) is a hemorrheologic agent to relieve intermittent claudication (leg cramping pain associated with peripheral arterial disease).
HRPI's major competitors include: for ACE-inhibitor antihypertensive, Merck & Co., lnc. and Bristol Myers Squibb; for diuretics, Merck & Co., Inc., SmithKline Beecham PLC and Hoffman-LaRoche Inc.; for oral antidiabetics, The Upjohn Company and Pfizer Inc.; for vasotherapeutics, Sandoz Corporation; for third generation cephalosporin antibiotics, Hoffman-LaRoche Inc., Glaxo, Inc., and Eli Lilly & Company; and for dermatologicals, Syntex Laboratories, Inc. and Schering-Plough Corporation.
Active ingredients for HRPI's major products are produced by PPD or imported from Hoechst AG or RU. Formulation and packaging of most products are performed in the United States by HRPI under strict manufacturing practices governed by the United States Food and Drug Administration (the "FDA"). Other products are imported from companies in the Hoechst Group and are subject to the same FDA regulations.
HRPI conducts research concentrated on the discovery of compounds which act on the central nervous system (e.g., Alzheimer's disease and schizophrenia) and those which treat diseases of the skin. At this time, HRPI is awaiting approval from the FDA of five new drug products. Approximately nine additional products are in clinical investigation under FDA Investigational New Drug Applications.
Copley. The Company's generic drug business is conducted through its participation in Copley. Copley develops, manufactures and markets a broad range of off-patent prescription and over the-counter pharmaceuticals. Additionally, Copley will market off-patent generic versions of certain drugs marketed by HRPI.
BPI is a supplier of bulk analgesics, pharmaceutical bulk actives and pharmaceutical intermediates. The Company participates in BHC Company ("BHC") (with a 50% interest; Boots Company PLC having a 50% indirect interest) which manufactures and markets bulk ibuprofen. BHC's major competitor is Ethyl Corporation. BPI also manufactures acetaminophen for which its major competitors include Mallinckrodt Corporation and Rhone-Poulenc Corporation. PPD produces and supplies HRPI with active ingredients for DiaBeta(R), Lasix(R), Topicort(R); and Trental(R) products.
HRAVC. HRAVC is a partnership between a wholly owned subsidiary of the Company (50%) and Uclaf Corporation (50%), which is indirectly wholly owned by RU. HRAVC is involved in developing and marketing animal health products. HRAVC's animal health products consist primarily of veterinary pharmaceuticals and animal-feed additives. HRAVC's products are promoted by a field sales force and primarily marketed through distributors. Animal health products are manufactured under tolling arrangements with HRPI and in some cases other toll manufacturers. The active ingredients for these products arc imported from other companies in the Hoechst Group.
AgrEvo. AgrEvo is a partnership between a wholly owned subsidiary of the Company (60%) and NOR-AM Chemical Company (40%), which is owned directly by Schering Berlin Inc. AgrEvo is involved in developing and marketing crop protection products. AgrEvo' s crop protection products are used with many of the important crops in the United States such as cereals, sugar beets, cotton, rice and tree fruits.
Advanced Technology Segment
This segment consists of the Advanced Technology Group and includes research and development costs to seed and develop new businesses. These costs are not borne by any group and are shown separately. Emerging businesses are primarily based on products or processes that have been developed by the Company or other companies in the Hoechst Group. This segment employs approximately 640 people.
Research and Development
The Company conducts research and development both independently and jointly with Hoechst AG and, additionally, has been a party to a broad research and development cost-sharing agreement with Hoechst AG since January 1, 1988.
The Company is continuing to expand its own research and development activities in areas where specific developments for the United States market increase the Company's competitiveness.
Research and development costs are included in expenses as incurred. The Company's research and development costs for 1994, 1993 and 1992 were $313 million, $258 million and $262 million, respectively. Management intends to maintain the Company's research and development expenditures in 1995 at approximately the same level as 1994.
At December 31, 1994, approximately 2,000 employees, including approximately 1,000 professionals, were engaged in basic and applied research and development at the Company. These individuals work in coordination with the Hoechst Group's research and development personnel in the Federal Republic of Germany and other parts of the world. The Hoechst Group in turn has access to a significant portion of the Company's technology, know-how and patent rights. The Hoechst Group is one of the leading research-oriented chemical companies in the world, employing approximately 15,500 persons in its various research and development laboratories. Research and development expenditures of the Hoechst Group amounted to approximately $2.1 billion in 1994. Based on individual license agreements and the cost-sharing agreement, the Company has access to a significant portion of the Hoechst Group's technology, know-how and patent rights for the United States and other markets, including licenses for new developments.
The Company's United States research and development facilities are located in Auburn Hills, Michigan (automotive plastic applications); Branchburg, New Jersey (photoresists); Bridgewater, New Jersey (pharmaceuticals); Charlotte, North Carolina (textile and technical fibers, specialty chemicals, separations products and polyester resins); Corpus Christi, Texas (chemicals, pharmaceutical intermediates and bulk actives); Coventry, Rhode Island (organic intermediates, dyes, pigments and specialty chemicals); Greer, South Carolina (polyester film); Winona, Minnesota (advanced materials); Florence, Kentucky (advanced materials); Portsmouth, Virginia (superabsorbent polymers) and Summit, New Jersey (advanced materials, polymers and engineering plastics).
Marketing and Competition
The Company's products are generally sold in the United States directly or through distributors or agents. Foreign subsidiaries and affiliates sell principally through local sales personnel or agents. With the exception of products sold by the Life Sciences segment, the principal customers worldwide are other manufacturers which use the Company's products in a wide variety of industrial and consumer products. Products sold by the Life Sciences segment are primarily sold through wholesalers and distributors.
In general, the Company sells its products in highly competitive worldwide markets. The number of competitors in a market or country and the Company's competitive position vary widely with the products and countries involved. See specific discussion of competitors in "Description of Business Segments". There is growing competition from private and state-owned industries in certain foreign countries in which there is an abundance of low-cost labor or raw materials. This competition has a direct or indirect effect on many product lines. For example, in the area of textile fibers, business is impacted by fabric and apparel imports into the United States, Canada and Mexico, particularly from the Far East. Depending upon the characteristics of the particular market, the Company competes on the basis of price, product quality and performance, technical support and customer service. Within the Chemicals and Fibers and Film segments, the Company competes primarily on the basis of price, product quality and performance. In general, Specialties and Advanced Materials products are sold based on product performance, technical support and, to a lesser extent, price. Life Sciences products compete based on product performance as well as technical support and expertise. The Company's business is affected to some degree by seasonality in the industries of its customers such as automotive, housing, agriculture, printing and textiles.
The business is also sensitive to changes in the world economy, including changes in currency exchange rates. Operations outside the United States are subject to the economic and political risks inherent in the countries in which they operate. Additionally, the export and domestic markets can be affected significantly by import laws and regulations and energy cost differentials. During 1994, the Company's export sales from the United States were 12.9% of consolidated net sales.
Indirect marketing activities of the Company are extended through technical and educational services, advertising and promotion. These activities reach each level of the manufacturing and distribution system, as well as consumers of apparel, home furnishings and industrial products. Product development and technical service personnel supplement direct sales efforts by assisting customers in using existing products and developing new ones.
Raw Materials and Energy
Most of the Company's products are made by chemically processing and upgrading several basic types of raw materials including petroleum hydrocarbons and derivatives, natural gas, woodpulp and aluminum. These derivatives include ethylene and paraxylene, which are primarily supplied by major United States and Canadian oil companies. Raw materials are purchased from affiliated and non- affiliated suppliers throughout the world.
The Company's production facilities rely largely on coal, fuel oil, natural gas and electricity for energy.
The Company currently has adequate supplies or access to sources of all purchased raw materials and energy for the foreseeable future. The Company does not consider itself dependent upon any one supplier for a material amount of its raw material or fuel purchases. However, in the United States, woodpulp (a raw material for cellulosics) is largely obtained from two suppliers, and Cape Industries, which effective January 1, 1995 changed its name to Hoechst Celanese Polyester Intermediates, is the sole supplier of DMT and is one of two suppliers of PTA used in the production of polyester. Celmex purchases the majority of its raw materials from Petroleos de Mexico.
In addition, some active ingredients and other raw materials used by the Life Sciences segment, as well as the Specialty Chemicals and Advanced Technology Groups, are supplied by other companies in the Hoechst Group.
Government Regulations
The pharmaceutical, agricultural and veterinary industries in the United States have for many years been subject to extensive regulations by the Federal government and to an increasing extent by state agencies, primarily as to product efficacy, safety, advertising and labeling. The general trend is toward more stringent regulations. Such regulations affect the cost of developing and marketing products.
The Company believes it is in substantial compliance with all environmental, health and safety regulations and continues to devote attention to the health and safety of its employees and the protection of the public health and the environment in the regions where it operates. Such compliance has not had an adverse effect on the Company's competitive position or business. The Company cannot predict the effect of regulations which may be adopted in the future by governmental bodies responsible for air, water and solid waste pollution controls and employee and community health and safety.
In November 1990, Congress passed, as part of the Omnibus Budget Reconciliation Act, legislation requiring pharmaceutical manufacturers to extend rebates to state Medicaid agencies based on each state's reimbursement of pharmaceutical products under the Medicaid program effective January 1, 1991. Medicaid rebates and related state programs reduced net sales and operating income by $36 million in 1994, $26 million in 1993 and $24 million in 1992.
Patents and Licenses
The Company owns, or is licensed under, more than 4,500 patents relating to its products and manufacturing processes, some of which are important to specific commercial operations. No single patent or group of patents is considered material to the business as a whole. The Company's principal licenses are either continuing licenses from third parties or relate to patents and know- how owned by other companies in the Hoechst Group. Generally in the latter
cases, the licenses require no specific payment because, overall, the research and development costs have been shared. In cases where license fees are involved with the Hoechst Group, they are generally based on percentages of sales and do not require minimum payments. Management believes that the terms of such license agreements are similar to those competitively negotiated between unrelated parties.
The Company has developed and acquired technical information and owns patents in the chemicals, fibers, life sciences, specialties and advanced materials fields, some of which have been licensed to affiliates and others worldwide.
Employees
At December 31, 1994, worldwide employment for the Company was approximately 29,200. The Company employed about 9,000 persons outside the United States. In the United States, fewer than one-fourth of the plants and employees are organized by labor unions. Most labor agreements are for terms of three years. The Company offers comprehensive benefit plans for employees and their families and believes relations with employees are satisfactory.
Environment
The Company's worldwide operations are subject to environmental laws and regulations which impose limitations on the discharge of pollutants into the air and water and establish standards for the treatment, storage and disposal of solid and hazardous wastes. The Company believes that it is in substantial compliance with all applicable environmental laws and regulations.
In 1994, combined worldwide expenditures, including third party and divested sites, for compliance with environmental control regulations and internal Company initiatives totaled $217 million, of which $74 million was for capital projects. In both 1995 and 1996, total annual environmental expenditures are expected to be approximately $300 million, of which $75 million is for capital projects. It is anticipated that stringent environmental regulations will continue to be imposed on the Company and the industry in general. Although the Company cannot predict expenditures beyond 1996, management believes that the current spending trends will continue.
The Company may be subject to claims brought by Federal or state regulatory agencies or private individuals pursuant to statutory authority or common law. In particular, the Company has a potential liability under the Federal Comprehensive Environmental Response Compensation and Liability Act ("Superfund") and related state laws for investigation and cleanup costs at approximately 100 sites. At most of these sites, numerous companies, including either the Company or one of its predecessor companies, have been notified that the United States Environmental Protection Agency ("EPA"), state governing body or private individuals consider such companies to be potentially responsible parties under Superfund or related laws. The proceedings relating to these sites are in various stages. The cleanup process has not been completed at most sites and the status of the insurance coverage for most of these proceedings is in litigation. The Company has accrued its best estimate of its ultimate liability for investigation or cleanup costs, but, due to the many variables involved in such estimation, the ultimate liability may vary. Expenditures for investigation, clean up and related activities have been $32 million for the three years ended December 31, 1994 with expenditures in no year greater than $13 million.
Segment and Geographical Information
See Note (14) of Notes to Consolidated Financial Statements for Segment and Geographical Information.
ITEM 2.
ITEM 2. PROPERTIES
The Company owns and operates various manufacturing facilities within the United States and abroad. It also owns or leases facilities related to its operations such as warehouses, pipelines, tolling operations, research and development and sales offices.
