1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 1-12626
EASTMAN CHEMICAL COMPANY
(Exact name of registrant as specified in its charter)
DELAWARE 62-1539359
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
100 N. EASTMAN ROAD
KINGSPORT, TENNESSEE 37660
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (423) 229-2000
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 [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Number of Shares Outstanding at
Class June 30, 2000
Common Stock, par value $0.01 per share 76,774,080
(including rights to purchase shares of
Common Stock or Participating Preferred Stock)
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PAGE 1 OF 103 TOTAL SEQUENTIALLY NUMBERED PAGES
EXHIBIT INDEX ON PAGE 29
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TABLE OF CONTENTS
ITEM PAGE
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PART I. FINANCIAL INFORMATION
1. Financial Statements 3-13
2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 14-23
PART II. OTHER INFORMATION
1. Legal Proceedings 24-25
4. Submission of Matters to a Vote of Security Holders 25-27
6. Exhibits and Reports on Form 8-K 27
SIGNATURES
Signatures 28
2
3
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS, COMPREHENSIVE
INCOME, AND RETAINED EARNINGS
(Dollars in millions, except per share amounts)
SECOND QUARTER FIRST SIX MONTHS
2000 1999 2000 1999
EARNINGS
Sales $ 1,316 $ 1,122 $ 2,533 $ 2,145
Cost of sales 1,026 897 1,993 1,726
-------- -------- -------- --------
Gross profit 290 225 540 419
Selling and general administrative expenses 81 83 161 159
Research and development costs 36 46 74 93
-------- -------- -------- --------
Operating earnings 173 96 305 167
Interest expense, net 34 28 67 54
Other (income) charges, net 11 4 8 12
-------- -------- -------- --------
Earnings before income taxes 128 64 230 101
Provision for income taxes 42 21 76 33
-------- -------- -------- --------
Net earnings $ 86 $ 43 $ 154 $ 68
======== ======== ======== ========
Earnings per share
Basic $ 1.12 $ .55 $ 2.00 $ .86
======== ======== ======== ========
Diluted $ 1.12 $ .54 $ 2.00 $ .86
======== ======== ======== ========
COMPREHENSIVE INCOME
Net earnings $ 86 $ 43 $ 154 $ 68
Other comprehensive loss (33) (13) (34) (42)
-------- -------- -------- --------
Comprehensive income $ 53 $ 30 $ 120 $ 26
======== ======== ======== ========
RETAINED EARNINGS
Retained earnings at beginning of period $ 2,133 $ 2,178 $ 2,098 $ 2,188
Net earnings 86 43 154 68
Cash dividends declared (34) (35) (67) (70)
-------- -------- -------- --------
Retained earnings at end of period $ 2,185 $ 2,186 $ 2,185 $ 2,186
======== ======== ======== ========
The accompanying notes are an integral part of these financial statements.
3
4
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(Dollars in millions)
JUNE 30, DECEMBER 31,
2000 1999
ASSETS
Current assets
Cash and cash equivalents $ 169 $ 186
Trade receivables, net of allowance of $14 and $13 584 558
Miscellaneous receivables 72 73
Inventories 548 485
Other current assets 152 187
-------- --------
Total current assets 1,525 1,489
-------- --------
Properties
Properties and equipment at cost 8,807 8,820
Less: Accumulated depreciation 4,983 4,870
-------- --------
Net properties 3,824 3,950
-------- --------
Goodwill, net of accumulated amortization of $20 and $14 265 271
Other intangibles, net of accumulated amortization of $11 and $6 170 175
Other noncurrent assets 463 418
-------- --------
Total assets $ 6,247 $ 6,303
======== ========
LIABILITIES AND SHAREOWNERS' EQUITY
Current liabilities
Payables and other current liabilities $ 1,041 $ 1,009
Borrowings due within one year 103 599
-------- --------
Total current liabilities 1,144 1,608
Long-term borrowings 1,854 1,506
Deferred income tax credits 496 485
Postemployment obligations 821 789
Other long-term liabilities 174 156
-------- --------
Total liabilities 4,489 4,544
-------- --------
Shareowners' equity
Common stock ($0.01 par - 350,000,000 shares
authorized; shares issued -- 84,612,446 and 84,512,004) 1 1
Paid-in capital 98 95
Retained earnings 2,185 2,098
Other comprehensive loss (88) (54)
-------- --------
2,196 2,140
Less: Treasury stock at cost (7,996,790 and 6,421,790 shares) 438 381
-------- --------
Total shareowners' equity 1,758 1,759
-------- --------
Total liabilities and shareowners' equity $ 6,247 $ 6,303
======== ========
The accompanying notes are an integral part of these financial statements.
4
5
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in millions)
FIRST SIX MONTHS
2000 1999
Cash flows from operating activities
Net earnings $ 154 $ 68
------ ------
Adjustments to reconcile net earnings to net cash provided
by operating activities, net of effect of acquisitions
Depreciation and amortization 199 180
Write-off of impaired assets -- 13
Provision (benefit) for deferred income taxes 6 (6)
(Increase) decrease in receivables (14) 78
Increase in inventories (57) (12)
Increase (decrease) in liabilities for employee benefits
and incentive pay 3 (74)
Increase in liabilities excluding borrowings and liabilities
for employee benefits and incentive pay 57 19
Other items, net 30 20
------ ------
Total adjustments 224 218
------ ------
Net cash provided by operating activities 378 286
------ ------
Cash flows from investing activities
Additions to properties and equipment (78) (134)
Acquisitions, net of cash acquired (52) (376)
Capital advances to suppliers -- (21)
Other investments (23) --
Proceeds from sales of fixed assets 60 --
Additions to capitalized software (9) (10)
------ ------
Net cash used in investing activities (102) (541)
------ ------
Cash flows from financing activities
Net (decrease) increase in commercial paper borrowings (49) 436
Proceeds from borrowings 100 --
Repayment of borrowings (221) --
Dividends paid to shareowners (68) (70)
Treasury stock purchases (57) (51)
Other items 2 1
------ ------
Net cash (used in) provided by financing activities (293) 316
------ ------
Net change in cash and cash equivalents (17) 61
Cash and cash equivalents at beginning of period 186 29
------ ------
Cash and cash equivalents at end of period $ 169 $ 90
====== ======
The accompanying notes are an integral part of these financial statements.
5
6
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited interim consolidated financial statements
have been prepared by the Company in accordance and consistent with the
accounting policies stated in the Company's 1999 Annual Report on Form
10-K and should be read in conjunction with the consolidated financial
statements appearing therein. In the opinion of the Company, all
normally recurring adjustments necessary for a fair presentation have
been included in the interim unaudited consolidated financial
statements. The unaudited interim consolidated financial statements are
based in part on estimates made by management.
The Company has reclassified certain 1999 amounts to conform to the
2000 presentation.
2. SECURITIZATION OF ACCOUNTS RECEIVABLE
In 1999, the Company entered into an agreement that allows it to sell
undivided interests in certain domestic trade accounts receivable under
a planned continuous sale program to a third party. Under this
agreement, receivables sold to the third party totaled $200 million at
June 30, 2000 and $150 million at December 31, 1999.
3. INVENTORIES
JUNE 30, DECEMBER 31,
(Dollars in millions) 2000 1999
At FIFO or average cost (approximates current cost)
Finished goods $ 459 $ 404
Work in process 129 128
Raw materials and supplies 226 210
------ ------
Total inventories 814 742
Reduction to LIFO value (266) (257)
------ ------
Total inventories at LIFO value $ 548 $ 485
====== ======
Inventories valued on the LIFO method were approximately 70% of total
inventories in each of the periods.
