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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
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 incorporation (I.R.S. Employer Identification No.)
or organization)
ONE TERRA WAY, 8601 95(TH) STREET, 53158
PLEASANT PRAIRIE, WISCONSIN (Zip Code)
(Address of Principal Executive Offices)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (414) 947-7300
Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
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Common Stock, $1.00 par value per share New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
(Title of Class)
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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. /X/
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As of February 12, 1999, 33,068,076 common shares were outstanding. The
aggregate market value of the common shares (based upon the February 12, 1999
closing price of these shares on the New York Stock Exchange) of Lawter
International, Inc. held by non-affiliates was approximately $288 million.
DOCUMENTS INCORPORATED BY REFERENCE
Annual Report to Stockholders for the year ended December 31, 1998--Parts I and
II.
Proxy Statement to Stockholders for the 1999 Annual Meeting--Part III.
TABLE OF CONTENTS
FORM 10-K
ITEM NO. NAME OF ITEM PAGE
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Part I
Item 1. Business.................................................................................... 2
Item 2. Properties.................................................................................. 4
Item 3. Legal Proceedings........................................................................... 5
Item 4. Submission of Matters to a Vote of Security Holders......................................... 5
Item 4A. Executive Officers of the Registrant........................................................ 5
Part II
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters................... 5
Item 6. Selected Financial Data..................................................................... 6
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations....... 8
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.................................. 11
Item 8. Financial Statements and Supplementary Data................................................. 12
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure........ 12
Part III
Item 10. Directors and Executive Officers of the Registrant.......................................... 12
Item 11. Executive Compensation...................................................................... 12
Item 12. Security Ownership of Certain Beneficial Owners and Management.............................. 12
Item 13. Certain Relationships and Related Transactions.............................................. 12
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K............................. 13
Report of Independent Public Accountants on Schedule and Consent of
Independent Public Accountants........................................................................ 28
Signatures.............................................................................................. 30
PART I
ITEM 1. BUSINESS.
FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS--
INDUSTRY SEGMENTS.
The Company has concluded that it operates primarily in one segment, the
specialty polymers segment, since all of its revenues are derived from the
manufacture and sale of its specialty polymers. Within this segment the Company
has two main product lines, printing ink vehicles and slip additives, and
synthetic and hydrocarbon resins. These products are manufactured, warehoused
and sold using essentially the same systems, sales force and distribution
network.
NARRATIVE DESCRIPTION OF BUSINESS--
PRINCIPAL PRODUCTS.
Reference is made to the information set forth under the caption "About
Lawter International, Inc." on the inside front cover of the Company's 1998
Annual Report to Stockholders (hereby incorporated by reference) for this
information.
Information with respect to sales by product group is as follows:
(PERCENT OF NET SALES) 1998 1997 1996
--------- --------- ---------
Printing Ink Vehicles and Slip Additives................................ 47.5 44.2 43.3
Synthetic and Hydrocarbon Resins........................................ 51.1 53.0 52.2
Other................................................................... 1.4 2.8 4.5
No material part of the business of the Company is dependent upon a single
product for any customer or a small group of customers.
The Company manufactures its products in four plants in the United States
and in five plants in foreign countries (Belgium, China(2), Ireland and
Singapore). Products are sold primarily by Company employed salesmen.
RAW MATERIALS.
The basic ingredients of the Company's products are purchased from others,
including larger chemical firms. Such ingredients are normally in adequate
supply. A portion of the Company's resin production is used by it in the
manufacture of printing ink vehicles and substantially all of the Company's
rosin production is used by it to manufacture resins.
PATENTS.
The Company owns certain patents on its products, but no single patent is
considered to be materially important to its business.
SEASONAL INFLUENCES.
The business of the Company is not in any material respect subject to
seasonal influences.
BACKLOG.
Since the Company generally fills orders for its products out of current
inventories, there is no significant backlog of orders at any time.
2
CUSTOMERS.
The Company sells the majority of its products to both large and small ink
companies. Lawter is a major supplier of printing ink vehicles and resins for
printing inks and, therefore, sells substantial quantities to the larger ink
companies around the world. Dianippon Ink and Chemicals is Lawter's largest
multilocation customer with twenty-three percent of consolidated net sales for
the most recently completed fiscal year.
COMPETITION.
The Company encounters keen competition in the conduct of its business.
Industry data indicating the relative ranking of competitive companies is not
available. The Company competes with several other independent producers of
printing ink vehicles and slip additives. The larger printing ink manufacturers
produce some of the vehicles required in their own operations, although
generally they do not sell vehicles in competition with the Company. The Company
is considered to be one of the medium sized to smaller producers of synthetic
and hydrocarbon resins. Several other producers of synthetic and hydrocarbon
resins are large chemical companies with much greater total sales and resources
than those of the Company.
In the sale of its principal products, printing ink vehicles, slip
additives, and synthetic and hydrocarbon resins, the Company's principal methods
of meeting competition are in the areas of product performance and service. The
Company specializes in products prepared primarily for specific end uses such as
vehicles used in printing inks having particular characteristics, including fast
setting and mar resistant inks, ink systems designed to produce less waste and
resins used in the production of specialty inks and protective coatings. The
Company is capable of fulfilling the requirements of customers either from
inventories or from production runs on relatively short notice.
The Company has approximately 15 direct competitors in the sale of its line
of printing ink vehicles and slip additives, and approximately 40 competitors in
the sale of its synthetic and hydrocarbon resins.
RESEARCH.
During the fiscal years ended December 31, 1998, 1997 and 1996, the Company
spent approximately $5,375,000, $5,342,000 and $5,049,000, respectively, on
research activities relating to the development of new products and the
improvement of existing products.
ENVIRONMENTAL MATTERS.
Environmental laws regulate the discharge of materials into the environment
and may require the Company to remove or minimize the environmental effects of
the disposal of waste. Environmental expenditures are expensed or capitalized
depending upon their future economic benefit. Expenditures that relate to an
existing condition caused by past operations and that have no future economic
benefits are expensed. Liabilities are recorded when environmental assessment
and/or remediation is probable and the costs can be reasonably estimated.
Expenditures for environmental matters during the fiscal years ended December
31, 1998, 1997 and 1996 were not material to the consolidated financial
statements of the Company.
It has been and is the Company's policy to voluntarily install equipment
deemed necessary to control the discharge of pollutants into the environment.
The Company has voluntarily installed numerous in-line
incinerators/after-burners at its major manufacturing facilities in order to
minimize the generation of vapor, liquid or solid waste. The Company believes
that its facilities and products comply in all material respects with applicable
environmental regulations and standards.
The Company believes that compliance with the Federal, state and local
environmental laws has had no material effect upon the capital expenditures or
competitive position of the Company. Environmental
3
capital expenditures in 1999 are not anticipated to be material. The Company
does not believe, based on information available at this time, that the level of
future expenditures for environmental matters will have a material effect on its
consolidated financial position.
EMPLOYEES.
At December 31, 1998, the Company had 613 employees.
FOREIGN SALES--
Reference is made to Note 9 in the Consolidated Financial Statements which
are included in this Form 10-K Annual Report as indicated in Item 14.
ITEM 2. PROPERTIES.
Information with respect to the principal properties, all of which are of
masonry and metal clad construction, in which the Company's operations are
conducted is as follows:
APPROXIMATE
FLOOR AREA
(SQUARE PRINCIPAL PRODUCTS OWNED OR
LOCATION FEET) OR ACTIVITIES LEASED
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Pleasant Prairie, Wisconsin 250,000 Corporate headquarters Owned
Printing ink vehicles and slip additives
Synthetic and hydrocarbon resins
Research facilities
Warehouse
Moundville, Alabama 250,000 Synthetic and hydrocarbon resins (1)
Warehouse
La Vergne, Tennessee 27,000 Printing ink vehicles Owned
Warehouse
Newark, New Jersey 50,000 Slip additives Leased
Warehouse
Bell, California 15,000 Warehouse Leased
Kallo, Belgium 230,000 Printing ink vehicles and slip additives Owned
Synthetic and hydrocarbon resins
Research facilities
Warehouse
Rexdale, Ontario, Canada 66,000 Warehouse Owned
Dazhou, Fujian, Peoples Republic 35,000 Gum rosin derivatives Owned
of China Warehouse
Tanggu, Peoples Republic of China 40,000 Printing ink vehicles Owned
Synthetic resins
Warehouse
Waterford, Ireland 97,000 Synthetic resins Owned
Ibaraki, Japan 11,000 Technical service center Leased
Warehouse
Jurong Town, Singapore 10,000 Printing ink vehicles Owned
Warehouse
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(1) The Moundville, Alabama plant is leased as described in Note 7 in the
Consolidated Financial Statements which are included in this Form 10-K
Annual Report as indicated in Item 14.
4
ITEM 3. LEGAL PROCEEDINGS.
On September 25, 1995, the U.S. EPA filed an administrative complaint
alleging record keeping violations under the Toxic Substance Control Act (TSCA).
