SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

x	QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2006
OR
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                        to                       

 

(Commission File Number) 1-15339

 

CHEMTURA CORPORATION

(Exact name of registrant as specified in its charter)

 

 

 

(Former name, former address and former fiscal year, if changed from last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

x Yes                           o No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filed. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act (check one).

Large Accelerated Filer x            Accelerated Filer o            Non-accelerated filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

o Yes                           x No

The number of shares of common stock outstanding as of the latest practicable date, is as follows:

 

 

CHEMTURA CORPORATION AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2006

 

 

PART I.   FINANCIAL INFORMATION

ITEM 1.   Financial Statements and Accompanying Notes

CHEMTURA CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Earnings (Unaudited)
First quarter ended March 31, 2006 and 2005
(In thousands of dollars, except per share data)

 

		2006			2005
Net sales		$	915,761		$	589,730
Cost of products sold		674,837			420,474
Selling, general and administrative		104,963			63,999
Depreciation and amortization		51,711			30,126
Research and development		14,798			10,511
Equity income		(274		)	(88		)
Facility closures, severance and related costs		504			158
Antitrust costs		12,808			3,166
Merger costs		10,045			—
Operating profit		46,369			61,384
Interest expense		29,073			24,406
Other (income) expense, net		(2,640		)	4,266
Earnings from continuing operations before income taxes		19,936			32,712
Income tax expense		6,731			14,483
Earnings from continuing operations		13,205			18,229
Earnings from discontinued operations		—			2,206
Net earnings		$	13,205		$	20,435
Basic earnings per common share:
Earnings from continuing operations		$	0.05		$	0.16
Earnings from discontinued operations		—			0.02
Net earnings		$	0.05		$	0.18
Diluted earnings per common share:
Earnings from continuing operations		$	0.05		$	0.15
Earnings from discontinued operations		—			0.02
Net earnings		$	0.05		$	0.17
Dividends per common share		$	0.05		$	0.05

 

See accompanying notes to condensed consolidated financial statements.

2

---

CHEMTURA CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
March 31, 2006 (Unaudited) and December 31, 2005
(In thousands of dollars)

		March 31,			December 31,
		2006			2005
ASSETS
CURRENT ASSETS
Cash and cash equivalents		$	141,290		$	138,556
Accounts receivable		607,608			547,857
Inventories		702,075			661,617
Other current assets		195,967			193,570
Assets held for sale		6,500			—
Total current assets		1,653,440			1,541,600
NON-CURRENT ASSETS
Property, plant and equipment, net		1,168,964			1,192,335
Cost in excess of acquired net assets		1,212,804			1,211,459
Intangible assets, net		608,782			620,677
Other assets		391,500			419,932
		$	5,035,490		$	4,986,003
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES
Short-term borrowings		$	67,868		$	60,168
Accounts payable		310,114			310,485
Accrued expenses		425,328			444,336
Income taxes payable		126,454			160,700
Total current liabilities		929,764			975,689
NON-CURRENT LIABILITIES
Long-term debt		1,397,652			1,309,603
Pension and post-retirement health care liabilities		616,379			618,539
Other liabilities		299,330			306,775
STOCKHOLDERS’ EQUITY
Common stock		2,518			2,515
Additional paid-in capital		2,956,522			2,950,649
Accumulated deficit		(868,674		)	(869,873		)
Accumulated other comprehensive loss		(131,159		)	(141,052		)
Treasury stock at cost		(166,842		)	(166,842		)
Total stockholders’ equity		1,792,365			1,775,397
		$	5,035,490		$	4,986,003

 

See accompanying notes to condensed consolidated financial statements.

3

---

CHEMTURA CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited)
First quarter ended March 31, 2006 and 2005
(In thousands of dollars)

 

Increase (decrease) in cash				2006			2005
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings				$	13,205		$	20,435
Adjustments to reconcile net earnings to net cash used in operations:
Depreciation and amortization				51,711			32,135
Equity income				(371		)	(88		)
Changes in assets and liabilities, net:
Accounts receivable				(102,272		)	(40,606		)
Accounts receivable —securitization				57,161			1,596
Inventories				(29,412		)	(30,168		)
Accounts payable				(3,440		)	(20,490		)
Pension and post-retirement health care liabilities				(5,733		)	(3,248		)
Other				(53,087		)	(29,586		)
Net cash used in operations				(72,238		)	(70,020		)
CASH FLOWS FROM INVESTING ACTIVITIES
Net proceeds from divestments				19,390			11,797
Payments for acquisitions				(6,733		)	—
Payments for Merger transaction costs				(4,737		)	—
Capital expenditures				(17,560		)	(13,978		)
Other investing activities				(2		)	(28		)
Net cash used in investing activities				(9,642		)	(2,209		)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from credit facility, net				86,993			25,000
Proceeds from (payments on) short-term borrowings				5,844			(162		)
Dividends paid				(12,007		)	(5,808		)
Proceeds from exercise of stock options				848			13,333
Other financing activities				433			991
Net cash provided by financing activities				82,111			33,354
CASH
Effect of exchange rates on cash				2,503			(1,414		)
Change in cash				2,734			(40,289		)
Cash at beginning of period				138,556			158,700
Cash at end of period				$	141,290		$	118,411

 

See accompanying notes to condensed consolidated financial statements.

 

4

CHEMTURA CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)

On July 1, 2005, Crompton Corporation (Crompton) and Great Lakes Chemical Corporation (Great Lakes) combined their businesses by merging a wholly-owned subsidiary of Crompton with and into Great Lakes (the Merger). Under the terms of the merger agreement, Great Lakes shareholders received 2.2232 shares of the Company’s common stock for each share of Great Lakes common stock and Great Lakes became a wholly-owned subsidiary of Crompton. The Company also changed its name to Chemtura Corporation.

Although substantially complete at March 31, 2006, the purchase price allocation for a number of accounts, including property, plant and equipment, other intangibles, deferred taxes, pre-merger contingencies, environmental liabilities and cost in excess of acquired net assets, has not been finalized because the Company has not completed all aspects of the accumulation and review of the Great Lakes information related to these matters.

ACCOUNTING POLICIES

Presentation of Condensed Consolidated Financial Statements

The information in the foregoing condensed consolidated financial statements for the first quarter ended March 31, 2006 and March 31, 2005 are unaudited, but reflect all adjustments which, in the opinion of management, are necessary for a fair presentation of the results of operations for the interim periods presented. All such adjustments are of a normal recurring nature, except as otherwise disclosed in the accompanying notes to the condensed consolidated financial statements.

The foregoing condensed consolidated financial statements include the accounts of Chemtura Corporation and its wholly-owned and majority-owned subsidiaries that it controls, including the results of operations of Great Lakes commencing on July 1, 2005, which are collectively referred to as “the Company.”  Other affiliates in which the Company has a 20% to 50% ownership interest or a non-controlling majority interest are accounted for in accordance with the equity method. All significant intercompany balances and transactions have been eliminated in consolidation.

On March 18, 2005, the Refined Products business was sold to Sun Capital Partners Group, Inc. Accordingly, the accompanying condensed consolidated financial statements for the first quarter of 2005 reflect the results of the Refined Products business as earnings from discontinued operations (net of tax). The condensed consolidated statements of cash flows have not been adjusted to separately reflect the discontinued operation and thus include the cash flows of the Refined Products business for the first quarter of 2005. Refer to the discontinued operations footnote for further information.

Certain financial information and footnote disclosures included in the annual financial statements have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission for reporting on Form 10-Q. The interim consolidated financial statements should be read in conjunction with the consolidated financial statements and notes included in the Company’s 2005 Annual Report on Form 10-K. The consolidated results of operations for the three months ended March 31, 2006 are not necessarily indicative of the results expected for the full year.

Operating Costs and Expenses

Cost of products sold includes all costs incurred in manufacturing products, including raw materials, direct manufacturing costs and manufacturing overhead. Cost of products sold also includes warehousing, distribution, engineering (other than polymer processing equipment design engineering), purchasing, customer service and environmental, health and safety functions, and shipping and handling costs for outbound product shipments. Selling, general and administrative expenses (SG&A) include costs and expenses related to the following functions and activities: selling, advertising, polymer processing equipment design engineering, information technology, legal, provision for doubtful accounts, corporate facilities and corporate administration. SG&A also includes accounting, finance and human resources, excluding direct support in manufacturing operations, which is included as cost of products sold. Research and development expenses (R&D) include basic and applied research and development activities of a technical and non-routine nature. R&D costs are expensed as incurred. Costs of products sold, SG&A and R&D expenses exclude depreciation and amortization expenses, which are presented on a separate line in the condensed consolidated statements of earnings.

Other

Included in cash and cash equivalents in the Company’s condensed consolidated balance sheets at March 31, 2006 and December 31, 2005, is approximately $0.5 million of restricted cash that is required to be on deposit to support certain letters of credit and performance guarantees, the majority of which will be settled within one year. In addition, at March 31, 2006, the Company had approximately $6.2 million in an escrow account that is restricted to pay an existing antitrust settlement liability, which has been recorded in other current assets in the condensed consolidated balance sheet.

5

---

Included in accounts receivable are allowances for doubtful accounts of $32.5 million at March 31, 2006 and $30.5 million at December 31, 2005.

Accumulated depreciation amounted to $916.6 million at March 31, 2006 and $861.7 million at December 31, 2005.

During the first quarter of 2006 and 2005, the Company made interest payments of approximately $42.7 million and $32.1 million, respectively. The increase was primarily due to the inclusion of Great Lakes. During the first quarter of 2006 and 2005, the Company made payments for income taxes (net of refunds) of $27.0 million and $14.7 million, respectively.

RECLASSIFICATIONS

During 2005, the Company reclassified certain immaterial amounts relating to operations from other (income) expense, net to cost of products sold and SG&A in the 2005 condensed consolidated statement of earnings. For the three months ended March 31, 2005, the Company reclassified other expense, net of $4.5 million from other (income) expense, net, to cost of products sold ($1.8 million) and to SG&A ($2.7 million).

STOCK-BASED COMPENSATION

 

The Company uses various employee stock-based compensation plans.  Awards under these plans are granted to eligible officers, management employees and non-management directors.  Awards may be made in the form of incentive stock options, non-qualified stock options, stock appreciation rights and restricted stock.  The Company plans to issue any shares related to the exercise of stock options or vested restricted stock under these plans by increasing total common shares outstanding.

