UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED OCTOBER 31, 1999
COMMISSION FILE NUMBER 1-12854
MCWHORTER TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 36-3919940
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
400 EAST COTTAGE PLACE 847-428-2657
CARPENTERSVILLE, ILLINOIS 60110
(Address of principal executive offices (Registrant's telephone number
including zip code) including area code)
Securities Registered Pursuant to Section 12(b) of the Act:
Name of Exchange on
Title of Each Class Which Registered
------------------- --------------------
COMMON STOCK, $0.01 PAR VALUE NEW YORK STOCK EXCHANGE
PREFERRED STOCK PURCHASE RIGHTS NEW YORK STOCK EXCHANGE
Securities Registered Pursuant to Section 12(g) of the Act: None
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/
As of December 31, 1999, the aggregate market value of the voting and
nonvoting stock held by nonaffiliates of McWhorter Technologies, Inc. (based
upon the New York Stock Exchange closing prices) was approximately $156,890,336.
As of December 31, 1999, 9,950,685 shares of common stock were
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of McWhorter Technologies, Inc.'s Proxy Statement filed
with the Securities and Exchange Commission on January 10, 2000 ("Proxy
Statement") are incorporated in Part III hereof by reference.
MCWHORTER TECHNOLOGIES, INC.
TABLE OF CONTENTS
PART I Page
Item 1. Business. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Item 2. Properties. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Item 3. Legal Proceedings and Environmental Matters . . . . . . . . . . . . . . . . . . . . . 7
Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . . . 8
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters . . . . . 8
Item 6. Selected Financial Data. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Item 7. Management's Discussion and Analysis of Results of Operations and Financial Condition 9
Item 8. Financial Statements and Supplementary Data. . . . . . . . . . . . . . . . . . . . . 16
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure. 35
PART III
Item 10. Directors and Executive Officers of the Registrant. . . . . . . . . . . . . . . . . 36
Item 11. Executive Compensation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
Item 12. Security Ownership of Certain Beneficial Owners and Management. . . . . . . . . . . 38
Item 13. Certain Relationships and Related Transactions. . . . . . . . . . . . . . . . . . . 38
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. . . . . . . . . . 39
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
PART I
ITEM 1. BUSINESS
McWhorter Technologies, Inc. (McWhorter or the Company) is a leading
manufacturer of surface coating resins and colorants and is a manufacturer of
resins used in the reinforced fiberglass plastics industry. Surface coating
resins are a primary component of paint and coatings which are used for a
variety of protective and decorative purposes. Colorants are used to disperse
pigments in paints and coatings. Resins used for reinforced fiberglass plastics
are a primary component for various fiberglass products.
All references to years are to fiscal years ended October 31 unless otherwise
stated.
PRODUCTS AND MARKETS
McWhorter's product lines focus primarily on the requirements of customers in
the paint and coatings and reinforced fiberglass plastics industries. Each of
these industries are highly fragmented with a large number of competitors. For
example, in the paint and coatings industry, McWhorter believes there are over
800 active companies manufacturing paint and coatings for a variety of end uses.
The paint and coatings industry is a mature market, growing at an estimated 2%
per annum, or about the same rate as durable goods. Although a number of paint
and coating manufacturers have captive resin and colorant manufacturing
capabilities today, increased costs of product reformulation and updating of
resin and colorant manufacturing processes to comply with environmental
regulations are causing a shift from captive manufacturing to outsourcing.
McWhorter believes this trend will increase its sales opportunities in future
years.
McWhorter produces various products including alkyds, copolymers, polyurethanes,
polyester resins, unsaturated polyesters, acrylic emulsions, polyvinyl acetate
emulsions, solution acrylics, powder resins, powder curing agents, a number of
specialty resins, and waterborne and solvent based colorant systems. Various
types of resins are required by customers due to differing application and
product performance characteristics. McWhorter consists of two reportable
business segments: Coating Resins and Colorants, and Composite Polymers. The
Coating Resins and Colorants segment includes the Company's liquid coating
resins, powder coating resins, and colorants product lines.
