| þ | Annual Report Pursuant to Section 15(d) of the Securities Exchange Act of 1934 |
| o | Transition Report Pursuant to Section 15(d) of the Securities Exchange Act of 1934 |
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| EX-23 Consent of PricewaterhouseCoopers LLP | ||||||||
| * | Other supplemental schedules required by 29 CFR 2520.103-10 of the Department of Labor’s Rules and Regulations for Reporting and Disclosure under ERISA have been omitted because they are not applicable. |
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| Allocated | Unallocated | Total | ||||||||||
Assets |
||||||||||||
Investments, at fair value |
$ | 347,783,786 | $ | 124,523,382 | $ | 472,307,168 | ||||||
Participant loans receivable |
2,456,433 | — | 2,456,433 | |||||||||
Employer contribution receivable |
387,925 | — | 387,925 | |||||||||
Total assets |
350,628,144 | 124,523,382 | 475,151,526 | |||||||||
Liabilities |
||||||||||||
Current portion of notes payable |
— | 3,765,735 | 3,765,735 | |||||||||
Long-term portion of notes payable |
— | 37,095,350 | 37,095,350 | |||||||||
Total liabilities |
— | 40,861,085 | 40,861,085 | |||||||||
Net assets available for plan benefits |
$ | 350,628,144 | $ | 83,662,297 | $ | 434,290,441 | ||||||
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| Allocated | Unallocated | Total | ||||||||||
Assets |
||||||||||||
Investments, at fair value |
$ | 347,995,016 | $ | 151,358,328 | $ | 499,353,344 | ||||||
Participant loans receivable |
2,413,792 | — | 2,413,792 | |||||||||
Total assets |
350,408,808 | 151,358,328 | 501,767,136 | |||||||||
Liabilities |
||||||||||||
Current portion of notes payable |
— | 3,469,084 | 3,469,084 | |||||||||
Long-term portion of notes payable |
— | 40,861,085 | 40,861,085 | |||||||||
Total liabilities |
— | 44,330,169 | 44,330,169 | |||||||||
Net assets available for plan benefits |
$ | 350,408,808 | $ | 107,028,159 | $ | 457,436,967 | ||||||
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| Allocated | Unallocated | Total | |||||||||||
Additions |
|||||||||||||
Interest and dividend income |
$ | 10,675,611 | $ | 3,435,084 | $ | 14,110,695 | |||||||
Share allocation of Cabot Corporation common
and preferred stock, at fair value |
10,841,899 | — | 10,841,899 | ||||||||||
Employer contributions |
2,220,473 | 1,194,359 | 3,414,832 | ||||||||||
Employee contributions |
11,967,856 | — | 11,967,856 | ||||||||||
Total additions |
35,705,839 | 4,629,443 | 40,335,282 | ||||||||||
Deductions |
|||||||||||||
Benefits paid to participants |
27,473,258 | — | 27,473,258 | ||||||||||
Interest expense |
— | 3,568,969 | 3,568,969 | ||||||||||
Net (appreciation) depreciation in fair value
of investments |
8,013,245 | 12,134,898 | 20,148,143 | ||||||||||
Share allocation of Cabot Corporation common
and preferred stock, at fair value |
— | 10,841,899 | 10,841,899 | ||||||||||
Share allocation of Cabot Corporation preferred
stock for dividend payment |
— | 1,449,539 | 1,449,539 | ||||||||||
Total deductions |
35,486,503 | 27,995,305 | 63,481,808 | ||||||||||
Net increase (decrease) |
219,336 | (23,365,862 | ) | (23,146,526 | ) | ||||||||
Net assets available for plan benefits |
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Beginning of year |
350,408,808 | 107,028,159 | 457,436,967 | ||||||||||
End of year |
$ | 350,628,144 | $ | 83,662,297 | $ | 434,290,441 | |||||||
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| 1. | Description of the Plan | |
| General Cabot Corporation (the Company) initially adopted the Cabot Corporation Employee Stock Ownership Plan (the ESOP) in 1988. As of December 31, 2000, the Cabot Retirement Incentive Savings Plan (the CRISP) and the Cabot Employee Savings Plan (the CESP) were merged with and into the ESOP. The combined amended and restated plan, a defined contribution plan, was renamed the Cabot Retirement Savings Plan (the Plan). The Plan is subject to the Employee Retirement Income Security Act of 1974 (ERISA). |
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| The following brief description of the Plan is provided for general information purpose only. A detailed description of the Plan is available for inspection at principal locations of the Company. | ||
| Eligibility All U.S. employees of the Company and its participating subsidiaries (except certain temporary and leased employees) are eligible to participate beginning on the later of the first day of employment or the date the employee is included in an employee group which participates. Company contributions, employee contributions and all earnings thereon are recorded in accounts set up for all eligible participants and are reflected as allocated assets in the statement of net assets available for plan benefits. |