Simultaneously, Lawter and the U.S. EPA entered into a consent order fully
settling the complaint. Pursuant to the consent order, and without admitting any
liability, the Company has paid $280,000 to the U.S. EPA and has conducted a
TSCA compliance audit. The Company decided to settle this matter in order to
avoid protracted litigation and related costs. The outcome of this compliance
audit has not been determined, however, any potential liability related to this
matter has been fully accrued.
The Company believes that it is the subject of a federal grand jury
investigation in Mobile, Alabama. This investigation was initiated in 1997 into
the classification for tariff purposes of certain products imported by the
Company. The grand jury has subpoenaed Company records. One current Company
employee and one former Company employee have appeared before the grand jury.
The Company is cooperating with the investigation. The Company believes that its
classification of such products was proper, and has presented its position to
the U.S. Attorney's office in Mobile, Alabama. The U.S. Customs Service has
initiated proceedings seeking to recover the duties on such products, as well as
certain penalties. The Company is contesting the position of the Customs
Service, and is preparing a written response to the Customs Service.
Reference is made to Note 8 in the Consolidated Financial Statements which
are included in this Form 10-K Annual Report as indicated in Item 14 for
additional information.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There were no matters submitted to a vote of security holders in the fourth
quarter of the year ended December 31, 1998.
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT.
Information with respect to the executive officers of the Company is as
follows:
YEAR
NAME POSITION AGE ELECTED
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John P. O'Mahoney.......... Chairman of the Board and Chief Executive Officer 42 1996
Mark W. Joslin............. Chief Financial Officer, Treasurer and Secretary 39 1996
Jacob F. Baarends.......... Vice President 51 1998
Nathan L. Goodnow.......... Vice President 36 1998
Mr. O'Mahoney served as Vice President of the Company, 1993-1995. Mr. Joslin
served as the Corporate Controller of ANGUS Chemical Company, 1991-1996. Mr.
Baarends served as the European and Pacrim Technical Director of the Company,
1991-1998. Mr. Goodnow served as Operations Manager of BASF Corporation,
1993-1998.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
(a) MARKET INFORMATION. The Company's Common Stock is traded on the New
York Stock Exchange.
The following table sets forth the high and low sales prices of the
Company's Common Stock, as reported on the New York Stock Exchange for the
periods indicated:
1998 1997
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QUARTER HIGH LOW HIGH LOW
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First........................................................ 12 1/2 10 3/8 12 3/4 11 1/4
Second....................................................... 11 7/16 9 1/4 12 5/8 10 5/8
Third........................................................ 11 7 14 1/8 12 1/8
Fourth....................................................... 11 5/8 6 1/8 12 1/2 10 5/8
(b) As of February 12, 1999, the number of holders of record of the
Company's Common Stock was approximately 1,969.
5
ITEM 6. SELECTED FINANCIAL DATA.
Information with respect to selected financial data is as follows. This
information should be read in conjunction with the Consolidated Financial
Statements which are included in this Form 10-K Annual Report as indicated in
Item 14.
TEN YEAR FINANCIAL SUMMARY
(IN THOUSANDS, EXCEPT PER SHARE FIGURES)
YEARS ENDED DECEMBER 31
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1998(1) 1997(1) 1996(1) 1995 1994
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Net Sales................................................ $ 212,843 $ 206,539 $ 193,814 $ 204,835 $ 191,056
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Gross Profit............................................. 64,933 63,100 60,433 45,801(7) 59,294
Selling, Administrative, Research and Distribution
Expenses............................................... 28,584 27,283 24,793 28,762(7) 24,102
Subsidiary Closure Costs................................. -- 9,535(5) -- -- --
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Operating Income......................................... 36,349 26,282 35,640 17,039 35,192
Net Investment Income (Expense).......................... (5,683) 2,333 4,914 6,170 4,470
Sale of Affiliate........................................ -- 32,030(6) -- -- --
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Earnings Before Income Taxes and Cumulative Effect of
Accounting Change...................................... 30,666 60,645 40,554 23,209 39,662
Provision for Income Taxes............................... 9,201 23,319 11,779 6,931 10,257
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Earnings Before Cumulative Effect of Accounting Change... 21,465 37,326 28,775 16,278 29,405
Cumulative Effect of Change in Accounting for Income
Taxes.................................................. -- -- -- -- --
--------- --------- --------- --------- ---------
Net Earnings............................................. $ 21,465 $ 37,326 $ 28,775 $ 16,278 $ 29,405
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Depreciation and Amortization............................ $ 6,233 $ 5,832 $ 5,499 $ 5,447 $ 4,344
Cash Provided by Operating Activities.................... 25,474 10,792 25,253 13,766 23,047
Cash Dividends........................................... 14,629 18,173 18,077 17,989 17,951
Capital Expenditures, net................................ 6,788 10,485 25,925 21,928 10,613
Gross Property, Plant and Equipment...................... 134,603 127,451 141,346 126,406 102,788
Net Working Capital...................................... 76,709 117,961 74,410 71,722 88,993
Total Assets............................................. 254,250 276,184 293,123 261,474 231,827
Long-term Obligations.................................... 129,050 29,050 29,050 4,100 4,152
Stockholders' Equity..................................... 33,524 161,357 145,615 133,189 131,185
Average Shares Outstanding(2)............................ 36,554 45,431 45,175 45,018 44,874
Earnings per Share(2):
Earnings Before Cumulative Effect of Accounting Change... $ .59 $ .82 $ .64 $ .36 $ .66
Cumulative Effect of Change in Accounting for Income
Taxes.................................................. -- -- -- -- --
--------- --------- --------- --------- ---------
Net Earnings............................................. $ .59 $ .82 $ .64 $ .36 $ .66
--------- --------- --------- --------- ---------
Cash Dividends per Share(2).............................. .40 .40 .40 .40 .40
Stockholders' Equity per Share(2)........................ .92 3.55 3.22 2.96 2.92
Cash Dividends to Net Earnings........................... 68.2% 48.7% 62.8% 110.5% 61.0%
Net Earnings to Average Equity........................... 22.0% 24.3% 20.6% 12.3% 24.0%
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(1) See Management's Discussion and Analysis for analysis of changes between
years.
(2) Average shares outstanding and per share amounts are adjusted to reflect the
four-for-three stock splits in 1991 and 1990.
(3) Represents cumulative effect on prior years' earnings of adopting SFAS No.
109 which was adopted January 1, 1993.
(4) Includes additional tax provision of $21.6 million for future repatriation
of foreign earnings.
6
TEN YEAR FINANCIAL SUMMARY
(IN THOUSANDS, EXCEPT PER SHARE FIGURES)
YEARS ENDED DECEMBER 31
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1993 1992 1991 1990 1989
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Net Sales.................................................. $ 172,249 $ 167,568 $ 152,893 $ 150,005 $ 136,006
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Gross Profit............................................... 46,628 53,933 50,543 48,397 40,576
Selling, Administrative, Research and Distribution
Expenses................................................. 21,495 22,641 20,401 20,717 18,074
Subsidiary Closure Costs................................... -- -- -- -- --
--------- --------- --------- --------- ---------
Operating Income........................................... 25,133 31,292 30,142 27,680 22,502
Net Investment Income (Expense)............................ 4,318 5,271 6,221 4,963 3,929
Sale of Affiliate.......................................... -- -- -- -- --
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Earnings Before Income Taxes and Cumulative Effect of
Accounting Change........................................ 29,451 36,563 36,363 32,643 26,431
Provision for Income Taxes................................. 28,449(4) 9,548 9,893 9,223 6,963
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Earnings Before Cumulative Effect of Accounting Change..... 1,002 27,015 26,470 23,420 19,468
Cumulative Effect of Change in Accounting for Income
Taxes.................................................... 4,025(3) -- -- -- --
--------- --------- --------- --------- ---------
Net Earnings............................................... $ 5,027 $ 27,015 $ 26,470 $ 23,420 $ 19,468
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Depreciation and Amortization.............................. $ 4,291 $ 4,179 $ 3,900 $ 3,521 $ 3,550
Cash Provided by Operating Activities...................... 23,811 34,440 23,192 34,240 20,388
Cash Dividends............................................. 17,909 17,556 14,947 12,582 12,561
Capital Expenditures, net.................................. 12,940 7,548 8,902 6,198 3,073
Gross Property, Plant and Equipment........................ 87,856 78,491 74,022 66,271 57,421
Net Working Capital........................................ 87,523 96,082 87,075 82,560 70,200
Total Assets............................................... 209,477 187,334 178,218 153,500 133,988
Long-term Obligations...................................... 4,206 4,858 5,238 5,137 5,083
Stockholders' Equity....................................... 114,025 129,659 117,315 105,090 87,752
Average Shares Outstanding(2).............................. 44,772 43,913 43,318 43,011 42,940
Earnings per Share(2):
Earnings Before Cumulative Effect of Accounting Change..... $ .02 $ .62 $ .61 $ .54 $ .45
Cumulative Effect of Change in Accounting for Income
Taxes.................................................... .09(3) -- -- -- --
--------- --------- --------- --------- ---------
Net Earnings............................................... $ .11 $ .62 $ .61 $ .54 $ .45
--------- --------- --------- --------- ---------
Cash Dividends per Share(2)................................ .40 .40 .35 .29 .29
Stockholders' Equity per Share(2).......................... 2.55 2.95 2.71 2.44 2.04
Cash Dividends to Net Earnings............................. 356.3% 65.0% 56.5% 53.7% 64.5%
Net Earnings to Average Equity............................. 4.1% 21.9% 23.8% 24.3% 23.3%
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(5) Represents costs associated with the closure of several subsidiaries. The
after tax effect of these costs was $.20 per share.