COATING RESINS AND COLORANTS
ALKYD RESINS AND COPOLYMERS. Alkyd resins and copolymers are McWhorter's largest
product category and are used in the manufacture of oil-based paints and
coatings. Alkyd resins and copolymers can be used in consumer paints (e.g.,
house paint, deck stains, etc.), industrial coatings (e.g., decorative and
protective coatings used on machinery, equipment, tools, etc.) and special
purpose coatings (e.g., parking-striping paints, automotive refinish coatings,
and industrial maintenance coatings). Alkyd resins and copolymers are formulated
and engineered according to customer specifications for various purposes and the
same product can be used in
3
different applications depending on the product's formulation. Alkyd resins
and copolymers can also be modified with other raw materials to improve
performance; silicone for longer-lasting products or high temperature
applications, vinyl toluene for quicker-dry applications, and acrylics for
improved durability.
POLYURETHANE RESINS. Oil-modified polyurethane resins are a form of an alkyd
resin used primarily in varnishes and other clear wood coatings for application
on wood floors, furniture, kitchen cabinets, etc. Oil-modified polyurethane
resins are also used as additives to floor coatings and other products to
improve a product's performance characteristics.
POLYESTER RESINS. Polyester resins are used in industrial coatings requiring
specific properties such as gloss and color retention, resistance to corrosion,
and flexibility. Typical uses for polyesters are coil coated metal buildings,
appliances and metal office furniture.
ACRYLIC AND POLYVINYL ACETATE EMULSION RESINS. Acrylic and polyvinyl acetate
emulsion resins are used primarily in consumer latex paints. Acrylic emulsion
resins are used in trim paints and exterior applications where weathering, color
and gloss retention are critical. Emulsions are also used in industrial and
special purpose coatings. The major advantage of acrylic emulsion resins is
their ability to meet or exceed environmental regulations because of their low
solvent content.
SOLUTION ACRYLICS. Solvent-borne acrylic resins are used in applications where
resistance to weathering is required. Coatings produced from solvent-borne
acrylic resins may be thermoplastic or may be combined with crosslinkers to form
high performance thermoset coatings. Typical applications include marine and
maintenance paints and automotive topcoats.
HYDROXYL AND CARBOXYL POLYESTER POWDER RESINS. Powder resins are used in the
manufacture of industrial powder coatings. Powder coatings are dry coatings
which provide an alternative to liquid coatings. The principal advantage of
powder coatings are that they emit no solvents, have excellent application and
performance characteristics, and have a high degree of transfer efficiency.
Powder coatings is one of the fastest growing segments of the industrial
coatings industry.
URETHANE POWDER CURING AGENTS. Powder curing agents are used in conjunction with
certain powder resins to impart durability and hardness. McWhorter produces
urethane curing agents, the largest volume category for powder paint.
SPECIALTY RESINS. Specialty resins include natural and synthetic adhesives used
in the paper industry. These resins are used for high pressure laminates and
surface particle boards including water-soluble amino resins for treated panels
and laminated plastics and phenol formaldehyde resins for laminated plastics.
WATERBORNE AND SOLVENT BASED COLORANT SYSTEMS. Colorants are used in formulated
interior and exterior paints, specifically, exterior aerospace applications,
topcoat and interior applications for vehicles, general and light industrial,
coil coatings for builders panels, architectural paints, and coatings for
beverage containers.
4
COMPOSITE POLYMERS
UNSATURATED POLYESTER RESINS. Unsaturated polyester resins are used for various
applications in the reinforced fiberglass plastics industry. The largest uses
are marine applications where unsaturated polyester resins are used in the
manufacture of boats. Other applications include tub and shower enclosures,
fiberglass tanks, and cultured marble surfaces.