4. PAYABLES AND OTHER CURRENT LIABILITIES
JUNE 30, DECEMBER 31,
(Dollars in millions) 2000 1999
Trade creditors $ 324 $ 323
Accrued payrolls, vacation, and variable-incentive compensation 151 143
Accrued restructuring charge 48 76
Accrued taxes 121 112
Deferred gain on foreign exchange options 53 --
Other 344 355
------ ------
Total $1,041 $1,009
====== ======
6
7
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. BORROWINGS
JUNE 30, DECEMBER 31,
(Dollars in millions) 2000 1999
SHORT-TERM BORROWINGS
Commercial paper $ -- $ 398
Notes payable 100 125
Other 3 76
------ ------
Total short-term borrowings $ 103 $ 599
------ ------
LONG-TERM BORROWINGS
6 3/8% notes due 2004 $ 500 $ 500
7 1/4% debentures due 2024 496 496
7 5/8% debentures due 2024 200 200
7.60% debentures due 2027 296 297
Commercial paper 349 --
Other 13 13
------ ------
Total long-term borrowings $1,854 $1,506
------ ------
Total borrowings $1,957 $2,105
====== ======
On July 13, 2000, Eastman replaced the existing $800 million revolving
credit facility expiring in December 2000 with a new $800 million
revolving credit facility (the "Credit Facility"). Although the Company
does not have any amounts outstanding under the Credit Facility, any
such borrowings would be subject to interest at varying spreads above
quoted market rates, principally LIBOR. The Credit Facility also
requires a facility fee on the total commitment that varies based on
Eastman's credit rating. The rate for such fee was .085% as of June 30,
2000. The Credit Facility contains a number of covenants and events of
default, including the maintenance of certain financial ratios. Eastman
was in compliance with all such covenants for the second quarter 2000.
Eastman utilizes commercial paper, generally with maturities of 90 days
or less, to meet its liquidity needs. Because the Credit Facility which
provides liquidity support for the commercial paper expires in July
2005, the commercial paper borrowings at June 30, 2000 are classified
as long-term borrowings because the Company has the ability to
refinance such borrowings long term. At December 31, 1999, the
Company's commercial paper borrowings were classified as short-term
borrowings because the revolving credit facility then in effect would
have expired in December 2000. As of June 30, 2000, the Company's
commercial paper outstanding balance was $349 million at an effective
interest rate of 6.83%. At December 31, 1999, the Company's commercial
paper outstanding balance was $398 million at an effective interest
rate of 6.30%.
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8
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In January 2000, the Company retired $125 million of Lawter
International, Inc.'s ("Lawter") notes and financed this with
commercial paper. During the first quarter 2000, the Company retired
$76 million of other short-term borrowings, also financed with
commercial paper, and assumed additional short-term borrowings totaling
$21 million in the Chemicke Zavody Sokolov ("Sokolov") acquisition. In
the second quarter 2000, short-term borrowings of $21 million assumed
in the Sokolov acquisition were repaid and financed with commercial
paper. Additional indebtedness of $100 million in the form of a
short-term note payable was incurred during the second quarter 2000 for
general operating purposes. Interest rates for these notes range from
6.33% to 7.33%.
6. EARNINGS AND DIVIDENDS PER SHARE
SECOND QUARTER FIRST SIX MONTHS
2000 1999 2000 1999
Shares used for earnings per share
calculation (in millions):
Basic 76.5 78.0 77.0 78.3
Diluted 76.9 78.4 77.2 78.6
Certain shares underlying options outstanding during the second quarter
of 2000 and 1999 were excluded from the computation of diluted earnings
per share because the options' exercise prices were greater than the
average market price of the common shares. Excluded from second quarter
2000 and 1999 calculations were shares underlying options to purchase
2,332,231 shares of common stock at a range of prices from $49.25 to
$73.8125 and 1,914,448 shares of common stock at a range of prices from
$52.0625 to $74.25 outstanding at June 30, 2000 and 1999, respectively.
Excluded from the year to date 2000 and 1999 calculations were shares
underlying options to purchase 3,060,841 common shares at a range of
prices from $45.4375 to $73.81525 and 1,915,720 common shares at a
range of prices from $50.6250 to $74.2500, respectively.
In 1999, several key executive officers were awarded performance-based
stock options to further align their compensation with the return to
Eastman's shareowners and to provide additional incentive and
opportunity for reward to individuals in key positions having direct
influence over corporate actions that are expected to impact the market
price of Eastman's stock. Options to purchase a total of 574,000 shares
will become exercisable through October 19, 2001, if both the stock
price and time vesting conditions are met. The options will be
cancelled and forfeited on October 19, 2001 as to any shares for which
the applicable stock price target is not met. At June 30, 2000, 149,240
shares underlying such options were included in diluted earnings per
share calculations as a result of the stock price conditions for
vesting being met.
Additionally, 200,000 shares underlying an option issued to the Chief
Executive Officer in third quarter 1997 were excluded from diluted
earnings per share calculations because the stock price vesting
conditions to exercise had not been met as to any of the shares as of
June 30, 2000.
The Company declared cash dividends of $0.44 per share in the second
quarter of 2000 and 1999 and $0.88 per share in the first six months of
2000 and 1999.
8
9
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. ACQUISITIONS
CHEMICKE ZAVODY SOKOLOV
As of February 21, 2000, the Company acquired 76 percent of the shares
of Sokolov, a manufacturer of waterborne polymer products, acrylic acid
and acrylic esters located in the Czech Republic. During the second
quarter 2000, the Company acquired an additional 21% of the shares
resulting in 97% ownership of Sokolov as of June 30, 2000. These
transactions, for cash consideration totaling approximately $46 million
(net of $3 million cash acquired) and the assumption of $21 million of
Sokolov debt, were financed with available cash and commercial paper
borrowings. Efforts will continue to accumulate additional shares as
they become available from the remaining minority shareholders.
The acquisition of Sokolov has been accounted for by the purchase
method of accounting and, accordingly, the results of operation of
Sokolov for the period from February 21, 2000 are included in the
accompanying consolidated financial statements. Assets acquired and
liabilities assumed have been recorded at their fair values. The
minority interest, which is included in other long-term liabilities in
the Consolidated Statements of Financial Position, is not significant.
Assuming this transaction had been made at January 1, 2000 and 1999,
the consolidated proforma results for the six months ending June 30,
2000, and the year 1999 would not be materially different from reported
results.
LAWTER INTERNATIONAL, INC.
On June 9, 1999, the Company completed its acquisition of Lawter for
cash consideration of approximately $370 million (net of $41 million
cash acquired) and the assumption of $145 million of Lawter's debt.
Lawter develops, produces and markets specialty products for the inks
and coatings market.
The acquisition of Lawter was accounted for by the purchase method of
accounting. Assets acquired and liabilities assumed were recorded at
their fair values. Goodwill and other intangible assets of
approximately $455 million, representing the excess of cost over the
estimated fair value of net tangible assets acquired, are being
amortized on a straight-line basis over 5-40 years. Assuming this
transaction had been made at January 1, 1999, the consolidated proforma
results for the six months ending June 30, 1999 would not be materially
different from reported results.
8. DERIVATIVE FINANCIAL INSTRUMENTS
Eastman had currency options with maturities of not more than three
years to exchange various foreign currencies for U.S. dollars in the
aggregate notional amount of $639 million at December 31, 1999. In
February 2000, currency options denominated in French franc, German
mark, and Italian lira with a notional amount of $545 million were
effectively settled, resulting in cash proceeds of $106 million. Of
this amount, approximately $14 million, net of premium amortization,
was recognized in operating earnings in the second quarter 2000 and a
total of $27 million, net of premium amortization, was
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10
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
recognized in operating earnings through June 30, 2000. The balance,
deferred until the underlying hedged transactions are realized, is
recorded in other liabilities in the Consolidated Statements of
Financial Position. The remaining deferred gain will be recognized over
a period ending fourth quarter 2001.