(6) Represents the gain on the sale of the Company's 28% share of Hach Company
common stock. This resulted in an after tax gain of $.43 per share.
(7) The 1995 Gross Margin was reduced by $10,562,000 for restructuring and other
charges. The 1995 Selling, Administrative, Research and Distribution
Expenses includes $2,791,000 in restructuring charges. The after tax effect
of these charges was $.24 per share.
7
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
LIQUIDITY AND CAPITAL RESOURCES
On April 1, 1998, the Company repurchased 11,503,130 shares of Lawter
International, Inc.'s common stock held by the estate of Daniel J. Terra, at a
price of $11.375 per share. The total price of $130,800,000 plus related costs
was financed through a $100,000,000 note issued to Prudential Insurance Company
of America at an interest rate of 6.91%, with the principal to be repaid in five
annual installments of $20,000,000 each beginning April 1, 2006 and a final
maturity date of April 1, 2010. The remaining amount was funded with cash on
hand.
Lawter's cash and equivalents, net of short-term borrowings, decreased
$47,600,000 from $59,900,000 at December 31, 1997 to $12,300,000 at December 31,
1998. This decrease was the result of the repurchase of the Company's common
stock held by the estate of Daniel J. Terra, acquisition of the ink resin
business of Robert Kraemer GmbH, and the buildup of strategic raw materials due
to favorable pricing.
The Company generally relies upon internally generated funds from operations
to satisfy working capital requirements and to fund capital expenditures.
However, in certain circumstances, the Company finds it is more advantageous to
borrow funds to satisfy these requirements.
In 1998 and 1997, the majority of Lawter's capital expansion program was
financed with internally generated funds. In 1996, the Company used external
financing for the new manufacturing facility in Belgium. The capital
expenditures budget for 1998 was $9,000,000. Actual expenditures were in line
with the budget. Lawter's capital expenditures for 1999 are estimated at
$9,500,000. These expenditures include funds for improved raw material sourcing
and product line expansion as well as additions to and maintenance of existing
facilities. The Company currently anticipates using internally generated funds
for the majority of these capital expenditures.
RESULTS OF OPERATIONS
1998 VERSUS 1997
NET SALES. The Company's consolidated net sales increased 3% when compared
to 1997. Higher sales volume in North America and the Pacrim was somewhat offset
by lower average selling prices due to a change in product mix and the stronger
U.S. dollar versus European and Pacrim currencies.
By region, net sales increased 9% in North America and 14% in the Pacrim
while decreasing 5% in Europe when compared to 1997. In North America, sales
improved as a result of increased market share, sales of new products and
industry growth. The higher sales in the Pacrim were attributable to increased
product and customer base, partially offset by a downturn in the economy.
European sales were impacted by more intense competition, by the Company's
decision not to renew participation in certain low margin business and by a
stronger U.S. dollar.
GROSS PROFIT. Gross profit as a percent of sales was 30.5% and 30.6% for
1998 and 1997, respectively. Included in the gross profit for 1997 was the
impact of the accounting for business interruption insurance claims (see
"Insurance" below). Excluding the effect of the business interruption insurance
claims, the gross margin increased from 29.3% in 1997 to 30.5% in 1998 as a
result of a change in product mix to higher margin products and lower raw
material costs worldwide.
SELLING, ADMINISTRATIVE, RESEARCH AND DISTRIBUTION EXPENSES. Selling,
administrative, research and distribution expenses increased from $27,283,000 in
1997 to $28,584,000 in 1998. The increase from 1997 was primarily attributable
to higher distribution and commission costs in Japan to support higher sales
volumes, higher freight charges as a result of higher volumes domestically and a
change in product mix to more sales of solutions which incur higher distribution
cost per pound shipped.
8
INVESTMENT INCOME. Investment income decreased in 1998 when compared to
1997 as a result of the sale, in July of 1997, of the Company's investment in
Hach Company which had accounted for about $3,100,000 in investment income on an
annualized basis at the time of the sale, and as a result of lost investment
income from cash used for the repurchase of the shares of the Company's Common
Stock from the estate of Daniel J. Terra in April of 1998.
INTEREST EXPENSE. Lawter 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 1997 to 1998.
INCOME TAXES. The effective tax rates for 1998 and 1997 were 30.0% and
38.5%, respectively. Included in 1997 was a 38.9% effective tax rate on the sale
of the Hach Company stock and a minimal tax benefit from the subsidiary closure
costs along with a one-time tax benefit from restructuring of an international
operation. Excluding these items, the effective tax rate in 1997 would have been
comparable to 1998.
1997 VERSUS 1996
NET SALES. The Company's consolidated net sales increased 7% when compared
to 1996. Included in 1997 are $20,900,000 in sales of products, mostly in
Europe, relating to the Wolstenholme and Hercules acquisitions, which were
acquired in the fourth quarter of 1996. Excluding the Wolstenholme and Hercules
products from both years, consolidated net sales decreased 3% as a result of the
impact of a stronger U.S. dollar versus most European currencies and lower
average selling prices caused by a change in product mix, partially offset by
increased volume in all geographic areas.
By region, net sales increased 12% in Europe, 24% in the Pacific Rim and
less than 1% in North America when compared to 1996. In addition to the impact
of Wolstenholme and Hercules sales, higher sales volumes in Europe were
partially offset by the stronger U.S dollar versus European currencies. The
increase in the Pacific Rim was the result of increased customer and product
base.
GROSS PROFIT. Gross profit as a percent of sales was 30.6% and 31.2% for
1997 and 1996, respectively. The gross profit in 1997 and 1996 included the
impact of the accounting for business interruption insurance claims (see
"Insurance" below). Excluding the effect of the business interruption insurance
claims, the gross margin increased from 28.2% in 1996 to 29.3% in 1997 as the
result of lower raw material costs in North America, decreased operating costs
as a result of the restructuring plan described in "Restructuring Charges" below
and the startup costs of the new polymer facility in Belgium included in 1996.
SELLING, ADMINISTRATIVE, RESEARCH AND DISTRIBUTION EXPENSES. Selling,
administrative, research and distribution expenses increased from $24,793,000 in
1996 to $27,283,000 in 1997. The higher expenses in 1997 were due principally to
increased sales volume, higher distribution costs caused by the shutdown of
various manufacturing facilities and increased commission and royalty payments
as the result of acquisitions.
SUBSIDIARY CLOSURE COSTS. Subsidiary closure costs represent $4,236,000 for
the write off of goodwill related to the Company's Italian subsidiary along with
$3,299,000 for the write off of accumulated foreign currency translation losses
at foreign subsidiaries and $2,000,000 for other costs related to other
subsidiaries that have been or are in the process of being closed. The after tax
effect of these costs was $.20 per share.
INVESTMENT INCOME. Investment income decreased in 1997 when compared to
1996 as a result of the Company's July 1997 sale of its equity investment in
Hach Company and the liquidation of its stock portfolio in 1996 which had
resulted in appreciation gains in 1996.
9
SALE OF AFFILIATE. During the third quarter of 1997, the Company sold its
28% share of Hach Company common stock for $59,987,000. This resulted in an
after tax gain of $19,570,000 or $.43 per share.
INCOME TAXES. The effective tax rates for 1997 and 1996 were 38.5% and
29.0%, respectively. The higher effective tax rate in 1997 was the result of a
38.9% effective tax rate on the sale of the Hach Company stock along with a
minimal tax benefit from the subsidiary closure costs. Excluding these items,
the effective tax rate in 1997 would have been 29.1%.
OTHER MATTERS
RESTRUCTURING CHARGES. In the fourth quarter of 1995, a new management team
was formed. The new management, taking into account a change in market
conditions, developed a new corporate strategy. Part of the decision making
process included an evaluation of the feasibility of continuing to utilize older
manufacturing facilities. With the anticipated completion of construction of the
new ink vehicle and resin facility in Belgium combined with the new ink vehicle
and resin facility in the U. S., the Company decided to implement a
restructuring plan. This plan included the decommissioning of older ink vehicle
and resin plants. These restructuring activities commenced in the fourth quarter
of 1995 and were substantially completed as of the end of 1997.
INSURANCE. In April 1996, there was an explosion and fire at the Company's
resin facility in Ireland. The facility was shut down for several months. The
Company was adequately insured and, therefore, recorded business interruption
insurance proceeds of $4,000,000 in 1996 and $2,622,000 in 1997 for lost sales
and additional expenses incurred. This was recorded as a reduction to Cost of
Products Sold. This facility is now fully operational.