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| Employee Contributions By means of a salary reduction arrangement the participant may make contributions to his or her account. Participants may elect to contribute, through a payroll deduction, up to 50% of their U.S. eligible compensation on a before-tax basis, an after-tax basis, or a combination thereof, subject to certain limitations under the Internal Revenue Code (the Code). |
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| Employer Contributions In addition to any discretionary contributions, the Company’s contribution is primarily in the forms of (i) a matching contribution of shares in the Cabot common stock fund or the Cabot preferred stock fund (the basic employer match), and (ii) a Cabot preferred stock allocation. These contributions are calculated and recorded on the last business day of the calendar quarters. |
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| Other than under certain collective bargaining agreements, the basic employer match is equal to 75% of a participant’s eligible before-tax and after-tax contributions, up to 7.5% of the participant’s eligible compensation. | ||
| The preferred stock allocation is comprised of a total quarterly allocation of 742.574 shares of preferred stock. The allocation to each participant is based on the value of Cabot preferred stock, the number of shares allocated as dividends and total eligible compensation, and is generally between 4% and 8% of a participant’s eligible compensation. In instances where a participant allocation is less than 4% of eligible compensation, the Company is required to remit a contribution to provide a minimum allocation of 4% of eligible compensation. Other than under certain collective bargaining agreements, participant allocations greater than 8% of eligible compensation are used to fund the basic employer match. In the event there is a surplus after both allocations to participants in an amount of 8% of eligible compensation and the basic employer match have been made, the surplus is contributed to participants based on total eligible compensation. Other than under certain collective bargaining agreements, the allocation is made to each participant’s account who is employed on the last business day of the calendar quarter or who has retired, died or become totally and permanently disabled during the quarter. |
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| Preferred stock to be allocated in future periods and held by the plan is reflected as unallocated assets in the statement of net assets available for plan benefits. | ||
| As discussed in Note 5, the Company also remits debt service contributions to the Plan. | ||
| Funding Policy In calendar year 2005, the total addition to each participant’s account shall not exceed the lesser of either 100% of the participant’s U.S. compensation (as defined by the Code) or $42,000. |
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| Investments The employee’s contribution will be allocated, at the employee’s election, to one or more of eleven funds established for investment of Plan assets: Vanguard Index Trust-500 Portfolio (Vanguard 500 Portfolio), a growth and income fund that invests in all of the stocks included in the Standard & Poor’s (S&P) 500 index in approximately the same proportions as they are represented in the S&P 500 index; Vanguard Windsor II, also a growth and income fund and comprised of common stocks that the investment manager believes are undervalued in the marketplace; Vanguard Wellington Fund, a balanced fund that invests in bonds and stocks that, in the opinion of the investment manager, provide relative stability of income and principal and potential growth of capital and income, respectively; Vanguard Fixed Income Securities Fund Short-Term Federal Portfolio (Vanguard Short-Term Federal Portfolio), an income fund that invests primarily in short-term U.S. Government and agency securities with maturities from one to three years; Vanguard Money Market Reserves-Federal Portfolio (Vanguard Federal Portfolio), which invests solely in securities with maturities of one year or less issued by the U.S. Treasury and agencies of the U.S. Government; Vanguard Explorer Fund, which invests primarily in common stocks of small companies that, in the opinion of the investment manager, provide favorable prospects for above-average growth in market value; Vanguard PRIMECAP Fund, which seeks long-term growth of capital by investing principally in a portfolio of common stocks; Vanguard International Growth Portfolio, which seeks to provide long-term growth of capital and diversification overseas by investing in the stock of companies located outside the United States; Vanguard Total Bond Market Index Fund, which seeks a high level of interest income by investing in a large sampling of fixed-income securities that match key characteristics of the Lehman Brother Aggregate Bond Index, a widely recognized measure of the entire taxable U.S. bond market; Vanguard Extended Market Index Fund, a fund which seeks to track the performance of a benchmark index that measures the investment return of small- and mid-capitalization stocks; and the Cabot Common Stock Fund, which invests primarily in Cabot common stock. |