9. EMPLOYEE SEPARATIONS
In the fourth quarter 1999, the Company accrued costs associated with
employee terminations which resulted from voluntary and involuntary
employee separations which occurred during the fourth quarter 1999. The
voluntary and involuntary separations resulted in a reduction of about
1,200 employees. About 760 employees who were eligible for full
retirement benefits left the Company under a voluntary separation
program and approximately 400 additional employees were involuntarily
separated from the Company. Employees separated under these programs
each received a separation package equaling two weeks' pay for each
year of employment, up to a maximum of one year's pay and subject to
certain minimum payments. Approximately $71 million was accrued in 1999
for termination allowance payments associated with the separations, of
which $6 million was paid in 1999 and $34 million was paid during the
first six months of 2000. As of June 30, 2000, a balance of $31 million
remains to be paid substantially during 2000 and is included in other
current liabilities in the Consolidated Statements of Financial
Position.
10. SEGMENT INFORMATION
Effective with the first quarter 2000, the Company reports financial
results in two operating segments--Chemicals and Polymers. Through
1999, the Company managed its operations in three segments--Specialty
and Performance, Core Plastics, and Chemical Intermediates. Prior year
amounts have been reclassified to conform to the 2000 presentation.
(Dollars in millions) SECOND QUARTER FIRST SIX MONTHS
2000 1999 2000 1999
SALES
Chemicals $ 591 $ 521 $1,146 $ 981
Polymers 725 601 1,387 1,164
------ ------ ------ ------
Consolidated Eastman total $1,316 $1,122 $2,533 $2,145
====== ====== ====== ======
OPERATING EARNINGS
Chemicals $ 64 $ 64 $ 120 $ 115
Polymers 109 32 185 52
------ ------ ------ ------
Consolidated Eastman total $ 173 $ 96 $ 305 $ 167
====== ====== ====== ======
10
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EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, DECEMBER 31,
2000 1999
ASSETS
Chemicals $2,955 $2,938
Polymers 3,292 3,365
------ ------
Consolidated Eastman total $6,247 $6,303
====== ======
11. SORBATES LITIGATION
As previously reported, on September 30, 1998, the Company entered into
a voluntary plea agreement with the U. S. Department of Justice and
agreed to pay an $11 million fine to resolve a charge brought against
the Company for violation of Section One of the Sherman Act. Under the
agreement, the Company entered a plea of guilty to one count of
price-fixing for sorbates, a class of food preservatives, from January
1995 through June 1997. The plea agreement was approved by the United
States District Court for the Northern District of California on
October 21, 1998. The Company recognized the entire fine in third
quarter 1998 and is paying the fine in installments over a period of
five years. On October 26, 1999, the Company pleaded guilty in a
Federal Court of Canada to a violation of the Competition Act of Canada
and was fined $780,000 (Canadian). The plea admitted that the same
conduct that was the subject of the September 30, 1998, plea in the
United States had occurred with respect to sorbates sold in Canada, and
prohibited repetition of the conduct and provides for future
monitoring. The fine has been paid and was recognized as a charge
against earnings in the fourth quarter 1999.
In addition, the Company, along with other companies, is currently a
defendant in twenty antitrust lawsuits brought subsequent to the
Company's plea agreements as putative class actions on behalf of
certain purchasers of sorbates in the United States and Canada. In each
case, the plaintiffs allege that the defendants engaged in a conspiracy
to fix the price of sorbates and that the class members paid more for
sorbates than they would have paid absent the defendants' conspiracy.
Six of the suits (five of which have since been consolidated) were
filed in Superior Courts for the State of California under various
state antitrust and consumer protection laws on behalf of classes of
indirect purchasers of sorbates; six of the proceedings (which have
subsequently been consolidated or found to be related cases) were filed
in the United States District Court for the Northern District of
California under federal antitrust laws on behalf of classes of direct
purchasers of sorbates; two cases were filed in Circuit Courts for the
State of Tennessee under the antitrust and consumer protection laws of
various states, including Tennessee, on behalf of classes of indirect
purchasers of sorbates in those states; one case was filed in the
United States District Court for the Southern District of New York (and
has been transferred to the Northern District of California) under
federal antitrust laws on behalf of a class of direct purchasers of
sorbates; one action was filed in the Circuit Court for the State of
Wisconsin under various state antitrust laws on behalf of a class of
indirect purchasers of sorbates in those states; one action was filed
in the District Court for the State of Kansas under Kansas antitrust
laws on behalf of a
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EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
class of indirect purchasers of sorbates in that state; one case was
filed in the Second Judicial District Court for the State of New Mexico
under New Mexico antitrust laws on behalf of a class of indirect
purchasers of sorbates in that state; one lawsuit was filed in the
Ontario Superior Court of Justice under the federal competition law and
pursuant to common law causes of action on behalf of a class of direct
and indirect purchasers of sorbates in Canada; and one suit was filed
in the Quebec Superior Court under the federal competition law on
behalf of a class of direct and indirect purchasers of sorbates in the
Province of Quebec. The plaintiffs in most cases seek treble damages of
unspecified amounts, attorneys' fees and costs, and other unspecified
relief; in addition, certain of the actions claim restitution,
injunction against alleged illegal conduct, and other equitable relief.
Each proceeding is in preliminary pretrial motion and discovery stage,
except for the direct and indirect cases pending in California, where
the Company has reached tentative settlements with the plaintiffs. The
only proposed class which has been certified is a conditional
settlement class relating to the Company and the other defendants in
the federal direct purchaser cases pending in California.
The Company has also been named as a defendant in a lawsuit concerning
sorbates filed by Dean Foods Company, Kraft Foods, Inc., and Ralston
Purina Company in the United States District Court for the Northern
District of Illinois. The plaintiffs allege that the defendants engaged
in a conspiracy to fix the price of sorbates in violation of Section
One of the Sherman Act and that the plaintiffs were direct purchasers
of sorbates from the defendants. These plaintiffs are not expected to
participate in the proposed settlement of the federal direct purchaser
cases pending in California.
The Company intends to continue vigorously to defend these actions
unless they can be settled on terms acceptable to the parties. These
matters could result in the Company being subject to monetary damages
and expenses. The Company recognized charges to earnings in the fourth
quarter 1998, the fourth quarter 1999, and the first and second
quarters of 2000 for estimated costs, including legal fees, related to
the pending sorbates litigation described above. Because of the early
stage of these lawsuits, however, the ultimate outcome of these matters
cannot presently be determined, and they may result in greater or
lesser liability than that currently provided for in the Company's
financial statements.
12. SUBSEQUENT EVENTS
ACQUISITION OF MCWHORTER TECHNOLOGIES, INC.
On July 11, 2000, the Company obtained a controlling interest in
McWhorter Technologies, Inc. ("McWhorter") for approximately $200
million in cash (excluding estimated acquisition-related costs) and the
assumption of approximately $150 million in debt. McWhorter is a
leading manufacturer of specialty resins and colorants used in the
production of consumer and industrial coatings and reinforced
fiberglass plastics.
This transaction, which was funded through commercial paper borrowings,
will be accounted for as a purchase. The purchase price will be
allocated based on fair values of assets acquired and liabilities
assumed, pending the completion of an independent appraisal currently
underway. The excess of purchase price over fair value of identified
tangible and intangible net assets acquired, including purchased
in-process research and development if any, will be allocated to
goodwill and amortized on a straight-line basis over 40 years.
12
13
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INITIAL PUBLIC OFFERING OF GENENCOR INTERNATIONAL, INC.
On July 27, 2000 Genencor International, Inc. ("Genencor"), a Delaware
corporation engaged in the discovery, development, manufacturing and
marketing of biotechnology products for the industrial chemicals,
agriculture and health care markets issued 7,000,000 of its common
shares in an initial public offering. The Company owns 25,000,000 common
shares, or approximately 40% of the outstanding common shares, and
preferred shares that have a liquidating value, including accrued
dividends, of approximately $76 million. As a result of Genencor's
initial public offering, the Company will recognize a gain of approximately $30
million in third quarter 2000 non-operating income.