The Company also received proceeds of $1,864,000 in 1996 for the final
settlement of claims arising from an explosion and fire at its U.S. resin
facility in 1994. This amount was also recorded as a reduction to Cost of
Products Sold.
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.
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 April 30, 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 June 30, 1999.
The Company is in the process of testing and upgrading its research and
development equipment. Various systems have been upgraded. The Company expects
to complete this testing by March 31, 1999 and to complete the remaining
upgrades by June 30, 1999.
Key suppliers were surveyed as to their Y2K compliance. Sixty-four percent
of these suppliers in North America and eighty 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
10
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 $125,000 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 December 31, 1998, the
Company had $129,000,000 in fixed rate long term debt, $27,800,000 in variable
rate short term debt and $25,900,000 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 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 believes that it is fully
prepared to transact business in the Euro and that the conversion from national
currencies to the Euro will have no material impact on the consolidated
financial position, results of operation or cash flows of the Company.
EFFECTS OF INFLATION. The Company attempts to minimize the effects of
inflation on sales and earnings by appropriately increasing selling prices and
pursuing ongoing cost control programs and productivity improvements. In 1998,
the effect of certain manufacturing and distribution cost increases were
minimized by decreased raw material costs. The effects of inflation were
minimized through increased manufacturing efficiencies and cost controls in 1997
and 1996.
LOOKING FORWARD. Lawter management believes that the Company's prospects
for growth of future sales and earnings are promising. While our markets
continue to be highly competitive and European and Asian markets are
experiencing difficulties, development of new markets, selective acquisitions,
continued emphasis on research and development, improved raw material sourcing
and cost effective utilization of our new production facilities, combined with
the present program of streamlining operations, will position the Company for
both medium and long-term gains in our strategic markets.
This Form 10-K Annual Report 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,
certain global and regional economic conditions and factors.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Quantitative and qualitative disclosures about market risk are included in
this Form 10-K in Item 7 under the caption "Market Risk."
11
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Financial statements and supplementary data are included in this Form 10-K
Annual Report as indicated in Item 14.
OPERATING RESULTS BY QUARTERS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE FIGURES)
NET EARNINGS
------------------------
GROSS
NET SALES PROFIT AMOUNT PER SHARE
---------- ----------- --------- -------------
1997
March 31................................................... $ 50,140 $ 15,616 $ 5,938 $ .13
June 30.................................................... 50,657 16,034 7,566 .17
September 30............................................... 50,411 16,014 17,099(1) .37(1)
December 31................................................ 55,331 15,436 6,723 .15
---------- ----------- --------- ---
$ 206,539 $ 63,100 $ 37,326 $ .82
---------- ----------- --------- ---
---------- ----------- --------- ---
1998
March 31................................................... $ 52,755 $ 15,820 $ 6,391 $ .14
June 30.................................................... 51,597 15,930 4,775 .14
September 30............................................... 53,024 16,148 5,046 .15
December 31................................................ 55,467 17,035 5,253 .16
---------- ----------- --------- ---
$ 212,843 $ 64,933 $ 21,465 $ .59
---------- ----------- --------- ---
---------- ----------- --------- ---
- ------------------------
(1) Includes a one-time gain from the sale of the Hach Company stock net of a
one-time charge for subsidiary closure charges. Excluding these items, the
net income in the third quarter would have been $6,815,000 or $.15 per
share.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
There have been no changes in or disagreements with independent auditors on
accounting and financial disclosure.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Reference is made to the Company's 1999 Proxy Statement under the heading
"Election Of Directors" (hereby incorporated by reference) and Item 4A
"Executive Officers of the Registrant" in Part I of this Form 10-K for this
information.
ITEM 11. EXECUTIVE COMPENSATION.
Reference is made to the Company's 1999 Proxy Statement under the heading
"Executive Compensation" (hereby incorporated by reference) for this
information.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Reference is made to the Company's 1999 Proxy Statement under the headings
"Security Ownership of Certain Beneficial Owners" and "Security Ownership of
Management" (hereby incorporated by reference) for this information.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Reference is made to the Company's 1999 Proxy Statement under the headings
"Indebtedness of Management" and "Certain Relationships and Related
Transactions" (hereby incorporated by reference) for this information.
12
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) 1. Consolidated Financial Statements--
PAGE
NUMBER
-------------
Balance Sheets as of December 31, 1998 and 1997......................................................... 15
Statements of Earnings for the years ended December 31, 1998, 1997 and 1996............................. 16
Statements of Cash Flows for the years ended December 31, 1998, 1997 and 1996........................... 17
Statements of Stockholders' Equity for the years ended December 31, 1998, 1997 and 1996................. 18
Notes to the Consolidated Financial Statements for the years ended December 31, 1998, 1997 and 1996..... 19
Report of Independent Public Accountants................................................................ 28
(a) 2. Financial Statement Schedules--
PAGE
NUMBER
-------------
Report of Independent Public Accountants on Schedule.................................................... 28
II Valuation and Qualifying Accounts.................................................................. 29
All other schedules are not submitted because they are not applicable, not
required or the required information is included in the consolidated financial
statements or notes thereto.
(a) 3. Exhibits--
(3)(a) Certificate of Incorporation, as amended through April 27, 1993 (incorporated by
reference to Exhibit I of the Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1993) (File No. 1-7558).
(b) Bylaws of the Company, as amended through November 9, 1995 (incorporated by
reference to Exhibit (3)(b) of the Company's Annual Report on Form 10-K for the
year ended December 31, 1995) (File No. 1-7558).
(4) Private Shelf Agreement between Lawter International, Inc. and The Prudential
Insurance Company of America (incorporated by reference to Exhibit 99.2 of the
Company's Form 8-K dated January 9, 1996) (File No. 1-7558).
(10)(a) Lawter International, Inc. 401-K Profit Sharing Plan.*
(b) Lawter International, Inc. Nonqualified Deferred Compensation Plan.*
(c) 1992 Non-Qualified Stock Option Plan (incorporated by reference to Exhibit (10)(d)
of the Company's Annual Report on Form 10-K for the year ended December 31, 1992)
(File No. 1-7558).*
(d) The 1994 Amendment to the 1992 Non-Qualified Stock Option Plan (incorporated by
reference to Appendix A of the Company's Definitive Proxy Statement dated April 28,
1994) (File No. 1-7558).*
(e) The 1995 Amendment to the 1992 Non-Qualified Stock Option Plan(incorporated by
reference to Exhibit (10)(e) of the Company's Annual Report on Form 10-K for the
year ended December 31, 1997) (File No. 1-7558).*
13
(f) The 1997 Amendment to the 1992 Non-Qualified Stock Option Plan(incorporated by
reference to Exhibit (10)(f) of the Company's Annual Report on Form 10-K for the
year ended December 31, 1997) (File No. 1-7558).*
(g) 1995 Non-Qualified Stock Option Plan for Non-Employee Directors (incorporated by
reference to Appendix A of the Company's Definitive Proxy Statement dated April 24,
1995) (File No. 1-7558).*
(h) The 1997 Amendment to the 1995 Non-Qualified Stock Option Plan for Non-Employee
Directors(incorporated by reference to Exhibit (10)(h) of the Company's Annual
Report on Form 10-K for the year ended December 31, 1997) (File No. 1-7558).*
(i) Employment Agreement, dated October 24, 1996, between the Company and John P.
O'Mahoney(incorporated by reference to Exhibit (10)(i) of the Company's Annual
Report on Form 10-K for the year ended December 31, 1996) (File No. 1-7558).*
(j) Employment Agreement, dated October 24, 1996, between the Company and Mark W.
Joslin(incorporated by reference to Exhibit (10)(j) of the Company's Annual Report
on Form 10-K for the year ended December 31, 1996) (File No. 1-7558).*
(k) Employment Agreement, dated August 3, 1998, between the Company and Jacob F.
Baarends.*
(l) Employment Agreement, dated October 29, 1998, between the Company and Nathan L.
Goodnow.*
(m) Settlement Agreement and Release, dated September 17, 1998, between the Company and
John P. Jilek.*
(n) Lawter International, Inc. Key Employee Investment Plan.*
(13) Those portions of the Lawter International, Inc. and Subsidiaries' 1998 Annual
Report to Stockholders which are incorporated by reference in this Form 10-K Annual
Report.
(21) Principal Subsidiaries of the Company.
(23) Consent of Independent Public Accountants (included in this Form 10-K on page 28).
(27) Financial Data Schedule for the year ended December 31, 1998.
- ------------------------
* These documents constitute all of the management contracts, compensatory plans
or arrangements in which any director or executive officer participates.
(b) There were no reports on Form 8-K filed during the fourth quarter of
1998.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
of 1933 and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act of 1933 and will be governed by the final adjudication of such issue.
The foregoing undertaking is made in compliance with Form S-8, as amended as
of July 13, 1990, and shall be incorporated by this reference into each Form S-8
of the registrant, including Registration Statements Nos. 33-24859, 33-61506,
2-84421 and 333-67337.