SALES AND DISTRIBUTION
McWhorter sells its products primarily to customers in the paint and coatings
and reinforced fiberglass plastics industry through a direct sales force, with
the balance sold through agents or distributors. McWhorter's business is
primarily focused in North America and Europe.
McWhorter's business is somewhat seasonal with sales volume being traditionally
the highest during the third quarter of its fiscal year. This seasonality is
largely due to the buying cycle of the consumer paint and maintenance coatings
businesses. Since orders are generally filled within a minimum lead time,
McWhorter has no significant backlog.
MANUFACTURING AND RESEARCH AND DEVELOPMENT
McWhorter operates its manufacturing plants 24 hours a day on a five- or
seven-day schedule, depending on local work practices, capacity utilization, and
customer requirements.
Solvent based products are generally produced in high temperature reactors. Raw
materials are fed into a reactor and heated to 400(degree)-500(degree) F for
10-30 hours, depending on the formulation. Once the desired properties are
achieved, the product is transferred to a mixing vessel, where additional
materials are added to complete the batch. Finally, the resin is filtered and
pumped into drums or bulk storage tanks before shipment to customers.
Powder products are produced in high temperature reactors similar to solvent
based products. However, the heated mixture is cooled, drying the material into
a powder form. The product is then flaked and bagged.
Emulsions are processed differently from solvent based and powder resins.
Emulsions are created by exothermic reactions in reactors designed to control
the reaction by cooling the product. Once the reaction is complete, material is
filtered and transferred to bulk storage tanks before shipment to customers.
Colorants are produced by mixing precise amounts of pigment and solvent or water
at low temperatures. Once the desired dispersion is attained, the product is
filtered and then pumped into drums for shipment to customers.
McWhorter manufactures certain proprietary resins under tolling arrangements,
which are common in the resin industry. Such arrangements are subject to
confidentiality and secrecy agreements which safeguard the customer's
technology.
5
McWhorter's research and development activities have emphasized emerging
technologies in the paint and coatings industry, focusing on developing products
designed to comply with environmental laws and maintain the integrity of a
product's performance characteristics.
RAW MATERIALS
Materials used in the manufacturing of resins and colorants are procured
primarily from domestic suppliers. Most of the raw materials are derived from
either petroleum or vegetable oil. McWhorter has not experienced difficulty in
recent years in obtaining an adequate supply of raw materials or other supplies
needed in the manufacturing process. The majority of the materials purchased are
subject to national supply contracts which generally average one to three years
in length with pricing subject to periodic reviews and adjustment based on
market conditions. Raw material prices fluctuate due to market conditions in the
petrochemical or vegetable oil markets.
INTELLECTUAL PROPERTY
McWhorter's business is not materially dependent upon franchises, licenses or
similar rights, or on any single patent or trademark or group of related patents
or trademarks. The techniques and formulas used to produce solvent based resins
are mature and well known. The techniques and formulas used to produce acrylic
emulsions, powder resins, curing agents, other specialty resins and colorants
are in some instances not well known or are protected by patents or as trade
secrets.
COMPETITION
McWhorter encounters competition from numerous other companies with respect to
each of the products it produces. A significant number of resin and colorant
producers are vertically integrated into coatings manufacturers, providing a
captive source of products for such manufacturers. Some of these captive
producers also sell directly to third parties.
Consistent quality, responsive service, technology and price are the critical
elements that customers use to select their resin and colorant suppliers.
McWhorter believes that it competes favorably in each of these areas.
EMPLOYEES
McWhorter employs approximately 1,085 full-time and part-time employees
worldwide. Management believes that the Company's relationship with its
employees is good.
ITEM 2. PROPERTIES
The Company's principal plants and facilities have an aggregate square footage
of approximately 1,029,000 square feet, of which 72%, or 745,000 square feet, is
located in the U.S., and approximately 28%, or 284,000 square feet, is located
outside the U.S., primarily in Italy and Sweden. Approximately 97% of the square
footage is owned and the balance is held under lease. All facilities are well
maintained, utilized for their intended purpose, and have sufficient capacity to
meet their reasonably-anticipated needs. There are no material encumbrances on
any of the facilities. Total practical production capacity of McWhorter's plant
facilities is approximately 896 million wet pounds per year. The Company's
corporate headquarters is located in Carpentersville, Illinois.