13
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This Management's Discussion and Analysis of Financial Condition and Results of
Operations should be read in conjunction with the Company's Consolidated
Financial Statements and Management's Discussion and Analysis contained in the
1999 Annual Report on Form 10-K, the Quarterly Report on Form 10-Q for the first
quarter 2000, and the unaudited interim consolidated financial statements
included elsewhere in this report. All references to earnings per share
contained in this report are diluted earnings per share unless otherwise noted.
RESULTS OF OPERATIONS
SUMMARY OF CONSOLIDATED RESULTS
Eastman's substantially higher revenues and net earnings for the second quarter
and six months 2000 are primarily attributable to higher selling prices in both
segments and moderate overall volume growth resulting from acquisitions. Lower
costs resulting from cost reduction efforts had a positive impact on results,
but costs for major raw materials, even with the Company's feedstock cost
hedging program, were significantly higher compared with 1999. Second quarter
2000 operating earnings were impacted by pre-tax non-recurring items totaling
$18 million that resulted from charges for certain litigation costs and
discontinued product lines and a gain on the sale of certain assets. Diluted
earnings per share for the second quarter 2000 were $1.12 compared with $0.54 in
1999. For the first six months 2000, diluted earnings per share were $2.00
versus $0.86 in 1999.
SECOND QUARTER FIRST SIX MONTHS
(Dollars in millions) 2000 1999 CHANGE 2000 1999 CHANGE
SALES $ 1,316 $ 1,122 17% $ 2,533 $ 2,145 18%
Sales for the second quarter and first six months 2000 were substantially higher
in both segments, driven by sharply higher selling prices for EASTAPAK polymers,
significantly higher prices and sales volume for specialty plastics products,
strong price increases for performance chemicals and intermediates, and volume
attributable to acquisitions. Foreign currency exchange, particularly in Europe,
had a slightly negative impact on sales.
SECOND QUARTER FIRST SIX MONTHS
(Dollars in millions) 2000 1999 CHANGE 2000 1999 CHANGE
GROSS PROFIT $ 290 $ 225 29% $ 540 $ 419 29%
As a percentage of sales 22.0% 20.1% 21.3% 19.5%
For the second quarter and first six months 2000, higher selling prices and
sales volumes combined with lower manufacturing costs attributable to cost
reductions and increased capacity utilization resulted in a substantial
improvement in gross profit. The increase in gross profit was partially offset
by significantly higher costs for major raw materials such as propane,
paraxylene, and ethylene glycol, but the impact on earnings was diminished
somewhat by the use of risk management tools, including the Company's hedging of
feedstock costs. Distribution expenses were higher due to increased sales
volumes but declined as a
14
15
percentage of sales. For the second quarter and six months 2000, charges
totaling $9 million related to dismantlement of facilities at Distillation
Products, Inc., in Rochester, New York, and the shutdown of the sorbates
manufacturing site at Chocolate Bayou, Texas, negatively affected gross profit,
but the impact was slightly offset by a $1 million gain on the sale of certain
assets.
SECOND QUARTER FIRST SIX MONTHS
(Dollars in millions) 2000 1999 CHANGE 2000 1999 CHANGE
SELLING AND GENERAL
ADMINISTRATIVE EXPENSES $ 81 $ 83 (2)% $ 161 $ 159 1%
As a percentage of sales 6.2% 7.4% 6.4% 7.4%
Selling and general administrative expenses declined slightly for the second
quarter 2000 and remained relatively unchanged for six months but declined as a
percentage of sales in both periods. Benefits derived from cost reduction
efforts in both periods were somewhat offset by expenses assumed from
acquisitions.
SECOND QUARTER FIRST SIX MONTHS
(Dollars in millions) 2000 1999 CHANGE 2000 1999 CHANGE
RESEARCH AND
DEVELOPMENT COSTS $ 36 $ 46 (22)% $ 74 $ 93 (20)%
As a percentage of sales 2.7% 4.1% 2.9% 4.3%
Research and development costs declined substantially for second quarter and six
months reflecting cost reduction efforts and timing of expenditures.
SECOND QUARTER FIRST SIX MONTHS
(Dollars in millions) 2000 1999 CHANGE 2000 1999 CHANGE
INTEREST COSTS $ 35 $ 32 $ 70 $ 63
LESS CAPITALIZED INTEREST 1 4 3 9
-------- --------- -------- ---------
Net Interest Expense $ 34 $ 28 21% $ 67 $ 54 24%
======== ========= ======== =========
Substantially increased net interest expense for second quarter and six months
reflects decreased capitalized interest resulting from the 1999 completion of
certain capital expansion projects, higher average commercial paper borrowings
due to acquisitions, and higher interest rates paid on such commercial paper
borrowings in 2000 compared to 1999.
SECOND QUARTER FIRST SIX MONTHS
(Dollars in millions) 2000 1999 CHANGE 2000 1999 CHANGE
OTHER (INCOME) CHARGES, NET $ 11 $ 4 >100% $ 8 $ 12 (33)%
Other income and charges include interest income and royalty income, gains and
losses on asset sales, results from equity investments, foreign exchange
transactions, and other items. Second quarter and six months 2000 include
pre-tax non-recurring items totaling approximately $10 million for certain
litigation and other items; while 1999 results reflect the impact of foreign
exchange transaction losses and other items.
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EARNINGS
(Dollars in millions, except SECOND QUARTER FIRST SIX MONTHS
per share amounts) 2000 1999 CHANGE 2000 1999 CHANGE
Operating earnings $ 173 $ 96 80% $ 305 $ 167 83%
Net earnings 86 43 100 154 68 126
Earnings per share
- --Basic 1.12 .55 104 2.00 .86 133
- --Diluted 1.12 .54 107 2.00 .86 133
SUMMARY BY OPERATING SEGMENT
Effective with the first quarter 2000, the Company reports financial results in
two operating segments--Chemicals and Polymers. Through 1999, the Company
managed its operations in three segments--Specialty and Performance, Core
Plastics, and Chemical Intermediates. Prior year amounts have been reclassified
to conform to the 2000 presentation.
CHEMICALS SEGMENT
SECOND QUARTER FIRST SIX MONTHS
(Dollars in millions) 2000 1999 CHANGE 2000 1999 CHANGE
Sales $ 591 $ 521 13% $ 1,146 $ 981 17%
Operating earnings 64 64 -- 120 115 4
For the second quarter and first six months 2000, sales revenue was
substantially higher due to increased selling prices for many products and
higher sales volumes resulting from acquisitions. Selling prices increased
significantly and volume was moderately higher for performance chemicals and
intermediates, coatings, adhesives, specialty polymers and inks products.
Slightly higher prices for fine chemicals in second quarter were more than
offset by a significant decline in sales volumes.
Despite the pricing improvements and higher sales volumes from acquisitions,
operating earnings for the second quarter were flat. Costs for major raw
materials increased significantly, even with the hedging of certain feedstock
costs. Higher raw materials costs, charges of $9 million related to the shutdown
of facilities in Rochester, New York and Chocolate Bayou, Texas, and certain
other charges offset benefits attributable to cost reduction efforts.
POLYMERS SEGMENT
SECOND QUARTER FIRST SIX MONTHS
(Dollars in millions) 2000 1999 CHANGE 2000 1999 CHANGE
Sales $ 725 $ 601 21% $ 1,387 $ 1,164 19%
Operating earnings 109 32 241% 185 52 256%
Substantially higher selling prices, particularly for EASTAPAK polymers,
reflected continued improving market conditions for container plastics during
the second quarter and first six months 2000. Although sales
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volume for container plastics was moderately lower for the second quarter, for
the first six months it was level with 1999.
For the second quarter and first six months 2000, specialty plastics sales
volume was strong and selling prices, driven by polyethylene products, were
substantially higher. Selling prices declined slightly for fibers products, but
sales volumes were moderately higher as a result of downtime experienced by a
competitor. Sales volumes for the Polymers segment overall increased at a
moderate level for the second quarter and six months 2000.