14
LAWTER INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share figures)
DECEMBER 31
-----------------------
1998 1997
----------- ----------
ASSETS
Current Assets:
Cash (Note 1)............................................................................ $ 14,130 $ 8,052
Time Deposits, Interest Bearing (Note 1)................................................. 25,948 74,819
Accounts Receivable--less allowance for doubtful accounts of $593 in 1998 and $490 in
1997................................................................................... 42,398 44,170
Inventories (Note 1)..................................................................... 49,479 43,090
Prepaid Expenses......................................................................... 1,086 1,051
----------- ----------
Total Current Assets..................................................................... $ 133,041 $ 171,182
----------- ----------
Property, Plant and Equipment (Notes 1 and 7):
Land..................................................................................... $ 6,670 $ 6,982
Buildings................................................................................ 34,505 34,476
Machinery and Equipment.................................................................. 90,090 83,681
Construction in Progress................................................................. 3,338 2,312
----------- ----------
$ 134,603 $ 127,451
Less Accumulated Depreciation............................................................ 42,460 38,803
----------- ----------
Net Property, Plant and Equipment........................................................ $ 92,143 $ 88,648
Other Assets (Note 1).................................................................... 29,066 16,354
----------- ----------
Total.................................................................................... $ 254,250 $ 276,184
----------- ----------
----------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts Payable......................................................................... $ 13,577 $ 12,324
Accrued Expenses......................................................................... 13,557 13,805
Short-term Borrowings (Note 8)........................................................... 27,790 22,993
Income Taxes Payable..................................................................... 1,408 4,099
----------- ----------
Total Current Liabilities................................................................ $ 56,332 $ 53,221
----------- ----------
Long-term Obligations (Note 7)........................................................... 129,050 29,050
Deferred Income Taxes (Note 4)........................................................... 35,344 32,556
----------- ----------
Total Liabilities........................................................................ $ 220,726 $ 114,827
----------- ----------
Stockholders' Equity (Note 3):
Preferred Stock--no par value, authorized 500,000 shares; none issued.................... $ -- $ --
Common Stock--$1.00 par value, authorized 120,000,000 shares; issued 45,533,335 shares... 45,533 45,533
Additional Paid-in Capital............................................................... 15,950 16,747
Common Stock, held in Treasury, at cost--11,503,130 shares............................... (137,412) --
Retained Earnings (Note 1)............................................................... 115,906 109,070
Accumulated Other Comprehensive Income (Translation Adjustments)(Note 10)................ (6,295) (9,535)
Other.................................................................................... (158) (458)
----------- ----------
Total Stockholders' Equity............................................................... $ 33,524 $ 161,357
----------- ----------
Total.................................................................................... $ 254,250 $ 276,184
----------- ----------
----------- ----------
The accompanying notes to the consolidated financial statements are an integral
part of these statements.
15
LAWTER INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
(in thousands, except per share figures)
YEARS ENDED DECEMBER 31
----------------------------------
1998 1997 1996
---------- ---------- ----------
Net Sales.................................................................... $ 212,843 $ 206,539 $ 193,814
Cost of Products Sold........................................................ 147,910 143,439 133,381
---------- ---------- ----------
Gross Profit................................................................. $ 64,933 $ 63,100 $ 60,433
Selling, Administrative, Research & Distribution Expenses.................... 28,584 27,283 24,793
Subsidiary Closure Costs..................................................... -- 9,535 --
---------- ---------- ----------
Operating Income............................................................. $ 36,349 $ 26,282 $ 35,640
Investment Income............................................................ 2,536 5,646 7,941
Interest Expense............................................................. (8,219) (3,313) (3,027)
Sale of Affiliate (Note 6)................................................... -- 32,030 --
---------- ---------- ----------
Earnings Before Income Taxes................................................. $ 30,666 $ 60,645 $ 40,554
Provision for Income Taxes (Notes 1 and 4)................................... 9,201 23,319 11,779
---------- ---------- ----------
Net Earnings................................................................. $ 21,465 $ 37,326 $ 28,775
---------- ---------- ----------
---------- ---------- ----------
Net Earnings per Share (Note 1):............................................. $ .59 $ .82 $ .64
---------- ---------- ----------
---------- ---------- ----------
The accompanying notes to the consolidated financial statements are an integral
part of these statements.
16
LAWTER INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
YEARS ENDED DECEMBER 31
-----------------------------------
1998 1997 1996
----------- ---------- ----------
CASH FLOW FROM OPERATING ACTIVITIES:
Net Earnings................................................................. $ 21,465 $ 37,326 $ 28,775
Adjustments to Reconcile Net Earnings to Net Cash Provided by Operating
Activities--
Depreciation and Amortization.............................................. 6,233 5,832 5,499
Deferred Income Taxes...................................................... 3,088 (3,474) 433
Undistributed Equity Income................................................ -- (1,456) (2,583)
Deferred Exchange Gain (Loss).............................................. (810) 2,984 (1,327)
Purchase of Marketable Securities.......................................... -- -- (23,202)
Proceeds from Sales of Marketable Securities............................... -- 2,502 27,828
Net Gain from Marketable Securities........................................ -- (2) (605)
Gain on Sale of Business................................................... -- (738) --
Gain on Sale of Hach Company Common Stock.................................. -- (33,730) --
Write-off of Goodwill...................................................... -- 4,236 --
(Increase) Decrease in Current Assets--
Accounts Receivable........................................................ 2,711 858 (4,983)
Inventories................................................................ (4,451) 3,149 43
Prepaid Expenses........................................................... 1 787 220
Increase (Decrease) in Current Liabilities--
Accounts Payable........................................................... 964 (6,541) (1,663)
Accrued Expenses........................................................... (452) (3,651) (367)
Income Taxes Payable....................................................... (3,275) 2,710 (2,815)
----------- ---------- ----------
NET CASH PROVIDED BY OPERATING ACTIVITIES.................................... $ 25,474 $ 10,792 $ 25,253
----------- ---------- ----------
CASH FLOW FROM INVESTING ACTIVITIES:
Expenditures for Property, Plant and Equipment, net........................ $ (6,788) $ (10,485) $ (25,925)
Purchase of Business, net of cash.......................................... (12,819) (9,219) (17,161)
Proceeds from the Sale of Business......................................... -- 4,856 --
Proceeds from Sale of Hach Company Common Stock............................ -- 59,987 --
Loans to Officers.......................................................... (23) (24) (478)
Repayment of Officers' Loans............................................... 323 43 47
----------- ---------- ----------
NET CASH PROVIDED BY (USED FOR) INVESTING ACTIVITIES......................... $ (19,307) $ 45,158 $ (43,517)
----------- ---------- ----------
CASH FLOW FROM FINANCING ACTIVITIES:
Employee Stock Programs.................................................... $ 3,063 $ 2,220 $ 2,929
Repurchase of Common Stock................................................. (141,272) -- --
Principal Payments on Long-term Obligations................................ -- (50) (50)
Proceeds from Long-term Borrowings......................................... 100,000 -- 25,000
Payment of Short-term Borrowings........................................... (2,756) (11,182) (26,177)
Proceeds from Short-term Borrowings........................................ 6,120 -- 26,013
Cash Dividends Paid........................................................ (14,629) (18,173) (18,077)
----------- ---------- ----------
NET CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES......................... $ (49,474) $ (27,185) $ 9,638
Effect of Exchange Rate Changes on Cash.................................... 514 (825) (123)
----------- ---------- ----------
INCREASE (DECREASE) IN CASH AND EQUIVALENTS.................................. $ (42,793) $ 27,940 $ (8,749)
Cash and Equivalents, Beginning of Year.................................... 82,871 54,931 63,680
----------- ---------- ----------
Cash and Equivalents, End of Year.......................................... $ 40,078 $ 82,871 $ 54,931
----------- ---------- ----------
----------- ---------- ----------
The accompanying notes to the consolidated financial statements are an integral
part of these statements.