The Company's principal manufacturing facilities, which are owned by the Company (unless otherwise indicated), are summarized below:
Chemicals Segment:
U.S. Bay City, Texas.................Vinyl acetate, butanol, propanol, synthetic fatty acids Bishop, Texas...................Methanol, formaldehyde pentaerythritol, trimethylolpropane, butyl acetate Bucks, Alabama..................Amines Clear Lake, Texas...............Acetic acid, ethylene oxide and glycol, vinyl acetate, acrylic acid and esters Pampa, Texas....................Acetic acid, acetic anhydride, ethyl acetate, methyl ethyl ketone, acrylic esters Portsmouth, Virginia............Specialty amines Rock Hill, South Carolina.......Formaldehyde
Non-U.S. Celanese Canada: Edmonton, Alberta.............Acetic acid, acetic anhydride, formaldehyde, methanol*, pentaerythritol, sodium formate, vinyl acetate Celmex: Cangrejera, Veracruz..........Acetic acid, vinyl acetate, dimethyl formamide, methyl amines, acetic anhydride and acrylic acid Celaya, Guanajuato............Ketones, acetic acid esters, solvents, acetic anhydride Cosoleacaque, Veracruz........Acrylic acid esters
Fibers and Film Segment:
U.S. Greer, South Carolina**.........Polyester film and resins Narrows, Virginia...............Acetate filament and flake, cigarette filter tow Rock Hill, South Carolina.......Acetate filament and flake, PBI Salisbury, North Carolina.......Technical and textile polyester staple and filament fibers and polyester resins Shelby, North Carolina..........Technical and textile polyester filament fibers Spartanburg, South Carolina.....Technical and textile polyester staple, polyester resins, spunbond and monofilament Wilmington, North Carolina......PTA, DMT and terate resins
---------- *The methanol operation is owned by Celanese Canada and the Company. ** Polyester film assets are owned by a partnership. See Item I "Business- Description of Business Segments".
Non-U.S. Hoechst Celanese S.A: Lanaken, Belgium..............Acetate and triacetate filament fibers, cigarette filter tow Celanese Canada: Drummondville, Quebec.........Acetate filament fibers Edmonton, Alberta.............Cellulose acetate flake and cigarette filter tow Millhaven, Ontario............Polyester staple fibers Celmex: Ocotlan, Jalisco..............Nylon, cellulose acetate flake, filament and cigarette filter tow and polyester filament and resins Queretaro, Queretaro..........High denier nylon, polyester staple and filament Toluca, Mexico................Polyester staple and high denier polyester and nylon filaments Zacapu, Michoacan.............Bioriented polypropylene film, laminated printed films and cellulosic casings
Specialties and Advanced Materials Segment:
Bayport, Texas*.................Ultra high molecular weight polyethylene Bishop, Texas...................Engineering plastics and acetaminophen Branchburg, New Jersey..........Presensitized offset printing plates, proofing films, liquid photoresist Bucks, Alabama.................Sodium hydrosulfite, sulfur dioxide, sodium bisulfite solution Charlotte, North Carolina*......Microporous membranes Chester Township, Pennsylvania..Compounded fluoropolymers Coventry, Rhode Island..........Dyes, pigments, organic intermediates Florence, Kentucky..............Engineering plastics Leeds, South Carolina...........Sodium bisulfite solution, sodium hydrosulfite, sodium hydrosulfite solution, specialty blended products Mount Holly, North Carolina.....Dyes, resins, surfactants and other specialty chemicals Portsmouth, Virginia............Superabsorbent materials Shelby, North Carolina..........Engineering plastics Wilmington, North Carolina......Polyphenylene sulfide Winona, Minnesota...............Engineering plastics
Life Sciences Segment:
Bridgewater, New Jersey.........Prescription and proprietary drugs for human use and veterinary pharmaceuticals Coventry, Rhode Island..........Bulk pharmaceutical chemicals Canton, Massachusetts...........Generic pharmaceuticals
Management believes that the Company's properties are suitable for its business and have adequate productive capacities to meet current and future business requirements.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
The Company is a defendant in a number of lawsuits, including environmental, product liability and personal injury actions. Certain of these lawsuits are or purport to be class actions. In some of these cases, claimed damages
---------- * This facility is leased.
are substantial. While it is impossible at this time to determine with certainty the ultimate outcome of these lawsuits, management believes, based on the advice of legal counsel, that adequate provisions have been made for probable losses with respect thereto and that the ultimate outcome will not have a material adverse effect on the financial position or results of operations of the Company.
The Company was named in 1986, 1987, 1988 and 1991 as one of numerous defendants in fourteen lawsuits in the Twenty-First Judicial District Court, Parish of Livingston, Louisiana. These lawsuits arose out of shipments of allegedly toxic waste to a waste oil processing site in Livingston Parish, Louisiana. Claims totalling approximately $20 billion are being made against the defendants for property damages, personal injury and psychological and other damages. While a class consisting of approximately 11,000 plaintiffs has been certified by the Federal district court to which these cases have been removed, it is difficult to assess the extent to which the Company may be liable, if at all, since individualized claims of class members are involved. However, considering the number of potentially responsible parties (over 80 defendants in each case), many of which are substantial corporations, and the Company's small proportion of the total volume of waste sent to the site (well under one percent), management believes, based on the advice of legal counsel, that its portion of such liability (including any site clean up costs) would not have a material adverse effect on the financial position of the Company or results of operations. Trial is expected to begin in September 1996. The Company is defending itself vigorously in these proceedings.
In February 1990, Region IV of the EPA issued a notice of violation to the Company at its Rock Hill, South Carolina plant alleging that the plant is subject to the benzene fugitive emission standard promulgated by the EPA under the Clean Air Act in 1984. The Company learned in September 1990 that Region IV referred the matter to the United States Department of Justice ("DOJ") for consideration of the appropriateness of enforcement. Although the Company has voluntarily agreed to meet the fugitive emissions standard at this facility as soon as possible, it is the Company's position that the facility properly determined in 1984 that it qualified for an exemption from the standard and, therefore, enforcement and sanctions are not appropriate. The DOJ and the EPA filed a complaint in July, 1992 in U.S. District Court in Columbia, South Carolina, asking the Court to set a penalty of not more than $25,000 per violation per day. The Company asked the EPA and the DOJ to consider an Alternate Dispute Resolution ("ADR") and they rejected ADR. The Company is defending itself vigorously.
In November 1993, the DOJ filed a complaint similar to the complaint described above with regard to the Company's plant in Narrows, Virginia. It is the Company's position that the Narrows plant also qualified for the same exemption that applied to the Rock Hill plant. The Company is defending itself vigorously.
On March 1, 1995, DOJ filed a complaint with regard to the Company's plant in Bishop, Texas, similar to the complaints (discussed in the preceeding two paragraphs) that were filed against the Rock Hill and Narrows plants. It is the Company's position that the Bishop plant also qualified for the same exemption claimed by the two other plants. The Texas Air Control Board, which had been delegated authority to implement the NESHAP, formally confirmed in December, 1984 that the Bishop plant was exempt. That confirmation has never been formally rescinded by Texas or EPA. The Company will vigorously defend itself.
In late June 1991, the Company entered into an agreement with the EPA to participate in a voluntary program known as the "Toxic Substances Control Act - Section 8 (e) CAP Program." Under this program, the EPA is allowing participating companies to conduct voluntary, retrospective self-audits, to submit newly discovered 8(e) studies to the EPA and to pay a penalty of $6 thousand for each unreported study. Under the program, however, the total penalties to the Company cannot exceed $1 million. Based on the number of studies the Company's self-audit had identified by the end of August 1992, it is now clear the Company's penalty, which is expected to be payable in mid to late 1995, will be the program's $1 million maximum amount.
Under the terms of a December 1991 consent order with the City of Mount Holly, North Carolina (the "Consent Order"), the Company agreed with respect to its Mount Holly plant to meet certain effluent limits for its discharges to the City's water treatment plant and to upgrade its Mount Holly plant's pretreatment facility. The Consent Order established a date to "begin construction" of the pretreatment facility upgrade and required the Company to pay a
stipulated sum for each day it fails to comply with the schedule. The City took the position that the Company began construction late and has requested payment of $137,000. The Company disagrees with this position. The parties agreed in June 1994 to a settlement of the matter whereby the Company will make an unrestricted cash payment of $14,250 and a payment of $57,000 to be used for a project to be selected by the city.
The Company is a named defendant in twenty-five putative class actions, five of which have been certified as class actions as well as a defendant in other non-class actions filed in twelve states (the "Plumbing Actions"). In these lawsuits the plaintiffs typically seek recovery for alleged property damage to housing units and mental anguish from the alleged failure of polybutylene plumbing systems, punitive damages, and, in certain cases, additional damages under the Texas Deceptive Trade Practices Act. The other defendants include United States Brass Corporation ("U.S. Brass"), Vanguard Plastics, Inc. ("Vanguard"), Shell Oil Company ("Shell") and duPont. Damage amounts are not specified. The plumbing systems were designed and manufactured primarily by U.S. Brass and Vanguard. The pipe was made from polybutylene resin supplied by Shell. The Company sold acetal copolymer resin and duPont sold acetal homopolymer resin to other companies who manufactured the fittings used in the plumbing systems. The class actions and the purported class actions are in the Circuit Court, State of Alabama, County of Greene (one case), the Circuit Court, State of Maryland, County of Montgomery (one case), the 20th Judicial Circuit Court, State of Illinois, County of St. Clair (one case), the Circuit Court, State of Missouri, County of St. Louis (one case), the Superior Court, State of Arizona, County of Maricopa (two cases), the Municipal Court, State of California, County of San Diego (one case), the Superior Court, State of California, Counties of San Diego (eleven cases), and Monterey (one case), the District Court, State of Nevada, County of Clark (one case), the 2nd Judicial District Court, State of Nevada, County of Washoe, (one case), the 11th and 164th Judicial District Courts, State of Texas, County of Harris (two cases) and in the United States District Court for the Southern District of Texas, Houston Division (one case) and the District Court, State of Colorado, County of Denver (one case). The Company is appealing the class certifications. Shell and the Company have entered into a proposed agreement, subject to, among other things, court approval. The proposed agreement provides for the repair of leaking plumbing systems and settlement of one of the San Diego County Superior Court class actions which cover mobile homes in San Diego County.
Based on, among other things, the finding of outside experts and the successful use of the Company's acetal copolymer in similar applications, the Company does not believe its acetal copolymer was defective or caused the plumbing systems to fail. In many cases the Company's exposure may be limited by the fact that the other defendants and other responsible parties may be found liable in whole or substantial part or by invocation of the statute of limitations since the Company ceased selling the resin for use in the plumbing systems in site built homes during 1986 and in manufactured homes during l989. The Company is defending itself vigorously in these actions. The Company has commenced litigation in the Superior Court - Law Division, State of New Jersey, County of Somerset against U.S. Brass and its former and current parent, Household International, Inc. ("Household"), and Eljer Industries, Inc. ("Eljer"), respectively, to recover, among other things, the portion of the plumbing action judgments, settlements and expenses that are attributable to U.S. Brass, Household and Eljer. However, as a result of U.S. Brass filing for Chapter l l protection in bankruptcy court in Sherman, Texas, all claims against U.S. Brass have been stayed and this litigation has been removed to the bankruptcy court. The Company has made a motion in the bankruptcy court to remand the litigation to state court so that its claims against Household and Eljer can be pursued.
The Company together with Shell and duPont agreed to and announced, in October 1994, a proposed settlement with plaintiffs of a purported nationwide class action subject to court approval, which would provide replumbings to qualifying homeowners with leaking polybutylene plumbing systems throughout the United States. This proposed settlement would have required the three participating companies to commit to spend up to $750 million for claims over a 13 year period which the Company estimates will end in 2003. The Texas state court, in February 1995, denied the three participating companies and plaintiffs' request for preliminary approval of this settlement. Appeals of this denial have been filed, and the three participating companies are also presently exploring several alternative courses of action.
The Company is not liable for any alleged defects in such systems, which were designed, manufactured and marketed by other companies. Nonetheless, the Company has agreed to participate in the proposed settlements to reduce litigation expenses and to provide relief to qualifying homeowners with polybutylene plumbing problems.
Management believes that the Plumbing Actions are substantially covered by insurance. In September 1989, after being sued by one of its insurers in New York, the Company filed suit in the Superior Court of the State of Delaware in and for New Castle County against National Union Fire Insurance Co. of Pittsburgh, Pennsylvania, the primary general liability insurance carrier for the Company from April 1985 to May 1989 and 40 excess/umbrella carriers insuring the Company from 1978 to 1989, seeking a declaration that insurance coverage exists for these product liability claims. The insurers' New York action has been dismissed. Negotiations with several of the carriers have resulted in settlement or agreements in principle to settle, resulting in substantial continuing coverage of the plumbing actions or cash payments for claims. There are ongoing discussions with several of the remaining insurers. The Company's Delaware suit has now been stayed pending the results of interlocutory appeals to the Delaware Supreme Court on two issues. Outside counsel believes that the Company has a substantial probability of prevailing in its litigation against the carriers.