Operating earnings for the Polymers segment improved significantly for the
second quarter and six months as a result of higher selling prices and cost
reduction efforts, although the impact was offset somewhat by higher raw
materials costs, even with the Company's feedstock cost hedging program.
Operating earnings included a gain of $1 million from the sale of certain
assets.
(For supplemental analysis of Chemicals and Polymers segment results, see
Exhibits 99.01 and 99.02 to this Form 10-Q.)
SUMMARY BY CUSTOMER LOCATION
SALES BY REGION
SECOND QUARTER FIRST SIX MONTHS
(Dollars in millions) 2000 1999 CHANGE 2000 1999 CHANGE
United States and Canada $ 810 $ 708 14% $ 1,557 $ 1,370 14%
Europe, Middle East, and
Africa 275 213 29 510 387 32
Asia Pacific 128 112 14 262 223 17
Latin America 103 89 16 204 165 24
Sales in the United States for second quarter 2000 were $756 million, up 15%
from 1999 second quarter sales of $657 million. For six months, sales revenues
in the United States increased 13% to $1.4 billion compared to $1.3 billion in
1999. The improvement in both periods was attributable to significantly higher
selling prices for EASTAPAK polymers and polyethylene products and higher sales
volumes for specialty plastics products and from acquisitions.
Sales outside the United States for second quarter 2000 were $560 million, up
20% from 1999 second quarter sales of $465 million due to higher sales volume,
including acquisitions, and prices, and were 43% of total sales in the second
quarter 2000 compared with 41% for the second quarter 1999. For six months,
sales revenues outside the United States increased 25% to $1.1 billion compared
to $0.9 billion in 1999. Slightly higher selling prices, increased volumes for
fibers and performance chemicals and intermediate products, and volume
attributable to acquisitions resulted in higher sales in Asia Pacific in the
second quarter. In Europe, substantially higher selling prices for EASTAPAK
polymers, and the additional volumes from acquisitions and for specialty
plastics products contributed to a significant increase in sales for the second
quarter 2000. For the second quarter 2000, higher selling prices for EASTAPAK
polymers in Latin America more than offset lower sales volumes in the region.
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LIQUIDITY, CAPITAL RESOURCES AND OTHER FINANCIAL DATA
2000 1999
FINANCIAL INDICATORS
For the first six months:
Ratio of earnings to fixed charges 3.9x 2.4x
At the periods ended June 30, 2000 and December 31, 1999:
Current ratio 1.3x 0.9x
Percent of total borrowings to total capital 53% 54%
Percent of floating-rate borrowings to total borrowings 23% 23%
CASH FLOW
FIRST SIX MONTHS
(Dollars in millions) 2000 1999
Net cash provided by (used in)
Operating activities $ 378 $ 286
Investing activities (102) (541)
Financing activities (293) 316
------- -------
Net change in cash and cash equivalents $ (17) $ 61
======= =======
Cash and cash equivalents at end of period $ 169 $ 90
======= =======
Cash provided by operating activities increased from the first six months of
1999 primarily due to higher net earnings, settlement of strategic foreign
currency hedging transactions (see Note 8 to Consolidated Financial Statements),
partially offset by an increase in working capital. Cash used in investing
activities reflects lower capital expenditures and capital advances to
suppliers, the sale of assets, the acquisition of Sokolov and other businesses,
and e-commerce investments. Cash used in financing activities in the first six
months 2000 reflects a decrease in commercial paper borrowings, proceeds from
additional borrowings, repayment of Lawter and other debt, and in both years the
payment of dividends and treasury stock purchases.
CAPITAL EXPENDITURES AND OTHER COMMITMENTS
For 2000, the Company estimates that depreciation will be about $370 million and
that capital expenditures will be approximately $250 million. Long-term
commitments related to planned capital expenditures are not material. The
Company had various purchase commitments at June 30, 2000 for materials,
supplies, and energy incident to the ordinary conduct of business. These
commitments, over a period of several years, approximate $1.5 billion.
LIQUIDITY
On July 13, 2000, Eastman replaced the existing $800 million revolving credit
facility expiring in December 2000 with a new $800 million revolving credit
facility (the "Credit Facility"). Although the Company does not have any amounts
outstanding under the Credit Facility, any such borrowings would be subject to
interest at varying spreads above quoted market rates, principally LIBOR. The
Credit Facility also requires
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a facility fee on the total commitment that varies based on Eastman's credit
rating. The rate for such fee was .085% as of June 30, 2000. The Credit Facility
contains a number of covenants and events of default, including the maintenance
of certain financial ratios. Eastman was in compliance with all such covenants
for the second quarter 2000.
Eastman utilizes commercial paper, generally with maturities of 90 days or less,
to meet its liquidity needs. Because the Credit Facility which provides
liquidity support for the commercial paper expires in July 2005, the commercial
paper borrowings at June 30, 2000 are classified as long-term borrowings because
the Company has the ability to refinance such borrowings long term. At December
31, 1999, the Company's commercial paper borrowings were classified as
short-term borrowings because the revolving credit facility then in effect would
have expired in December 2000. As of June 30, 2000, the Company's commercial
paper outstanding balance was $349 million at an effective interest rate of
6.83%. At December 31, 1999, the Company's commercial paper outstanding balance
was $398 million at an effective interest rate of 6.30%.
In January 2000, the Company retired $125 million of Lawter International,
Inc.'s ("Lawter") notes and financed this with commercial paper. During the
first quarter 2000, the Company retired $76 million of other short-term
borrowings, also financed with commercial paper, and assumed additional
short-term borrowings totaling $21 million in the Chemicke Zavody Sokolov
("Sokolov") acquisition. In the second quarter 2000, short-term borrowings of
$21 million assumed in the Sokolov acquisition were repaid and financed with
commercial paper. Additional indebtedness of $100 million in the form of a
short-term note payable was incurred during the second quarter 2000 for general
operating purposes. Interest rates for these notes range from 6.33% to 7.33%.
The Company has an effective registration statement on file with the Securities
and Exchange Commission to issue up to $1 billion of debt or equity securities.
No securities have been sold from this shelf registration.
In 1999, the Company entered into an agreement that allows the Company to sell
undivided interests in certain domestic trade accounts receivable under a
planned continuous sale program to a third party. Under this agreement,
receivables sold to the third party totaled $200 million at June 30, 2000 and
$150 million at December 31, 1999. Undivided interests in designated receivable
pools were sold to the purchaser with recourse limited to the receivables
purchased. Fees to be paid by the Company under this agreement are based on
certain variable market rate indices and are included in other (income) charges,
net, in the Consolidated Statements of Earnings, Comprehensive Income, and
Retained Earnings.
As of February 21, 2000, the Company acquired 76 percent of the shares of
Sokolov, a manufacturer of waterborne polymer products, acrylic acid and acrylic
esters located in the Czech Republic. During the second quarter 2000 the Company
acquired an additional 21% of the shares resulting in 97% ownership of Sokolov
as of June 30, 2000. These transactions, for cash consideration totaling
approximately $46 million (net of $3 million cash acquired) and the assumption
of $21 million of Sokolov debt, were financed with available cash and commercial
paper borrowings. Efforts will continue to accumulate additional shares as they
become available from the remaining minority shareholders.
The Company is currently authorized to repurchase up to $400 million of its
common stock. During the first quarter 2000, 1,575,000 shares of common stock at
a total cost of approximately $57 million were repurchased under this
authorization. No shares of common stock were repurchased during the second
quarter 2000. A total of 2,669,800 shares of common stock at a cost of
approximately $107 million have been repurchased under the authorization.
Repurchased shares may be used to meet common stock requirements for
compensation and benefit plans and other corporate purposes. Share repurchases
are weighed against alternative uses for available cash, such as debt reduction
and strategic acquisitions.