 

Description of the Plans

 

The 1988 Long-Term Incentive Plan (1988 Plan), as amended, authorized the Board of Directors (Board) to grant stock options, stock appreciation rights, restricted stock and long-term performance awards covering up to 10 million shares to the officers and other key employees of the Company over a period of ten years through October 1998.  Non-qualified and incentive stock options were granted under the 1988 plan at prices not less than 100% of the fair market value of the underlying common shares on the date of the grant.  All outstanding options will expire not more than ten years and one month from the date of grant.

 

The 1993 Stock Option Plan for Non-Employee Directors, as amended in 1996, authorized 200,000 options to be granted to non-employee directors.  The options vest over a two-year period and are exercisable over a ten-year period from the date of grant, at a price equal to the fair market value of the underlying common shares on the date of grant.

 

The 1998 Long-Term Incentive Plan (1998 Plan) was approved by the Company’s shareholders in 1999.  This plan authorizes the Board to grant stock options, stock appreciation rights, restricted stock and long-term performance awards to eligible employees and non-qualified stock options to non-employee directors over a ten-year period.  During 2006 and 2005, non-qualified and incentive stock options were granted under the 1998 Plan at prices not less than 100% of the fair market value of the underlying common shares on the date of grant.  All outstanding options will expire not more than ten years and one month from the date of grant.  The 1998 Plan authorizes the Company to grant shares and options for shares of common stock equal to the sum of (i) the shares available for award under the 1988 Plan and the 1993 Stock Option Plan For Non-Employee Directors as of October 18, 1998 and (ii) the shares awarded under prior plans of the Company which were forfeited, expired, lapsed, not earned or tendered to pay the exercise price of options or withholding taxes.  In 1999, the number of common shares reserved for issuance under the 1998 plan was increased by 2.8 million shares and, pursuant to the merger with Witco, increased by an additional 5 million shares.  Under the terms of the merger with Witco, the shareholders also approved the conversion of all outstanding Witco options into options to purchase the Company's common stock.  These 4.7 million converted options expired 30 days after the merger with Witco and became available for grant under the 1998 Plan.

 

In October 2001, the Board approved the 2001 Employee Stock Option Plan (2001 Plan).  The 2001 Plan authorizes the Board to grant up to 1 million non-qualified stock options to key non-officer employees.  Options under the 2001 plan will be granted at prices not less than 100% of the fair market value of the underlying common shares on the date of grant and will expire not more than 10 years and one month from the date of grant. During 2005, non-qualified stock options were granted under the 2001 Plan at prices not less than 100% of the fair market value of the underlying common shares on the date of grant.

 

In accordance with the terms of the merger agreement, all unvested Great Lakes options as of the merger date were immediately vested and all of the outstanding options were converted into options to purchase the Company’s common stock.

6

---

Adoption of FASB Statement No. 123 (R) “Share-Based Payment”

 

In December 2004, the FASB issued Statement No. 123 (revised 2004), “Share-Based Payment” (FASB 123(R)), which replaced Statement No. 123, “Accounting for Stock-Based Compensation” (FASB 123) and supersedes Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (APB 25).  FASB 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair value, beginning with the first annual period after June 15, 2005.  The pro forma disclosures previously permitted under FASB 123 are no longer an alternative to financial statement recognition.   In March 2005, the SEC Staff issued Staff Accounting Bulletin 107, “Share-Based Payment” (SAB 107), which expresses views of the SEC Staff about the application of FASB 123(R).

 

Through January 1, 2006, the Company elected to continue its historical method of accounting for stock-based compensation in accordance with APB 25, as permitted under FASB 123 and Financial Accounting Standards Board Statement No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure” (FASB 148). Under APB 25, compensation expense for fixed plans was recognized based on the difference between the exercise price and the stock price on the date of grant. Since the Company’s fixed plan awards were granted with an exercise price equal to the stock price on the date of grant, no compensation expense was recognized in the statement of earnings for these awards.  However, compensation expense was recognized for the restricted stock awards under the Company’s long-term incentive programs in accordance with the provisions of APB 25.  The following table illustrates the effect on net earnings (loss) and related per share amounts for the quarter ended March 31, 2005, as if the Company had applied the fair value recognition provisions of FASB 123 and FASB 148 to all stock-based employee compensation awards.

 

 

Effective January 1, 2006, the Company adopted FASB 123(R) using the modified prospective method. Under the modified prospective method, the compensation cost for all new awards and awards modified, repurchased or cancelled after the date of adoption of FASB 123(R), as well as the unrecognized compensation cost of unvested awards as of the date of adoption are recognized in earnings based on the grant-date fair value of those awards.

 

Total stock-based compensation expense, including amounts for restricted stock and other, was $3.6 million for the three months ended March 31, 2006 and is presented within SG&A expense.  Included within the $3.6 million is $1.5 million ($0.9 million after tax and less than $0.01 per basic and diluted earnings per share) of incremental compensation expense that represents the effect of the Company’s January 1, 2006 adoption of FASB 123 (R) primarily for the Company’s stock option program.  Compensation expense related to stock options has been allocated 50% to the Corporate segment and 50% to the Company’s operating segments.  All other stock-based compensation expense is recorded in the Corporate segment.

 

Stock Option Plans

 

In January 2006, the Board granted merger integration awards consisting of long-term incentive awards of stock options covering 211,800 shares which will vest ratably over a three-year period.  

7

---

 

In March 2006, the Board of Directors also approved the grant of options covering 1,926,800 shares with an exercise price equal to the fair market value of the underlying common stock at the date of grant, including options covering 220,000 shares related to merger integration.  These options will vest ratably over a three-year period. 

 

The Company uses the Black-Scholes option-pricing model to determine the compensation expense related to stock options.  The Company has elected to recognize compensation cost for option awards granted equally over the requisite service period for each separately vesting tranche, as if multiple awards were granted.  Using this method the weighted average fair value of stock options granted during the three months ended March 31, 2006 and 2005 was $4.85 and $6.30, respectively.  The Black-Scholes option-pricing model requires the use of various assumptions.  The following table presents the weighted average assumptions used:

 

 

During 2006, the Company took into consideration guidance contained in FASB 123(R) and SAB 107 when reviewing and developing assumptions for the 2006 grants. The weighted average expected life for the 2006 grants of 6 years reflects the simplified method contained in SAB 107, which defines the expected life as the average of the contractual term of the options and the weighted average vesting period for all option tranches. Expected volatility for the 2006 option grants is based on historical volatility over the six years prior to the option grant date. Currently, the Company has no expectation that the expected volatility is likely to differ from its historical volatility.

 

Stock option plan activity for the three months ended March 31, 2006 is as follows:

 

		Shares		Weighted Average Exercise Price			Weighted Average Contractual Life		Aggregate Intrinsic Value (in millions)
Options outstanding, January 1, 2006		15,329,956		$	12.22
Granted		2,138,600		10.92
Exercised		(102,800	)	8.25					$	0.3
Canceled or expired		(309,124	)	19.22
Options outstanding, March 31, 2006		17,056,632		$	11.95		5.5		$	30.6
Options exercisable, March 31, 2006		13,523,053		$	12.13		4.5		$	27.8

 

Total remaining unrecognized compensation cost associated with unvested stock options at March 31, 2006 was $13.0 million which will be recognized over the weighted average period of approximately two years.

 

The total intrinsic value of stock options exercised during the three months ended March 31, 2005 was $7.3 million.  The total intrinsic value of stock options outstanding and exercisable at March 31, 2005 was $57.2 million and $45.9 million, respectively.

 

Restricted Stock Plans

 

In January 2006, the Board granted merger integration awards consisting of long-term incentive awards in the amount of 70,600 shares of restricted stock which will vest ratably on the first and second anniversary of the grants.

 

In March 2006, the Board approved a grant of long-term incentive awards of restricted stock which carry a market condition requirement.  These shares will vest based on the achievement of specified stock price appreciation milestones, which represents a market condition, over a three-year period.  This grant was for 572,400 shares of restricted stock. The plan also includes a provision for the grant of an additional 572,400 shares, for a maximum payout of 1,144,800 shares of restricted stock to be issued if the maximum level of specified stock appreciation is attained.  Shares will be scheduled to vest when a particular milestone is reached and maintained (based on closing price on the New York Stock Exchange) for fifteen (15) consecutive trading days.  Share awards for milestones achieved during 2006 and 2007 will become vested and paid out on February 1, 2008.  Share awards for milestones achieved during 2008 will become vested and paid out on February 1, 2009.

8

---

Additionally, in February and March 2006, the Board approved grants of 61,400 and 7,500 shares of restricted stock that do not contain market condition requirements.  The grant of 61,400 shares vests immediately, while the grant of 7,500, respectively, shares vests half in 2008 and half in 2010.

 

The fair value of restricted stock awards without market conditions is determined based on the number of shares granted and the quoted closing price of the Company’s stock at the date of grant.  To determine the fair value of restricted stock with market conditions, the Company uses the Monte Carlo simulation method.  The Company’s determination of the fair value of restricted stock awards with market conditions on the date of grant is affected by its stock price as well as assumptions regarding a number of highly complex and subjective variables, if other reasonable assumptions were used the results may differ.  The Company used the following when applying the Monte Carlo simulation method:

 

Expected Volatility:  The Company estimates the volatility of its common stock at the date of grant based on the historical volatility of its common stock.

 

Risk-Free Interest Rate:  The Company bases the risk-free interest rate used in the Monte Carlo simulation on implied yield currently available on U.S. Treasury issues with an equivalent remaining term equal to the expected life of the award.

 

The fair value of all restricted stock awards with market conditions are amortized on a straight-line vesting basis over the requisite service periods.  In the case of accelerated vesting based on the market performance of the Company’s common stock, the compensation costs related to the vested awards that have not previously been amortized are recognized upon vesting.

 

Restricted stock award activity for the three months ended March 31, 2006 is as follows:

 

 

 

Total remaining unrecognized compensation cost associated with unvested restricted stock awards at March 31, 2006 was $11.5 million which will be recognized over the weighted average period of approximately two years.

 

The total fair value of shares granted and vested during the three months ended March 31, 2005 was $5.9 million and $2.4 million, respectively.  The total fair value of unvested restricted stock at March 31, 2005 was $18.1 million.  The weighted average grant-date fair value of restricted shares granted during the three months ended March 31, 2005 was $12.74.

 

Tax Benefits of Stock-Based Compensation Plans

 

Prior to the adoption of FASB 123(R), any benefit the Company received from tax deductions resulting from the exercise of stock options and restricted stock awards was presented in the cash flow from operations section of the consolidated statements of cash flows. FASB 123(R) requires the benefits of tax deductions in excess of grant-date fair value be presented in the cash flow from financing section of the consolidated statements of cash flows.  The Company did not obtain any significant cash tax benefit associated with shares exercised in the first quarter of 2006 as the Company has offset its taxable income with net operating loss carryforwards. Cash proceeds received from option exercises for the three months ended March 31, 2006 and 2005 were $0.8 million and $13.3 million, respectively.

