UNITED STATES
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, 1999
or
[ ] 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: 1-7558
LAWTER INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
Delaware 36-1370818
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
8601 95th Avenue; Pleasant Prairie, Wisconsin 53142
(Address of principal executive offices)
(414) 947-7300
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common stock $1.00 par value per share - 33,068,076 shares outstanding as
of April 30, 1999.
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
The condensed financial statements included herein have been prepared by the
Company, without audit, pursuant to the rules and regulations of the Securities
and Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations, although the Company believes that disclosures are adequate to make
the information presented not misleading. It is suggested that these condensed
financial statements be read in conjunction with the financial statements and
the notes thereto included in the Company's latest annual report on Form 10-K.
In the opinion of the Company, all adjustments (consisting of normal recurring
accruals) necessary to present fairly the financial position of Lawter
International, Inc. and Subsidiaries as of March 31, 1999 and December 31, 1998
and the results of their operations for the three months ended March 31, 1999
and 1998, and the statements of cash flows for the three months ended March 31,
1999 and 1998, have been included. It should be noted that these interim
statements are based on certain annual estimates such as the final level of LIFO
inventories and the provision for income taxes. These and other similar items
may be subject to year end adjustments. The results of operations for such
interim periods are not necessarily indicative of the results for the full year.
Lawter International, Inc. and Subsidiaries
Condensed Statements of Earnings
(Shown in thousands)
Three Months Ended March 31
---------------------------
<TABLE>
<S> <C> <C>
1999 1998
-------- --------
Net Sales $ 55,102 $ 52,755
Cost of Products Sold 38,014 36,935
-------- --------
Gross Margin $ 17,088 $ 15,820
Selling, Admin. Research and
Distribution Expenses 7,229 7,017
-------- --------
Income from Operations $ 9,859 $ 8,803
Investment Income 360 1,072
Interest Expense (2,408) (745)
-------- --------
Earnings before Income Taxes $ 7,811 $ 9,130
Provision for Income Taxes 2,343 2,739
-------- --------
Net Earnings $ 5,468 $ 6,391
======== ========
Earnings per Share of Common Stock (Note 2) $ .17 $ .14
Dividends per Share of Common Stock $ .10 $ .10
Weighted Average Shares Outstanding 33,068 45,533
</TABLE>
The accompanying notes to the condensed financial statements are an integral
part of these statements.
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<PAGE>
Lawter International, Inc. and Subsidiaries
Condensed Balance Sheets
(Shown in thousands)
<TABLE>
<S> <C> <C>
March 31 December 31
-------- -----------
Assets 1999 1998
- -------- -------- --------
Current Assets
Cash $ 14,189 $ 14,130
Time Deposits 29,636 25,948
Accounts Receivable (net) 41,612 42,398
Inventories (Note 1)
Raw Materials 22,964 26,694
Finished Goods 21,363 22,785
Prepaid Expenses 1,188 1,086
-------- --------
Total Current Assets $130,952 $133,041
-------- --------
Property, Plant and Equipment $130,911 $134,603
Less Accumulated Depreciation (42,708) (42,460)
-------- --------
Net Property $ 88,203 $ 92,143
-------- --------
Intangibles and Other Assets $ 27,367 $ 29,066
-------- --------
Total Assets $246,522 $254,250
======== ========
Liabilities and Stockholders' Equity
- ------------------------------------
Current Liabilities
Accounts Payable $ 12,718 $ 13,577
Short-Term Borrowings 25,263 27,790
Accrued Expenses 12,360 13,557
Income Taxes Payable 1,633 1,408
-------- --------
Total Current Liabilities $ 51,974 $ 56,332
-------- --------
Deferred Income Taxes $ 35,816 $ 35,344
-------- --------
Long-Term Obligations $129,050 $129,050
-------- --------
Total Liabilities $216,840 $220,726
-------- --------
Stockholders' Equity
Preferred Stock (None Issued) $ --- $ ---
Common Stock 45,533 45,533
Additional Paid-in Capital 15,950 15,950
Common Stock, held in Treasury (137,412) (137,412)
Retained Earnings 118,067 115,906
Cumulative Translation Adjustments (12,296) (6,295)
Other (160) (158)
-------- --------
Net Stockholders' Equity $ 29,682 $ 33,524
-------- --------
Total Liabilities and Equity $246,522 $254,250
======== ========
</TABLE>
The accompanying notes to the condensed financial statements are an integral
part of these balance sheets.