Management believes that the Plumbing Actions will not have a material adverse effect on the financial position or the results of operations of the Company. See Note (15) of Notes to the Consolidated Financial Statements.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MAITERS
Not applicable.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
Note: This table should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations and the Financial Statements.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following sections should be read in conjunction with Note (14) of Notes to Consolidated Financial Statements for Segment and Geographical Information.
Results of Operations
1994 Compared to 1993
Net sales of $7,794 million in 1994 increased 13%, or $895 million, over net sales of S6,899 in 1993. Net sales in all business segments improved over the prior year, most notably in the Chemicals and Fibers and Film segments.
In the Chemicals segment, sales improvements over 1993 were the result of strong volumes across all product lines, most notably in methanol, acetyls and acrylates. Basic commodity chemical prices have continued to improve with a significant increase in methanol pricing throughout 1994. In the Fibers and Film segment, sales improvements were realized as strong domestic volumes more than offset declines in pricing. Textile Fibers achieved marked volume gains as polyester operations continued in 1994 to operate at capacity levels. High customer inventories in filter products hindered export pricing and sales volumes in Technical Fibers. Polyester Resins and Films experienced significant sales growth as the continued increase in market demand for packaging resins favorably impacted U.S. and Mexican volumes. The Specialties and Advanced Materials segment realized
an increase in sales over last year. Specialty Chemicals' sales improved primarily from increased volumes for pigments due to strong demand in the paint and plastics markets, as well as gains in the electronics product line caused by strengthening conditions in the computer and consumer electronics markets. These improvements were slightly offset by price and volume declines in dyes due to a decrease in the demand for bright colors used in fleecewear. In Advanced Materials, sales improved versus the prior year due to volume increases reflecting improved economic conditions and further commercialization of products in the automotive and fiber optics industries. Sales in the Life Sciences segment increased as a result of the consolidation of Copley Pharmaceutical, Inc. ("Copley"), Hoechst Canada, Inc. ("HCI") and AgrEvo USA Company ("AgrEvo") (See Note (I) of Notes to the Consolidated Financial Statements). This increase coupled with the introduction of a new animal health product, Champion(R), more than offset the decrease in pharmaceutical sales resulting from increased generic competition and the reduction of the Company's sales incentive programs to wholesalers.
Selling, general and administrative expenses ("SG&A") increased over last year largely due to the consolidation of Copley, HCI and AgrEvo. Research and development expenses were higher than the prior year, primarily in the Life Sciences segments mainly attributable to additional research and development costs in bulk pharmaceuticals and the consolidation of Copley, HCI and AgrEvo.
The 1994 operating loss of $94 million was $454 million lower than the 1993 operating income of $360 million. During 1994, the Company recorded a special charge of $532 million against operating income for estimated costs and expenses pertaining to pending and future product liability claims, net of probable insurance recoveries, relating to certain plumbing systems, using fittings manufactured by other companies from acetal copolymer resin sold by the Company, (See Note (16) of Notes to the Consolidated Financial Statements and Item 3. -"Legal Proceedings") and management's best estimate of an additional accrual for environmental remediation and restoration liabilities, based on a review of the Company's present and closed manufacturing sites primarily in the Fibers and Film segment. In addition, this special charge includes the estimated costs and expenses relating to the reduction in the workforce and asset write- downs, principally in the Specialties and Advanced Materials segment.
The Company together with two other substantial manufacturers had agreed to and announced a proposed settlement of a purported nationwide class action related to the product liability claims, subject to court approval (See Note (15) of Notes to the Consolidated Financial Statements). This proposed settlement would have required the three participating companies to establish a settlement fund of up to $750 million to be paid out over a period which the Company estimates would have envied by 2003. The Texas State Court, in February 1995, denied the companies request for preliminary approval of this settlement. Appeals of this denial have been filed, the three participating companies are presently exploring several alternatives.
Operating income for the Chemicals segment improved versus the prior year due to stronger volumes and higher methanol pricing partially offset by higher raw material costs of ethylene, propylene and sourced methanol. In the Fibers and Film segment, Textile Fibers experienced increased raw material costs and production line start up costs which were more than offset by volume gains. In Technical Fibers, cost reduction programs were not enough to offset the effect of oversupply conditions existing in the filter products markets. The operating income for Polyester Resins and Films increased over the prior year due to higher sales volumes realized in packaging resins which were partially offset by higher raw material costs resulting from higher worldwide demand for paraxylene, methanol, purified terephthalic acid and dimethylterephthalate. In the Specialties and Advanced Materials segment, Specially Chemicals' operating income declined versus the prior year as increased sales volumes were not enough to compensate for higher manufacturing costs, however, volume gains in Advanced Materials resulted in improved operating income for 1994. The Life Sciences segment experienced a loss at the operating income level compared to the prior year. The operating income contributed by Copley, HCI and AgrEvo did not offset the effect that generic competition had on branded pharmaceutical products and the reduction of the Company's sales incentive programs to wholesalers.
Interest expense increased $36 million or 47% from last year as a result of higher debt levels related to the acquisition of Copley during the fourth quarter of 1993 as well as increasing interest rates.
Equity in net earnings (loss) of affiliates has improved due to increased earnings in a 50% owned affiliate which manufactures bulk ibuprofen and earnings contributed by an equity investment acquired during the year. During the fourth quarter of 1994, the Company transferred its 41% ownership in Ticona Polymerwerke GmbH to Hoechst AG.
The Company made certain estimates in previous periods in providing for income taxes. Based on more current information, the Company changed such accounting estimates giving rise to a tax benefit of $63 million in the second quarter of 1994. As a result, the effective rate was a benefit of 71% compared to the 1993 effective tax rate of 35%.
As a result of the significant devaluation of the Mexican new peso in December 1994, the equity section of the Company was negatively impacted by approximately $120 million due to the translation effect of the Company's 40% ownership of Celmex. The Company is uncertain about the possible future impact the fluctuation of the Mexican currency will have on its consolidated results.
1993 Compared to 1992
Net sales of $6,899 million in 1993 were 2%, or $145 million, below 1992 sales. Life Sciences sales were slightly higher than in 1992, but sales declined in all other operating segments.
Chemicals segment sales were lower than 1992 as increased volumes were offset by lower selling prices as a result of continued overcapacity. Fibers and Film segment sales declined from 1992 as reduced export volumes and selling prices were slightly offset by improved domestic volumes. Textile Fibers sales were level compared to 1992. Higher acetate filament sales volumes and prices reflect continuing strength in the fashion industry. These improvements were offset by lower volumes in North American polyester filament and lower selling prices for polyester staple that resulted from increased competitive pressures. In Technical Fibers, sales volumes and prices were lower than in 1992 as filter product shipments to the Far East decreased and overall selling prices declined due to excess worldwide capacity and the strengthening of the dollar in Europe. Tire and MRG (mechanical rubber goods) volumes were lower as a result of the weak European economy, while increased spunbond sales reflected a stronger domestic roofing market. Polyester Resins and Films sales increased marginally over 1992 as packaging resin volumes increased due to higher demand, particularly in the Mexican market. After adjusting for the disposition of the high density polyethylene ("HDPE") business in 1992, Specialties and Advanced Materials sales improved as increased volumes offset lower selling prices. Specialty Chemicals sales were virtually unchanged as reduced selling prices, due to worldwide competitive pressures, and lower volumes, primarily in fine chemicals and printing products, were offset by increased selling prices and improved product mix for pigments and improved volumes for surfactants, electronic products, waxes, and superabsorbent materials. Within Advanced Materials, sales were higher as volumes increased for both high performance polymers and engineering thermoplastics due to general economic growth in their end use markets. Life Sciences sales were slightly higher as both price and volume improvements in crop protection and animal health, in part the result of new product introductions, offset lower full year pharmaceutical volumes. Fourth quarter pharmaceutical sales were higher than the prior 1993 quarters due to wholesaler purchases that normally would have occurred in the first quarter of 1994.
Selling, general and administrative expenses ("SG&A") for 1993 remained virtually the same as 1992 as improvements in Chemicals, Specialty Chemicals, and Advanced Materials offset unfavorable expenses in Fibers and Film. In addition, Fibers and Film SG&A includes a $50 million receipt in settlement of a litigation. Research and development expenses of $258 million were slightly lower than in 1992.
During 1993, the Company charged $29 million to operating income for restructuring (principally Mexican chemical operations), $19 million of which related to the write-down of property, plant and equipment. As part of an ongoing Fibers and Film segment North American strategy, the Company restructured its North American polyester fibers operations. During 1992, the Company charged $87 million to operating income for restructuring, $34 million
of which related to the write-down of property, plant and equipment. An additional $15 million was charged to operations in 1992 for restructuring and regionalization of certain other businesses.
Operating income of $360 million was $38 million, or 10%, lower than 1992. Improvements in the Fibers and Film and the Specialties and Advanced Materials segments were offset by lower Chemicals and Life Sciences segments operating income. Chemicals segment operating income declined from $210 million in 1992 to $88 million in 1993 due to several nonrecurring items. Operating income from continuing operations improved as manufacturing costs and product mix were favorable compared to the prior year. Operating income was reduced, however, due to 1993 restructuring charges and costs associated with a toxic tort suit involving the Pampa, Texas plant. Also. during 1992, Chemicals segment recorded income of $68 million related to the settlement of its Pampa insurance claims. Fibers and Film operating income improved by $117 million from $298 million in 1992 to $415 million in 1993. Textile Fibers operating income was relatively flat compared to 1992 as an increase in sales volume was offset by higher manufacturing costs. Technical Fibers operating income was lower than in 1992 primarily due to reduced shipments and lower selling prices of filter products. The decrease in Polyester Resins and Films operating income was due to increased manufacturing costs and higher raw material costs principally in Mexico. In addition, Fibers and Film 1993 operating income includes a $50 million receipt in settlement of a litigation while 1992 operating income included $87 million in restructuring costs. The Specialties and Advanced Materials segment operating income improved from $26 million to $58 million primarily due to higher volumes and lower selling and marketing expenses. Specialty Chemicals operating income was lower primarily due to increased manufacturing costs. Operating income increased significantly for Advanced Materials due to improved volumes and favorable manufacturing costs resulting from higher efficiencies and reduced maintenance expenses. Operating income in Life Sciences declined from $60 million in 1992 to $17 million in 1993 primarily due to reduced pharmaceutical sales and to research and development expenditures associated with strategic initiatives within the pharmaceuticals business.
Beginning in 1993, the Company segregated sales and costs associated with the Advanced Technology segment from segment sales and operating income of its operating segments. The Advanced Technology segment represents research and development costs to seed and develop new businesses. Prior to 1993 this group was included in the Specialties and Advanced Materials segment. These costs and results have not been borne by any operating group. When projects and/or businesses become viable, they are transferred to the appropriate operating segment.
Equity in net (loss) earnings of affiliates declined by $12 million compared to 1992 primarily due to lower earnings by Japanese and German affiliates which reflect the continued sluggish economic conditions in those countries.
Interest expense decreased $5 million, or 6%, primarily due to lower interest rates, particularly in Mexico. Interest and Other Income, net, was $22 million lower than in 1992 primarily due to lower interest income in 1993, the result of lower interest rates. In 1992, Interest and Other Income included a gain on the sale of the HDPE facility.
The effective tax rate decreased to 35% in 1993 compared to 47% in 1992. The decrease is mainly attributable to the accounting change required by the Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("FAS 109").
The Company implemented Statement of Financial Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions" ("FAS 106"), effective January 1, 1992, and FAS 109 and Statement of Financial Accounting Standards No. 112, "Employers' Accounting for Postemployment Benefits" ("FAS 112"), January 1, 1993. FAS 106 requires the Company to accrue the current cost of those benefits and resulted in a net after-tax cumulative charge of $141 million in the first quarter of 1992. FAS 109, which requires the asset and liability method of accounting for income taxes and the calculation of deferred taxes using enacted tax rates, resulted in a net after-tax cumulative charge of $31 million in 1993. In addition, by applying FAS 109, pre-tax operating income was reduced by $40 million due to the increase in depreciation and amortization expense resulting from the increased carrying amounts of assets and liabilities acquircd in a purchase business combination. The increase in operating expense was offset by a lower deferred tax provision. FAS 112 requires recognition of postemployment benefits on an accrual basis and resulted in a net after-tax cumulative charge of $8 million in 1993. The effect of this change on 1993 earnings before the cumulative effect of accounting changes was not material.