 

In November 2005, the FASB issued FASB Staff Position No. FASB 123(R)-3, “Transition Election Related to Accounting for the Tax Effects of Share-Based Award Payments” (“FSP 123(R)-3”).  The provisions of FSP 123(R)-3 set forth an alternative method of calculating the excess tax benefits available to absorb tax deficiencies recognized subsequent to the adoption of FASB No. 123(R).  The Company, which is currently evaluating its available transition alternatives, has until January 1, 2007 to make its one-time election.

 

9

---

Subsequent Issuances

 

In April 2006, the Company’s shareholders approved the 2006 Chemtura Corporation Long-Term Incentive Plan. The plan permits the grant of various forms of stock-based compensation awards, including stock options, restricted stock, stock appreciation rights and performance awards. The plan provides for the issuance of a maximum of 10.5 million shares, with shares granted under the plan pursuant to awards other than stock options and stock appreciation rights limited to one-third of the total maximum number of shares available for award under the plan.

 

MERGER

On March 9, 2005, the Company and Great Lakes announced the signing of a definitive merger agreement (the Agreement) for an all-stock merger transaction. The transaction closed on July 1, 2005, and in accordance with the terms of the Agreement, Great Lakes shareholders received 2.2232 shares of the Company’s common stock for each share of Great Lakes common stock resulting in the issuance of approximately 116.1 million shares, which is net of 11.5 million treasury shares, of the Company’s common stock with a fair value of approximately $1.85 billion. The fair value is based on a fair value per common share of $14.52, which represents the average of the closing prices on March 9, 2005, the date the terms of the agreement were agreed to and announced, and the two days before and after that date. The Company has also exchanged all of the outstanding vested and unvested Great Lakes stock options for 8.1 million of fully vested stock options of the Company. In addition, vesting was accelerated for substantially all of the outstanding unvested restricted share units of Great Lakes. As a result of the Merger, the Company obtained a 100% equity interest in Great Lakes.

The acquired assets and assumed liabilities have been recorded at their fair value and the excess cost of the acquired net assets over their fair value has been recorded as goodwill. The Company believes that this goodwill is attributable to an enhanced competitive position, greater stability through geographic and end-market diversification, a significantly strengthened balance sheet and credit profile, and a broader platform for future growth. The total purchase price has been allocated to the acquired net tangible and intangible assets and assumed liabilities based upon valuations and estimates of fair value. The valuations and estimates utilized to determine the purchase price allocation are still subject to change. Although substantially completed as of March 31, 2006, the purchase price allocation for a number of accounts, including property, plant and equipment, other intangibles, deferred taxes, pre-merger contingencies, environmental liabilities and cost in excess of acquired net assets has not been finalized because the Company has not fully completed all aspects of the accumulation and review of the Great Lakes information related to these matters. The Company is also in the process of

10

---

evaluating the deductibility of certain merger costs capitalized to goodwill associated with the Merger.  The purchase price at July 1, 2005 has been allocated as follows:

 

In-process research and development has no future alternate use and was written off to operations during 2005.

The following pro forma unaudited results of operations for 2005 give effect to the Merger as if it had been consummated as of the beginning of the period. The pro forma unaudited results of operations combine the historical results of operations of the Company and Great Lakes with the pro forma adjustments described below.

The pro forma unaudited results of operations do not give effect to synergies and cost savings expected to result from the Merger. The pro forma unaudited results of operations do not purport to be indicative of what the actual results of operations would have been had the Merger been completed on the dates assumed, or the results of operations that may be achieved in the future.

The pro forma unaudited results of operations for the quarter ended March 31, 2005 are as follows:

 

(a)          The 2005 pro forma loss from continuing operations includes a charge for the write-off of in-process research and development expenses of $73,300 ($73,300 net of tax), and a charge for the impact on cost of products sold of the fair value adjustment to inventory of $37,100 ($27,329 net of tax).

The pro forma adjustments included in the loss from continuing operations and in net loss above are summarized as follows:

 

11

(In thousands)				2005
Reduction in pension expense				$	975
Reduction in interest expense				2,202
Purchase accounting depreciation				2,637
Amortization				(4,550		)
Inventory accounting				(927		)
Elimination of merger expenses				2,549
Pro forma adjustments — gross				$	2,886
Pro forma adjustments - net of tax				$	2,770

 

The pro forma adjustments are as follows:

(a)                Pension — represents a reduction in pension expense, principally due to the elimination of the impact of amortization of historical gains and losses from Great Lakes’ historical net periodic benefit cost.

(b)               Interest — represents the impact on interest expense of amortization of the fair value adjustment to Great Lakes’ long-term debt.

(c)                Purchase accounting depreciation — represents the impact on depreciation expense of the fair value adjustment and change in the remaining useful lives of Great Lakes’ property, plant and equipment.

(d)               Amortization — represents the impact on amortization expense of the fair value adjustment and change in remaining useful life of Great Lakes’ intangible assets.

(e)                Inventory accounting — represents the impact of conforming Great Lakes’ inventory variance capitalization policy to a consistently applied method utilized by the Company.

(f)                  Merger expenses — represents the reversal of merger-related expenses incurred by Great Lakes.

As a result of the Merger, the Company assumed the merger-related liabilities of Great Lakes, which primarily related to the change in control provisions in employment contracts that were triggered by the Merger. A reconciliation of this reserve balance from July 1, 2005 is as follows:

(In thousands)				Severance and Related Costs (a)			Other Merger- Related Costs (b)			Total
Great Lakes liability assumed at July 1, 2005				$	41,569		$	27,345		$	68,914
2005 purchase price adjustment				2,851			20,788			23,639
Cash payments				(37,783		)	(46,826		)	(84,609		)
Non-cash utilization				(302		)	(201		)	(503		)
Balance at December 31, 2005				$	6,335		$	1,106		$	7,441
2006 purchase price adjustment				417			-			417
Cash payments				(4,131		)	(606		)	(4,737		)
Non-cash utilization				(135		)	-			(135		)
Balance at March 31, 2006				$	2,486		$	500		$	2,986

(a)             Includes severance relating to former Great Lakes personnel only, including severance recorded for employees identified as redundancies subsequent to the date of the Merger.

(b)            Includes primarily investment banking fees, legal fees and audit fees directly related to the closing of the Merger incurred by the Company.

As a result of the Merger, the Company recorded charges for costs directly related to the Merger as a component of operating profit . The related reserve activity is summarized as follows:

12

---

 

(In thousands)				Severance and Related Costs (c)			Merger Integration Costs (d)			Total
2005 merger costs				$	9,477		$	35,753		$	45,230
Cash payments				(4,813		)	(22,725		)	(27,538		)
Non-cash utilization				(403		)	-			(403		)
Balance at December 31, 2005				$	4,261		$	13,028		$	17,289
2006 merger costs				137			9,908			10,045
Cash payments				(1,417		)	(12,506		)	(13,923		)
Balance at March 31, 2006				$	2,981		$	10,430		$	13,411

(c)             Includes severance relating to former Crompton personnel only.

(d)            Includes primarily consulting costs related to the integration of Crompton and Great Lakes.

The above merger related reserves are included in accrued expenses on the Company’s condensed consolidated balance sheets at March 31, 2006 and December 31, 2005, respectively.

As of March 31, 2006, the Company terminated approximately 585 employees worldwide, as a direct result of the Merger. The Company expects to substantially complete its merger integration efforts by the end of 2006.

FACILITY CLOSURES, SEVERANCE AND RELATED COSTS

During the first quarter of 2006, as a result of the Company’s continuing efforts to become more efficient and to reduce costs, the Company recorded a pre-tax charge of $1.6 million for severance and related costs resulting from headcount reductions at two of its European locations.

In 2004, the Company completed an activity-based restructuring initiative intended to structure the Company’s operations in a more efficient and cost effective manner, including a voluntary severance program. During the first quarter of 2005, the Company recorded a pre-tax charge of $2.3 million as a result of this initiative. For the full year of 2005, the Company recorded pre-tax charges totaling $24 million, of which $19.5 million related to unrecoverable future lease costs and asset write-offs related to the closure of the Company’s former research and development facility in Tarrytown, NY. During the first quarter of 2006, the Company recorded a pre-tax credit of $0.3 million, primarily to adjust reserves for contractual obligations that are no longer required. Charges and adjustments related to these programs are summarized as follows:

(In thousands)				Severance and Related Costs (a)			Asset Write-offs (b)			Other Facility Closure Costs (c)			Total
Balance at December 31, 2004				$	40,053		$	—		$	1,591		$	41,644
2005 charge				2,898			3,970			17,102			23,970
Cash payments				(34,483		)	—			(4,066		)	(38,549		)
Non-cash charges and accretion				(442		)	(3,970		)	334			(4,078		)
Balance at December 31, 2005				8,026			—			14,961			22,987
2006 charge				(147		)	—			(133		)	(280		)
Cash payments				(4,521		)	—			(1,622		)	(6,143		)
Non-cash accretion				—			—			167			167
Balance at March 31, 2006				$	3,358		$	—		$	13,373		$	16,731

(a)          Includes domestic and international severance, benefits and related pension curtailments.

(b)         Includes asset write-offs related to sites closed as a result of the activity-based initiative, including assets related to the Tarrytown, NY closure.

(c)          Includes consulting costs that have been incurred, which were directly related to developing and implementing the activity-based restructuring initiative, unrecoverable future lease costs related to the closure of the Tarrytown, NY site and other contractual obligations related to closed sites.

13

---

Also, during the first quarter of 2006, the Company recorded a pre-tax credit of $0.8 million to adjust certain reserves related to the 1998 closure of its Painseville, Ohio facility.

The Company also had remaining reserves of  $0.3 million, $0.8 million and $0.9 million relating to its 2004 executive reorganization, 2003 cost reduction program and 2001 cost reduction initiative and corporate headquarter relocation, respectively, at March 31, 2006. The reserve balances for these programs were $0.5 million, $0.8 million and $1.0 million, respectively, at December 31, 2005. The decrease to these reserves during the first quarter of 2006 were due to payments.

During the fourth quarter of 2004, the Enenco joint venture, in which the Company owned a 50 percent interest, closed its manufacturing facility in Memphis, TN. During the first quarter of 2005, the Company acquired the remaining 50 percent interest from its joint venture partner and as a result accounts for Enenco as a wholly-owned subsidiary of the Company. This transaction resulted in a pre-tax credit to facility closures, severance and related costs during the first quarter of 2005 of $2 million due to recoveries from the joint venture partner of $1.1 million, adjustments to third party accruals of $0.7 million and adjustments to decommissioning and demolition reserves of $0.2 million.