6
ITEM 3. LEGAL PROCEEDINGS AND ENVIRONMENTAL MATTERS
The Company is party to various legal proceedings arising in the ordinary course
of business, none of which is expected to have a material adverse effect on the
Company's business or financial position.
The operations of McWhorter, like those of other companies in its industry,
involve the generation and disposal of substances regulated by the United States
Environmental Protection Agency, certain state agencies under various federal
and state environmental laws, and foreign agencies. As a result, McWhorter is
involved in various claims relating to environmental and waste disposal matters.
These claims generally allege that McWhorter, together with other parties, is
responsible under federal and state environmental laws for the remediation of
hazardous waste at a particular site. Several of these laws provide that
potentially responsible parties may be held jointly and severally liable for
investigation and remediation costs regardless of fault. Although McWhorter
continually assesses its potential liability with respect to its past and
present operations, any potential liability that may be attributable to
McWhorter is subject to a number of uncertainties, including, among others, the
number of parties involved with respect to any given site, the volumetric
contribution which may be attributed to McWhorter relative to that attributable
to other parties, the nature and magnitude of the wastes involved, and the
method and extent of remediation. McWhorter does not believe that any potential
liability, either individually or in the aggregate, ultimately determined to be
attributable to McWhorter will have a material adverse effect on its business or
financial condition.
At October 31, 1999 the estimated amount of probable environmental liability of
McWhorter is approximately $2,847,000. Cargill Incorporated (Cargill) has agreed
to indemnify McWhorter, subject to certain limitations, for damages resulting
from certain environmental matters relating to its former Resin Products
Division (RPD) that was acquired by the Company in 1994. Indemnification for
environmental liabilities, subject to certain limitations, related to the
Company's Italian facilities is provided for under the escrow provisions of the
Syntech S.p.A. acquisition agreement. The Syntech escrow for environmental
liabilities closed in fiscal 2000 and reimbursement for existing and future
environmental claims has been remitted to McWhorter. As a result of the probable
recoveries under these indemnification agreements of $2,207,000, McWhorter's net
estimated environmental liability is approximately $640,000. There are a total
of thirteen sites at which McWhorter believes it has probable environmental
liability, including two sites for which the estimated liability is less than
$10,000 per site. The maximum estimated amount of environmental liability
attributable to any individual site is approximately $970,000, of which a
significant portion is expected to be reimbursed. During 1999, McWhorter spent
approximately $911,000 on remediation costs, of which $672,000 was spent for
on-site liabilities and has been or is expected to be reimbursed. During 2000,
McWhorter expects to spend approximately $1,199,000 on remediation costs, of
which $776,000 is expected to be reimbursed under the indemnification
agreements. During 1999 McWhorter spent approximately $430,000 on capital
expenditures to comply with environmental laws and regulations and during 2000
McWhorter expects to spend approximately $1,130,000 on such expenditures.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the fourth
quarter of 1999.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
McWhorter common stock is traded on the New York Stock Exchange under the
trading symbol "MWT."
The following table details the high and low sales prices for the common stock
for fiscal 1999 and 1998. The Company did not declare any cash dividends on its
common stock in either fiscal year.
1999 1998
- ---------------------------------------------------------------------
LOW HIGH LOW HIGH
- ---------------------------------------------------------------------
First quarter $19.50 $23.81 $23.63 $26.38
Second quarter 12.44 19.75 24.31 26.50
Third quarter 12.50 17.50 24.00 28.38
Fourth quarter 12.50 18.38 18.88 24.75
- ---------------------------------------------------------------------
As of December 31, 1999, there were 1,201 holders of record of the common stock.