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| The preferred stock allocations are recorded in the Cabot Preferred Stock Fund, which invests primarily in Cabot preferred stock. | ||
| Vesting Each participant is at all times 100% vested in his or her contributions. Effective January 1, 2002, all salaried participants will be vested in all company contributions and earnings thereon according to the following five-year vesting schedule: 20% upon completion of two years of service, 40% upon completion of three years of service, 60% upon completion of four years of service, and 100% upon completion of five years of service. A participant’s entire account balance becomes 100% vested and payable upon the participant’s attainment of age 65, or upon the participant’s early retirement (defined as age 55 with 10 years of service to the company), disability or death. The vesting of company contributions and earnings thereon for union member participants is in accordance with the relevant union’s vesting schedule. |
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| Benefits The Plan requires, other than under certain collective bargaining agreements, all participant benefits to be paid in the form of a lump sum distribution. |
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| A participant may also withdraw up to 100% of before-tax contributions upon showing a financial hardship exists, but only after the participant has withdrawn all other vested benefits from the Plan and the maximum loan has been made from the participant’s account. Participants with after-tax contributions may elect to withdraw these amounts at any time. | ||
| If a participant leaves the Company before retirement for any reason other than death or total and permanent disability, and his or her account balance is $5,000 or less, he or she will receive the vested portion of his or her account balance in a lump sum distribution. | ||
| A participant may elect to defer payment of a benefit until April 1 following the year that the participant reaches age 701/2. | ||
| Loans Participants may obtain loans from the Plan in an amount not to exceed, in the aggregate, the lesser of $50,000 or 50% of the total vested amounts in the participant’s account. Each loan must be paid in full within five years through payroll deductions and is secured by the participant’s remaining account balance. The Plan provides that loans may bear interest at reasonable rates as determined by the Benefits Committee of Cabot Corporation. The interest rate is currently the prime rate plus 2%, and is adjusted quarterly to reflect changes in the prime rate. Interest rates on outstanding loans as of December 31, 2005 ranged from 6.00% to 10.91%. |
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| 2. | Summary of Significant Accounting Policies | |
| Basis of Presentation The financial statements of the Plan are prepared using the accrual method of accounting. |
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| Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of additions and deductions during the reporting period. Actual results could differ from those estimates. |
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| Risk and Uncertainties The Plan allows for various investment options (as selected by the Plan administrator) in any combination of stocks, bonds, fixed income securities, mutual funds and other investment securities. Investment securities are exposed to various risks, such as interest rate, market and credit risks. Due to the level of risk associated with certain investment securities, it is at least reasonably possible that changes in the values of investment securities will occur in the near term and that such changes could materially affect participants’ account balances and the amounts reported in the statements of net assets available for plan benefits. |
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| Investment Valuation The preferred stock is valued by Duff and Phelps, LLC, an independent appraiser. The value of the preferred stock depends primarily on the Company’s common stock value. |