The Company has included $10.3 million and $11.4 million of its facility closures, severance and related cost reserves in other liabilities at March 31, 2006 and December 31, 2005, respectively, and $10.0 million and $14.0 million in accrued expenses in its condensed consolidated balance sheets.

ASSETS HELD FOR SALE

In March 2006, the Company signed a definitive agreement to sell a significant portion of the real estate of the former Great Lakes offices in West Lafayette, Indiana. At March 31, 2006, the Company has classified the net book value of these assets of $6.5 million as assets held for sale on its condensed consolidated balance sheet and has ceased depreciating these assets.

DISCONTINUED OPERATIONS

Refined Products

On June 24, 2005, the Company sold certain assets and assigned certain liabilities of its Refined Products business to Sun Capital Partners Group, Inc. (Sun) for $80 million.  The consideration that the Company received was subject to adjustment based on the change in certain transferred assets and liabilities of the Refined Products business through the closing date and for retained accounts receivable and accounts payable, which resulted in a $30.3 million reduction to the proceeds received.  The Company also pre-paid approximately $6.8 million of the manufacturing costs for certain petroleum additives products that will be manufactured for the Company by Sun. During the second quarter of 2005, the Company recognized a loss on the transaction of $28.2 million (net of an income tax benefit of $14.3 million). During the fourth quarter of 2005, the Company recognized a gain of $28.3 million primarily due to the elimination of the cumulative currency translation adjustment resulting from the liquidation of a foreign subsidiary engaged in the Refined Products business.

The agreement provided for the sale of assets and assignment of liabilities with carrying amounts as follows:

(In thousands)				June 24, 2005
Inventory				$	40,928
Other current assets				1,066
Property, plant and equipment, net				42,540
Other assets				11,573
Total assets held for sale				$	96,107
Accounts payable				$	4,331
Accrued expenses				3,800
Total liabilities held for sale				$	8,131

 

The revenues, operating profit and pre-tax earnings from discontinued operations for 2005 are as follows:

(In thousands)				Quarter Ended March 31, 2005
Net sales				$	68,732

14

---

 

Pre-tax earnings from discontinued operations		$	3,459
Income taxes		(1,253		)
Earnings from discontinued operations		$	2,206

 

OrganoSilicones

On July 31, 2003, the Company sold certain assets and assigned certain liabilities of its OrganoSilicones business unit to the Specialty Materials division of GE and acquired GE’s Specialty Chemicals business. As a result of this transaction, the Company will continue to receive quarterly earn-out payments through September of 2006 based on the combined performance of GE’s existing Silicones business and the OrganoSilicones business that GE acquired from the Company. The total of such payments will be a minimum of $105 million and a maximum of $250 million. The minimum earn-out of $105 million was accrued as part of the gain on the sale of the business. The Company received a total of $19.4 million and $11.8 million of earn-out proceeds during the three months ended March 31, 2006 and March 31, 2005, respectively, of which $10.6 million and $3.1 million represented additional earn-out proceeds received in 2006 and 2005, respectively, related to the combined performance of the GE and OrganoSilicones businesses. The cumulative balance of additional earn-out proceeds was $43.7 million and $33.0 million as of March 31, 2006 and December 31, 2005, respectively. Such amounts have not been recognized in earnings, as the recognition of this additional gain is contingent upon the continued favorable future performance of GE’s Silicones business through September 2006. The balance of additional proceeds received in excess of the minimum earn-out has been included in accrued expenses in the March 31, 2006 and December 31, 2005 condensed consolidated balance sheets.

DIVESTITURES AND ACQUISITIONS

On March 24, 2006, the Company acquired the Trace Chemicals business from Bayer CropScience LP. Trace Chemicals is a leader in farmer-applied seed treatments in markets serving the United States. The acquisition will serve to enhance the Company’s offerings in the Crop Protection business. The cash paid for this acquisition was $6.7 million and included inventory, property, plant and equipment and intangible assets. As of March 31, 2006, the purchase price allocation for the assets acquired and liabilities assumed, and goodwill resulting from this acquisition has not been finalized because the Company has not fully completed the accumulation and review of the Trace Chemicals information related to these matters.

On March 31, 2005, the Company entered into an agreement with Hamilton Robinson LLC, a private equity firm, to form a venture (Davis-Standard LLC), which would combine the Company’s Polymer Processing Equipment business and Hamilton Robinson’s Black Clawson Converting Machinery Company. The transaction closed on April 29, 2005 and resulted in the Company acquiring a 61.24% non-controlling interest in Davis-Standard LLC. In accordance with EITF 96-16, “Investor’s Accounting for an Investee When the Investor Has a Majority of the Voting Interest but the Minority Shareholder or Shareholders Have Certain Approval or Veto Rights”, the Company is not consolidating the financial statements of Davis-Standard LLC because the holder of the minority interest in Davis-Standard LLC effectively exercises control over the operations of the business through its majority voting rights. As of the closing date, the Company deconsolidated approximately $136.6 million of assets and $62.8 million of liabilities of the Polymer Processing Equipment business. The investment is recorded in other assets with no significant gain or loss recognized on the transaction. The Company accounts for its investment in Davis-Standard LLC under the equity method and records its proportionate share of the venture’s results of operations in other (income) expense, net in the Company’s condensed consolidated statements of earnings. The carrying amount of the Company’s investment in Davis-Standard LLC was $74.5 million at March 31, 2006 and $75.2 million at December 31, 2005. The excess cost over the Company’s share of net assets of the venture was $37.6 million at March 31, 2006 and $41.5 million at December 31, 2005. The Company recorded $0.1 million of other income for the quarter ended March 31, 2006.

ACCOUNTS RECEIVABLE PROGRAMS

At December 31, 2005, the Company had an accounts receivable securitization program to sell up to $125 million of domestic receivables to agent banks. Effective March 2, 2006, the Company expanded its domestic accounts receivable program to include the former Great Lakes subsidiaries and to allow for the sale of up to $275 million of domestic receivables. Accounts receivable sold under this program were $112.9 million and $28.9 million as of March 31, 2006 and December 31, 2005, respectively. In addition, the Company’s European subsidiaries have a separate program to sell up to approximately $125 million of their eligible accounts receivable to agent banks as of March 31, 2006. International accounts receivable sold under this program were $29.4 million and $56.3 million as of March 31, 2006 and December 31, 2005, respectively.  The total costs associated with these programs of $2.1 million and $3 million for the three months ended March 31, 2006 and 2005, respectively, are included in other (income) expense, net in the condensed consolidated statements of earnings.

On April 6, 2006, the Company expanded its international accounts receivable program to include the former Great Lakes subsidiaries and to allow for the sale of up to $175 million of international receivables.

15

---

Under the domestic program, certain subsidiaries of the Company sell their accounts receivable to a special purpose entity (SPE) that has been created as a separate legal entity for the purpose of acquiring such receivables and selling an undivided interest therein to agent banks. In accordance with the domestic sale agreement, the agent banks purchase an undivided ownership interest in the accounts receivable owned by the SPE. The amount of such undivided ownership interest will vary based on the level of eligible accounts receivable as defined in the agreement. In addition, the agent banks retain a security interest in all of the receivables owned by the SPE, which was $161.9 million and $107.5 million as of March 31, 2006 and December 31, 2005, respectively. The balance of the unsold receivables owned by the SPE is included in the Company’s accounts receivable balance on the condensed consolidated balance sheet. Under the international program, certain foreign subsidiaries of the Company sell eligible accounts receivable directly to agent banks. During the period, the Company had an obligation to service the accounts receivable sold under its domestic and international programs. The Company has treated the transfer of receivables under its domestic and international receivable programs as a sale of accounts receivable.

INVENTORIES

Components of inventories are as follows:

				(Unaudited)
				March 31,			December 31,
(In thousands)				2006			2005
Finished goods				$	509,806		$	466,365
Work in process				31,516			31,406
Raw materials and supplies				160,753			163,846
				$	702,075		$	661,617

 

GOODWILL AND INTANGIBLE ASSETS

The Company’s intangible assets (excluding goodwill) are comprised of the following:

				(Unaudited)
(In thousands)				March 31, 2006						December 31, 2005
				Gross Cost			Accumulated Amortization			Gross Cost			Accumulated Amortization
Patents				$	157,723		$	(35,472	)	$	156,089		$	(33,279	)
Trademarks				331,937			(44,073		)	331,633			(40,079		)
Customer relationships				140,143			(12,691		)	140,143			(11,309		)
Production rights				45,000			(3,214		)	50,000			(2,381		)
Other				58,782			(29,353		)	57,578			(27,718		)
				$	733,585		$	(124,803	)	$	735,443		$	(114,766	)

 

Gross cost of intangible assets decreased $1.9 million during the first quarter of 2006 due primarily to a $5 million reduction for the fair value adjustment of production rights related to the Merger, partially offset by increased capitalized patent re-registration costs of $0.9 million, capitalized legal costs of $0.4 million and favorable foreign currency translation of $1.9 million.

Amortization expense from continuing operations related to intangible assets (excluding goodwill) amounted to $9.7 million and $4.1 million for the first quarter ended March 31, 2006 and March 31, 2005, respectively. The increase in amortization expense was primarily due to the addition of intangible assets related to the Merger. Estimated amortization expense of intangible assets (excluding goodwill) as of December 31, 2005 for the next five fiscal years is as follows: $37.5 million (2006), $37.1 million (2007), $36.5 million (2008), $34.5 million (2009) and $30.6 million (2010).

Also, included in amortization expense is the amortization of purchase accounting fair value adjustments of equity investments, which are included in other assets, resulting from the Merger. Amortization of purchase accounting fair value adjustments amounted to $1.7 million for the first quarter ended March 31, 2006. There was no amortization related to these items in 2005. Estimated amortization of purchase accounting fair value adjustments for the next five fiscal years is as follows: $3.3 million (2006), $1.6 million (2007), $1.6 million (2008), $0.4 million (2009) and $0.4 million (2010).

Goodwill by reportable segment is as follows:

16

---

 

(In thousands)				December 31, 2005			Great Lakes Merger		Trace Acquisition		Translation		March 31, 2006
Plastic Additives				$	318,194		(624	)	—		217		$	317,787
Polymers				51,730			—		—		4		51,734
Specialty Additives				49,462			(57	)	—		25		49,430
Crop Protection				162,896			(647	)	4,574		241		167,064
Consumer Products				556,523			(3,366	)	—		1,253		554,410
Other				72,654			(439	)	—		164		72,379
				$	1,211,459		(5,133	)	4,574		1,904		$	1,212,804

 

During the first quarter of 2006, goodwill increased by $1.4 million due to $4.6 million from the acquisition of Trace Chemicals and favorable foreign currency translation of $1.9 million, partially offset by adjustments to the allocation of the purchase price relating to the Merger of $5.1 million.