There have been no sales of securities by the Company during the period covered
by this report that were not registered under the Securities Act of 1933.
ITEM 6. SELECTED FINANCIAL DATA
YEAR ENDED
------------------------------------------------------------------------------
IN THOUSANDS, OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31,
EXCEPT PER SHARE AMOUNTS 1999 1998(A) 1997(C) 1996 1995
- ------------------------------------------------------------------------------------------------------------
Net sales $443,797 $454,930 $331,465 $315,925 $311,398
Net income 11,901(b) 12,844(b) 15,418(b) 13,833 11,070
Earnings per share-diluted 1.17(b) 1.24(b) 1.48(b) 1.32 1.02
Total assets 362,062 362,465 259,182 153,254 138,127
Long-term debt 134,036 130,128 57,152 13,145 19,182
- --------------------------------------------- ------------- -------------- --------------------------------
(a) REFLECTS THE ACQUISITION OF THE MCWHORTER TECHNOLOGIES EUROPE JOINT VENTURE
AND ACCURATE SINCE THE DATES OF ACQUISITION. REFER TO NOTE 2 OF THE NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS.
(b) REFER TO NOTE 14 OF THE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
(c) REFLECTS THE ACQUISITION OF SYNTECH S.P.A. SINCE THE DATE OF ACQUISITION.
REFER TO NOTE 2 OF THE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
8
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
The following discussion and analysis provides information which management
believes is relevant to an assessment and understanding of the consolidated
results of operations and financial condition of McWhorter Technologies, Inc.
(the Company or McWhorter). The discussion should be read in conjunction with
the Consolidated Financial Statements and Notes. All references to years are to
fiscal years ended October 31 unless otherwise stated. Unless otherwise stated,
per share information is on a diluted basis. References to nonrecurring items or
charges relate to those items or charges discussed in Note 14 of the Notes to
Consolidated Financial Statements.
The Company adopted Statement of Financial Accounting Standards (SFAS)
No. 131, "Disclosures about Segments of an Enterprise and Related Information".
This standard requires disclosure of segment information using a management
approach. Based on this approach, the Company has determined it has two
reportable segments: Coating Resins and Colorants and Composite Polymers. The
Coating Resins and Colorants segment includes the Company's liquid coating
resins, powder coating resins, and colorants product lines. Refer to Note 13 of
the Notes to Consolidated Financial Statements.
OVERVIEW AND OUTLOOK In 1998 and 1997, the Company completed several
strategic acquisitions aimed at globalizing its business and broadening its
product offerings to its coatings customers. The acquisition of Syntech S.p.A.
and its affiliated entities and subsidiaries (Syntech) in August 1997 and the
buy-out of the interests of its European joint venture partners in January 1998
provided the Company with a strong presence in Europe and an excellent base for
further expansion. The acquisition of Accurate Coatings and Dispersions, Inc.
(Accurate), a manufacturer of colorants, in April 1998 complemented the
Company's coating resins product lines. All these acquisitions were accounted
for under the purchase method and their results have been included in the
consolidated results of the Company from the respective dates of acquisition.
Refer to Note 2 of the Notes to Consolidated Financial Statements. In 1999, the
Company continued the integration of these strategic acquisitions. Management
expects the acquired entities to have improved performance in 2000.
In July 1999, the Company sold its interest in the Chinese joint
venture which was acquired as part of the Syntech acquisition. Other expense,
net in 1999 included a pretax charge of approximately $1,000,000, or $.06 per
share after taxes, primarily related to this transaction.
During 1999, the Company started the implementation of resourcing plans
to ultimately achieve lower manufacturing costs. Costs associated with the
resourcing plan for powder coating resins and the previously announced Chicago
Heights, Illinois facility closure (1998 pretax nonrecurring charges associated
with this closure were $4,650,000) were greater than anticipated, negatively
impacting 1999 margins. The Chicago Heights closure and the powder coating
resins resourcing plan are expected to be completed by the end of June 2000 and
the end of 2000, respectively.