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The Company expects that no contribution to its defined benefit pension plan
will be required in 2000.
Proceeds of $106 million from the settlement in the first quarter 2000 of
strategic foreign currency hedging transactions were used to enter into new
foreign exchange contracts, reduce commercial paper borrowings and repurchase
stock (see Note 8 to Consolidated Financial Statements).
Existing sources of capital, together with cash flows from operations, are
expected to be sufficient to meet foreseeable cash flow requirements.
DIVIDENDS
The Company declared cash dividends of $0.44 per share in the second quarter of
2000 and 1999 and $0.88 per share in the first six months of 2000 and 1999.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which standardizes the accounting for
derivative instruments, including certain derivative instruments embedded in
other contracts, by requiring that an entity recognize those items as assets or
liabilities in the statement of financial position and measure them at fair
value. SFAS No. 133 is effective for all fiscal quarters of all fiscal years
beginning after June 15, 2000. The Company is evaluating the effect of this
standard on its financial statements and will comply with requirements of the
new standard which become effective for the Company's 2001 financial reporting
cycle.
In December 1999, the Securities and Exchange Commission ("SEC") issued SEC
Staff Accounting Bulletin 101 ("SAB 101"), "Revenue Recognition in Financial
Statements". SAB 101 summarizes certain of the staff's views in applying
generally accepted accounting principles to revenue recognition in financial
statements. The Company is currently assessing the provisions of SAB 101 and has
not yet made a determination of the impact SAB 101 will have on Eastman's
consolidated financial statements.
E-BUSINESS
A major initiative is Eastman's intent to be a leading e-business company in the
chemical industry. The Company believes e-commerce technology is fundamentally
changing the way business is done in the chemical industry. Aggressively
pursuing this technology, the Company is building a portfolio of options to make
it easier for customers to do business with Eastman. Eastman is working quickly
to expand its sophisticated e-business technologies to other regions of the
world--from investing in business-to-business e-commerce portals serving the
Asia Pacific region to providing online transactional capabilities on the
Company website (eastman.com).
During 2000, the Company has continued its e-business development with the
formation of two joint ventures and additional investments in other e-commerce
businesses. The Company has formed a joint venture, ShipChem.com, to address the
high cost and inefficiencies of transporting materials in the chemical industry.
The establishment of ShipChem.com's e-logistics portal provides a foundation
from which manufacturers and distributors can manage their transportation
activities as a single integrated global process. The Company has also formed
PaintandCoatings.com, Inc., a joint venture to create an independent Internet
marketplace for the paint and coatings industry.
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The Company has made a number of minority investments in Internet-based
businesses that it believes have potential to significantly impact the way
business is conducted in the chemical industry. These investments include Asera,
which creates and maintains turn-key extranets with customized,
password-protected content for business customers; ChemConnect, a company that
enables online trading of chemicals and plastics; Commerx, Inc., a leading Net
marketplace developer and provider of e-commerce solutions for industrial
processing markets, offering supply chain efficiencies and various
Internet-enabled technologies; e-Chemicals, Inc., a company that provides
Internet-enabled solutions for procurement, sales, financial settlement,
transportation and logistics, environmental health and safety, and sales support
for the chemical industry; e-Credit, a company that provides financial services;
MartQuest, provider of one-stop eChannel that will enable sellers to easily
connect with multiple marketplaces; Moai Technologies, Inc., a company that
provides Internet-based, dynamic pricing software services; The Patent and
License Exchange, Inc., a marketplace to facilitate the identification,
valuation and trading of intellectual property; SESAMi.com, an e-commerce
pioneer for the chemical industry in Asia; and webMethods, Inc., a company that
provides a platform which enables companies to pursue direct integration with
trading partners.
OUTLOOK
Sales volume overall, excluding the McWhorter acquisition, is expected to be
similar in the last half of 2000 to the first six months 2000. The supply and
demand balance for EASTAPAK polymers is expected to continue to improve, driving
higher utilization of plant capacity that the Company brought on-line in recent
years. Sales volume for fibers is expected to continue to decline. Although
higher costs for raw materials are expected to continue in the near term, it is
anticipated that the impact on earnings will be mostly offset by selling price
increases and cost structure improvements. Through aggressive cost management
and actions taken during the fourth quarter 1999, the Company expects to achieve
$100 million savings in labor-related costs during 2000 and to fully implement
strategies by the end of 2000 which will achieve an additional $100 million
savings in non-labor costs.
The rate of capital spending may accelerate during the second six months of 2000
from that of the first six months of 2000. However, the Company estimates
capital expenditures for the year will be approximately $250 million.
Additionally, the Company expects capital expenditures for 2001 to be somewhat
higher than in 2000.
The Company expects the McWhorter acquisition will be accretive on a cash basis
immediately and it is expected to be accretive to earnings during 2001. Net
interest expense is expected to increase in the third quarter 2000 because of
increased borrowings resulting from this acquisition.
The Company will continue to focus on creating shareowner value by improving
earnings and return on capital and by implementing its strategic initiatives. To
develop a portfolio which management believes would achieve the Company's
strategies for growth and value creation, the Company has made and may continue
to make acquisitions and divestitures and form alliances. Over the short term,
the Company will continue to examine alternatives for diminishing the impact of
its fibers and polyethylene product lines. Longer term, the Company will
continue to examine alternatives for its polyethylene terephthalate ("PET")
product line. The Company expects to continue growing the coatings, adhesives,
specialty polymers, inks and specialty plastics product lines through new
product development and value-creating acquisitions.
During the remainder of 2000, the Company will continue to focus on improving
financial performance through improved earnings, reduced capital spending,
decreased working capital, and aggressive cost reductions and management.
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FORWARD-LOOKING STATEMENTS
The above-stated expectations and certain statements in this report may be
forward-looking in nature as defined in the Private Securities Litigation Reform
Act of 1995. These statements and other forward-looking statements made by the
Company from time to time relate to such matters as planned capacity increases
and utilization; capital spending; expected tax rates and depreciation;
environmental matters; legal proceedings; global and regional economic
conditions; supply and demand, volume, price, costs, margin, and sales and
earnings and cash flow expectations and strategies for individual products,
businesses, and segments as well as for the whole of Eastman Chemical Company;
cost reduction targets; and development, production, commercialization, and
acceptance of new products and technologies.
These plans and expectations are based upon certain underlying assumptions,
including those mentioned within the text of the specific statements. Such
assumptions are in turn based upon internal estimates and analyses of current
market conditions and trends, management plans and strategies, economic
conditions, and other factors. These plans and expectations and the assumptions
underlying them are necessarily subject to risks and uncertainties inherent in
projecting future conditions and results. Actual results could differ materially
from expectations expressed in the forward-looking statements if one or more of
the underlying assumptions and expectations proves to be inaccurate or is
unrealized. In addition to the factors discussed in this report, the following
are some of the important factors that could cause the Company's actual results
to differ materially from those projected in any such forward-looking
statements:
- - The Company has manufacturing and marketing operations throughout the
world, with over 40% of the Company's revenues attributable to sales
outside the United States. Economic factors, including foreign currency
exchange rates, could affect the Company's revenues, expenses and results.
Changes in laws, regulations, or other political factors in any of the
countries in which the Company operates could affect business in that
country or region, as well as the Company's results of operations.
- - The Company has made and may continue to make acquisitions, divestitures,
and investments, and enter into alliances as part of its growth strategy.
There can be no assurance that these will be completed or that such
transactions will be beneficial to the Company's results of operations.
- - The Company has made and may continue to make strategic e-business
investments, including formation of joint ventures and investments in other
e-commerce businesses, in order to build Eastman's E-business capabilities.
There can be no assurance that such investments will achieve their
objectives or that they will be beneficial to the Company's results of
operations.
- - The Company has undertaken and may continue to undertake productivity and
cost reduction initiatives and organizational restructurings to improve
performance and generate cost savings. There can be no assurance that these
will be completed or beneficial or that estimated cost savings from such
activities will be realized.