The Company has elected to perform its annual goodwill impairment procedures for all of its reporting units in accordance with FASB Statement No. 142, “Goodwill and Other Intangible Assets” as of July 31. The Company will update its review as of July 31, 2006, or sooner, if events occur or circumstances change that could reduce the fair value of a reporting unit below its carrying value.

INDEBTEDNESS

On July 1, 2005, concurrent with the consummation of the Merger, the Company entered into a $600 million five-year credit facility available through July 2010, which includes a $300 million letter of credit facility. On December 12, 2005, the Company exercised its option to expand its borrowing under its $600 million credit facility by $125 million, thereby increasing the availability under this facility to $725 million. There was no cost associated with the exercise of this option. The facility allows the Company to increase capacity to $750 million. The Company is evaluating the expansion of the credit facility to add the additional $25 million of liquidity. Borrowings under the new credit facility bear interest at the EURIBO Rate (as defined in the credit agreement governing the new credit facility) plus a margin ranging from 0% to 1.6%. A facility fee is payable on unused commitments at a rate ranging from 0.125% to 0.4%. The new credit facility is guaranteed by certain domestic subsidiaries of the Company (the “Subsidiary Guarantors”). Although it is currently unsecured, during any time in which the Company’s non-credit enhanced long-term senior unsecured debt (“Public Debt Rating”) is rated BB or lower by Standard & Poor’s (“S&P”) or Ba2 or lower by Moody’s Investors Service, Inc. (“Moody’s”), the Company and the Subsidiary Guarantors are required to pledge all owned stock and other equity interests (limited to 66% of the voting stock of first-tier foreign subsidiaries). At March 31, 2006, borrowings under the new credit facility amounted to $496 million with a weighted-average interest rate of 4.97%.

During the first quarter of 2006, the Company obtained a $50 million uncommitted working capital facility due on September 1, 2006. At March 31, 2006, borrowings under the agreement amounted to $50 million with an interest rate of 6.02%.

On April 19, 2006, the Company and certain of its consolidated subsidiaries entered into an underwriting agreement with several financial institutions for the sale by the Company of $500 million aggregate principal amount of 6.875% Senior Notes due 2016 (Notes). The offering was made under the Company’s shelf registration statement on Form S-3 filed with the Securities and Exchange Commission on April 19, 2006 and by a prospectus supplement dated April 19, 2006. The underwriters purchased the Notes from the Company at 98.452% (6.95% effective rate) of their principal amount, plus accrued interest from April 24, 2006. The offering closed on April 24, 2006 and the Company received net proceeds from the offering of $492.3 million after expenses. The proceeds were utilized to repay the outstanding balance on the Company’s revolving credit facility of $365 million, the outstanding balance on uncommitted lines of credit of $50 million and to reduce borrowings under the domestic receivable securitization programs of $60 million, with the remaining proceeds used for general corporate purposes. The Company has commenced redemption of all of its outstanding Senior Floating Rate Notes due 2010, which will be funded through the revolving credit facility.

Due to higher than planned merger related expenses and weaker earnings in its rubber chemicals and EPDM operating segments, the Company is reviewing with its banks the need to adjust certain covenants in its credit facility for the balance of 2006 and beyond.

INCOME TAXES

The Company reported income tax expense from continuing operations for the first quarters of 2006 and 2005 of $6.7 million and $14.5 million, respectively. The effective tax rate from continuing operations for the first quarter of 2006 was 34% compared to 44% for the first quarter of 2005. The first quarter 2005 effective tax rate reflected a $3.8 million provision for valuation reserves relating to certain tax items.

17

---

In January of 2006, the Internal Revenue Service completed an examination of the Company’s corporate income tax return for tax years 2002 and 2003. The Company has adequate reserves to cover the examination results and does not expect to recognize any significant benefits in subsequent periods.

COMMON STOCK

The Company is authorized to issue 500 million shares of $0.01 par value common stock. There were 251,775,230 and 251,480,684 common shares issued at March 31, 2006 and December 31, 2005, respectively, of which 11,490,491 shares were held as treasury stock at March 31, 2006 and December 31, 2005.

The Company issued 1,822,091 treasury shares during the three months ended March 31, 2005, primarily pursuant to its compensation programs and long-term incentive plans. No treasury shares were issued during the three months ended March 31, 2006.

EARNINGS PER COMMON SHARE

The computation of basic earnings per common share is based on the weighted average number of common shares outstanding. The computation of diluted earnings per common share is based on the weighted average number of common and common equivalent shares outstanding.

The Company’s stock options (in thousands) of 6,929 and 852 in March 2006 and 2005, respectively, were excluded from the calculation of diluted earnings per share because the exercise prices of the stock options were greater than or equal to the average price of the common shares, and therefore the inclusion would have been antidilutive. These options could be dilutive if the average share price increases and is greater than the exercise price of these options. Company performance-based restricted shares (in thousands) of 152 and 211 in March 2006 and 2005, respectively, were also excluded from the calculation of diluted earnings per share, because the specified performance criteria for the vesting of these shares has not yet been met. These restricted shares could be dilutive in the future if the specified performance criteria are met.

The following is a reconciliation of the shares used in the computations:

				Quarter Ended March 31,
(In thousands)				2006		2005
Weighted average common shares outstanding				240,125		116,760
Effect of dilutive stock options and other equivalents				1,066		2,185
Weighted average common shares adjusted for dilution				241,191		118,945

 

COMPREHENSIVE INCOME (LOSS)

An analysis of the Company’s comprehensive income (loss) follows:

				Quarter Ended March 31,
(In thousands)				2006			2005
Net earnings				$	13,205		$	20,435
Other comprehensive income (loss):
Foreign currency translation adjustments				17,986			(36,126		)
Change in fair value of derivatives (net of tax)				(8,156		)	8,838
Other				64			9
Comprehensive income (loss)				$	23,099		$	(6,844	)

 

The components of accumulated other comprehensive loss at March 31, 2006 and December 31, 2005 are as follows:

 

				(Unaudited)
				March 31,			December 31,
(In thousands)				2006			2005
Foreign currency translation adjustment				$	17,321		$	(666	)
Minimum pension liability adjustment (net of tax)				(145,803		)	(145,803		)
Fair value of derivatives (net of tax)				(2,692		)	5,464
Other				15			(47		)
Accumulated other comprehensive loss				$	(131,159	)	$	(141,052	)

 

18

---

Reclassifications from other comprehensive income to earnings related to the Company’s natural gas price swap contracts during the first quarter ended March 31, 2006 were $3.5 million. Reclassifications during the first quarter of 2005 were not significant.

19

PENSION AND OTHER POST-RETIREMENT BENEFIT PLANS

Components of net periodic benefit cost for the quarters ended March 31, 2006 and March 31, 2005 are as follows:

				Qualified Domestic Defined Benefit Plans						International and Non- Qualified Defined Benefit Plans						Post-Retirement Health Care Plans
				Quarter Ended March 31,						Quarter Ended March  31,						Quarter Ended March 31,
(In thousands)				2006			2005			2006			2005			2006			2005
Service cost				$	180		$	1,604		$	1,862		$	1,870		$	312		$	330
Interest cost				11,850			9,583			5,091			3,902			2,584			3,217
Expected return on plan assets				(14,580		)	(11,999		)	(3,609		)	(2,055		)	(594		)	(595		)
Amortization of unrecognized transition obligation				—			(2		)	28			31			—			—
Amortization of prior service cost				—			15			148			101			(806		)	162
Amortization of net loss				1,703			2,193			598			388			402			70
Curtailment gain recognized				—			—			(429		)	(84		)	—			—
Settlement (gain) loss recognized				—			—			(221		)	807			—			—
Net periodic benefit cost (credit)				$	(847	)	$	1,394		$	3,468		$	4,960		$	1,898		$	3,184

 

The following table represents the allocation of net periodic benefit cost (credit) for the first quarters ended March 31, 2006 and 2005, which reflects the Refined Products business as a discontinued operation:

				Qualified Domestic Defined Benefit Plans						International and Non- Qualified Defined Benefit Plans						Post-Retirement Health Care Plans
				Quarter Ended March 31,						Quarter Ended March 31,						Quarter Ended March 31,
(In thousands)				2006			2005			2006			2005			2006			2005
Continuing operations				$	(847	)	$	1,394		$	3,468		$	4,201		$	1,898		$	3,184
Discontinued operations				—			—			—			759			—			—
Net periodic benefit cost (credit)				$	(847	)	$	1,394		$	3,468		$	4,960		$	1,898		$	3,184

 

During the first quarter of 2006, the Company made a lump sum payment under the provisions of its supplemental executive retirement programs of approximately $2.7 million. As a result of the first quarter 2006 payment, a settlement gain of approximately $0.2 million was recorded.

The Company expects to contribute approximately $0.2 million to its domestic qualified pension plans in 2006, of which no contributions were made as of March 31, 2006. The Company expects to contribute $14.5 million to its international and non-qualified pension plans, of which $3.8 million has been contributed as of March 31, 2006.  The Company’s funding assumptions for its domestic pension plans assume no significant change with regards to demographics, legislation, plan provisions, or actuarial assumption or methods to determine the estimated funding requirements.

DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

The Company’s activities expose its earnings, cash flows and financial position to a variety of market risks, including the effects of changes in foreign currency exchange rates, interest rates and energy prices. The Company maintains a risk-management strategy that uses derivative instruments as needed to mitigate risk against foreign currency movements and to manage interest rate and energy price volatility. In accordance with FASB Statement No. 133, “Accounting for Derivative Instruments and Hedging Activities,” FASB Statement No. 138, “Accounting for Certain Derivative Instruments and Certain Hedging Activities,” and FASB Statement No. 149, “Amendment of Statement No. 133 on Derivative Instruments and Hedging Activities,” the Company recognizes in earnings changes in the fair value of all derivatives designated as fair value hedging instruments that are highly effective and recognizes in accumulated other comprehensive loss (AOCL) changes in the fair value of all derivatives designated as cash flow hedging instruments that are highly effective. The Company does not enter into derivative instruments for trading or speculative purposes.