On November 11, 1993, the Company purchased 52.96% of the outstanding shares of Copley for approximately $546 million. Copley develops, manufactures and markets a broad range of off-patent prescription and over-the-counter pharmaceuticals. The acquisition was accounted for under the purchase method of accounting. Accordingly, the purchase price will be allocated to the assets acquired and liabilities assumed based on their estimated respective fair values as of the date of acquisition. The allocation of the purchase price will be finalized during 1994. The excess of cost over net assets acquired was approximately $510 million and is being amortized over its estimated life. The Company financed the acquisition through a revolving credit agreement with its parent, Hoechst Corporation. Copley's results of operations have been included in the Company's consolidated financial statements as of the date of acquisition. Copley's operations are not material in relation to the Company's consolidated financial statements and pro forma financial information, therefore, has not been presented. Copley is included in the Life Sciences segment.
The following discussion and analysis of "1992 Compared to 1991" has been restated to reflect Advanced Technology as a separate segment.
1992 Compared to 1991
Net sales of $7,044 million for 1992 represented an increase of 3.7%, or $250 million. over 1991. Improvements in the Fibers and Film, Specialties and Advanced Materials and Life Sciences segments more than offset a decline in the Chemicals segment.
Chemicals segment sales declined due to continued unfavorable selling prices, principally methanol and ethylene glycol/oxide, partially offset by domestic and export volume improvements, mostly acrylates and vinyl acetate monomer. In the Fibers and Film segment, 1992 full year sales increased due to improved volumes and, to a lesser extent, higher selling prices. Textile Fibers sales were higher due to an increase in polyester staple, acetate filament and polyester textile filament prices. Volume improvements, primarily in polyester staple and spunbond, were partially offset by unfavorable acetate filament export volumes. Spunbond prices were lower due to increased competitive pressures. Strong fourth quarter sales contributed to 1992 increases in Technical Fibers. The improvement is attributable to higher sales volumes from filter products and the polyester high denier industrial fibers business units resulting from increased market demands. In Polyester Resins and Films, sales increased as a result of favorable pricing and higher volumes in polyethylene terephthalate film and packaging resins. Specialties and Advanced Materials segment sales were slightly higher, primarily due to volume improvements in superabsorbents, dyes and pigments, the last two increasing due to stronger apparel and automotive markets. Advanced Materials sales increased due to higher volumes in engineering thermoplastics and high performance polymers, the result of a general strengthening of the U.S. economy. These volume increases were partially offset by unfavorable selling prices due to competitive pressures. Life Sciences segment sales increased due to a strong fourth quarter. The heavy sales volumes were the result of significant wholesaler purchases which normally would have occurred in the first quarter of l993. New product introductions in the crop protection and animal health area also contributed to the increase.
Selling, general and administrative expenses were $946 million, an increase of $56 million, or 6.3%, from 1991. Selling, general and administrative expenses were higher as increased expenses within Life Sciences were partially offset by declines in the Fibers and Film and Specialties and Advanced Materials segments. Life Sciences expenses increased due to a field force expansion and higher costs to support new marketing programs. Research and development expenses of $262 million were flat across all segments and unchanged from 1991 levels.
The Company restructured its North American polyester fibers operations. As part of an ongoing North American strategy, Hoechst Celanese will install additional staple fiber capacity within Celanese Mexicana, S.A. This expansion should not result in a net increase in North American staple fiber capacity. The realignment of other polyester facilities in Canada and the United States is currently being studied. During 1992, $87 million has been charged to Fibers and Film operating income for restructuring, $34 million of which related to the write-down of property, plant and equipment. An additional $15 million has been established for restructuring and regionalization of certain other businesses.
Operating income was $398 million, a decrease of $75 million, or 15.9%, from 1991. Excluding the effects of restructuring costs, all business areas within the Fibers and Film segment showed improvements in operating income and offset a decline in the Chemicals segment operating income. The favorability in operating income experienced by Textile Fibers was mainly due to sales improvements. Technical Fibers registered a modest improvement in operating income from increased sales. Fllm and Fiber Intermediates operating income was higher due to substantially improved sales volumes and, to a lesser extent, favorable raw materials costs (paraxylene and ethylene glycol). Although raw material costs were somewhat lower, Chemicals segment operating income declined as competitive pressures in the commodity chemicals market continued to have an adverse impact on selling prices and profit margins. Specialties and Advanced Materials segment operating income improved primarily due to higher sales volumes. In Specialty Chemicals, strong sales volumes were the main contributor to improved operating income. Improvements were also realized in Advanced Materials, which was aided by a strengthening in the automotive and electronics markets. Life Sciences segment operating income was relatively flat as fourth quarter sales volume improvements were offset by higher selling, general and administrative expenses. In addition to higher volumes of Trental(R) (pentoxifylline), Diabeta(R) (glyburide) and Altace/TM/ (ramipril), earnings benefited from improved performance in the animal health and crop protection businesses.
Equity in net earnings of affiliates was $4 million, a decline of $14 million from the comparable 1991 period. The reduction is due, in part, to start up costs related to the Company's participation in a joint venture to manufacture and market bulk ibuprofen. In addition, lower volumes and increased price competition contributed to lower earnings by Japanese and German affiliates reflecting continued sluggish economic conditions in those countries.
Interest expense declined $13 million to $81 million due primarily to lower interest rates, particularly in Mexico. Interest and other income, net, rose slightly to $74 million. The increase is predominantly due to gains realized on the sale of the HDPE facility and certain other cost investments, partially offset by lower 1992 interest income, the result of lower interest rates.
The effective tax rate was 47.1% and 47.4% for 1992 and 1991, respectively.
In November 1987, an explosion and fire caused severe damage resulting in the shutdown of the Chemical segment's Pampa, Texas plant. Rebuilding of the plant production facilities was completed in April 1989 with ancillary and support facilities completed in June of 1991. In 1989, the Company established a valuation allowance for any potential shortfall between the insurance claims and the ultimate insurance settlement. During the fourth quarter of 1992, the Company agreed to a settlement with its insurance carriers covering the explosion and business interruption claims. As a result of the settlement, approximately $68 million was credited to Operating income.
Effective January 1, 1992, the Company adopted the provisions of Statement of Financial Accounting Standards No.106 "Employers' Accounting for Postretirement Benefits Other than Pensions" ("FAS 106") which decreased net income by $141 million, net of tax.
Environmental
In 1994, combined worldwide expenditures, including third party and divested sites, for compliance with environmental regulations and internal Company initiatives totaled $217 million of which $74 million was for capital projects. In both 1995 and 1996 total annual environmental expenditures are expected to be approximately $300 million of which $75 million is for capital projects. It is anticipated that stringent environmental regulations will continue to be imposed on the Company and the industry in general. Although the Company cannot predict expenditures beyond 1996, management believes that the current spending trends will continue.
In 1994, 1993 and 1992 the total environmental costs charged to operations for remediation efforts amounted to $105 million, $34 million and $46 million, respectively. As of December 31, 1994 and 1993 the Company's total environmental liability recognized in the financial statements is $208 million and $149 million, respectively. The amounts are neither reduced for anticipated insurance recovery nor discounted from the anticipated payment date.
In the opinion of management, environmental expenditures will not have a material adverse effect upon the Company's competitive position.
Inflation
In recent years, inflation has not had a material impact on the Company's costs due principally to price competition among suppliers of raw materials. However, in certain segments of the Company's businesses, changes in the prices of raw materials, particularly petroleum derivatives, could have a significant impact on the Company's costs, which the Company may not be able to reflect fully in its pricing structure.
Ratio of Earnings to Fixed Charges
Ratio of earnings to fixed charges for 1994 was less than one compared to 3.6 for 1993. The ratio declined due to a special charge of $532 million associated primarily with product liability reserves, restructuring costs, assets write-downs and compliance with environmental regulations, as well as, increased interest expense from new debt.
For purposes of calculating the ratio of earnings to fixed charges, earnings consists of earnings from operations before fixed charges, minority interests, income taxes and cumulative effect of accounting changes. Fixed charges consist of interest and debt expense, capitalized interest, interest on obligations under capital leases, the estimated interest portion of rents under operating leases, discount or premium of indebtedness, and the majority-owned preferred stock dividend requirement.
Liquidity and Capital Resources of the Company
Cash and cash equivalents were $192 million at December 31, 1994, an increase of $21 million from the prior year. The increase resulted from net cash provided by operations of $578 million, which more than offset capital expenditures of $502 million, cash used in financing activities of $42 million and the unfavorable effect of exchange rate changes on cash of $22 million.
Long-term debt proceeds for 1994 primarily included the issuance of $250 million 10-year 6 1/8% notes, $150 million medium-term notes, $40 million pollution control bonds and a $30 million loan from its parent Hoechst Corporation ("Parent"). The Company also had short term borrowings from Hoechst AG and its affiliates of $510 million in the aggregate. The proceeds were used to repay the amount borrowed under a revolving credit agreement with its Parent in connection with the acquisition of Copley and to redeem all of the $250 million 9.45% notes outstanding.
In 1994, the Company paid its Parent a $70 million dividend. The Company also declared a 1994 dividend of $60 million which was paid in February 1995. The Company intends to continue its practice of paying a dividend to its Parent at the discretion of the Company's Board of Directors.
The Company had an aggregate of $175 million medium-term notes outstanding as of December 31, 1994. The Company may sell from time to time up to an additional $250 million of such notes. The proceeds from the sale of any medium- term notes will be used for general corporate purposes.
The Company has a $600 million commercial paper program which is fully supported by committed domestic revolving credit facilities. In addition, the Company has a $750 million revolving credit agreement with its Parent. At December 31, 1994, there was no outstanding balance under any of the facilities.
The Company expects that its capital expenditures, investments and working capital requirements will continue to be met primarily from internally generated funds from operations. However, the Company may, due to the timing of funding requirements or investments, supplement its liquidity from external or affiliated sources. Such sources include the Company's medium-term note shelf registration, its commercial paper program or loans from its Parent or Hoechst AG and affiliates.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS
Index to Consolidated Financial Statements
HOECHST CELANESE CORPORATION
CONSOLIDATED BALANCE SHEETS
See accompanying notes to consolidated financial statements.
HOECHST CELANESE CORPORATION
CONSOLIDATED STATEMENTS OF EARNINGS
See accompanying notes to consolidated financial statements.
HOECHST CELANESE CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
See accompanying notes to consolidated financial statements.
HOECHST CELANESE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING ACTIVITIES: (a) In 1992, excludes $34 million of funds held by trustee related to pollution control bond financing arrangement. See accompanying notes to consolidated financial statements.
HOECHST CELANESE
CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Summary of Significant Accounting Policies
(a) Principles of consolidation
Hoechst Celanese Corporation (the "Company") is wholly owned by Hoechst Corporation ("Parent"), a holding company, itself a wholly owned subsidiary of Hoechst Aktiengesellschaft ("Hoechst AG"). The consolidated financial statements include the accounts of the Company and its majority owned or controlled subsidiaries, joint ventures and partnerships. All significant intercompany balances and transactions have been eliminated in consolidation. Certain reclassifications have been made in the 1993 consolidated financial statements to conform to the classifications used in 1994.
Substantially all of the Company's minority interests are comprised of Celanese Mexicana, S.A. ("Celmex"), which effective January 1, 1995 has changed its name to Grupo Celanese, S.A., Celanese Canada Inc. and Copley Pharmaceutical, Inc. ("Copley").
Effective January 1 , 1994, Hoechst AG and Schering Berlin Inc. ("Schering") formed a worldwide joint venture to manufacture and sell agricultural chemicals. In North America, a joint venture was formed, AgrEvo USA Company ("AgrEvo"), through Agri-Vet Inc., a wholly owned subsidiary of the Company, and NOR-AM Chemical Company, a wholly owned subsidiary of Schering. The Company's contribution to the joint venture consisted of its former U.S. and Hoechst Canada, Inc.'s ("HCI") crop protection business in exchange for a 60% interest. Schering's contribution consisted of its former U.S. crop protection business in exchange for a 40% interest. The effect on the Company's consolidated financial statements was not material.
Also effective January 1, 1994 Hoechst Corporation agreed to increase its investment in the Company by contributing the shares of HCI to the Company. HCI is involved in various industries including industrial chemicals, colorants, pharmaceutical production and crop protection. As discussed above, HCI's crop protection business was contributed to the AgrEvo joint venture. The Company consolidated the remainder of HCI, after the contribution of its crop protection business to AgrEvo. During 1994, the Company also transferred its 41% investment in Ticona Polywerke GmbH to Hoechst AG. These transactions resulted in a $35 million net increase to paid-in capital. The effect on the Company's consolidated financial statements was not material.
On November 11, 1993, the Company purchased 52.96% of the outstanding shares of Copley for $546 million. Copley develops, manufactures and markets a broad range of off-patent prescription and over-the-counter pharmaceuticals. The acquisition has been accounted for under the purchase method of accounting. During 1994, the Company finalized the allocation of the purchase price associated with the acquisition of the majority share of Copley. The purchase price has been allocated to the assets acquired and liabilities assumed based on their estimated respective fair values. The excess of cost over fair value of the net assets acquired is being amortized over 20 years.