9
Despite unsatisfactory financial results in 1999, management is
optimistic about the Company's financial results in 2000 and beyond. The Company
experienced 5 percent volume growth in the fourth quarter of 1999 versus 1998,
led by the Composite Polymers segment and colorants product line. Improving
economic conditions in Europe also had a favorable impact on the Company's sales
volumes. In the coating resins product line, sales of new product technologies
grew to 18 percent of 1999 sales. Management expects this momentum to continue
into 2000. Raw material cost pressures are expected to continue into the early
part of calendar 2000. Margin decreases that the Company has been experiencing
due to increasing raw material costs since July 1999 are expected to improve as
selling price increases take effect. The resourcing actions discussed above are
expected to generate approximately $3,000,000 of savings in 2001. The Company
also started initiatives to improve overall manufacturing and inventory costs
which are expected to achieve savings of approximately $2,000,000 in 2001.
RESULTS OF OPERATIONS 1999 VS. 1998 Consolidated net sales for 1999
were $443,797,000 compared to $454,930,000 in 1998, a decrease of 2 percent.
Lower volumes for the year, mainly from softness in the European businesses, and
lower prices driven by lower raw material costs in the first half of the year
negatively impacted sales comparisons.
Consolidated gross margins decreased to 16.3 percent in 1999 and 1998.
Excluding the nonrecurring item in 1998, consolidated margins decreased to 16.3
percent in 1999 from 16.4 percent in 1998. Higher manufacturing costs in our
North American plants were offset by raw material declines. Margins in the
second half of 1999 were unfavorably impacted by increasing raw material costs.
Selling price increases have been announced or planned for each of the Company's
product lines but are lagging raw material increases.
Net sales for the Coating Resins and Colorants segment were
$356,784,000 in 1999 versus $375,767,000 in 1998, a decrease of 5 percent. The
pass through of lower raw material prices, very soft volumes in the first half
in the North American liquid coating resins and colorants product lines, and
difficult economic conditions in Europe were partially offset by the inclusion
of Accurate for twelve months in 1999 versus seven months in 1998.
Operating margin for the Coating Resins and Colorants segment was 6.4
percent in 1999 versus 7.5 percent in 1998. The 1998 operating margin excluding
the nonrecurring item was 7.6 percent. Higher manufacturing costs,
underabsorption due to lower than expected volumes, and full-year amortization
of Accurate intangibles offset by favorable sales mix and lower raw material
prices resulted in lower margins in 1999. The higher manufacturing costs were
related to the implementation of resourcing plans for powder coating resins and
the Chicago Heights facility shutdown and scale-up of new products.
Net sales for the Composite Polymers segment were $87,013,000 in 1999
versus $79,163,000 in 1998, an increase of 10 percent. The impact of improved
volumes from new business and growth with existing customers was partially
offset by the pass through of lower raw material prices.
10
Operating margin for the Composite Polymers segment was 17.3 percent in
1999 versus 17.7 percent in 1998. Increased manufacturing costs and research and
selling costs resulted in the decrease. The increase in research and selling
costs represents the building of necessary infrastructure to meet future
business growth.
Net Corporate expenses and other decreased to $9,574,000 in 1999 from
$16,482,000 in 1998. Excluding nonrecurring items, net corporate expenses and
other increased to $8,574,000 in 1999 from $8,284,000 in 1998. Higher legal
expenses for an arbitration case adjudicated in the Company's favor and higher
information technology expenses were offset by the incentive compensation
accrual reversal discussed in Note 11 of the Notes to Consolidated Financial
Statements.
Net interest expense was $7,810,000 in 1999 compared to $7,737,000 in
1998. This increase is due to debt borrowed to fund the Accurate acquisition
offset by lower interest rates in 1999.