The Company uses price swap contracts as cash flow hedges to convert a portion of its forecasted natural gas purchases from variable price to fixed price purchases. These contracts are designated as hedges of a portion of the Company’s forecasted natural gas purchases. The Company’s hedge contracts cover a gradually decreasing percentage of its purchase requirements

20

---

over a rolling two-year period. These contracts involve the exchange of payments over the life of the contracts without an exchange of the notional amount upon which the payments are based. The differential paid or received as natural gas prices change is recognized as an adjustment to cost of products sold.

The Company uses interest rate swap contracts as fair value hedges to convert $125 million of the $400 million 7% fixed rate debt to variable rate debt. Each interest rate swap contract is designated with the principal balance and the term of the specific debt obligation. These contracts involve the exchange of interest payments over the life of the contract without the exchange of the notional amount upon which the payments are based. The differential to be paid or received as interest rates change is recognized as an adjustment to interest expense.

The following table summarizes the unrealized (gains) and losses related to certain cash flow hedging for the first quarters ended March 31, 2006 and 2005.

				Quarter Ended March 31,
(In thousands)				2006			2005
Cash flow hedges (in AOCL):
Balance at beginning of period				$	(5,464	)	$	(2,769	)
Price swap contracts — natural gas				8,156			(8,838		)
Balance at end of period				$	2,692		$	(11,607	)

 

ASSET RETIREMENT OBLIGATIONS

The Company applies the provisions of FASB Statement No. 143, “Accounting for Asset Retirement Obligations,” which requires companies to record a liability for asset retirement obligations in the period in which a legal obligation is created. Such liabilities are recorded at fair value, with an offsetting increase to the carrying value of the related long-lived assets. In future periods, the liability is accreted to its present value and the capitalized cost is depreciated over the useful life of the related asset. Companies are also required to adjust the liability for changes resulting from the passage of time and/or revisions to the timing or the amount of the original estimate. Upon retirement of the long-lived asset, the Company either settles the obligation for its recorded amount or incurs a gain or loss. The Company’s asset retirement obligations are primarily the result of legal obligations to remove leasehold improvements upon termination of leases of various facilities, legal obligations to close brine supply and disposal wells and waste disposal wells at the end of their useful lives, and decommissioning and decontamination obligations that are legally required to be fulfilled upon closure of various of the Company’s manufacturing facilities. The measurement of such obligations are recorded at fair value, which the Company estimates by discounting projected cash flows using its credit adjusted risk-free rate applicable at that time the obligation is initially recorded.

In March 2005, the FASB issued FASB Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations,” (FIN 47). FIN 47 clarifies that the term “conditional asset retirement obligation” as used in FASB Statement No. 143 refers to a legal obligation to perform an asset retirement activity in which the timing and/or method of settlement are conditional on a future event that may or may not be within the control of the entity. Accordingly, an entity is required to recognize a liability for the fair value of a conditional asset retirement obligation if the fair value of the liability can be reasonably estimated. The company adopted FIN 47 in the fourth quarter of 2005, effective from January 1, 2005. The effect of this adoption resulted in a cumulative effect of accounting change of $0.5 million (net of taxes of $0.3 million) as of December 31, 2005.

The following is a summary of the change in the carrying amount of the asset retirement obligations during the first quarter of 2006 and 2005, the net book value of assets related to the asset retirement obligations at March 31, 2006 and 2005 and the related depreciation expense recorded during the first quarter of 2006 and 2005.

 

				Quarter Ended March 31,
(In thousands)				2006			2005
Asset retirement obligation balance at beginning of year				$	10,560		$	717
Accretion expense — cost of products sold				83			38
Asset retirement obligation balance at end of period				$	10,643		$	755
Net book value of asset retirement obligation assets at end of period				$	1,566		$	76
Depreciation expense				$	18		$	11

 

21

---

At March 31, 2006, $0.5 million of the asset retirement obligation was included in accrued expenses and $10.1 million was included in other liabilities on the condensed consolidated balance sheet. At March 31, 2005, the entire balance was included in other liabilities.

ANTITRUST INVESTIGATIONS AND RELATED MATTERS

Antitrust Investigations

Rubber Chemicals

On May 27, 2004, the Company pled guilty to a one-count information charging the Company with participating in a combination and conspiracy to suppress and eliminate competition by maintaining and increasing the price of certain rubber chemicals sold in the United States and elsewhere during the period between July 1995 to December 2001. The U.S. federal court imposed a fine of $50.0 million, payable in six annual installments, without interest, beginning in 2004. In light of the Company’s cooperation with the U.S. Department of Justice (the “DOJ”), the court did not impose any period of corporate probation. On May 28, 2004, the Company pled guilty to one count of conspiring to lessen competition unduly in the sale and marketing of certain rubber chemicals in Canada. The Canadian federal court imposed a sentence requiring the Company to pay a fine of CDN $9.0 million (approximately U.S. $7 million), payable in six annual installments, without interest, beginning in 2004. The Company paid (in U.S. dollars) $2.3 million in 2004 and $2.3 million in 2005, in cash, for the U.S. and Canadian fines. Remaining cash payments for the U.S. and Canadian fines are expected to equal (in U.S. dollars) approximately $6.9 million in 2006; $11.5 million in 2007; $16.2 million in 2008; and $18.4 million in 2009. The Company recorded a pre-tax charge of $45.2 million against results of operations for its fiscal year ended December 31, 2003, as a reserve for the payment of the U.S. and Canadian fines, which represented the present value of the expected payments. The Company had reserves related to these settlements of $6.5 million in accrued expenses and $41.0 million in other liabilities at March 31, 2006, and $6.5 million in accrued expenses and $40.3 million in other liabilities at December 31, 2005 on its condensed consolidated balance sheets.

The Company and certain of its subsidiaries were previously the subject of a coordinated civil investigation by the European Commission (the “EC”) with respect to the sale and marketing of rubber chemicals. On December 21, 2005, the Company announced that the EC imposed a fine of Euro 13.6 million (approximately U.S. 16 million) on the Company in connection with the EC’s rubber chemicals investigation. The amount of the fine reflects the EC’s maximum leniency of a 50 percent reduction in the fine, resulting from the Company’s continual cooperation with the EC throughout its investigation. In December 2005, the Company recorded a pre-tax charge of $16.1 million for the EC fine, which is included in accrued expenses on the Company’s condensed consolidated balance sheets at March 31, 2006 and December 31, 2005. As of the date of this periodic report on Form 10-Q, there are no remaining governmental investigations of the Company with respect to its sale and marketing of rubber chemicals.

Other Product Areas

The Company and certain of its subsidiaries are subjects of, and continue to cooperate in, coordinated criminal and civil investigations being conducted by the DOJ, the Canadian Competition Bureau and the EC (collectively, the “Governmental Authorities”) with respect to possible antitrust violations relating to the sale and marketing of certain other products, including ethylene propylene diene monomer (EPDM); heat stabilizers, including tin-based stabilizers and precursors, mixed metal stabilizers and epoxidized soybean oil (ESBO); nitrile rubber; and, in the case of the DOJ and the Canadian Competition Bureau, urethanes and urethane chemicals. The EC has notified the Company that it has closed its investigation with respect to urethanes and urethane chemicals. Such investigations concern anticompetitive practices, including price fixing and customer or market allocations, undertaken by the Company and such subsidiaries and certain of their officers and employees. The Company and its subsidiaries that are subject to the investigations have received from each of the Governmental Authorities verbal or written assurances of conditional amnesty from prosecution and fines. The EC’s grant of conditional amnesty with respect to heat stabilizers is presently limited to tin-based stabilizers and their precursors, but the Company expects to be granted conditional amnesty by the EC with respect to mixed metal stabilizers and ESBO. The assurances of amnesty are conditioned upon several factors, including continued cooperation with the Governmental Authorities. The Company is actively cooperating with the Governmental Authorities regarding such investigations.

Internal Investigation

The Company has completed its internal investigation of the Company’s business and products to determine compliance with applicable antitrust law and with the Company’s antitrust guidelines and policies. During the course of its internal investigation, the Company strengthened its training and compliance programs and took certain actions with respect to certain employees, including termination of employment and other disciplinary actions.

Impact upon the Company

The Company does not expect the previously described resolution of the rubber chemicals investigations by the United States, Canada and the EU to have a material adverse effect on its cash flows. However, the resolution of any other possible antitrust violations against the Company and certain of its subsidiaries and the resolution of any civil claims now pending or hereafter asserted against them may have a material adverse effect on the Company’s financial condition, results of operations, cash flows or prospects. No assurances can be given regarding the outcome or timing of these matters.

22

---

The Company’s antitrust costs, which are comprised primarily of settlements and legal costs, decreased from $35.9 million (pre-tax) during the immediately prior fiscal quarter ended December 31, 2005 to $12.8 million (pre-tax) for the fiscal quarter ended March 31, 2006. The antitrust costs for the first quarter of 2006 include $7.7 million primarily for settlement offers made to certain plastic additives and urethanes claimants and $5.1 million for legal costs associated with the antitrust investigations and civil lawsuits. The Company expects to continue to incur costs, which may be substantial, until all antitrust investigations are concluded and civil claims are resolved.

Civil Lawsuits

Except for those actions indicated as being subject to a settlement agreement dismissed by the applicable court or as otherwise provided, the actions described below under “Civil Lawsuits” are in early procedural stages of litigation. The Company cannot predict the outcome of any of the actions described below under “Civil Lawsuits” and believes potential remedial costs or damages are indeterminable. The Company will seek cost-effective resolutions of the various pending and threatened legal proceedings against the Company; however, the resolution of any civil claims now pending or hereafter asserted against the Company or any of its subsidiaries could have a material adverse effect on the Company’s financial condition, results of operations or cash flows. Except for direct purchaser claims with respect to rubber chemicals, EPDM and nitrile rubber, the Company has not recorded a charge for potential liabilities and expenses in connection with the civil claims not subject to any settlement agreement, because it is not yet able to reasonably estimate such costs.

At March 31, 2006 and December 31, 2005, the Company had reserves related to the civil lawsuits described below of $64.3 million and $57.6 million, respectively, in accrued expenses on its condensed consolidated balance sheets.