17
LAWTER INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands, except per share figures)
ACCUMULATED
COMMON ADDITIONAL OTHER
STOCK $1 PAID-IN TREASURY RETAINED COMPREHENSIVE
PAR VALUE CAPITAL STOCK EARNINGS INCOME OTHER
----------- ----------- ----------- ---------- -------------- ---------
Years Ended December 31, 1996, 1997 and
1998
Balance, January 1, 1996................ $ 45,066 $ 11,864 $ -- $ 79,218 $ (2,914) $ (45)
Add (deduct):
Net Earnings.......................... -- -- -- 28,775 -- --
Cash Dividends Declared--$.40 per
share............................... -- -- -- (18,076) -- --
Exercise of Stock Options............. 283 2,847 -- -- -- --
Loans to Officers (Note 3) -- -- -- -- -- (431)
Unrealized Loss on Investments........ -- -- -- -- -- (60)
Foreign Currency Translation
Adjustments......................... -- -- -- -- (912) --
----------- ----------- ----------- ---------- ------- ---------
Balance, December 31, 1996.............. $ 45,349 $ 14,711 $ -- $ 89,917 $ (3,826) $ (536)
Add (deduct):
Net Earnings.......................... -- -- -- 37,326 -- --
Cash Dividends Declared--$.40 per
share............................... -- -- -- (18,173) -- --
Exercise of Stock Options............. 184 2,036 -- -- --
Loans to Officers (Note 3)............ -- -- -- -- -- 18
Unrealized Gain on Investments........ -- -- -- -- -- 60
Foreign Currency Translation
Adjustments......................... -- -- -- -- (5,709) --
----------- ----------- ----------- ---------- ------- ---------
Balance, December 31, 1997.............. $ 45,533 $ 16,747 $ -- $ 109,070 $ (9,535) $ (458)
Add (deduct):
Net Earnings.......................... -- -- -- 21,465 -- --
Cash Dividends Declared--$.40 per
share............................... -- -- -- (14,629) -- --
Key Employee Investment Plan.......... -- (797) 3,860 -- -- --
Loans to Officers (Note 3)............ -- -- -- -- -- 300
Repurchase of Common Stock............ -- -- (141,272) -- -- --
Foreign Currency Translation
Adjustments......................... -- -- -- -- 3,240 --
----------- ----------- ----------- ---------- ------- ---------
Balance, December 31, 1998.............. $ 45,533 $ 15,950 $ (137,412) $ 115,906 $ (6,295) $ (158)
----------- ----------- ----------- ---------- ------- ---------
----------- ----------- ----------- ---------- ------- ---------
The accompanying notes to the consolidated financial statements are an integral
part of these statements.
18
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--STATEMENT OF ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements of the Company include all of its
wholly owned subsidiaries. All material intercompany balances and transactions
have been eliminated in consolidation. The equity method is used for any
investment where ownership is from 20% to 50%.
FOREIGN CURRENCY TRANSLATION
All assets and liabilities of operations denominated in foreign currencies
are translated at the rates of exchange in effect at the close of the year.
Revenue and expense accounts are translated at the average exchange rates which
were in effect during the year. Translation gains and losses are reported as a
separate component of stockholders' equity and are not included in net earnings.
Foreign currency transaction gains and losses continue to be an element in
determining net earnings for the period. Foreign currency transaction gains
(losses), included in selling, administrative, research and distribution
expenses, were $(332,000) in 1998, $(321,000) in 1997 and $93,000 in 1996.
Revenues and expenses are also affected by fluctuations of currency rates from
year to year. The effect of these rate fluctuations in 1998 when compared to
1997 and 1997 when compared to 1996 resulted in an unfavorable impact on
operating results in addition to the transaction gains or losses reflected in
net earnings.
CONSOLIDATED STATEMENT OF CASH FLOWS
The Company considers time deposits, which are highly liquid with an
original maturity of three months or less, to be cash equivalents for purposes
of the consolidated statements of cash flows. The carrying amount of cash and
time deposits approximates fair market value. The Company paid interest of
$8,320,000 in 1998, $4,462,000 in 1997 and $3,778,000 in 1996.
EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 128 "Earnings Per Share," which
requires companies to present basic earnings per share and diluted earnings per
share, instead of primary earnings per share and fully diluted earnings per
share that were previously required. The new standard is effective for all
periods ending after December 15, 1997. The new standard has no impact on the
Company's earnings per share.
Earnings per share of common stock are computed on the weighted average
shares outstanding during the respective years (36,554,000 in 1998, 45,431,000
shares in 1997 and 45,175,000 shares in 1996). Net earnings per share would not
be materially different from reported earnings per share if all outstanding
stock options were exercised.
INTANGIBLE ASSETS
The excess of cost over equity in net assets of acquisitions is being
amortized on a straight line basis over periods not exceeding 40 years. The
Company continually evaluates whether later events and circumstances have
occurred that indicate the remaining estimated useful life of goodwill may
warrant revision or that the remaining balance of goodwill may not be
recoverable. When factors indicate that goodwill should be evaluated for
possible impairment, the Company uses an estimate of the related business
segment's undiscounted net income over the remaining life of the goodwill in
measuring whether the goodwill is recoverable.
19
RESEARCH AND DEVELOPMENT
Research and development costs ($5,375,000 in 1998, $5,342,000 in 1997 and
$5,049,000 in 1996) are charged to expense as incurred.
INCOME TAXES
The Company provides U.S. income taxes on earnings of those foreign
subsidiaries which are intended to be remitted to the parent company.
Undistributed earnings reinvested indefinitely in foreign subsidiaries totaled
$27,937,000 at December 31, 1998. Income taxes paid during 1998, 1997 and 1996
amounted to $10,539,000, $23,295,000 and $13,595,000, respectively.
INVESTMENTS
During 1997 and 1996, all of Lawter's marketable securities were classified
as available-for-sale securities, which were reported at fair value. Unrealized
gains and losses were charged or credited to Stockholders' Equity. In 1997 and
1996, proceeds from the sales of these securities were $2,502,000 and
$7,333,000, respectively, the realized gain (loss) included in income was $2,000
and $(183,000), respectively and the unrealized gain (loss) charged to
Stockholders' Equity (net of the tax effect) was $60,000 and $(60,000),
respectively.
At December 31, 1995, all of Lawter's marketable securities were classified
as trading securities. Trading securities were reported at fair value, with
changes in fair value included in earnings. The net unrealized holding loss
included in income was $1,699,000 in 1996.
For the purpose of determining realized gains and losses, the cost of
securities sold was based upon specific identification.
INVENTORIES
The majority of the Company's domestic inventories are valued at last-in,
first-out (LIFO) cost which is not in excess of net realizable value. The
Company's other inventories aggregating $29,621,000 and $28,375,000 at December
31, 1998 and 1997, respectively, are valued at the lower of first-in, first-out
(FIFO) cost or market. The finished goods inventories include the cost of raw
materials and manufacturing labor and overhead. Inventories are summarized as
follows:
(IN THOUSANDS) 1998 1997
- -------------------------------------------------------------------------------------------- --------- ---------
Raw Materials............................................................................... $ 26,694 $ 21,132
Finished Goods.............................................................................. 22,785 21,958
--------- ---------
$ 49,479 $ 43,090
--------- ---------
--------- ---------
If the FIFO inventory valuation method had been used for all inventories,
they would have been $3,614,000 and $4,259,000 higher than reported at December
31, 1998 and 1997, respectively.
PROPERTY
Property, plant and equipment is stated at cost. Depreciation, computed
using the straight-line method for financial statement purposes, is provided
over the useful lives of the various classes of property, plant and equipment.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principals requires management to make estimates and
assumptions. The reported amounts of assets and liabilities
20
and disclosure of contingent assets and liabilities at the date of the financial
statements and the amount of revenues and expenses reported during the period
are affected by these assumptions and estimates. Actual results could differ
from these estimates.
STATEMENT OF EARNINGS PRESENTATION
Certain prior year amounts have been reclassified to conform with current
year presentation.
NOTE 2--RETIREMENT PLANS
The Company had in 1998, a contributory 401(k) profit sharing plan. In 1997
and 1996, the Company had contributory profit sharing plans and a
non-contributory money purchase pension plan. The majority of domestic and
Canadian employees are covered by one of these plans.
Company contributions to these plans charged to operations were $391,000 in
1998, $478,000 in 1997 and $494,000 in 1996 and are funded on a current basis.
There is no past service liability under these plans. The Company has no
material postretirement or postemployment benefit obligations.
NOTE 3--COMMON STOCK
SFAS No. 123, "Accounting for Stock-Based Compensation," permits either
recording the estimated value of stock-based compensation over the applicable
vesting period or continued application of APB Opinion No. 25 with disclosure on
a pro forma basis of information for the unrecorded cost and related effect on
earnings per share in the Notes to the Financial Statements. The Company applies
the standard on a pro forma basis. Had compensation costs for the Company's
stock option plans been determined based on the fair value at the grant dates
for awards consistent with the provisions of SFAS No. 123, the Company's net
earnings and earnings per share would have been adjusted to the pro forma
amounts indicated below.
(IN THOUSANDS) 1998 1997 1996
- --------------------------------------------------------------------------------- --------- --------- ---------
Net earnings--as reported........................................................ $ 21,465 $ 37,326 $ 28,775
Net earnings--pro forma.......................................................... 21,037 37,054 28,292
Earnings per share--as reported.................................................. $ .59 $ .82 $ .64
Earnings per share--pro forma.................................................... .58 .82 .63
The Company has two fixed stock option plans for officers, directors and
other key employees. Options may be granted at prices not less than the fair
market value at the date of grant. Options expire ten years from the date of
grant and are exercisable one year after the date of grant.
The fair value of each option granted is estimated on the grant date using
the Black-Scholes option-pricing model. The following weighted average
assumptions were made in estimating the fair value: dividend yield of 4.1%, 3.3%
and 3.6% in 1998, 1997 and 1996, respectively; expected volatility of 31.8% in
1998, 22.0% in 1997 and 18.1% in 1996; risk-free interest rate of 5.1% in 1998,
and 5.8% in 1997 and 1996; and expected lives of 5 years.