- - In addition to cost reduction initiatives, the Company is striving to
improve margins on its products through price increases, where warranted
and accepted by the market; however, the Company's earnings could be
negatively impacted should such increases be unrealized or not be
sufficient to cover increased raw materials costs.
- - The Company is reliant on certain strategic raw materials for its
operations and utilizes risk management tools, as appropriate, to mitigate
short-term market fluctuations in raw materials costs. There can be no
assurance, however, that such measures will achieve their objective or be
beneficial to the Company's results of operations.
- - The Company's competitive position in the markets in which it
participates is, in part, subject to external factors. For example,
supply and demand for certain of the Company's products is driven by
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end-use markets and worldwide capacities which, in turn, impact demand for
and pricing of the Company's products.
- - The Company has an extensive customer base; however, loss of certain top
customers could adversely affect the Company's financial condition and
results of operations until such business is replaced.
- - Limitation of the Company's available manufacturing capacity due to
significant disruption in its manufacturing operations could have a
material adverse affect on revenues, expenses and results.
- - The Company's facilities are subject to complex environmental laws and
regulations which require and will continue to require significant
expenditures to remain in compliance with such laws and regulations
currently and in the future. The Company's accruals for such costs and
liabilities are believed to be adequate, but are subject to changes in
estimates on which the accruals are based and depend on a number of factors
including the nature of the allegation, the complexity of the site, the
nature of the remedy, the outcome of discussions with regulatory agencies
and other potentially responsible parties at multi-party sites, and the
number and financial viability of other potentially responsible parties.
- - The Company's operations are parties to or targets of lawsuits, claims,
investigations, and proceedings, including product liability, personal
injury, patent and intellectual property, commercial, contract,
environmental, antitrust, health and safety, and employment matters, which
are being handled and defended in the ordinary course of business. The
Company believes amounts reserved are adequate for such pending matters;
however, results of operations could be affected by significant litigation
adverse to the Company.
The foregoing list of important factors does not include all such factors nor
necessarily present them in order of importance. This disclosure represents
management's best judgment as of the date of filing. The Company does not
undertake responsibility for updating such information.
- ----------------------------
EASTAPAK is a trademark of Eastman Chemical Company.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
GENERAL
The Company's operations are parties to or targets of lawsuits, claims,
investigations, and proceedings, including product liability, personal injury,
patent and intellectual property, commercial, contract, environmental,
antitrust, health and safety, and employment matters, which are being handled
and defended in the ordinary course of business. While the Company is unable to
predict the outcome of these matters, it does not believe, based upon currently
available facts, that the ultimate resolution of any of such pending matters,
including those described in the following paragraphs, will have a material
adverse effect on the Company's overall financial position or results of
operations. However, adverse developments could negatively impact earnings in a
particular period.
SORBATES LITIGATION
As previously reported, on September 30, 1998, the Company entered into a
voluntary plea agreement with the U. S. Department of Justice and agreed to pay
an $11 million fine to resolve a charge brought against the Company for
violation of Section One of the Sherman Act. Under the agreement, the Company
entered a plea of guilty to one count of price-fixing for sorbates, a class of
food preservatives, from January 1995 through June 1997. The plea agreement was
approved by the United States District Court for the Northern District of
California on October 21, 1998. The Company recognized the entire fine in third
quarter 1998 and is paying the fine in installments over a period of five years.
On October 26, 1999, the Company pleaded guilty in a Federal Court of Canada to
a violation of the Competition Act of Canada and was fined $780,000 (Canadian).
The plea admitted that the same conduct that was the subject of the September
30, 1998, plea in the United States had occurred with respect to sorbates sold
in Canada, and prohibited repetition of the conduct and provides for future
monitoring. The fine has been paid and was recognized as a charge against
earnings in the fourth quarter 1999.
In addition, the Company, along with other companies, is currently a defendant
in twenty antitrust lawsuits brought subsequent to the Company's plea agreements
as putative class actions on behalf of certain purchasers of sorbates in the
United States and Canada. In each case, the plaintiffs allege that the
defendants engaged in a conspiracy to fix the price of sorbates and that the
class members paid more for sorbates than they would have paid absent the
defendants' conspiracy. Six of the suits (five of which have since been
consolidated) were filed in Superior Courts for the State of California under
various state antitrust and consumer protection laws on behalf of classes of
indirect purchasers of sorbates; six of the proceedings (which have subsequently
been consolidated or found to be related cases) were filed in the United States
District Court for the Northern District of California under federal antitrust
laws on behalf of classes of direct purchasers of sorbates; two cases were filed
in Circuit Courts for the State of Tennessee under the antitrust and consumer
protection laws of various states, including Tennessee, on behalf of classes of
indirect purchasers of sorbates in those states; one case was filed in the
United States District Court for the Southern District of New York (and has been
transferred to the Northern District of California) under federal antitrust laws
on behalf of a class of direct purchasers of sorbates; one action was filed in
the Circuit Court for the State of Wisconsin under various state antitrust laws
on behalf of a class of indirect purchasers of sorbates in those states; one
action was filed in the District Court for the State of Kansas under Kansas
antitrust laws on behalf of a class of indirect purchasers of sorbates in that
state; one case was filed in the Second Judicial District Court for the State of
New Mexico under New Mexico antitrust laws on behalf of a class of indirect
purchasers of sorbates in that state; one lawsuit was filed in the Ontario
Superior Court of
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Justice under the federal competition law and pursuant to common law causes of
action on behalf of a class of direct and indirect purchasers of sorbates in
Canada; and one suit was filed in the Quebec Superior Court under the federal
competition law on behalf of a class of direct and indirect purchasers of
sorbates in the Province of Quebec. The plaintiffs in most cases seek treble
damages of unspecified amounts, attorneys' fees and costs, and other unspecified
relief; in addition, certain of the actions claim restitution, injunction
against alleged illegal conduct, and other equitable relief. Each proceeding is
in preliminary pretrial motion and discovery stage, except for the direct and
indirect cases pending in California, where the Company has reached tentative
settlements with the plaintiffs. The only proposed class which has been
certified is a conditional settlement class relating to the Company and the
other defendants in the federal direct purchaser cases pending in California.
The Company has also been named as a defendant in a lawsuit concerning sorbates
filed by Dean Foods Company, Kraft Foods, Inc., and Ralston Purina Company in
the United States District Court for the Northern District of Illinois. The
plaintiffs allege that the defendants engaged in a conspiracy to fix the price
of sorbates in violation of Section One of the Sherman Act and that the
plaintiffs were direct purchasers of sorbates from the defendants. These
plaintiffs are not expected to participate in the proposed settlement of the
federal direct purchaser cases pending in California.
The Company intends to continue vigorously to defend these actions unless they
can be settled on terms acceptable to the parties. These matters could result in
the Company being subject to monetary damages and expenses. The Company
recognized charges to earnings in the fourth quarter 1998, the fourth quarter
1999, and the first and second quarters of 2000 for estimated costs, including
legal fees, related to the pending sorbates litigation described above. Because
of the early stage of these lawsuits, however, the ultimate outcome of these
matters cannot presently be determined, and they may result in greater or lesser
liability than that currently provided for in the Company's financial
statements.
ENVIRONMENTAL MATTER
As previously reported, in May 1997, the Company received notice from the
Tennessee Department of Environment and Conservation ("TDEC") alleging that the
manner in which hazardous waste was fed into certain boilers at the Tennessee
Eastman facility in Kingsport, Tennessee violated provisions of the Tennessee
Hazardous Waste Management Act. The Company had voluntarily disclosed this
matter to TDEC in December 1996. Over the course of the last three years, the
Company has provided extensive information relating to this matter to TDEC, the
U.S. Environmental Protection Agency ("EPA"), and the U.S. Department of
Justice. On September 7, 1999, the Company and EPA entered into a Consent
Agreement and Consent Order whereby the Company agreed to pay a civil penalty of
$2.75 million to EPA for an alleged violation concerning monitoring and
recordkeeping. The Company recognized the fine in 1999 and is paying the fine in
three installments over a period of one year. Various agencies are continuing to
review the information submitted by the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The 2000 Annual Meeting of the Shareowners of Eastman Chemical Company
was held on May 4, 2000. There were 76,693,503 shares of common stock
entitled to be voted, and 57,684,877 shares represented in person or
by proxy, at the Annual Meeting.