U.S. Federal Antitrust Actions

Partially Terminated Global Settlement Agreement. On January 11, 2005, the Company and plaintiff class representatives entered into a Settlement Agreement (the “Global Settlement Agreement”) that was intended to resolve, with respect to the Company, three consolidated direct purchaser class action lawsuits that were filed in the United States District Courts in the District of Connecticut, Western District of Pennsylvania and the Northern District of California, respectively, against the Company, its subsidiary Uniroyal Chemical Company, Inc., now known as Chemtura USA Corporation (referred to as “Uniroyal” for purposes of the description of the Company’s civil lawsuits), and other companies, by plaintiffs on behalf of themselves and classes consisting of all persons or entities who purchased EPDM, nitrile rubber and rubber chemicals, respectively, in the United States directly from one or more of the defendants or any predecessor, parent, subsidiary or affiliates thereof, at any time during various periods, with the earliest commencing on January 1, 1995. The complaints in the consolidated actions principally alleged that the defendants conspired to fix, raise, maintain or stabilize prices for EPDM, nitrile rubber and rubber chemicals, as applicable, sold in the United States in violation of Section 1 of the Sherman Act and that this caused injury to the plaintiffs who paid artificially inflated prices for such products as a result of such alleged anticompetitive activities. The Global Settlement Agreement provided that the Company would pay a total of $97.0 million, consisting of $62.0 million with respect to rubber chemicals, $30.0 million with respect to EPDM and $5.0 million with respect to nitrile rubber, in exchange for the final dismissal with prejudice of the foregoing three lawsuits as to the Company and a complete release of all claims against the Company set forth in the lawsuits.

In accordance with its rights under the Global Settlement Agreement, the Company terminated those parts of the settlement covering rubber chemicals and EPDM following the exercise of opt out rights by certain potential members of the applicable classes. As a result of the Company’s partial termination of the Global Settlement Agreement, the consolidated direct purchaser class action lawsuits relating to rubber chemicals and EPDM continue to proceed in their respective federal district courts. The Company is negotiating settlements directly with a number of the larger potential claimants in those actions. The Company’s settlements with respect to certain of these claimants is described below under “Remaining Direct and Indirect Purchaser Lawsuits.” The nitrile rubber portion of the Global Settlement Agreement has been approved by the United States District Court for the Western District of Pennsylvania.

ParaTec Elastomers Cross-Claims. A defendant in the class action lawsuit relating to nitrile rubber, ParaTec Elastomers LLC, a former joint venture in which the Company previously owned a majority interest but now has no interest, has asserted cross claims against the Company and its subsidiary Uniroyal in this class action, seeking indemnification for settlements that ParaTec Elastomers LLC has entered into and damages that ParaTec Elastomers LLC has allegedly suffered or may suffer as a result of the Company’s actions, including the Company’s alleged failure to obtain immunity for ParaTec Elastomers with respect to the EC’s investigation of the sale and marketing of nitrile rubber. The ParaTec Elastomers complaint seeks damages of unspecified amounts, including attorneys’ fees and punitive damages with respect to certain of the alleged causes of action, injunctive relief, pre- and post-judgment interest, costs and disbursements and such other relief as the court deems just and proper. On August 6, 2004, the Company filed a motion to dismiss the cross claims, or in the alternative to compel arbitration. On September 29, 2005, the motion to dismiss was granted with respect to the plaintiff’s claims of violation of the Connecticut Unfair Trade Practices Act, breach of contract, fraud and promissory estoppel. The motion to dismiss was denied with respect to the plaintiff’s claims for contractual indemnification pursuant to the ParaTec Elastomers LLC Agreement, breach of fiduciary duty and breach of covenant of good faith and fair dealing. In addition, the court denied the Company’s motion to compel arbitration. The Company has

23

---

appealed the denial of its motion to compel arbitration. The Company has not recorded an accrual for this matter because it is not probable.

Remaining Direct and Indirect Purchaser Lawsuits. The Company, individually or together with its subsidiary Uniroyal, and other companies, continues to be or has become a defendant in certain direct and indirect purchaser lawsuits filed in federal courts during the period from May 2004 through January 2006 involving the sale of rubber chemicals, EPDM, polychloroprene, nitrile rubber, plastic additives and urethanes and urethane chemicals. The complaints in the direct purchaser actions (as further described below) principally allege that the defendants conspired to fix, raise, maintain or stabilize prices for rubber chemicals, EPDM, polychloroprene, nitrile rubber, plastic additives or urethanes and urethane chemicals, as applicable, sold in the United States in violation of Section 1 of the Sherman Act and that this caused injury to the plaintiffs who paid artificially inflated prices for such products as a result of such alleged anticompetitive activities. With respect to the indirect purchaser class action relating to plastic additives (as further described below), the complaint principally alleges that the defendants conspired to fix, raise, stabilize and maintain the price of plastic additives and allocate markets and customers in the named jurisdictions in violation of certain antitrust statutes and consumer protection and unfair or deceptive practices laws of the relevant jurisdictions, and that this caused injury to purchasers in the foregoing states who paid more to purchase indirectly plastics additives as a result of such alleged anticompetitive activities. With respect to the complaints relating to the sale of polychloroprene (as further described below), although the Company does not sell or market polychloroprene, the complaints allege that the Company and producers of polychloroprene conspired to raise prices with respect to polychloroprene and the other products included in the complaint collectively in one conspiracy. In each of the foregoing actions, the plaintiffs seek, among other things, treble damages of unspecified amounts, costs (including attorneys’ fees) and injunctive relief preventing further violations of the Sherman Act (with respect to the direct purchaser actions) or the improper conduct alleged in the complaint (with respect to the indirect purchaser class action).

·              With respect to rubber chemicals, the Company, Uniroyal and other companies remain defendants in two direct purchaser lawsuits, including the consolidated rubber chemicals direct purchaser lawsuit previously subject to the Global Settlement Agreement. Discovery in these actions closes in June of 2006. The plaintiffs in a previously pending indirect purchaser lawsuit filed in the United States District Court, Eastern District of Tennessee filed a Notice of Voluntary Dismissal on April 27, 2006.

·              The first direct purchaser lawsuit, as amended, was filed on March 15, 2005 in the United States District Court, Northern District of California, by plaintiffs on behalf of themselves and a class consisting of all persons and entities who purchased rubber chemicals in the United States directly from any of the defendants or from any present or former parent, subsidiary or affiliate thereof at any time during the period from May 1, 1995 to December 31, 2001. The plaintiffs in this lawsuit consist of the plaintiffs that had been previously subject to the now partially terminated Global Settlement Agreement. In December 2005, the Company and Uniroyal entered into settlement agreements with four plaintiffs in this lawsuit, as well as the plaintiffs in two previously pending direct purchaser lawsuits filed in Pennsylvania and Ohio by RBX Industries, Inc. and Goodyear Tire & Rubber Company, respectively. The purchases by these plaintiffs represent over half of the Company’s relevant U.S. rubber chemicals sales during the periods covered by the lawsuits. Pursuant to these settlement agreements, the Company paid an aggregate of $50.8 million in exchange for the plaintiffs’ release of their claims against the Company. The settlement agreement with Goodyear Tire & Rubber Company also resolves Goodyear’s federal direct purchaser lawsuit against the Company with respect to purchases of EPDM and polychloroprene, as described below, and the aggregate settlement amount of $50.8 million includes the settlement amount for such other lawsuit. Discovery with respect to the class and PolyOne closes at the end of June 2006.  A trial date has not yet been set.

·              The second lawsuit was filed on March 9, 2005, in the United States District Court, Northern District of Ohio (now transferred to the Northern District of California), by Parker Hannifin Corporation and PolyOne Corporation with respect to purchases of rubber chemicals from one or more of the defendants. Parker Hannifin’s claims with respect to this lawsuit have been settled.

·              The third lawsuit was filed on June 1, 2005, in the United States District Court, Northern District of California, by Caterpillar Inc., Carlisle Companies Incorporated and certain subsidiaries of Carlisle Companies Incorporated with respect to purchases of rubber chemicals from one or more of the defendants. The claims with respect to this lawsuit have been settled.

·              With respect to EPDM, the Company, Uniroyal and other companies are defendants in four direct purchaser lawsuits, including the consolidated EPDM direct purchaser lawsuit previously subject to the Global Settlement Agreement.

·              The first lawsuit, as amended, was filed on July 1, 2004, in the United States District Court, District of Connecticut, by plaintiffs on behalf of themselves and a class consisting of all persons and entities who purchased EPDM in the United

24

---

States directly from any of the defendants or from any predecessor, subsidiary or affiliate thereof at any time during the period from January 1, 1997 to December 31, 2001.

·              The second lawsuit was filed on July 28, 2004, in the United States District Court, Eastern District of Pennsylvania (now transferred to the District of Connecticut), by RBX Industries, Inc.

·              The third lawsuit was filed on June 1, 2005, in the United States District Court, Northern District of New York (now conditionally transferred to the District of Connecticut), by Carlisle Companies Incorporated and certain of its subsidiaries with respect to purchases of EPDM from one or more of the defendants.

·              The Company, Uniroyal and other companies are also defendants in one multi-product lawsuit involving EPDM, which is described separately below.

·              With respect to nitrile rubber, the Company, Uniroyal and other companies are defendants in a multi-product direct purchaser lawsuit involving nitrile rubber, which is described separately below.

·              With respect to plastic additives, the Company and other companies are defendants in one direct purchaser lawsuit and one indirect purchaser lawsuit.

·              The first lawsuit was filed on December 28, 2004, in the United States District Court, Northern District of Ohio, by PolyOne Corporation with respect to purchases of plastic additives from one or more of the defendants. This action has been transferred to the Eastern District of Pennsylvania for coordination with the consolidated class action pending there. The Company has settled the consolidated class action involving plastic additives, but the case remains pending against certain other defendants.

·              The second lawsuit is a class action lawsuit, filed in August 2005, as thereafter amended, in the United States District Court, Eastern District of Pennsylvania, by plaintiffs on behalf of themselves and a class consisting of all persons and business entities within Arizona, Tennessee and Vermont that indirectly purchased products containing plastic additives manufactured, sold or distributed by the defendants, other than for resale, at any time from January 1, 1990 to January 31, 2003.

·              With respect to urethanes, the Company, Uniroyal and other companies are defendants in a consolidated direct purchaser class action lawsuit filed on November 19, 2004, in the United States District Court, District of Kansas, by plaintiffs on behalf of themselves and a class consisting of all persons and entities who purchased urethanes in the United States directly from any of the defendants or from any present or former parent, subsidiary or affiliate thereof at any time during the period from January 1, 1998 to the present. This action consolidates twenty-six direct purchaser class action lawsuits previously described in the Company’s prior periodic reports filed with the Securities and Exchange Commission. The plaintiffs’ class certification motion is pending.