(b) Cash equivalents
The Company considers all highly liquid investments with a maturity of three months or less to be cash equivalents.
HOECHST CELANESE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(1) Summary of Significant Accounting Policies (continued)
(c) Financial instruments
Effective January 1, 1994, the Company implemented Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" ("FAS 115"), which requires debt and equity securities be classified as held-to-maturity, trading or available-for-sale securities and reported at fair value or amortized cost. Management determines the appropriate classification of securities at the time of purchase and reevaluates that designation as of each balance sheet date. In accordance with FAS 115, the Company has classified its investments in debt and equity securities as "available- for-sale" and has reported those investements at their fair or market value as of December 31, 1994.
In 1994, the Company also adopted the Statement of Financial Accounting Standards No. 119, "Disclosure about Derivative Financial Instruments and Fair Value of Financial Instruments" ("FAS 119"). FAS 119 establishes standards of financial accounting and reporting for financial instruments whose underlying values are based on other financial instruments with similar characteristics.
(d) Inventories
Inventories are stated at the lower of cost (first-in, first-out ["FIFO"] or last-in, first-out ["LIFO"]) or market.
(e) Investments and equity in net earnings (loss) of affiliates
In general, the Company's share of net earnings or losses of companies in which it owns at least 20% and less than a majority, and does not exercise management control, is included in the Consolidated Statements of Earnings as "Equity in net earnings (loss) of affiliates."
(f) Property, plant and equipment, net
Property, plant and equipment, net is stated at cost. Depreciation and amortization are computed on a straight-line basis over estimated useful lives.
Amortization of leasehold improvements is provided on a straight-line basis over the estimated useful lives of the related assets or lease terms, whichever is shorter.
Expenditures for maintenance and repairs are charged against operations; major replacements, renewals and significant improvements are capitalized.
(g) Intangibles
Excess of cost over fair value of net assets of businesses acquired ("Goodwill") is being amortized using the straight-line method principally over periods of twenty and forty years. It is the Company's policy to review that the forecasted cumulative, undiscounted cash flow of those acquired businesses is greater than the carrying value of the Goodwill. Amortization expense charged against operations amounted to $61 million in 1994, $39 million in 1993 and $37 million in 1992.
HOECHST CELANESE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(1) Summary of Significant Accounting Policies (continued)
(g) Intangibles (continued)
Patents and trademarks are being amortized on a straight-line basis over their estimated useful or legal lives, whichever is shorter. Amortization expense charged against operations amounted to $15 million in 1994, $15 million in 1993 and $11 million in 1992.
(h) Income taxes
The Company's consolidated results of operations are included in the consolidated Federal income tax return of its Parent. The Company's Parent allocates a provision for Federal income taxes equivalent to the tax effect on the operations of the Company as if a separate return were filed.
Deferred income taxes have been provided to recognize the effect of temporary differences between financial statement and income tax accounting.
(i) Research and development
Research and development costs are included in expenses as incurred.
(j) Functional currencies
In general, local currencies have been designated as the functional currencies for the Company's foreign operations and are translated to United States dollars using the respective exchange rates. In Mexico, prior to 1993, the United States dollar was the functional currency.
(2) Related Party Transactions
Purchases from Hoechst AG and its affiliates aggregated $708 million in 1994, $495 million in 1993 and $516 million in 1992. Net sales to Hoechst AG and its affiliates aggregated $259 million in 1994, $216 million in 1993 and $217 million in 1992.
The Company's principal licenses are under patents owned by Hoechst AG and its affiliates. License fees, relating to license agreements between the Company and Hoechst AG and its affiliates, charged to operations aggregated $33 million in 1994, $48 million in 1993 and $48 million in 1992.
The Company has a revolving credit agreement with its Parent under which it may borrow up to $750 million. The Company has agreed to pay interest at 30 day LIBOR plus .0625 of 1%. During 1993, the Company borrowed $768 million under this agreement. Repayments on the revolving credit agreements for 1994 and 1993, respectively, were $679 million and $89 million. Interest charges related to such borrowings aggregated $4 million in 1994 and $2 million in 1993. During 1994, the Company did not borrow against this facility and there was no outstanding balance at December 31, 1994. The outstanding balance on this credit facility was $679 million at December 31, 1993.
HOECHST CELANESE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(2) Related Party Transactions (continued)
Term note obligations payable to Parent aggregated $186 million at December 31, 1994 and $156 million at December 31, 1993. Interest expense on these obligations aggregated $13 million in 1994, $7 million in 1993 and $2 million in 1992.
Short-term note obligations payable to Hoechst AG and its affiliated companies aggregated $510 million at December 31, 1994. Interest expense on such obligations aggregated $12 million in 1994. Short-term note obligations payable to Parent aggregated $100 million at December 31, 1992, which was repaid during 1993. No such obligations were outstanding at December 1994 or 1993. Interest expense on this obligation aggregated $6 million in 1993 and $2 million in 1992.
(3) Net Receivables
As of December 31,1994 and 1993, the Company had no significant concentrations of credit risk. Concentrations of credit risk with respect to trade receivables are limited since the Company's customer base is dispersed across many different industries and geographies.
(4) Inventories
At December 31, 1994, $498 million ($518 million at December 31, 1993) of total inventories were valued by the LIFO method.
HOECHST CELANESE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(5) Investments and Equity in Net Earnings (Loss) of Affiliates (In millions, except number of affilliates)
(6) Property, Plant and Equipment, Net
Interest costs capitalized in 1994, 1993 and 1992 were $15 million, $21 million and $14 million, respectively.
HOECHST CELANESE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(7) Income Taxes
Effective January 1, 1993, the Company adopted Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("FAS 109"), which requires the asset and liability method of accounting for income taxes, and deferred taxes are calculated using enacted tax rates. In addition, FAS 109 significantly changes the accounting for purchase business combinations. The provisions of FAS 109 have been applied without restating prior years' financial statements.
Prior to FAS 109, acquired assets and liabilities in a purchase business combination were shown net of tax. Under FAS 109, these assets and liabilities are assigned their fair value and deferred taxes are provided on the difference between such value and their tax bases. Accordingly, in adopting FAS 109, the Company adjusted the carrying amount of the assets acquired and liabilities assumed in connection with the 1987 Celanese Corporation acquisition. The noncash effects from the application of FAS 109 were to increase Property, plant and equipment $178 million; Investments in affiliates, $34 million; Other assets, $10 million and Other liabilities, $64 million. Pretax operating income for the years ended December 31, 1994 and 1993 was reduced by $40 million due to the increase in depreciation and amortization expense resulting from the higher carrying amounts. The increase in operating expense was offset by a lower deferred tax provision.
HOECHST CELANESE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(7) Income Taxes (continued)
The tax effects of the temporary differences which give rise to a significant portion of deferred tax assets and liabilities as of December 31, 1994, and 1993 are as follows:
The cumulative effect of adopting FAS 109 as of January 1, 1993 amounted to $31 million and is included as part of the increase to deferred income taxes in the Consolidated Balance Sheets and a charge to the Consolidated Statements of Earnings as of December 31,1993. The net adjustment represents the establishment of deferred taxes primarily due to differences between the book and tax bases of LiFO inventories and the adjustment of deferred taxes to reflect the currently enacted tax rate.
A valuation allowance is provided when it is more likely than not that some portion or all of the deferred tax assets will not be realized. Based on the Company's historical and current pretax earnings, management believes it is more likely than not that the Company will realize the benefit of the deferred tax assets existing at December 31, 1994 and 1993. Further, management believes the existing deductible temporary differences will reverse during periods in which the Company generates net taxable income.
The financial reporting basis of investments in certain non-U.S. subsidiaries differs from their tax basis. In accordance with FAS 109, a deferred tax liability is not recorded on this temporary difference because the investments are essentially permanent in duration. A reversal of the Company's plans to permanently reinvest in these operations would cause such temporary differences to become taxable. At December 31, 1994 and 1993 these temporary differences were approximately $374 million and $424 million, respectively. A determination of the amount of unrecognized deferred tax liability related to these investments is not practicable.
HOECHST CELANESE CORPORATION
NOTES TO CONSOLIDATED FINANCLAL STATEMENTS (continued)
(8) Accounts Payable and Accrued Liabilities
(9) Long-term Debt
The Company has a commercial paper program aggregating $600 million. There were no balances due at December 31, 1994 and 1993.
The Company has revolving credit agreements with banks that provide for loans up to $50 million through October, 1996. Under these agreements, the Company pays a commitment fee of 3/16 of 1% per annum based on unused amounts. The Company has additional revolving credit agreements with several banks that provide for loans up to $550 million for a renewable term of 364 days. The Company pays a commitment fee of 1/16 of 1% per annum on unused amounts. The above described credit lines provide the credit backup for the Company's commercial paper program. The credit lines were unused at December 31, 1994 and 1993. The Company had standby and trade letters of credit outstanding amounting to $130 million at December 31, 1994 and $105 million at December 31, 1993.
The Company has limited involvement with derivative financial instruments and does not use them for trading purposes. The Company's derivative policy allows for hedging against future interest rates or currency changes on existing debt which provides the ability to lock in optimal rates for planned future borrowings and promotes the achievement of a desired level of fixed floating rate mix.
HOECHST CELANESE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(9) Long-term Debt (continued)
The Company enters into interest rate swap and cap agreements to reduce costs inherent in the Company's debt portfolio. Regarding interest rate swap transactions, interest balances due to timing differences are recorded appropriately in the consolidated balance sheets; up front receipts are included in deferred revenue and are netted in interest expense over the term of the agreement. Amounts received under interest rate cap agreements are netted against interest expense. The premium paid for the cap is included in other assets in the Consolidated Balance Sheets and is amortized to interest expense over the term of the agreement. At December 31, 1994, the Company had open interest rate swaps and cap positions with a notional amount of $400 million. The Company's exposure to counterparty financial instruments is not material.
The Company's debt instruments include covenants, as defined in the loan agreements, that require maintenance of consolidated net worth of not less than $2.3 billion, and the limitation of dividends and other restricted payments. At December 31, 1994, $442 million was available for dividends or other restricted payments under existing loan agreements. The Company intends to continue its current policy to pay dividends to its Parent at the discretion of the Company's Board of Directors.
Annual maturities of long-term debt each year for the next five years are: $26 million in 1995; $6 million in 1996; $86 million in 1997; $106 million in 1998; and $263 million in 1999.
(10) Other Liabilities
(11) Benefit Plans
The Company has several defined-benefit pension plans covering substantially all employees. Benefit formulas are based on years of service and compensation levels or years of service and negotiated benefits. The pension plans in the United States are being funded in accordance with the requirements of the Employee Retirement Income Security Act of 1974.
Net periodic pension cost for defined-benefit pension plans consists of the following:
HOECHST CELANESE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(11) Benefit Plans (continued)
The actuarial computations, based on the projected unit credit method, assumed a discount rate of 8.25%, 7.5% and 8.5% in 1994, 1993 and 1992, respectively. The assumed rate of return was 9.0%, 9.0% and 8.5% in 1994, 1993 and 1992, respectively. The assumed rate of increase in compensation levels was 5.0%, 4.5% and 5.6% in 1994, 1993 and 1992, respectively.
The following table sets forth the funded status of the Company's qualified plans and the amounts recognized in the Company's Consolidated Balance Sheets at December 31, 1994 and 1993:
Assets of the Company's pension plans consist of equity and fixed income securities, real estate and deposit administration contracts maintained in master trust funds, which are managed by various investment managers appointed by the Company.
The Company has various investment savings plans for certain employees, some of which qualify under Section 401(k) of the Internal Revenue Code. The Company's contributions to the plans are based on specified percentages of employee contributions and aggregated $36 million in 1994, $33 million in 1993 and $31 million in 1992.
The Company provides certain of its employees with non-qualified supplemental retirement benefits. The accumulated benefit obligation of these benefits totaled $103 million in 1994 and $96 million in 1993.
HOECHST CELANESE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continuedj
(12) Other Postretirement Benefits
Under various employer sponsored plans, the Company provides certain health care and life insurance benefits for retired employees and their dependents. Substantially all of the Company's employees are eligible for health care benefits after reaching normal retirement age with 10 years of service. Benefits, eligibility and cost sharing provisions for union employees vary by location. Generally, the medical plans pay a stated percentage, based upon years of service, of most medical expenses reduced for any deductible and payments made by government programs and other group coverage. The Company is generally self-insured for these costs and has no plan assets. The plans' provisions include a cap which limits future Company contributions for medical coverage under these plans.