The Company issues common stock when stock options are exercised. At the
time of exercise, officers may borrow funds from the Company in order to
exercise their stock options. These loans bear interest at the Company's
effective rate to borrow and are repayable within eighteen months. The unpaid
portion of the options exercised, evidenced by a note, has been deducted from
Stockholders' Equity in the accompanying Consolidated Balance Sheets. The par
value of the shares issued is credited to the common stock account and the
excess of the purchase price over the par value is credited to additional
paid-in capital.
21
A summary of the status and activity in the stock option plans is shown in
the tables below.
WEIGHTED
NUMBER OF AVERAGE
SHARES PRICE
---------- -----------
Outstanding January 1, 1996................................................................ 2,020,313 $ 11.85
Granted.................................................................................... 233,250 11.29
Exercised.................................................................................. (282,149) 10.38
Forfeited or Expired....................................................................... (160,864) 11.91
----------
Outstanding December 31, 1996.............................................................. 1,810,550 12.00
Granted.................................................................................... 205,000 11.86
Exercised.................................................................................. (184,800) 12.01
Forfeited or Expired....................................................................... (63,375) 12.10
----------
Outstanding December 31, 1997.............................................................. 1,767,375 11.97
Granted.................................................................................... 568,415 9.95
Exercised.................................................................................. -- --
Forfeited or Expired....................................................................... (109,325) 12.23
----------
Outstanding December 31, 1998.............................................................. 2,226,465 11.44
----------
Exercisable December 31, 1996.............................................................. 1,608,550 12.08
Exercisable December 31, 1997.............................................................. 1,568,500 11.71
Exercisable December 31, 1998.............................................................. 1,665,100 10.41
1998 1997 1996
---------------- ----------------- -----------------
Price range at end of year............................... $7.63 to 14.38 $10.75 to 14.38 $11.00 to 14.38
Price range for exercised shares......................... N/A $11.25 to 13.25 $9.29 to 10.41
Options available for grant at end of year............... 378,735 843,825 992,950
Weighted average remaining contractual life at the end of
the year............................................... 7 Years 7 Years 8 Years
NOTE 4--PROVISION FOR INCOME TAXES
The Company uses the asset and liability method to account for income taxes.
Pre-tax earnings were as follows:
(IN THOUSANDS) 1998 1997 1996
- --------------------------------------------------------------------------------- --------- --------- ---------
United States.................................................................... $ 17,087 $ 56,758 $ 25,483
Foreign.......................................................................... 13,579 3,887 15,071
--------- --------- ---------
$ 30,666 $ 60,645 $ 40,554
--------- --------- ---------
--------- --------- ---------
22
The provisions (benefits) for income taxes were as follows:
(IN THOUSANDS) 1998 1997 1996
- --------------------------------------------------------------------------------- --------- --------- ---------
Currently payable:
United States:
Federal........................................................................ $ 3,819 $ 19,871 $ 8,667
State.......................................................................... 1,340 4,009 1,180
Foreign.......................................................................... 924 1,650 1,481
--------- --------- ---------
Total Current.................................................................... 6,083 25,530 11,328
--------- --------- ---------
Deferred:
Excess of tax over book depreciation............................................. 4,632 3,952 1,556
Undistributed earnings of the equity investment.................................. -- (6,148) 904
Undistributed earnings of foreign subsidiaries................................... (1,353) -- (2,560)
Other............................................................................ (161) (15) 551
--------- --------- ---------
Total Deferred................................................................... 3,118 (2,211) 451
--------- --------- ---------
$ 9,201 $ 23,319 $ 11,779
--------- --------- ---------
--------- --------- ---------
Temporary differences that gave rise to the deferred tax liability at
December 31, 1998 were as follows:
(IN THOUSANDS)
- -----------------------------------------------------------------------------------
Undistributed earnings of foreign subsidiaries..................................... $ 24,618
Excess of tax over book depreciation............................................... 12,488
Other.............................................................................. (1,762)
---------
$ 35,344
---------
---------
The Company's earnings from manufacturing operations in Waterford, Ireland
were tax exempt until 1990 and will have a 10% tax rate through 2010.
The total "Provision for Income Taxes" represents an effective tax rate of
30.0% for 1998, 38.5% for 1997 and 29.0% for 1996. The differences from the U.S.
statutory rate for 1998, 1997 and 1996 were as follows:
(IN THOUSANDS) 1998 1997 1996
- --------------------------------------------------------------------------------- --------- --------- ---------
Computed tax provision at 35%.................................................... $ 10,733 $ 21,226 $ 14,194
Increase (decrease) in tax provision resulting from:
Waterford, Ireland operation..................................................... (1,727) (1,144) (1,884)
Inclusion of state & local income taxes (net of Federal income taxes)............ 871 2,606 787
Goodwill write off............................................................... -- 1,483 --
Foreign currency translation adjustment write off................................ -- 1,606 --
Other foreign operations......................................................... 139 (1,033) (710)
Other............................................................................ (815) (1,425) (608)
--------- --------- ---------
Provision for Income Taxes....................................................... $ 9,201 $ 23,319 $ 11,779
--------- --------- ---------
--------- --------- ---------
NOTE 5--RESTRUCTURING CHARGES
In the fourth quarter of 1995, a new management team was formed. The new
management, taking into account a change in market conditions, developed a new
corporate strategy. Part of the decision making process included an evaluation
of the feasibility of continuing to utilize older manufacturing facilities. With
the anticipated completion of construction of the new ink vehicle and resin
facility in Belgium combined with the new ink vehicle and resin facility in the
U. S., the Company decided to implement a restructuring plan. This plan included
the decommissioning of older ink vehicle and resin plants. These restructuring
activities commenced in the fourth quarter of 1995 and were substantially
completed as of the end of 1997.
23
NOTE 6--EQUITY INVESTMENTS
At December 31, 1996, the Company owned 3,157,223 shares, representing
approximately 28% of the outstanding shares, of the Common Stock of Hach Company
(Hach). During the third quarter of 1997, the Company sold its 28% share of Hach
for $59,987,000. This resulted in an after tax gain of $19,570,000 or $.43 per
share. The investment in Hach was accounted for under the equity method.
Hach is a leading international manufacturer of instruments and test kits
that analyze the chemical content and other properties of water and other
aqueous solutions. In addition, Hach sells analytical reagents which are used in
connection with the instruments and test kits.
NOTE 7--LONG-TERM OBLIGATIONS
Long-term obligations were as follows:
(IN THOUSANDS) 1998 1997
- ----------------------------------------------------------------------- ---------- ---------
Series 1993-LI IDB Bond................................................ $ 4,000 $ 4,000
Series 1978-A IDB Bond................................................. 50 50
---------- ---------
Net long-term bonds payable............................................ 4,050 4,050
Prudential Shelf Agreement............................................. 125,000 25,000
---------- ---------
Total long-term obligations............................................ $ 129,050 $ 29,050
---------- ---------
---------- ---------
In December of 1995, the Company entered into a private shelf agreement with
Prudential Capital Group under which it may borrow up to $125,000,000. The shelf
agreement provides for promissory notes to mature no more than 15 years after
the original date of issuance, which was December 6, 1995. On January 5, 1996,
the Company borrowed $25,000,000 at an interest rate of 6.33%, with the
repayment of principal on January 6, 2003. On April 1, 1998, the Company
borrowed an additional $100,000,000 at an interest rate of 6.91%, with principal
to be repaid in five annual installments of $20,000,000 each beginning April 1,
2006, with a final maturity date of April 1, 2010. There are various covenants
related to this agreement. At December 31, 1998, the Company was in compliance
with these covenants.
During 1993, the Industrial Development Board of the Town of Moundville
(IDB) issued a $4,000,000, 6.75% Industrial Revenue Bond, Series 1993-LI to the
Company. Interest is payable semi-annually. Principal is due in six annual
installments of various amounts beginning December 1, 2006 with the final
payment due December 1, 2011. The Series 1978-A Industrial Revenue Bond was
originally issued in 1978 by the IDB for $1,000,000. Interest is payable
semi-annually at 7.25%. Remaining principal of $50,000 is payable on September
1, 2003.
In connection with the issuance of these Industrial Revenue Bonds by the
IDB, the Company entered into capital lease agreements with the IDB with future
minimum lease payments sufficient to amortize the principal and interest on each
series of the Industrial Revenue Bonds.
Costs capitalized under these leases were $8,500,000 as of December 31, 1998
and 1997. The capitalized costs are being depreciated over the estimated useful
lives of the individual assets.
24
At December 31, 1998, the future lease payments under the capitalized leases
relating to the Industrial Revenue Bonds were as follows:
(IN THOUSANDS)
- --------------------------------------------------------------------------------------------------------
1999.................................................................................................... $ 270
2000.................................................................................................... 270
2001.................................................................................................... 270
2002.................................................................................................... 270
2003.................................................................................................... 323
Later years............................................................................................. 5,536
---------
Total minimum lease payments............................................................................ 6,939
Less interest........................................................................................... (2,889)
---------
Present value of minimum lease payments................................................................. $ 4,050
---------
---------
Operating leases are not significant.