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| Investments in common stock traded on a national securities exchange are valued at the last reported sale price on the last business day of the year. Investments in mutual funds are valued at the net asset value as of the end of the year. The short-term investment funds are carried at cost which approximates market value. Participant loans are valued at cost which approximates fair value. | ||
| Investment Transactions Purchases and sales of securities are reflected on a trade date basis. Gains or losses on sales of securities are based on average cost. |
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| Dividend income is reported on the ex-dividend date. Interest income is recorded as earned on the accrual basis. | ||
| The Plan presents in the statement of changes in net assets the net realized and unrealized appreciation (depreciation) in the fair value of its investments which consists of realized gains or losses and unrealized appreciation or (depreciation) on those investments. | ||
| Benefit Payments Benefits are recorded when paid. |
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| 3. | Investments | |
| The fair value of investments held by the Plan by general type are as follows: |
| December 31, | ||||||||||||||||
| 2005 | 2004 | |||||||||||||||
| Allocated | Unallocated | Allocated | Unallocated | |||||||||||||
Common stocks |
$ | 35,644,674 | $ | — | $ | 42,996,773 | $ | — | ||||||||
Preferred stocks |
100,044,645 | 124,523,382 | 114,046,328 | 151,358,328 | ||||||||||||
Mutual funds |
212,094,467 | — | 190,951,915 | — | ||||||||||||
| $ | 347,783,786 | $ | 124,523,382 | $ | 347,995,016 | $ | 151,358,328 | |||||||||
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| The fair value of investments held by the Plan that exceed 5% or more of net assets available for plan benefits as of December 31, 2005 and 2004 are as follows: |
| December 31, | ||||||||||||||||
| 2005 | 2004 | |||||||||||||||
| Allocated | Unallocated | Allocated | Unallocated | |||||||||||||
Vanguard Windsor II Fund |
$ | 32,350,302 | $ | — | $ | 27,950,622 | $ | — | ||||||||
Vanguard Wellington Fund |
33,767,586 | — | 31,808,630 | — | ||||||||||||
Cabot Common Stock Fund |
35,644,674 | — | 42,996,773 | — | ||||||||||||
Cabot Preferred Stock Fund |
100,044,645 | 124,523,382 | 114,046,328 | 151,358,328 | ||||||||||||
Vanguard 500 Portfolio Fund |
46,008,650 | — | 44,293,447 | — | ||||||||||||
Vanguard PRIMECAP Fund |
30,628,873 | — | 28,338,706 | — | ||||||||||||
| The net appreciation (depreciation) in fair value of investments for the years ended December 31, 2005 and 2004 was as follows: |
| 2005 | 2004 | |||||||
Preferred stock |
$ | (20,907,525 | ) | $ | 47,664,767 | |||
Common stock |
(3,434,626 | ) | 6,102,084 | |||||
Mutual fund |
4,194,008 | 15,263,825 | ||||||
Total |
$ | (20,148,143 | ) | $ | 69,030,676 | |||
| Each share of the preferred stock is convertible into shares of the Company’s common stock, subject to certain events and anti-dilution adjustment provisions, and carries voting rights on an “as converted” basis. The conversion rate for one share of preferred stock to common stock was 146.3782 as of December 31, 2005 and 2004. | ||
| The Company has the right to cause the trustee to redeem shares of preferred stock at any time at their redemption price for cash, shares of the Company’s common stock, or a combination thereof, at the Company’s option. As of December 31, 2005, the redemption price is $1,000 per share. In addition to the redemption price, any accrued and unpaid dividends will become payable on the redemption date. |
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| 4. | Notes Payable | |
| Notes payable consisted of the following: |
| December 31, | ||||||||
| 2005 | 2004 | |||||||
Note due 2013, 8.29% |
$ | 40,861,085 | $ | 44,330,169 | ||||
| In November 1988, the Plan borrowed $75,000,000 from an institutional lender in order to finance its purchase of 75,000 shares of the Company’s Series B ESOP Convertible Preferred Stock. This debt accrues interest at a rate of 8.29% per annum, and is being repaid in equal quarterly installments, with the final payment due on December 31, 2013. This debt is guaranteed by the assets in the unallocated fund and Cabot Corporation. | ||
| The aggregate principal amounts of notes due and payable in each of the next five fiscal years and the balance thereafter are as follows: |
| Year ended December 31, | ||||
2006 |
$ | 3,765,736 | ||
2007 |
4,087,755 | |||
2008 |
4,437,311 | |||
2009 |
4,816,758 | |||
2010 |
5,228,654 | |||
Thereafter |
18,524,871 |
| 5. | Debt Service Contributions | |