·              The remaining federal purchaser lawsuit is a multi-product lawsuit. The Company, Uniroyal and other companies are also defendants in a direct purchaser lawsuit filed on November 16, 2004, in the United States District Court, Northern District of Ohio, by Parker Hannifin Corporation and PolyOne Corporation with respect to purchases of EPDM, nitrile rubber and polychloroprene from one or more of the defendants. Parker Hannifin Corporation’s claims with respect to the nitrile rubber portion of this suit have been settled. This action has been transferred to the District of Connecticut. In December 2005, the Company and Uniroyal entered into a settlement agreement with Goodyear Tire & Rubber Company with respect to a previously pending single direct purchaser lawsuit filed on May 7, 2004, as amended, in the United States District Court, Northern District of Ohio (subsequently transferred to the District of Connecticut), by Goodyear Tire & Rubber Company with respect to purchases of EPDM and polychloroprene. This settlement agreement also resolves the federal direct purchaser lawsuit by Goodyear Tire & Rubber Company against the Company with respect to rubber chemicals, as described above.

State Court Antitrust Class Actions

Rubber Chemicals. With respect to rubber chemicals, the Company, certain of its subsidiaries and other companies remain defendants in seven pending putative indirect purchaser class action lawsuits filed during the period from October 2002 through January 2006 in state courts.

·              Four of the outstanding seven lawsuits were filed in California, Florida, Tennessee and West Virginia, from October 2002 through February 2003, and the putative class in each lawsuit comprises all persons within each of the applicable states who purchased tires other than for resale that were manufactured using rubber processing chemicals sold by the defendants since 1994. The complaints principally allege that the defendants agreed to fix, raise, stabilize and maintain the price of rubber processing chemicals used as part of the tire manufacturing process in violation the laws of these states and that this caused injury to individuals who paid more to purchase tires as a result of such alleged anticompetitive activities. The plaintiffs seek, among other things, treble damages of an unspecified amount, interest and attorneys’ fees and costs. Plaintiffs

25

---

in the California lawsuit were denied class certification on January 30, 2006. A previously pending putative indirect purchaser action filed in Minnesota was dismissed by the court on August 29, 2005. The plaintiff in this case has filed a notice of appeal of the court’s decision.

·              The fifth lawsuit was filed in Massachusetts on March 17, 2004 and amended on April 21, 2004, and the putative class comprises all natural persons within Massachusetts who purchased for non-commercial purposes any product containing rubber chemicals sold by the defendants or any subsidiary or affiliate thereof, or any co-conspirator, from January 1, 1994 through December 31, 2001 and who are residents of Massachusetts. The complaint principally alleges that the defendants agreed to fix, raise, stabilize and maintain the price of rubber chemicals distributed or sold in Massachusetts and throughout the United States in violation of the laws of that state and that the plaintiff and the alleged class were injured. The plaintiff seeks, among other things, double or treble damages of an unspecified amount, interest and attorneys’ fees and costs.

·              The remaining two lawsuits, one filed in Florida on May 25, 2004, as thereafter amended, and the other filed in Pennsylvania on February 14, 2005, as thereafter amended, are multi-product lawsuits and are described under the heading “Multi-Product Lawsuit” below.

The Company and its defendant subsidiaries have filed motions to dismiss on substantive and personal jurisdictional grounds or answers with respect to all of the pending lawsuits. Certain motions to dismiss remain pending, and other motions to dismiss have been denied by the applicable court, which are being, or will be, appealed by the Company and its defendant subsidiaries.

EPDM. With respect to EPDM, the Company, its subsidiary Uniroyal, and other companies are defendants in fifteen pending putative indirect purchaser class action lawsuits filed during the period of October 2003 through February 2005 in state courts.

·              Nine of the outstanding fifteen lawsuits were filed in California, North Carolina, Florida, New York, Iowa, New Mexico, Vermont, Nebraska and Kansas, respectively, from October 2003 through February 2005, and the putative class of each action comprises all persons or entities in each of the applicable states who purchased indirectly EPDM at any time from the defendants or any predecessors, parents, subsidiaries, or affiliates thereof from at least January 1, 1994. The complaints principally allege that the defendants conspired to fix, raise, stabilize, and maintain the price of EPDM and allocate markets and customers in the United States, including foregoing states, respectively, in violation of the laws of those states and that this caused injury to purchasers who had paid more to purchase indirectly EPDM as a result of such alleged anticompetitive activities. The plaintiffs seek, among other things, single or treble damages of an unspecified amount, costs (including attorneys’ fees), and disgorgement of profits. The Company and its defendant subsidiaries have filed motions to dismiss on substantive and personal jurisdictional grounds or answers with respect to most of the foregoing actions. Certain motions to dismiss remain pending, and other motions to dismiss have been denied by the applicable court.

·              The tenth lawsuit was filed in Tennessee on December 22, 2004, and the putative class comprises all persons or business entities in Tennessee, 24 other states and the District of Columbia that purchased indirectly EPDM manufactured, sold or distributed by the defendants, other than for resale, from January 1994 to December 2002. The complaint principally alleges that the defendants conspired to fix, raise, stabilize, and maintain the price of EPDM and allocate markets and customers in the United States, including the foregoing states, respectively, in violation of the laws of those states and that this caused injury to purchasers who paid more to purchase indirectly EPDM as a result of such alleged anticompetitive activities. The plaintiffs seek, among other things, single or treble damages of an unspecified amount, costs (including attorneys’ fees), and disgorgement of profits.

·              The five remaining lawsuits, filed in Massachusetts, Florida, California, New York and Pennsylvania, respectively, between May 2004 and February 2005, as thereafter amended, are multi-product lawsuits and are described under the heading “Multi-Product Lawsuits” below.

Plastic Additives. With respect to plastic additives, the Company and other companies are defendants in two pending putative indirect purchaser class action lawsuits. The two outstanding lawsuits were filed in California and Nebraska, respectively, and the putative class of each action comprises all persons or entities in each of the applicable states who purchased indirectly plastic additives at any time from any of the defendants, other than for resale, during various periods, each commencing on January 1, 1990. Each of the foregoing lawsuits principally alleges that the defendants and co-conspirators agreed to fix, raise, stabilize and maintain the price of plastic additives in violation of the laws of jurisdictions named in the complaints, as applicable, and that this caused injury to purchasers who paid more to purchase plastic additives as a result of such alleged anticompetitive activities. The plaintiffs seek, among other things, treble damages of an unspecified amount, costs (including attorneys’ fees) and/or injunctive relief preventing the defendants from continuing the unlawful activities alleged in the complaint. The Company has filed motions to dismiss the remaining two cases, one of which as been denied by the applicable court.

26

---

Nitrile Rubber. With respect to nitrile rubber, the Company, its subsidiary Uniroyal, and other companies are defendants in fifteen pending putative indirect purchaser class action lawsuits filed during the period of March 2004 through February 2005 in state courts.

·              Six of the outstanding fifteen lawsuits were filed in California from March 2004 to August 2004. The putative classes in these actions comprise all persons or entities in California who purchased indirectly nitrile rubber from any of the defendants at various times from January 1, 1994. The complaints principally allege that the defendants conspired to fix, raise, stabilize and maintain the price of nitrile rubber and allocate markets and customers in the United States and California in violation of the laws of that state and that this caused injury to purchasers who paid more to purchase, indirectly, nitrile rubber as a result of such alleged anticompetitive activities. The plaintiffs in these actions seek, among other things, treble damages of an unspecified amount, costs (including attorneys’ fees), and disgorgement of profits. By agreement, plaintiffs in the six California actions will file a consolidated amended complaint. The lawsuits filed in California have been stayed until a complaint consolidating the lawsuits has been filed.

·              One of the outstanding lawsuits was filed in Tennessee on December 22, 2004. The putative class comprises all individuals and entities in 23 states and the District of Columbia who purchased indirectly nitrile rubber from the defendants or any of their co-conspirators, parents, predecessors, successors, subsidiaries and affiliates from January 1, 1994 to the present. The complaint principally alleges that the defendants conspired to fix, raise, stabilize and maintain the price of nitrile rubber and allocate markets and customers in Tennessee and the other named jurisdictions in violation of the Tennessee Trade Practices Act and the Tennessee Consumer Protection Act of 1977, as well as the common law of the other named jurisdictions, and that this caused injury to purchasers in the foregoing states who paid more to purchase, indirectly, nitrile rubber as a result of such alleged anticompetitive activities. The plaintiffs seek, among other things, treble damages of unspecified amounts and costs (including attorneys’ fees).

·              Three of the outstanding lawsuits were filed in Vermont, Arizona, and Nebraska, respectively, from January 2005 through February 2005, and the putative class of each action comprises all persons or entities in each of the applicable states who purchased indirectly nitrile rubber manufactured, sold or distributed by the defendants, other than for resale, during January 1, 1995 through June 30, 2003. The complaints principally allege that the defendants conspired to fix, raise, stabilize and maintain the price of nitrile rubber in violation of the laws of these states. The plaintiffs seek, among other things, damages of unspecified amounts and costs (including attorneys’ fees).

·              The five remaining lawsuits, filed in Massachusetts, Florida, California, New York and Pennsylvania, respectively, between May 2004 and February 2005, as thereafter amended, are multi-product lawsuits and are described under the heading “Multi-Product Lawsuits” below.

The Company has filed motions to dismiss on substantive and personal jurisdictional grounds with respect to four of the pending non-multi-product lawsuits described above, one of which has been denied by the applicable court.

Urethanes. With respect to our urethanes business, the Company, its subsidiary Uniroyal, and other companies are defendants in eighteen pending putative indirect purchaser class action lawsuits in six states.

·              Eleven of the outstanding eighteen lawsuits were filed in California from March through June 2004. The putative class in the California actions comprises all persons or entities in California who purchased indirectly urethanes from any of the defendants at any time during various periods with the earliest commencing on January 1, 1990. The lawsuits filed in California have been stayed until a complaint consolidating the lawsuits has been filed.

·              One of the lawsuits was filed in Tennessee on April 28, 2004. The putative class comprises all natural persons who purchased indirectly urethanes during the period from January 1, 1994 to April 2004. The Company has filed a motion to dismiss with respect to this lawsuit.

·              One of the lawsuits was filed in Florida on October 28, 2005. The putative class is comprised of all individuals or entities in any of 21 states or the District of Columbia who indirectly purchased urethanes manufactured or sold by the defendants at any time during the period from January 1, 1999 through December 31, 2004. The Company has filed a motion to dismiss with respect to this lawsuit.

·              The five remaining lawsuits, filed in Massachusetts, Florida, California, New York and Pennsylvania, respectively, between May 2004 and February 2005, as thereafter amended, are multi-product lawsuits and are described under the heading “Multi-Product Lawsuits” below.

The foregoing lawsuits principally allege that the defendants conspired to fix, raise, stabilize and maintain the price of urethanes and allocate markets and customers in violation of the laws of the applicable jurisdictions, and that this caused

27