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<PAGE>
Lawter International, Inc. and Subsidiaries
Condensed Statements of Cash Flows
(Shown in thousands)
Three Months Ended March 31
---------------------------
<TABLE>
<S> <C> <C>
1999 1998
-------- --------
Cash Flow from Operating Activities:
Net Earnings $ 5,468 $ 6,391
Adjustments to Reconcile Net Earnings to
Net Cash Provided by Operating Activities-
Depreciation and Amortization 1,615 1,482
Deferred Exchange Gain (Loss) 1,523 205
Gain on Sale of Fixed Assets (9) ---
(Increase) Decrease in Current Assets-
Accounts Receivable (864) 1,096
Inventories 2,849 (6,029)
Prepaid Expenses (178) (1,210)
Increase (Decrease) in Current Liabilities-
Accounts Payable 96 (803)
Accrued Expenses (916) (603)
Income Taxes Payable 1,163 770
-------- --------
Net Cash Provided by (Used for) Operating
Activities $ 10,747 $ 1,299
-------- --------
Cash Flow from Investing Activities:
Expenditures for Property, Plant
& Equipment - Net $ (1,584) $ (452)
Purchase of Business - Net --- (3,200)
Loans to Officers (6)
Repayment of Officers' Loans 224 ---
-------- --------
Net Cash Used for Investing Activities $ (1,360) $ (3,658)
-------- --------
Cash Flow from Financing Activities:
Proceeds from Short-Term Borrowings $ 500 $ 1,197
Payment of Short-Term Borrowings (1,390) ---
Cash Dividends Paid (3,312) (4,553)
-------- --------
Net Cash Provided by (Used for) Financing
Activities $ (4,202) $ (3,356)
-------- --------
Effect of Exchange Rate Changes on Cash $ (1,441) $ (128)
-------- --------
Increase (Decrease) in Cash and Equivalents $ 3,744 $ (5,843)
Cash and Equivalents, Beginning of Period 40,078 82,871
-------- --------
Cash and Equivalents, End of Period $ 43,822 $ 77,028
======== ========
</TABLE>
The accompanying notes to the condensed financial statements are an integral
part of these statements.
-4-
<PAGE>
Lawter International, Inc. and Subsidiaries
Notes to the Condensed Financial Statements
Note 1. Inventories
At year end, the Company takes a complete physical inventory to determine
inventory values. During interim periods, the Company uses a combination of
perpetual inventory records, physical inventories and the gross profit method to
determine inventory values.
The Company values the majority of its domestic inventories at last-in, first-
out (LIFO) cost which is not in excess of net realizable value. The Company's
other inventories are valued at the lower of first-in, first-out (FIFO) cost or
market.
Because the inventory determination under the LIFO method can only be made at
the end of each fiscal year based on the inventory levels and costs at that
point, interim LIFO determinations, including that at March 31, 1999, must
necessarily be based on management's estimates of expected year end inventory
levels and costs. Such future estimates of inventory levels and prices are
subject to many forces beyond the control of management.
Note 2. Earnings per Share
Earnings per share of common stock are computed on the weighted average shares
outstanding during the respective periods. Net earnings per share would not be
materially different from reported earnings per share if all outstanding stock
options were exercised.
Note 3. Comprehensive Income
Lawter's comprehensive earnings were as follows:
(In $000's) Three Months Ended March 31
---------------------------
<TABLE>
<S> <C> <C>
1999 1998
-------- --------
Net Earnings $ 5,468 $ 6,391
Unrealized Translation Adjustments (6,001) (2,043)
-------- --------
Total Comprehensive Income $ (533) $ 4,348
======== ========
</TABLE>
Note 3. New Accounting Pronouncements
In 1998, the American Institute of Certified Public Accountants issued Statement
of Position 98-5 "Start-up Pre-Operating and Organization Costs." This
statement requires start-up costs to be expensed as incurred versus the current
practice of capitalizing these costs. This statement has been adopted in the
first quarter of 1999 and has no significant impact on the financial position,
results of operations or cash flows of the Company.
In 1998, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 133 "Accounting for Derivative Instruments and Hedging
Activities." This statement has been adopted in the first quarter of 1999 and
has no significant impact on the financial position, results of operations or
cash flows of the Company as no derivatives are in use at this time.
-5-
<PAGE>
In 1998, the American Institute of Certified Public Accountants issued Statement
of Position 98-1 "Accounting for Software Development Costs." This statement
requires the Company to capitalize certain direct internal and direct external
costs in connection with software development projects. This statement has been
adopted in the first quarter of 1999 and has no significant impact on the
financial position, results of operations or cash flows of the Company.