Net Periodic Postretirement Benefit Cost included the following components:
The following table sets forth the unfunded status of the plans, which represents the accrued postretirement benefit cost recognized in the Company's Consolidated Balance Sheets at December 31, 1994 and 1993:
For measuring the expected postretirement benefit obligation, the Company assumed a 10.025% rate of increase in the per capita claims cost in 1994 and assumed that the rate would decrease gradually over a six year period to 5.5% and remain at that level thereafter. The discount rate used in determining the accumulated postretirement benefit obligation was 8.25% and 7.5% at December 31, 1994 and December 31, 1993, respectively.
If the health care cost trend were increased 1.0%, the accumulated postretirement benefit obligation as of December 31, 1994 would have increased by approximately $24 million, or 6.5%. The effect of the change on the aggregate of service and interest cost for 1994 would be an increase of approximately $2 million. or 5.6%.
HOECHST CELANESE CORPORATION
NOTES TO CONSOLIDATED FINANCLAL STATEMENTS (continued)
(12) Other Postretirement Benefits (continued)
Effective January 1, 1993, the Company adopted the provisions of Statement of Financial Accounting Standards No. 112, "Employers' Accounting for Postemployment Benefits" ("FAS 112"). This Statement requires an accrual method of recognizing postemployment benefits such as disability-related benefits.
The cumulative effect at January 1, 1993 of adopting FAS 112 reduced net income by $8 million, net of $4 million of income tax benefits. The effect of this change on 1993 income before cumulative effect of accounting changes was not material.
Effective January 1, 1992, the Company adopted the provisions of Statement of Financial Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions" ["FAS 106"], which requires the Company to accrue the current cost of those benefits. The Company elected to recognize immediately the transition obligation measured as of January 1, 1992. This resulted in a one-time after-tax charge of $141 million (after a reduction for income taxes of $90 million and the effect of minority interests of $3 million). The effect of this change on operating results, after recording the cumulative effect for years prior to 1992, was to recognize an additional pretax expense of $23 million.
(13) Leased Assets and Lease Commitments
At December 31, 1994, minimum lease commitments under long-term operating leases are as follows:
Total minimum rent charged to operations under all operating leases was $69 million in 1994, $68 million in 1993 and $64 million in 1992.
Effective December 31, 1992, the Parent increased its investment in the Company's by contributing to the Company property, plant and equipment that had been leased under capital leases from its Parent. Rental payments made under such lease obligations amounted to $10 million for the period ended December 31, 1992. The effect of the transaction was to increase additional paid-in capital by $49 million, reverse $10 million of previously existing deferred income taxes and decrease debt (obligations under capital leases) by $59 million.
Management expects that, in the normal course of business, leases that expire will be renewed or replaced by other leases.
HOECHST CELANESE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(14) Segment and Geographical Information
---------- (a) Beginning in 1993, the Company segregated amounts associated with Advanced Technology. This new segment represents research and development costs to seed and develop new businesses. When projects or businesses become viable, they are transferred to the appropriate operating segment. The prior years' segment results have been restated to reflect this change.
(b) Includes Special charges. See Note (16).
(c) Includes $18 million of depreciation reserves for asset write-downs related to the 1994 Special charges.
(d) Includes $15 million of depreciation and a $4 million reserve for asset impairment related to the 1993 realignment program.
(e) Includes $29 million of assets related to the purchase of Copley and $3 million of assets related to the purchase of certain other businesses.
(f) Includes a $30 million reserve for asset impairment related to 1992 realignment program for North American Fibers.
HOECHST CELANESE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(14) Segment and Geographical Information (continued)
The following table presents financial information based on the geographic location of the manufacturing facilities of the Company:
---------- (a) Included in United States net sales are export sales of $1,003 million in 1994, $845 million in 1993 and $877 million in 1992.
(b) Product transfers between geographic areas are priced on a basis intended to reflect, as nearly as practicable, the prevailing market value of the products transferred.
HOECHST CELANESE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(15) Commitments and Contingencies
The Company is a defendant in a number of lawsuits, including environmental, product liability and personal injury actions (see Note (18) for discussion of environmental). Certain of these lawsuits are or purport to be or have been preliminarily certified as class actions. In some of these cases, claimed damages are substantial. While it is impossible at this time to determine with certainty the ultimate outcome of these lawsuits, management believes, based on the advice of legal counsel, that adequate provisions have been made and that the ultimate outcome will not have a material adverse effect on the consolidated financial position or results of operations of the Company.
The Company is named as a defendant in twenty-five putative class actions, five of which have been certified as class actions as well as defendant in other non-class actions filed in eleven states ("the Plumbing Actions"). In these lawsuits the plaintiffs typically seek recovery for alleged property damage to housing units, mental anguish from the alleged failure of polybutylene plumbing systems, and punitive damages and, in certain cases, additional damages under the Texas Deceptive Trade Practices Act. The other defendants include United States Brass Corporation ("U. S. Brass") (formerly a wholly owned subsidiary of Household International, Inc.), Vanguard Plastics, Inc. ("Vanguard"), Shell Oil Company ("Shell") and E. I. duPont de Nemours & Co. Inc., ("duPont").
Damage amounts are not specified. The plumbing systems were designed and manufactured primarily by U. S. Brass and Vanguard. The pipe was made from polybutylene resin supplied by Shell. The Company sold acetal copolymer resin and duPont sold acetal homopolymer resin to other companies who manufactured certain of the fittings used in the plumbing systems. Based on, among other things, the finding of outside experts and the successful use of the Company's acetal copolymer in similar applications, the Company does not believe that its acetal copolymer was defective or caused the plumbing systems to fail. In many cases the Company's exposure may be limited by the fact that the other defendants and other responsible parties may be found liable in whole or substantial part or by invocation of the statute of limitations since the Company ceased selling the resin for use in the plumbing systems in site built homes during 1986 and in manufactured homes during 1989.
The Company together with Shell and duPont agreed to and announced, in October 1994, a proposed settlement of a purported nationwide class action subject to court approval, which would provide replumbings to qualifying homeowners with leaking polybutylene plumbing systems throughout the United States. This proposed settlement would have required the three participating companies to commit to spend up to $750 million for claims over a 13 year period which the Company estimates will end in 2003. The Texas State Court, in February 1995, denied the companies' request for preliminary approval of this settlement. Appeals of this denial have been filed, and the three participating companies are also presently exploring several alternatives.
The Company is not liable for any alleged defects in such systems, which were designed, manufactured and marketed by other companies. Nonetheless, the Company has agreed to participate in the settlement to reduce litigation expenses and to provide relief to qualifying homeowners with polybutylene plumbing problems.
The Company has accrued its best estimate of its share of the plumbing actions. Due to the many variables involved in the estimation process, as facts and circumstances change, the estimate will be adjusted. Since the Company was only one of the suppliers of a resin used in part of the plumbing systems and not a manufacturer or marketer of these systems, the Company does not know the number of units that contain the plumbing systems, the number of systems that will fail, if any, or the extent of any failures. Based on settlement agreements signed
HOECHST CELANESE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(15) Commitments and Contingencies (continued)
with several insurers and the opinion of counsel as to the outcome of current litigation with the remaining insurers, management believes that the expenses related to the plumbing actions are substantially covered by insurance.
Management believes that the plumbing claims will not have a material adverse effect on the consolidated financial position, or results of operations of the Company.
In order to mitigate the potential exposure to and cost of litigation, the Company, together with Shell and duPont, has agreed to continue funding the Plumbing Claims Group ("PCG"). PCG is the company which assesses individual repair requests and pays for certain repairs of qualifying homeowners with leaking polybutylene plumbing systems. To date, PCG has been funded by the Company, Shell and duPont on an ongoing basis as monies were spent. However, the ultimate amount that will be allocated to each company has yet to be determined.
At December 31, 1994, there were outstanding Commitments relating to capital projects of approximately $110 million.
(16) Special Charges
During 1994, the Company recorded a special charge of $532 million ($319 million net of tax). This charge included the expected costs pertaining to pending and future product liability claims, net of probable insurance recoveries, relating to certain plumbing systems using fittings manufactured by other companies from acetal copolymer resin and additional environmental remediation exposures. In addition, this special charge includes the expected costs and expenses relating to the reduction in the workforce and the write-down of assets associated mostly with the Specialties and Advanced Material segment. See Notes (15) and (18) for additional information relating to the class action and environmental, respectively.
During 1993, the Company realigned its North American, principally Mexican, chemicals operations and charged $29 million to Chemicals operating income, $19 million of which related to the write-down of property, plant and equipment.
During 1992, the Company realigned its North American polyester fibers operations and charged $87 million to Fibers and Film operating income, $34 million of which related to the write-down of property, plant and equipment. An additional $15 million was established for regionalization of certain other businesses.
HOECHST CELANESE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(17) Fair Value of Financial Instruments
Summarized below are the carrying values and fair values of the Company's financial instruments as of December 31, 1994 and 1993. The fair value represents the Company's estimate and, therefore, should not be construed as the value that the Company would receive or give up for a financial instrument.
Included in other assets are certain investments accounted for under the cost method. In general, the investments are not publicly traded and, therefore, fair values are not readily determinable; the Company believes that the carrying value approximates the fair value.
The fair value of the Company's long-term debt and derivative financial instruments is estimated based on quotations from investment bankers and on current rates of debt for similar types of issues. Derivative Financial Instruments relating to debt are required disclosure for 1994 only, and the fair value on these instruments is equal to the unrealized gain (loss).
The carrying amounts reported in the balance sheet for cash and cash equivalents, net receivables, commercial paper, notes payable, trade payables and the current installments of long-term debt approximates fair market value, due to the short maturity of these instruments.
(18) Environmental
The Company's worldwide operations are subject to environmental laws and regulations which impose limitations on the discharge of pollutants into the air and water and establish standards for the treatment, storage and disposal of solid and hazardous wastes. The Company believes that it is in substantial compliance with all applicable environmental laws and regulations.
The Company reviews the effects of any new laws and regulations on each of its locations; determines whether a liability exists based on that review; and records a liability, as appropriate. The Company expenses all expenditures mandated by law or Company policy to ameliorate existing conditions. Liabilities that are established represent the Company's best estimate based on all the available facts and are adjusted as facts and circumstances change.
The Company may be subject to substantial claims brought by Federal or state regulatory agencies or private individuals pursuant to statutory authority or common law. In particular, the Company has a potential liability under the Federal Comprehensive Environmental Response Compensation and Liability Act ("Superfund") and related state laws for investigation and cleanup costs at approximately 100 sites. At most of these sites, numerous
HOECHST CELANESE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(18) Environmental (continued)
companies, including either the Company or one of its predecessor companies, have been notified that the United States Environmental Protection Agency ("EPA"), state governing body or private individuals consider such companies to be potentially responsible parties ("PRPs") under Superfund or related laws. The proceedings relating to these sites are in various stages. The cleanup process has not been completed at most sites and the status of the insurance coverage for most of these proceedings is uncertain. Consequently, the Company cannot determine accurately its ultimate liability for investigation or cleanup costs at these sites. Expenditures (including third party and divested sites) for investigation, clean up and related activities have been $32 million for the three years ended December 31, 1994 with expenditures in no year greater than $13 million.
As events progress at each site for which it has been named a PRP, the Company accrues, as appropriate, a liability for site cleanup. Such liabilities include all costs that are probable and can be reasonably estimated. In establishing these liabilities, the Company considers: its shipments of waste to a site; its percentage of total waste shipped to the site; the types of wastes involved; the conclusions of any studies; the magnitude of any remedial actions that may be necessary; and the number and viability of other PRPs. Often HCC will join with other PRPs to sign joint defense agreements that will settle, among the PRPs, each party's percent allocation of costs at the site. Although the ultimate liability may differ from the estimate, the Company routinely reviews the liabilities and revises the estimate, as appropriate, based on the most current information available.
In 1994, 1993 and 1992 the total environmental costs charged to operations for remediation efforts amounted to $105 million, $34 million and $46 million, respectively. As of December 31, 1994 and 1993, the Company's total environmental liability recognized in the financial statements is $208 million and $149 million. The amounts are neither reduced for anticipated insurance recovery nor discounted from the anticipated payment date. Moreover, environmental liabilities are paid over an extended period and the timing of such payments cannot be predicted with certainty.
Management believes that environmental costs will not have a material adverse effect on the financial position or results of operations of the Company.
(19) Other Matters
As a result of the significant devaluation of the Mexican peso in December 1994, the equity section of the Company was negatively impacted by approximately $120 million due to the translation effect of the Company's 40% ownership of Celmex. The Company is uncertain about the possible future impact the fluctuation of the Mexican currency will have on its consolidated results.
Fibers and Film's 1993 operating income includes a $50 million receipt in settlement of a litigation. The amount has been included in Selling, general and administrative expenses.