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Four items of business were acted upon by shareowners at the Annual
Meeting:
- - the election of three directors to serve in the class for which the term in
office expires at the Annual Meeting of Shareowners in 2003 and until their
successors are duly elected and qualified;
- - the ratification of the appointment of PricewaterhouseCoopers LLP as
independent accountants for the Company until the Annual Meeting of
Shareowners in 2001;
- - a shareowner proposal requesting that the Board of Directors take the
necessary steps to declassify the Board of Directors and establish annual
election of all directors; and
- - a shareowner proposal requesting that the Board of Directors issue a report
concerning emission of "greenhouse gases" and potential climate change.
The results of the voting for the election of directors were as follows:
- -------------------------------------------------------------------------------------------------------
VOTES BROKER
NOMINEE VOTES FOR WITHHELD ABSTENTIONS NON-VOTES
- -------------------------------------------------------------------------------------------------------
Jerry E. Dempsey 56,496,664 1,188,213 -0- -0-
Donald W. Griffin 56,490,440 1,194,437 -0- -0-
Marilyn R. Marks 56,504,924 1,179,953 -0- -0-
Accordingly, the three nominees received a plurality of the votes cast in the
election of directors at the meeting and were elected.
The results of the voting on the ratification of the appointment of
PricewaterhouseCoopers LLP as independent accountants were as follows:
- -------------------------------------------------------------------------------------------------------
VOTES FOR VOTES AGAINST ABSTENTIONS BROKER NON-VOTES
- -------------------------------------------------------------------------------------------------------
57,278,087 163,717 243,073 -0-
Accordingly, the number of affirmative votes cast on the proposal constituted
more than a majority of the votes cast on the proposal at the meeting, and the
appointment of PricewaterhouseCoopers LLP as independent accountants was
ratified.
The results of the voting on the approval of the shareowner proposal to
declassify the Board of Directors were as follows:
- -------------------------------------------------------------------------------------------------------
VOTES FOR VOTES AGAINST ABSTENTIONS BROKER NON-VOTES
- -------------------------------------------------------------------------------------------------------
34,747,867 14,570,932 647,023 7,719,055
Accordingly, the number of affirmative votes cast on the proposal constituted
more than a majority of the votes cast on the proposal at the meeting, and the
shareowner proposal was approved. This vote did not itself declassify the Board.
That would require that the Board and holders of a majority of all outstanding
shares of the Company vote to amend the Certificate of Incorporation to
declassify the Board.
26
27
The results of the voting on the approval of the shareowner proposal
to issue a report concerning emission of "greenhouse gases" and
potential climate change were as follows:
- -------------------------------------------------------------------------------------------------------
VOTES FOR VOTES AGAINST ABSTENTIONS BROKER NON-VOTES
- -------------------------------------------------------------------------------------------------------
3,170,825 42,179,410 4,616,254 7,718,388
Accordingly, the number of affirmative votes cast on the proposal constituted
less than a majority of the votes cast on the proposal at the meeting, and the
shareowner proposal was not approved.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits filed as part of this report are listed in the Exhibit
Index appearing on page 29.
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the quarter
ended June 30, 2000.
27
28
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.
Eastman Chemical Company
Date: August 8, 2000 By: /s/ James P. Rogers
-------------------------
James P. Rogers
Senior Vice President and
Chief Financial Officer
28
29
EXHIBIT INDEX
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION PAGE NUMBER
- ---------------- --------------------------------------------------------------------------- -----------------
3.01 Amended and Restated Certificate of Incorporation of Eastman Chemical
Company (incorporated herein by reference to Exhibit 3.01 to Eastman
Chemical Company's Registration Statement on Form S-1, File No. 33-72364,
as amended)
3.02 Amended and Restated Bylaws of Eastman Chemical Company, as amended May
4, 2000 (incorporated herin by reference to Exhibit 3.02 to Eastman
Chemical Company's Quarterly Report on Form 10-Q for the quarter ended
March 31, 2000 (the "March 31, 2000 10-Q")
4.01 Form of Eastman Chemical Company Common Stock certificate
(incorporated herein by reference to Exhibit 3.02 to Eastman
Chemical Company's Annual Report on Form 10-K for the year
ended December 31, 1993)
4.02 Stockholder Protection Rights Agreement dated as of December
13, 1993, between Eastman Chemical Company and First Chicago
Trust Company of New York, as Rights Agent (incorporated
herein by reference to Exhibit 4.4 to Eastman Chemical
Company's Registration Statement on Form S-8 relating to the
Eastman Investment Plan, File No. 33-73810)
4.03 Indenture, dated as of January 10, 1994, between Eastman
Chemical Company and The Bank of New York, as Trustee (the
"Indenture") (incorporated herein by reference to Exhibit
4(a) to Eastman Chemical Company's current report on Form
8-K dated January 10, 1994 (the "8-K"))
4.04 Form of 6 3/8% Notes due January 15, 2004 (incorporated herein by
reference to Exhibit 4(c) to the 8-K)
4.05 Form of 7 1/4% Debentures due January 15, 2024 (incorporated herein by
reference to Exhibit 4(d) to the 8-K)
4.06 Officers' Certificate pursuant to Sections 201 and 301 of
the Indenture (incorporated herein by reference to Exhibit
4(a) to Eastman Chemical Company's Current Report on Form
8-K dated June 8, 1994 (the "June 8-K"))
4.07 Form of 7 5/8% Debentures due June 15, 2024 (incorporated herein by
reference to Exhibit 4(b) to the June 8-K)
4.08 Form of 7.60% Debentures due February 1, 2027 (incorporated herein by
reference to Exhibit 4.08 to Eastman Chemical Company's Annual Report on
Form 10-K for the year ended December 31, 1996 (the "1996 10-K"))
29
30
EXHIBIT INDEX (CONTINUED)
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION PAGE NUMBER
- ---------------- --------------------------------------------------------------------------- -----------------
4.09 Officer's Certificate pursuant to Sections 201 and 301 of
the Indenture related to 7.60% Debentures due February 1,
2027 (incorporated herein by reference to Exhibit 4.09 to
the 1996 10-K)
4.10 $200,000,000 Accounts Receivable Securitization agreement
dated April 13, 1999 (amended April 11, 2000), between the
Company and Bank One, NA, as agent. Pursuant to Item
601(b)(4)(iii) of Regulation S-K, in lieu of filing a copy
of such agreement, the Company agrees to furnish a copy of
such agreement to the Commission upon request.
4.11 Credit Agreement, dated as of July 13, 2000 (the "Credit Agreement")
among Eastman Chemical Company, the Lenders named therein, and Citibank,
N.A. as Agent 31-92
*10.01 Form of Indemnification Agreements dated May 5, 2000, between James L.
Chitwood, David M. Pond, and James P. Rogers and Eastman Chemical
Company for service as directors of Genencor International, Inc. 93-99
12.01 Statement re Computation of Ratios of Earnings to Fixed Charges 100
27.01 Financial Data Schedule for Second Quarter 2000 (for SEC use only)
99.01 Operating Segment Information (Sales Revenue Change, Volume
Effect and Price Effect) 101
99.02 Acquisition Information (Sales Revenue and Volume Growth Comparison --
With and Without Acquisitions) 102-103
*Management contract or compensatory plan or arrangement filed pursuant to Item
601(b)(10)(iii) of Regulation S-K.
30