Note 4. Subsequent Event
On April 28, 1999, the Company and Eastman Chemical Company ("Parent")
announced that they had entered into an Agreement and Plan of Merger (the
"Merger Agreement") pursuant to which Lipstick Acquisition Corp., a Delaware
corporation and wholly-owned subsidiary of Parent ("Purchaser"), will commence a
cash tender offer (the "Offer"), to purchase all the issued and outstanding
shares of common stock of the Company, $1.00 par value per share (the "Shares"),
at a price of $12.25 per Share, net to the seller in cash, without interest
thereon, subject to the terms and conditions of the Offer. The obligation of
Purchaser to accept for payment or pay for Shares is subject to the satisfaction
of the condition that there shall be validly tendered in accordance with the
terms of the Offer prior to the expiration date of the Offer and not withdrawn a
number of Shares which, together with the Shares then owned by Parent and
Purchaser, represents at least a majority of the Shares outstanding on a fully
diluted basis, and certain other conditions. The Merger Agreement provides
that, following the consummation of the Offer, upon the satisfaction or waiver
of certain conditions, Purchaser will be merged with and into the Company (the
"Merger"), with the Company continuing as the surviving corporation (the
"Surviving Corporation"). In the Merger, each Share outstanding immediately
prior to the effective time of the Merger (other than Shares held in the
treasury of the Company, Shares owned by Parent, Purchaser or any other wholly
owned subsidiary of Parent, or Shares held by stockholders who properly perfect
their dissenters' rights under the Delaware General Corporation Law) will be
converted, by virtue of the Merger and without any action by the holder thereof,
into the right to receive $12.25 per Share (or any higher price paid per Share
in the Offer) (the "Offer Price"), net to the seller in cash, without interest
thereon.
In connection with the Merger Agreement and pursuant to a Stock Option
Agreement dated as of April 28, 1999 among the Company, Parent and Purchaser,
the Company has granted Purchaser an irrevocable option to purchase up to that
number of newly issued Shares equal to the number of Shares (not to exceed 19.9%
of the number of Shares outstanding on April 28, 1999) that, when added to the
number of Shares owned by Purchaser and its affiliates immediately following
consummation of the Offer, shall constitute 90% of the Shares then outstanding
on a fully diluted basis (giving effect to the issuance of such option shares)
for a consideration per option share equal to the Offer Price.
As of April 28, 1999, there were approximately 33,000,000 Shares issued and
outstanding. The transaction is subject to various regulatory approvals,
including Hart-Scott-Rodino clearance, and to the satisfaction of certain other
conditions, and also provides for the payment of a break-up fee and
reimbursement of certain expenses under certain conditions.
On May 4, 1999, the Purchaser commenced the Offer, and the Company filed
with the Securities and Exchange Commission a Statement on Schedule 14D-9 which
contains additional information concerning the Offer and the Merger.
-6-
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Liquidity and Capital Resources
Lawter's cash and equivalents, net of short-term borrowings, increased
$6,300,000 from $12,300,000 at December 31, 1998 to $18,600,000 at March 31,
1999. The increase in cash was the result of Earnings for the quarter and a
reduction in inventory levels. Management believes that the Company's cash
reserves will be adequate for its currently foreseeable working capital needs
and future capital expenditures.
Capital expenditures in the near future will include funds for improved raw
material sourcing and product line expansion as well as additions to and
maintenance of existing facilities.
Results of Operations
SALES. The Company's consolidated net sales increased 4% in the first quarter
of 1999 when compared to the first quarter of 1998 due to a 9% increase in
sales volume and a weaker U.S. dollar versus European and Asian currencies
partially offset by a change in product mix and pricing which caused average
selling prices to be lower. Included in the first quarter sales were the sales
of Rokramar, Inc., which was purchased on December 31, 1998. Excluding
Rokramar, consolidated net sales decreased 2%, reflecting weak market conditions
in Europe.
GROSS MARGINS. Gross margins as a percent of net sales were 31.0% and 30.0% for
the quarters ended March 31, 1999 and 1998, respectively. The gross margin in
1999 increased compared to 1998 due to favorable raw material sourcing and a
change in product mix to higher margin products. This increase was partially
offset by the addition of Rokramar which will initially have low margins as a
result of certain products being toll processed for the Company. Over the next
two years, the Company plans to take this production internal.
SELLING, ADMINISTRATIVE, RESEARCH AND DISTRIBUTION EXPENSES. Selling,
administrative, research and distribution expenses increased from $7,017,000 in
the quarter ended March 31, 1998 to $7,229,000 in the quarter ended March 31,
1999. This increase was principally due to the addition of Rokramar and higher
sales volume domestically, partially offset by foreign exchange transaction
gains in 1999.