REPORT OF INDEPENDENT AUDITORS
The Board of Directors Hoechst Celanese Corporation:
We have audited the accompanying consolidated balance sheets of Hoechst Celanese Corporation as of December 31, 1994 and 1993, and the related consolidated statements of earnings, stockholder's equity, and cash flows for each of the years in the three-year period ended December 31, 1994. 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 generally accepted auditing standards. 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 Hoechst Celanese Corporation as of December 31, 1994 and 1993, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 1994, in conformity with generally accepted accounting principles.
As discussed in Notes 7 and 12 to the consolidated financial statements, the Company adopted the provisions of the Financial Accounting Standards Board's Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" and No. 112, "Employers' Accounting for Postemployment Benefits" in 1993. As discussed in Note 12 to the consolidated financial statements, the Company adopted the provisions of the Financial Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions" in 1992.
KPMG PEAT MARWICK LLP
Short Hills, New Jersey January 31, 1995
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
There has been no change of accountants or reported disagreement on any matter of accounting principles or procedures or financial statement disclosure in 1994.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The directors and executive officers of Hoechst Celanese are as follows:
Name Age Position(s) with the Company ---- --- ----------------------------
Guenter Metz........... 59 Chairman of the Board of Directors Karl G. Engels/(1)/.... 51 President, Chief Executive Officer and Director Harry R. Benz/(1)/..... 57 Senior Vice President-Finance, Chief Financial Officer and Director Thomas F. Kennedy/(1)/. 52 Executive Vice President and Director William B. Harris/(1)/. 48 Senior Vice President and Director David A. Jenkins....... 54 Vice President-General Counsel and Director Charles M. Langston.... 45 Vice President-Strategic Resources Management Klaus Schmieder........ 46 Vice President and Treasurer Alban W. Schuele....... 50 Vice President-Canadian Operations Raymond W. Smedley..... 54 Vice President and Controller
/(1)/ Member of Executive Committee, a committee of the Board of Directors.
---------- All directors of the Company, except as noted below, have been appointed for a term commencing November 22, 1994. All terms of directors will end on the date of the next annual stockholder meeting.
All executive officers were appointed for a term commencing November 28, 1994. All terms of executive officers will end at the first meeting of the Board following the next annual stockholder meeting.
Dr. Metz has been Director and Chairman of the Company since January 1, 1995. He has been a Director of Hoechst Corporation since February 1987 and has been Chairman of Hoechst Corporation since April 1994. From October 1986 to February 1987 he was a Director of American Hoechst Corporation ("AHC"). Since April 1988 he has been Deputy Chairman of the Board of Management of Hoechst AG. Since April 1994 he has been responsible for all Hoechst Group activities in North America. Dr. Metz has been with Hoechst AG for 32 years and is a resident of the Federal Republic of Germany.
Mr. Engels has been President of the Company since May 1994 and director of the Company since September 1991. From April 1992 to April 1994 he was Senior Vice President of the Company and from September 1991 to March 1992 he was Vice President of the Company. He was Vice President-Marketing and Sales of the Fibers Division of Hoechst AG from November 1986 until August 1991. From January 1985 to October 1986 he was Director of Personnel and Social Policies for the Hoechst Group. From 1981 to December 1984, he was Divisional Director and head of the Staff Department of Hoechst AG, coordinating the Hoechst Group affiliates outside the Federal Republic of Germany. Mr. Engels has been with Hoechst AG for 22 years.
Mr. Benz has been Senior Vice President-Finance and Chief Financial Officer of the Company since April 1992 and Director of the Company since February 1987. From February 1987 to March 1992 he was Vice President-Finance and Chief Financial Officer of the Company. He was a Director and Chief Financial Officer with AHC from October 1980 to February 1987. Prior to 1980 he served as AHC's Treasurer for nine years. He also had responsibility for AHC's Petrochemicals and Plastics Group. Prior to joining AHC, he was employed by Peat, Marwick, Mitchell & Co. for 10 years.
Mr. Kennedy has been Executive Vice President of the Company since April 1992 and Director of the Company since March 1989. On January 1, 1995, he was appointed Head of Hoechst Worldwide Basic Chemicals. He was Group President of the Chemical Group from July 1989 to March 1992. From March 1989 to March 1992 he was Vice President of the Company. Prior to that, he was President of the Chemical Group from March 1989 to June 1989, Executive Vice President of the Chemical Group from January 1988 to February 1989 and Executive Vice President of Celanese Chemical Company, Inc. from September 1986 until December 1987. He previously served as Vice President and General Manager of Filter Products from October 1984 to September 1986. Prior to that, he was Business Director of Celanese Chemical Company, Inc.
Mr. Harris has been Senior Vice President of the Company since May 1, 1994 and on the same date he was appointed Head of Hoechst Worldwide Fibers. He was President of Textile Fibers Group from January 1990. From January 1988 to May 1994 he was Vice President of the Company. He served as Treasurer of the Company from January 1988 until March 1989 and Executive Vice President, Textile Fibers Group from April 1989 until December 1989. He was formerly President of Celanese Fibers Operations, Ltd. from September 1986 until January 1988 and Vice President and General Manager of Polymer and Filter Products from September 1986 until December 1987. He served as Vice President, Administration of Celanese Fibers from November 1984 until August 1986. From May 1984 he was Executive Vice President of Celanese Canada Inc. and from November 1982 until April 1984 he was Vice President, Finance of Celanese Canada Inc.
Mr. Jenkins has been Vice President-General Counsel of the Company since January 1989 and a Director since April 1989. He served as Deputy General Counsel of the Company from June 1987 to December 1987 and as Vice President and General Counsel of the Hoechst Celanese Advanced Technology Company from August 1986 to June 1987. He was Secretary of Celanese from June 1984 to August 1986 and General Attorney of Celanese from September 1976 to August 1986.
Dr. Langston has been Vice President-Strategic Resources Management of the Company since January 1991. Prior to that, he was Vice President, Human Resources of the Life Sciences Group from March 1989 to December 1990. From July 1987 to February 1989 he was the Company's Director of Compensation. From September 1982 to June 1987 he was Director, Human Resources of the Specialty Chemicals Group.
Mr. Schmieder has been Vice President and Treasurer of the Company since January 1, 1992. He was Regional Manager for the Asia/Pacific Region of Hoechst AG from January 1990 to December 1991. From 1987 to December 1989 he worked on various assignments in the Central Staff and Legal Departments of Hoechst AG. From 1977 to 1987 he was in the Legal Department of Hoechst AG. Mr. Schmieder has been with Hoechst AG for 18 years.
Mr. Schuele has been Vice President of the Company since February 1987 and responsible for Canadian Operations since May 1991. Prior to that, he was President of Specialty Products Group from February 1989 to April 1991 and Vice President-Quality and Communications from January 1988 to January 1989. He served as Treasurer from 1981 until January 1988 and became a Vice President in 1985. He joined AHC in 1980 as Assistant Treasurer after having been with The Chase Manhattan Bank, N.A. for 10 years.
Mr. Smedley has been Vice President and Controller of the Company since February 1987. Prior to that, he served as Controller of AHC from 1975 and Vice President and Controller from 1980. Prior to joining AHC in 1972, he was with Price Waterhouse & Co. for 10 years. He is a Certified Public Accountant.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The following tables set forth the compensation paid during the past three years and, in the case of pensions, payable in the future to the Chief Executive Officer and the four next most highly compensated executive officers of the Company.
Compensation Table
The following table sets forth the total amount of cash compensation paid to the named executives in 1994, 1993 and 1992.
---------- /(1)/ Bonus paid early in the following year for services rendered in each of the listed years. /(2)/ Company contribution to Savings Plan. /(3)/ Retired from the Company effective January 1, 1995. He is currently serving on the Board of Management of Hoechst AG. /(4)/ Pursuant to an agreement with the Company, Dr. Patterson will continue as an employee of the Company through February 28, 1996, at which time his employment will terminate and he will be eligible to receive 29 weeks of separation pay. Dr. Patterson has indicated his intention to retire under the provisions of the Hoechst Celanese Retirement Plan and the Hoechst Celanese Executive Pension Plan on March 1, 1996.
1994 Long-Term Incentive Awards Table
The following table sets forth the awards made under the Company's Long- Term Incentive Award Plan to the named executives in 1994.
Long-Term Incentive Plans - Awards in Last Fiscal Year
Payments and awards are tied to achieving specified levels of Return on Capital Employed ("ROCE"), both absolute and relative to a competitive group of other companies. The target amount will be earned if 100% of the targeted ROCE is achieved. If threshold levels are not achieved, no payments will be made from the Plan. If threshold levels are achieved but target levels are not achieved, payments as low as 25% of the target amounts will be made. If certain stretch goals beyond target levels are achieved, payments as high as 150% of the target amounts will be made.
Pension Table
The following table sets forth estimated annual retirement benefits for the named executives under the Hoechst Celanese Retirement Plan and the Hoechst Celanese Executive Pension Plan.
----------
/(l)/ This table represents total benefits payable from both the Hoechst Celanese Retirement Plan and the Hoechst Celanese Executive Pension Plan. Drs. Drew and Patterson and Messrs. Kennedy and Harris are participants in both of these plans. Mr. Engels is covered by the Hoechst AG Pension Plan. Benefits from the Executive Pension Plan are only payable in the event the executive retires directly from employment with the Company.
/(2)/ Amounts shown assume the executive retires at age 65 (or earlier if certain years of service requirements with the Company are met) and are paid annually for the remainder of the executive's life regardless of marital status. Benefits listed in the table are not subject to any deduction for Social Security.
/(3)/ Final Average Earnings are defined in the plans as the average of the three highest years' earnings (base salary plus bonus) out of the last 10 years before retirement. The current Final Average Earnings for Dr. Drew are within 10% of the amounts reported as 1994 Annual Compensation on the Compensation Table. The Final Average Earnings for Dr. Patterson, Messrs Kennedy and Harris are approximately $606,250; $568,500 and $340,361, respectively. The approximate years of Credited Service of the executives covered by the plans are: Dr. Drew, 28 years; Dr. Patterson, 27 years; Mr. Kennedy, 28 years and Mr. Harris, 22 years.
Employment contract with Hoechst AG. Mr. Engels has a special contract with Hoechst AG that covers certain aspects of his assignment in the United States in the nature of foreign relocation allowances, such as moving and travel expenses, vacation, home leaves, contributions to the German health insurance system while employed in the United States, emergency home leaves, etc. His salary and benefits are provided by the Company as long as he is employed in the United States by the Company.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Collectively, the directors and executive officers of the Company beneficially own less than 1% of the outstanding capital stock of Hoechst AG. Each of Messrs. Benz, Kennedy and Schuele serves on the Board of Directors of Celanese Canada Inc. Each of Messrs. Benz and Kennedy own 300 shares of its common stock. Mr. Scheule is the beneficial owner of 2,200 shares.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Relationship with Hoechst AG
The Company is wholly owned by Hoechst Corporation, which in turn is wholly owned by Hoechst AG, a large chemical company headquartered in Frankfurt, Federal Republic of Germany. Hoechst AG is a publicly held company whose shares are listed and traded on the Tokyo stock exchange in Japan and on a number of major stock exchanges in Europe including the Frankfurt, Federal Republic of Germany; London, United Kingdom; and Geneva, Switzerland stock exchanges.
The Company and Hoechst AG are parties to a broad research and development cost-sharing agreement. In most cases, licenses between the Company and Hoechst AG under patents owned by Hoechst AG require no specific payment because overall research and development costs have been shared. However, when license agreements are negotiated and utilized between the Company and Hoechst AG, they are on terms that are as favorable to the Company as could be obtained by third parties from Hoechst AG.
The Company, from time to time, has entered into various financing agreements with its parent, Hoechst Corporation, and affiliates of Hoechst AG at competitive rates. See Note (2) of Notes to Consolidated Financial Statements.
The Company has, from time to time, contracted for various plant and equipment design and consulting services from companies in the Hoechst Group on terms at least as favorable as could be obtained from third parties.
The Company purchases from companies in the Hoechst Group many chemical raw materials at competitive prices for use in manufacturing chemically-related products. Several finished chemicals, which are resold in the United States, are also purchased from companies in the Hoechst Group. See Note (2) of Notes to Consolidated Financial Statements.
The Company intends to continue its current policy of paying dividends to Hoechst Corporation at the discretion of the Company's Board of Directors. Payment of dividends by the Company is restricted by its public debt instruments, when there is, or a payment would result in, a default under these instruments or if the payments (when aggregated with other "Restricted Payments" as defined therein) would exceed a formula amount based on the total of $250 million plus Consolidated Net Income (as defined therein) plus certain Net Cash Proceeds from the sale, conversion or exchange of stock (as specified therein).
Certain of the Company's employees, including a director, have employment contracts with Hoechst AG. See "Executive Compensation."
PART IV
ITEM 14.