NOTE 8--COMMITMENTS AND CONTINGENCIES
The Company has unsecured lines of credit for short term borrowings of
approximately $63,000,000 at December 31, 1998. During 1998, average borrowings
were $25,323,000 against these lines of credit and the weighted average interest
rate was 4.58%. In 1997, average borrowings were $32,318,000 and the weighted
average interest rate was 4.08%. In 1996, average borrowings were $36,370,000
and the weighted average interest rate was 4.48%. There are no significant
commitment fees or compensating balance requirements relating to these lines of
credit.
The Company from time to time is subject to claims brought on behalf of both
private persons and governmental agencies. Management and the Company's general
counsel are not aware of any claim where the disposition of such claim is
expected to have a material adverse effect upon the Company's consolidated
financial position.
On November 17, 1998, officers and other key employees purchased 349,972
shares of Lawter Common Stock through the Company's Key Employee Investment Plan
at the then market price of $8.75 per share. Under the terms and conditions of
the plan, the employees took out personal loans that are guaranteed by the
Company to purchase the stock, and must hold the stock for a period of three
years unless the employee separates from the Company or there is a change in
control of the Company.
NOTE 9--SEGMENT INFORMATION
In accordance with Statement of Financial Accounting Standards No. 131
"Segment Reporting," the Company has concluded that it operates primarily in one
segment, the specialty polymers segment, since all of its revenues are derived
from the manufacture and sale of its specialty polymers. Within this segment,
the Company has two main product lines, printing ink vehicles and slip
additives, and synthetic and hydrocarbon resins. These products are
manufactured, warehoused and sold using essentially the same systems, sales
force and distribution network.
Lawter's total business is broken down into three geographical areas: North
America, Europe and the Pac Rim. North America sales include sales to the United
States, Canada, Mexico, Central America and South America. European sales
include sales to Europe, the Mid East and Africa. Pac Rim sales include sales to
China, Japan, Singapore, Taiwan and other countries in the region. The Company
sells the majority of its products to both large and small ink companies. Lawter
is a major supplier of printing ink vehicles and resins for printing inks and,
therefore, sells substantial quantities to larger ink companies around the
world. One customer whose purchases are made for a wide variety of specialized
products at multiple
25
locations through numerous companies in various countries approximated
twenty-three percent of sales in 1998, twenty-two percent of sales in 1997, and
nineteen percent of sales in 1996.
Transfers between geographic areas are not material. Corporate earnings
before tax is the net of the gain on the sale of the Hach Company common stock,
investment income, interest expense and corporate expenses. Identifiable assets
are those assets used exclusively in the operations of each geographic area.
Corporate assets are principally comprised of time deposits, and other assets.
The contribution of European operations to net earnings is greater than their
contribution to earnings before tax principally due to the Waterford, Ireland
operation discussed in Note 4.
Information about the Company's operations by geographic region for the
years ended December 31, 1998, 1997 and 1996 is shown in the table below.
(IN THOUSANDS) 1998 1997 1996
- ----------------------------------------------------------------------------- ---------- ---------- ----------
Net Sales: (based on location of customer)
North America................................................................ $ 110,436 $ 101,389 $ 98,375
Europe....................................................................... 87,834 91,170 83,464
Pac Rim...................................................................... 14,573 13,980 11,975
---------- ---------- ----------
Total........................................................................ $ 212,843 $ 206,539 $ 193,814
---------- ---------- ----------
---------- ---------- ----------
Earnings Before Tax:
North America................................................................ $ 26,217 $ 25,754 $ 24,947
Europe....................................................................... 11,540 5,912 11,113
Pac Rim...................................................................... 1,205 1,340 1,368
Corporate.................................................................... (8,296) 27,639 3,126
---------- ---------- ----------
Total........................................................................ $ 30,666 $ 60,645 $ 40,554
---------- ---------- ----------
---------- ---------- ----------
Identifiable Assets:
North America................................................................ $ 76,530 $ 69,339 $ 72,418
Europe....................................................................... 99,448 98,842 116,320
Pac Rim...................................................................... 19,188 10,915 10,062
Corporate.................................................................... 59,084 97,088 94,323
---------- ---------- ----------
Total........................................................................ $ 254,250 $ 276,184 $ 293,123
---------- ---------- ----------
---------- ---------- ----------
NOTE 10--NEW ACCOUNTING PRONOUNCEMENTS
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income." This Statement
requires that all items that are required to be recognized under accounting
standards as components of comprehensive income be reported in an annual
financial statement that is displayed with the same prominence as other annual
financial statements. This Statement also requires that an enterprise classify
items of other comprehensive income by their nature in a financial statement and
display the accumulated balance of other comprehensive income separately from
retained earnings and paid-in capital in the equity section of a statement of
financial position. Unrealized translation adjustments is currently the only
type of other comprehensive income that the Company has.
26
Unrealized foreign currency translation adjustments were as follows:
1998 1997 1996
--------- --------- ---------
Unrealized Translation Adjustments arising in period................................. $ 3,942 $ (6,074) $ (839)
Tax Benefit (Expense)................................................................ (702) 365 (73)
--------- --------- ---------
Net of Tax Amount.................................................................... $ 3,240 $ (5,709) $ (912)
--------- --------- ---------
--------- --------- ---------
The Company adopted Statement of Financial Accounting Standards No. 132
"Employers' Disclosures about Pensions and Other Postretirement Benefits" in
1998. Note 2 addresses the disclosure requirements of this Statement.
The Company will adopt Statement of Financial Accounting Standards No.133
"Accounting for Derivative Instruments and Hedging Activities" in 1999. SFAS No.
133 will have no significant impact since no derivatives are in use at this
time.
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 will not have a
material impact on the Company and will be adopted in 1999.
27
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of Lawter International, Inc.:
We have audited the accompanying consolidated balance sheets of Lawter
International, Inc. (a Delaware corporation) and subsidiaries as of December 31,
1998 and 1997, and the related consolidated statements of earnings,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1998. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Lawter
International, Inc. and subsidiaries as of December 31, 1998 and 1997, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1998, in conformity with generally accepted
accounting principles.
The schedule listed in the index on page 13 is the responsibility of the
Company's management and is presented for purposes of complying with the
Securities and Exchange Commission rules and is not part of the basic financial
statements. This schedule has been subjected to the auditing procedures applied
in our audit of the basic consolidated financial statements and, in our opinion,
fairly states in all material respects the financial data required to be set
forth therein in relation to the basic consolidated financial statements taken
as a whole.
ARTHUR ANDERSEN LLP
Chicago, Illinois,
February 8, 1999
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference of our report dated February 8, 1999, included (or incorporated by
reference) in this Annual Report of Lawter International, Inc. and Subsidiaries
on Form 10-K for the year ended December 31, 1998, into the Company's previously
filed Registration Statements on Forms S-3 (File No. 33-24165), S-8 (File No.
33-24859), S-8 (File No. 33-61506), S-8 (File No. 2-84421) and S-8 (File No.
333-67337).
ARTHUR ANDERSEN LLP
Chicago, Illinois,
March 26, 1999
28
LAWTER INTERNATIONAL, INC. AND SUBSIDIARIES
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(in thousands)
ALLOWANCES FOR DOUBTFUL ACCOUNTS 1998 1997 1996
- ---------------------------------------------------------------------------------------- --------- --------- ---------
Balance at beginning of year............................................................ $ 490 $ 743 $ 636
Additions (credited)/charged to earnings.............................................. 208 (102) 166
Additions/(deductions) for accounts written off, net of recoveries.................... (105) (151) (59)
--------- --------- ---------
Balance at end of year.................................................................. $ 593 $ 490 $ 743
--------- --------- ---------
--------- --------- ---------
29
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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)
/s/ JOHN P. O'MAHONEY
------------------------------------------
John P. O'Mahoney
Chairman of the Board and
Chief Executive Officer
(Principal Executive Officer)
/s/ MARK W. JOSLIN
------------------------------------------
Mark W. Joslin
Chief Financial Officer and Treasurer
(Principal Financial and
Accounting Officer)
Date: March 26, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
NAME TITLE DATE
- ------------------------------ --------------------------- -------------------
/s/ WILLIAM P. CLARK Director
- ------------------------------ March 26, 1999
William P. Clark
/s/ ARTHUR A. HARTMAN Director
- ------------------------------ March 26, 1999
Arthur A. Hartman
/s/ LEONARD P. JUDY Director
- ------------------------------ March 26, 1999
Leonard P. Judy
/s/ RICHARD D. NORDMAN Director
- ------------------------------ March 26, 1999
Richard D. Nordman
/s/ JOHN P. O'MAHONEY Director
- ------------------------------ March 26, 1999
John P. O'Mahoney
/s/ FRED G. STEINGRABER Director
- ------------------------------ March 26, 1999
Fred G. Steingraber
Registrant's 1998 Annual Report to Stockholders, some portions of which have
been incorporated by reference in this Form 10-K, has been sent to each
stockholder and was included with this report to the Securities and Exchange
Commission.
30