INVESTMENT INCOME. Net investment income in the quarter ended March 31, 1999
decreased from the quarter ended March 31, 1998 due primarily to the repurchase
of the shares of the Company's Common Stock from the estate of Daniel J. Terra
in April of 1 998.
INTEREST EXPENSE. The Company financed the majority of the repurchase of the
Company's Common Stock with a $100,000,000 note issued to Prudential Insurance
Company of America in April of 1998 resulting in the increase in interest
expense from the first quarter of 1998 to the first quarter of 1999.
INCOME TAXES. The effective tax rate was comparable at 30.0% for each of the
three months ended March 31, 1999 and 1998.
-7-
<PAGE>
Other Matters
SUBSEQUENT EVENT. On April 28, 1999, the Company and Eastman Chemical Company
("Parent") announced that they had entered into an Agreement and Plan of Merger
(the "Merger Agreement") pursuant to which Lipstick Acquisition Corp., a
Delaware corporation and wholly-owned subsidiary of Parent ("Purchaser"), will
commence a cash tender offer (the "Offer"), to purchase all the issued and
outstanding shares of common stock of the Company, $1.00 par value per share
(the "Shares"), at a price of $12.25 per Share, net to the seller in cash,
without interest thereon, subject to the terms and conditions of the Offer. The
obligation of Purchaser to accept for payment or pay for Shares is subject to
the satisfaction of the condition that there shall be validly tendered in
accordance with the terms of the Offer prior to the expiration date of the Offer
and not withdrawn a number of Shares which, together with the Shares then owned
by Parent and Purchaser, represents at least a majority of the Shares
outstanding on a fully diluted basis, and certain other conditions. The Merger
Agreement provides that, following the consummation of the Offer, upon the
satisfaction or waiver of certain conditions, Purchaser will be merged with and
into the Company (the "Merger"), with the Company continuing as the surviving
corporation (the "Surviving Corporation"). In the Merger, each Share
outstanding immediately prior to the effective time of the Merger (other than
Shares held in the treasury of the Company, Shares owned by Parent, Purchaser or
any other wholly owned subsidiary of Parent, or Shares held by stockholders who
properly perfect their dissenters' rights under the Delaware General Corporation
Law) will be converted, by virtue of the Merger and without any action by the
holder thereof, into the right to receive $12.25 per Share (or any higher price
paid per Share in the Offer) (the "Offer Price "), net to the seller in cash,
without interest thereon.
In connection with the Merger Agreement and pursuant to a Stock Option
Agreement dated as of April 28, 1999 among the Company, Parent and Purchaser,
the Company has granted Purchaser an irrevocable option to purchase up to that
number of newly issued Shares equal to the number of Shares (not to exceed 19.9%
of the number of Shares outstanding on April 28, 1999) that, when added to the
number of Shares owned by Purchaser and its affiliates immediately following
consummation of the Offer, shall constitute 90% of the Shares then outstanding
on a fully diluted basis (giving effect to the issuance of such option shares)
for a consideration per option share equal to the Offer Price.
As of April 28, 1999, there were approximately 33,000,000 Shares issued and
outstanding. The transaction is subject to various regulatory approvals,
including Hart-Scott-Rodino clearance, and to the satisfaction of certain other
conditions, and also provides for the payment of a break-up fee and
reimbursement of certain expenses under certain conditions.
On May 4, 1999, the Purchaser commenced the Offer, and the Company filed
with the Securities and Exchange Commission a Statement on Schedule 14D-9 which
contains additional information concerning the Offer and the Merger.
YEAR 2000. The Company is taking the actions described below to evaluate and
address its exposure to year 2000 ("Y2K") issues, which may result from the
inability of some computer programs to identify the Year 2000 properly,
potentially leading to errors or system failure.
The Company is conducting Y2K reviews of each of the following areas:
(i) internal information systems, (ii) embedded systems, (iii) research and
development equipment, and (iv) suppliers providing products and services to the
Company.
-8-
<PAGE>
The Company's internal information systems have been inventoried and
assessed. The Company believes its enterprise software in North America is fully
Y2K compliant. Its North American hardware and operating system software are
scheduled to be upgraded by August 31, 1999. In Europe, the Company believes
that the internal information systems software and hardware are fully Y2K
compliant. In the Pacrim, the Company believes that all critical systems are
Y2K compliant.
Embedded systems, specifically the Foxboro production system, which is
used in the Company's resin facilities in Wisconsin and Kallo, Belgium, have
been assessed and are currently awaiting upgrades. The Company expects to
complete these upgrades by August 31, 1999.