ITEM 14. EXHIBITS AND REPORTS ON FORM 8-K
(a)(l) Financial Statements
The Consolidated Financial Statements of the Company and the Report of Independent Auditors of KPMG Peat Marwick LLP are set forth in the Financial Statements (Item 8) and are filed as part of this report.
(a)(2) Exhibits
The following Exhibits are filed as part of this report:
Exhibit Number Description ------ -----------
3.1 Restated Certificate of Incorporation of the Company (filed as a part of Exhibit 3 to the Company's Form S-l Registration Statement No. 33-13326 filed April 10, 1987, and incorporated herein by reference).
3.2 Bylaws of the Company as amended December 15, 1989 (filed as an Exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 1989, and incorporated herein by reference).
4.1 Form of Indenture between the Company and The Bank of New York relating to the 9.45% Notes due 1997, and the form of such notes (filed as Exhibits to the Company's Quarterly Report on Form 10-Q for the interim period ended June 30, 1987, and incorporated herein by reference).
4.2 Form of Indenture between the Company and The Bank of New York relating to the 9 5/8% Notes due 1999, and the form of such notes (filed as Exhibits to the Company's Quarterly Report on Form 10-Q for the interim period ended September 30, 1987, and incorporated herein by reference).
4.3 Form of Indenture between the Company and Chemical Bank relating to medium-term notes and the form of such notes (filed as Exhibits to the Company's Quarterly Report on Form 10-Q for the interim period ended September 30, 1988, and incorporated herein by reference).
4.4 Form of First Supplemental Indenture between the Company and Chemical Bank relating to medium-term notes and the form of such notes (filed as Exhibits to the Company's Form S-3 Registration Statement No. 33-23628 filed April 24, 1991, and incorporated herein by reference).
4.5 Form of Indenture between the Company and Chemical Bank relating to debt securities and medium-term notes and the form of such securities and notes (filed as Exhibits to the Company's Form S-3 Registration Statement Nos. 33-23628 and 33-51675 filed December 22, 1993 and incorporated herein by reference).
4.6 The Company agrees to furnish the Commission upon request a copy of any other instrument with respect to long-term debt of the Company and any subsidiary for which consolidated or unconsolidated financial statements are required to be filed and as to which the amount of securities author- ized thereunder does not exceed 10% of the total assets of the Company and its subsidiaries on a consolidated basis.
10.1 Memorandum of Cooperation, dated October 20, 1983, between AHC and Roussel-Uclaf S.A., relating to Hoechst-Roussel Pharmaceuticals Incorporated (filed as an Exhibit to the Company's Form S-1 Registration Statement No. 33-13326 filed April 10, 1987, and Incorporated herein by reference).
10.2 Agreement containing Consent Order and Agreement to Hold Separate, dated February 19, 1987, among Hoechst AG, AHC, Celanese and the United States Federal Trade Commission (filed as an Exhibit to the Company's Form S-l Registration Statement No. 33-13326 filed April 10, 1987, and incorporated herein by reference).
10.3 Technology Cooperation and License Agreement between Hoechst AG and the Company as of January 1, 1988 (filed as an Exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 1987, and incorporated herein by reference).
10.4 Summary of AHC Medical Program Policy provisions applicable to former members of the AHC Executive Committee (filed as an Exhibit to the Company's Form S-1 Registration Statement No. 33-13326 filed April 10, 1987, and incorporated herein by reference).
10.5 Summary of AHC Executive Retiree Life Insurance Program (filed as an Exhibit to the Company's Form S-l Registration Statement No. 33-13326 filed April 10, 1987, and incorporated herein by reference).
10.6 The Hoechst Celanese Executive Pension Plan, as amended, as of November 1, 1991 (filed as an Exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 1991, and incorporated herein by reference).
10.7 Supplemental Pension Plan to Retirement Plan (formerly the Celanese Supplemental Pension Plan to the Celanese Retirement Income Plan) (filed as an Exhibit to the Celanese Annual Report on Form 10-K (File No. 1- 1308) for the fiscal year ended December 31, 1977, and incorporated herein by reference).
10.8 Grantor Trust Agreement, between Celanese and Bankers Trust Company dated December 27, 1985, for payment of benefits under the Executive Pension Plan (filed as an Exhibit to the Celanese Annual Report on Form 10-K (File No. 1-1308) for the fiscal year ended December 31, 1985, and incorporated herein by reference).
10.9 The Hoechst Celanese Executive Medical and Dental Plan, effective January 1, 1989 (filed as an Exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 1988, and incorporated herein by reference).
10.10 Employment Agreement, dated January 21, 1987, between Celanese and Joseph H. Patterson (filed as an Exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 1987, and incorporated herein by reference).
10.11 Summary of Management Incentive Plan (filed as an Exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 1987, and incorporated herein by reference).
10.12 Hoechst Celanese Long-Term Incentive Plan, effective January 1, 1989 (filed as an Exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 1988, and incorporated herein by reference).
10.13 A description of the Hoechst Celanese Executive Benefits Reimbursement Program (filed as an Exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 1988, and incorporated herein by reference).
Exhibit Number Description ------- -----------
10.14 Agreement, dated December 7, 1994, between the Company and Joseph H. Patterson.
12 Computation of Ratio of Earnings to Fixed Charges.
21 Subsidiaries.
Where Name Incorporated
Hoechst Celanese Chemical Group, Inc. Texas
23 Consent of Independent Accountants.
24.1 Powers of attorney, dated March 6, 1995, for directors and officers of the Company authorizing Harry R. Benz, Karl G. Engels and/or David A. Jenkins to sign this 10-K on their behalf.
24.2 Certified copy of resolution adopted by the Board of Directors of the Company on February 27, 1995, authorizing officers to sign this 10-K on behalf of the Company pursuant to powers of attorney.
27 Financial Data Schedule (included in electronic filing only)
(b) Reports on Form 8-K
During the quarter ended December 31, 1994, no reports on Form 8-K were filed.
SIGNATURES
Pursuant to the requirements of Section 15(d) of the Securities Exchange Act of 1934, Hoechst Celanese has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Hoechst Celanese Corporation
By: /s/ Karl G. Engels ------------------------------------ Karl G. Engels President, Chief Executive Officer and Director
March 29, 1995
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed on March 29, 1995, by the following persons on behalf of the registrant and in the capacities indicated.
Signature Title --------- -----
Principal Executive Officer:
/s/ Karl G. Engels Director, President and Chief Executive Officer ------------------------ Karl G. Engels
Principal Financial Officer:
/s/ Harry R. Benz Director, Senior Vice President-Finance and ------------------------ Chief Financial Officer Harry R. Benz
Principal Accounting Officer:
/s/ Raymond W. Smedley Vice President and Controller ------------------------ Raymond W. Smedley
Directors: Guenter Metz* Director William B. Harris* Director David A. Jenkins* Director Thomas F. Kennedy* Director Joseph H. Patterson* Director
---------- *Karl G. Engels, by signing his name hereto, does sign this document on behalf of each of the persons indicated above pursuant to powers of attorney duly executed by such persons, filed with the Securities and Exchange Commission.
By: /s/ Karl G. Engels ------------------------ Karl G. Engels Attorney-in-Fact
Supplemental information to be furnished with reports filed pursuant to Section 15(d) of the Securities Exchange Act of 1934 (the "Act") by registrants which have not registered securities pursuant to Section 12 of the Act:
Hoechst Celanese Corporation is a wholly owned subsidiary of Hoechst Corporation. Accordingly, no annual report of proxy material has been sent to security holders.
EXHIBITS TO 1994 ANNUAL REPORT ON FORM 10-K -------------------------------------------
3.1 Restated Certificate of Incorporation of the Company (filed as a part of Exhibit 3 to the Company's Form S-1 Registration Statement No. 33-13326 filed April 10, 1987, and incorporated herein by reference).
3.2 Bylaws of the Company as amended December 15, 1989 (filed as an Exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 1989, and incorporated herein by reference).
4.1 Form of Indenture between the Company and The Bank of New York relating to the 9.45% Notes due 1997, and the form of such notes (filed as Exhibits to the Company's Quarterly Report on Form 10-Q for the interim period ended June 30, 1987, and incorporated herein by reference).
4.2 Form of Indenture between the Company and The Bank of New York relating to the 9 5/8% Notes due 1999, and the form of such notes (filed as Exhibits to the Company's Quarterly Report on Form 10-Q for the interim period ended September 30, 1987, and incorporated herein by reference).
4.3 Form of Indenture between the Company and Chemical Bank relating to medium-term notes and the form of such notes (filed as Exhibits to the Company's Quarterly Report on Form 10-Q for the interim period ended September 30, 1988, and incorporated herein by reference).
4.4 Form of First Supplemental Indenture between the Company and Chemical Bank relating to medium-term notes and the form of such notes (filed as Exhibits to the Company's Form S-3 Registration Statement No. 33-23628 filed April 24, 1991, and incorporated herein by reference).
4.5 Form of Indenture between the Company and Chemical Bank relating to debt securities and medium-term notes and the form of such securities and notes (filed as Exhibits to the Company's Form S-3 Registration Statement Nos. 33-23628 and 33-51675 filed December 22, 1993 and incorporated herein by reference).
4.6 The Company agrees to furnish the Commission upon request a copy of any other instrument with respect to long-term debt of the Company and any subsidiary for which consolidated or unconsolidated financial statements are required to be filed and as to which the amount of
securities authorized thereunder does not exceed 10% of the total assets of the Company and its subsidiaries on a consolidated basis.
10.1 Memorandum of Cooperation, dated October 20, 1983, between AHC and Roussel-Uclaf S.A., relating to Hoechst-Roussel Pharmaceuticals Incorporated (filed as an Exhibit to the Company's Form S-1 Registration Statement No. 33-13326 filed April 10, 1987, and incorporated herein by reference).
10.2 Agreement containing Consent Order and Agreement to Hold Separate, dated February 19, 1987, among Hoechst AG, AHC, Celanese and the United States Federal Trade Commission (filed as an Exhibit to the Company's Form S-1 Registration Statement No. 33-13326 filed April 10, 1987, and incorporated herein by reference).
10.3 Technology Cooperation and License Agreement between Hoechst AG and the Company as of January 1, 1988 (filed as an Exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 1987, and incorporated herein by reference).
10.4 Summary of AHC Medical Program Policy provisions applicable to former members of the AHC Executive Committee (filed as an Exhibit to the Company's Form S-1 Registration Statement No. 33-13326 filed April 10, 1987, and incorporated herein by reference).
10.5 Summary of AHC Executive Retiree Life Insurance Program (filed as an Exhibit to the Company's Form S-1 Registration Statement No. 33-13326 filed April 10, 1987, and incorporated herein by reference).
10.6 The Hoechst Celanese Executive Pension Plan, as amended, as of November 1, 1991 (filed as an Exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 1991, and incorporated by reference).
10.7 Supplemental Pension Plan to Retirement Plan (formerly the Celanese Supplemental Pension Plan to the Celanese Retirement Income Plan) (filed as an Exhibit to the Celanese Annual Report on Form 10-K (File No. 1- 1308) for the fiscal year ended December 31, 1977, and incorporated herein by reference).
10.8 Grantor Trust Agreement, between Celanese and Bankers Trust Company dated December 27, 1985, for payment of benefits under the Executive Pension Plan (filed as an Exhibit to the Celanese Annual Report on Form 10-K (File No. 1-1308) for the fiscal year ended December 31, 1985, and incorporated herein by reference).
10.9 The Hoechst Celanese Executive Medical and Dental Plan, effective January 1, 1989 (filed as an Exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 1988, and incorporated herein by reference).
10.10 Employment Agreement, dated January 21, 1987, between Celanese and Joseph H. Patterson (filed as an Exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 1987, and incorporated herein by reference).
10.11 Summary of Management Incentive Plan (filed as an Exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 1987, and incorporated herein by reference).
10.12 Hoechst Celanese Long-Term Incentive Plan, effective January 1, 1989 (filed as an Exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 1988, and incorporated herein by reference).
10.13 A description of the Hoechst Celanese Executive Benefits Reimbursement Program (filed as an Exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 1988, and incorporated herein by reference).
10.14 Agreement, dated December 7, 1994, between the Company and Joseph H. Patterson.
12 Computation of Ratio of Earnings to Fixed Charges.
21 Subsidiaries.
WHERE NAME INCORPORATED
Hoechst Celanese Chemical Group, Inc. Texas
23 Consent of Independent Accountants.
24.1 Powers of attorney, dated March 6, 1995, for directors and officers of the Company authorizing Harry R. Benz, Karl G. Engels and/or David A. Jenkins to sign this 10-K on their behalf.
24.2 Certified copy of resolution adopted by the Board of Directors of the Company on February 27, 1995, authorizing officers to sign this 10-K on behalf of the Company pursuant to powers of attorney.
27. Financial Data Schedule