| The Company contributes to the Plan on a quarterly basis the deficiency between dividends earned on the leveraged preferred stock and the payment due by the Plan to the lender. These debt service contributions are recorded as unallocated employer contributions. | ||
| 6. | Forfeitures | |
| Upon termination of a participant from the Plan before being fully vested, the nonvested portion of the Company contributions is forfeited. The Plan allows the Company to offset Company contributions with participant forfeitures. During 2005, the Company used $2,408,697 of participant forfeitures to offset Company contributions. As of December 31, 2005, available participant forfeitures totaled $21,676 and are recorded in the statement of net assets available for plan benefits. | ||
| 7. | Administrative Expenses | |
| All administrative expenses associated with the operation of the Plan were paid by the Company during the year ended December 31, 2005. However, under the terms of the Plan, such costs may be charged to the Plan. |
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| 8. | Tax Status | |
| In a letter dated September 2, 2003, the Internal Revenue Service advised the Company of its favorable determination with respect to the qualified status of the Plan, as amended and restated, under the Code. The Plan is intended to qualify as a profit sharing plan under section 401(a) of the Code that contains a stock bonus feature constituting an employee stock ownership plan under section 4975(e) of the Code. The plan administrator and counsel believe that the Plan is designed and is currently being operated in compliance with the applicable requirements of the Code. Therefore, no provision for income tax has been accrued. | ||
| 9. | Plan Termination | |
| The Plan was established with the intention that it will continue indefinitely. However, the Company reserves the right to suspend its contributions or to terminate the Plan at any time. In the event the Plan is terminated, all participants become 100% vested and the assets of the Plan, after payment of any expenses, taxes or proper charges of the trustee, will be allocated in accordance with the provisions of ERISA. | ||
| 10. | Party-In-Interest | |
| The Plan’s investment options include certain mutual funds of The Vanguard Group. Vanguard Fiduciary Trust Company is the recordkeeper and trustee of the Plan’s assets and, therefore, participant investments in mutual funds within The Vanguard Group qualify as party-in-interest transactions. In addition, the Plan invests in common and preferred stock of the plan sponsor and these transactions qualify as party-in-interest transactions. Finally, the Plan provides loans to certain participants that also qualify as party-in-interest transactions. |
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| Current | ||||||||||
| Identity of Issuer | Description of Investment | Cost | Value | |||||||
Cabot
Corporation Stock |
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Cabot Corporation |
Preferred stock of Cabot Corporation* | $ | 75,784,225 | $ | 224,568,027 | |||||
Cabot Corporation |
Common stock of Cabot Corporation* | 21,204,038 | 35,644,674 | |||||||
| Total Cabot Corporation stock | 96,988,263 | 260,212,701 | ||||||||
Mutual
Funds — Bonded |
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The Vanguard Group |
Vanguard 500 Portfolio Fund* | 42,894,351 | 46,008,650 | |||||||
The Vanguard Group |
Vanguard Explorer Fund* | 15,559,548 | 18,339,869 | |||||||
The Vanguard Group |
Vanguard Extended Market Index Fund* | 2,425,693 | 2,517,131 | |||||||
The Vanguard Group |
Vanguard Federal Portfolio Fund* | 18,450,831 | 18,450,831 | |||||||
The Vanguard Group |
Vanguard International Growth Portfolio Fund* | 9,700,535 | 11,549,094 | |||||||
The Vanguard Group |
Vanguard PRIMECAP Fund* | 25,620,527 | 30,628,873 | |||||||
The Vanguard Group |
Vanguard Short-term Federal Portfolio* | 8,436,763 | 8,297,864 | |||||||
The Vanguard Group |
Vanguard Total Bond Market Index Fund* | 10,361,056 | 10,184,267 | |||||||
The Vanguard Group |
Vanguard Wellington Fund* | 31,987,153 | 33,767,586 | |||||||
The Vanguard Group |
Vanguard Windsor II Fund* | 28,436,893 | 32,350,302 | |||||||
| Total mutual funds | 193,873,350 | 212,094,467 | ||||||||
| Participant Loans - stated interest rates | ||||||||||
| ranging from 6.00% - 10.91%* | 2,456,433 | 2,456,433 | ||||||||
| Total investments | $ | 293,318,046 | $ | 474,763,601 | ||||||
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| Cabot Retirement Savings Plan (Name of Plan) |
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| Date: June 23, 2006 | /s/ Robby D. Sisco | |||
| Robby D. Sisco Vice President |
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