The Company is in the process of testing and upgrading its research and
development equipment. The Company has completed this testing and certain
systems have been upgraded. The remaining upgrades are expected to be completed
by June 30, 1999 .
Key suppliers were surveyed as to their Y2K compliance. Eighty-four
percent of these suppliers in North America and eighty-eight percent in Europe
have responded that they are addressing the issue, and plan to be compliant.
Meaningful responses from suppliers in the Pacrim have not yet been received.
The Company will continue to seek assurances from suppliers that they will be
Y2K compliant. The Company has initiated contingency planning and expects to
finalize such plans for each of the areas identified above before yearend 1999.
In a worst case scenario, any failure by the Company or any key supplier
or customer to become Y2K compliant could result in disruption of the Company's
normal operations and the inability or unwillingness of its customers to
purchase the Company's products. Any such failure or disruption could have a
material adverse affect on the Company's business, financial condition or
results of operations.
The Company expects costs associated with Y2K remediation to be
approximately $250,000, which will be expensed as incurred and will not have a
material impact on the financial position, results of operations or cash flow of
the Company. To date, approximately $150,000 of such costs have been incurred.
Market Risk. The Company is exposed to various market risks, including changing
interest rates and foreign currency rates. At March 31, 1999, the Company had
$129,000,000 in fixed rate long term debt, $29,600,000 in variable rate short
term debt and $25,300,000 in variable rate short term deposits. The book value
of all debt and deposits approximates market value. Based on the Company's
overall interest rate exposure, a change in interest rates would not have a
material impact on the consolidated financial position, results of operation or
cash flows of the Company. Historically, the Company has not entered into
interest rate protection agreements.
The Company transacts approximately fifty percent of its business in
various foreign currencies, primarily in Europe, the Pacrim and Canada. A
significant change in currency rates could have a material effect on the
consolidated financial position, results of operation or cash flows of the
Company. The Company does not have any foreign currency related derivative
instruments. A ten percent adverse change in foreign currency rates would
decrease annual earnings by about $.04 per share.
Euro. The Company has significant operations in Europe. During 1998, the
Company addressed the impact of the Euro. The Company has conducted business in
-9-
<PAGE>
the Euro and believes that it is fully prepared to further transact business in
the Euro and that the conversion from national currencies to the Euro has not
and will not have a material impact on the consolidated financial position,
results of operation or cash flows of the Company.
LOOKING FORWARD. This Form 10-Q contains forward-looking statements which are
not historical facts. These statements involve risks and uncertainties that
could cause actual results to differ materially, including, but not limited to,
foreign currency rate fluctuations, competitive factors, raw material costs and
certain global and regional economic conditions and factors which are beyond the
Company's control.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
Quantitative and qualitative disclosures about market risk are included in
this Form 10-Q in Item 2 under the caption "Market Risk."
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) (2) Agreement and Plan of Merger, dated as of April 27, 1999 by and
among Eastman Chemical Company, Lipstick Acquisition Corp. and the Company
(incorporated by reference to Current Report on Form 8-K, filed by Eastman
Chemical Company on May 3, 1999).
(27) Financial Data Schedule.
(b) On April 29, 1999, the Company filed a Form 8-K to report that the Company
entered into an Agreement and Plan of Merger with Eastman Chemical Company
and Lipstick Acquisition Corp., a wholly owned subsidiary of Eastman
Chemical Company.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LAWTER INTERNATIONAL, INC.
--------------------------
(Registrant)
May 12, 1999 /s/ John P. O'Mahoney
- ------------ --------------------------
John P. O'Mahoney
Vice Chairman and
Chief Executive Officer
May 12, 1999 /s/ Mark W. Joslin
- ------------ --------------------------
Mark W. Joslin
Chief Financial Officer
and Treasurer
-10-
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 43,825
<SECURITIES> 0
<RECEIVABLES> 41,612
<ALLOWANCES> 0
<INVENTORY> 44,327
<CURRENT-ASSETS> 130,952
<PP&E> 130,911
<DEPRECIATION> 42,708
<TOTAL-ASSETS> 246,522
<CURRENT-LIABILITIES> 51,974
<BONDS> 129,050
0
0
<COMMON> 45,533
<OTHER-SE> (15,851)
<TOTAL-LIABILITY-AND-EQUITY> 246,522
<SALES> 55,102
<TOTAL-REVENUES> 55,102
<CGS> 38,014
<TOTAL-COSTS> 38,014
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,408
<INCOME-PRETAX> 7,811
<INCOME-TAX> 2,343
<INCOME-CONTINUING> 5,468
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,468
<EPS-PRIMARY> .17
<EPS-DILUTED> .17
</TABLE>