The effective tax rate was 41.9 percent in 1999 and 28.4 percent in
1998. The 1998 tax rate was affected by an adjustment that reduced income tax
expense as discussed in Note 8 of the Notes to Consolidated Financial
Statements. Excluding this adjustment, the 1998 tax rate was 41.3 percent. The
1999 effective tax rate increased as a result of the mix of foreign and domestic
earnings.
Net income for 1999 was $12,491,000, or $1.23 per share compared to
$15,752,000, or $1.52 per share in 1998, excluding the net after-tax charges
associated with nonrecurring items. Including nonrecurring items, net income for
1999 was $11,901,000, or $1.17 per share compared to $12,844,000, or $1.24 per
share in 1998.
RESULTS OF OPERATIONS 1998 VS. 1997 Consolidated net sales for 1998
were $454,930,000 compared to $331,465,000 in 1997, an increase of 37 percent.
Acquisitions accounted for the entire increase.
Consolidated gross margins were 16.3 percent in 1998 and 1997.
Excluding the nonrecurring item in 1998, consolidated gross margins increased to
16.4 percent in 1998 from 16.3 percent in 1997. Margins in 1998 were favorably
impacted by sales mix, internal process improvements, and raw material cost
decreases. This was offset by absorption issues in the Company's liquid coating
resins product line resulting from lower than anticipated volumes.
Net sales for the Coating Resins and Colorants segment were
$375,767,000 in 1998 versus $259,035,000 in 1997, an increase of 45 percent. The
increase was primarily due to our acquired businesses and volume increases in
powder coating resins which were partially offset by volume decreases in liquid
coating resins.
Operating margin for the Coating Resins and Colorants segment was 7.5
percent in 1998 versus 9.5 percent in 1997. The 1998 operating margin excluding
the nonrecurring item was 7.6 percent. Lower operating margins in the acquired
businesses primarily due to amortization of
11
intangibles and underabsorption in the liquid coating resins product line
were offset by sales mix, raw material price decreases, and internal process
improvements resulting in the decrease in margins in 1998. Operating profit
in 1998 included the European acquisitions for the full year and Accurate
since April.
Net sales for the Composite Polymers segment were $79,163,000 in 1998
versus $72,430,000 in 1997, an increase of 9 percent. The impact of improved
volumes was partially offset by the pass through of lower raw material prices.
Operating margin for the Composite Polymers segment was 17.7 percent in 1998
versus 15.3 percent in 1997. The increase was due to higher value added margins,
higher volumes, lower manufacturing costs, and sales mix.
Net Corporate expenses and other increased to $16,482,000 in 1998 from
$8,665,000 in 1997. Excluding nonrecurring items, net Corporate expenses and
other increased to $8,284,000 in 1998 from $7,854,000 in 1997. The increase was
primarily due to our acquired businesses partially offset by decreases in LIFO
related reserves as a result of lower raw material costs.
Net interest expense was $7,737,000 in 1998 compared to $2,166,000 in
1997. This comparison reflected higher debt levels due to the acquisitions.
The effective tax rate was 28.4 percent in 1998 and 38.3 percent in
1997. The tax rates in both years were affected by adjustments that reduced tax
expense as discussed in Note 8 of the Notes to Consolidated Financial
Statements. Excluding these adjustments, the 1998 and 1997 tax rates were 41.3
percent and 40.7 percent, respectively. The 1998 rate was higher as a result of
the nondeductibility of goodwill amortization related to the Syntech acquisition
and foreign tax rate differential.
Net income in 1998 was $15,752,000, or $1.52 per share, excluding net
after-tax charges associated with nonrecurring items. This represents a 3
percent increase in earnings per share over net income of $15,418,000, or $1.48
per share, for 1997. Including the nonrecurring items, net income for 1998 was
$12,844,000, or $1.24 per share.
FINANCIAL CONDITION At October 31, 1999, the Company's net working
capital was $55,037,000 and the current ratio was 1.6. At October 31, 1998, the
Company's net working capital was $45,170,000 and the current ratio was 1.5.
Cash provided by operations was $32,331,000 in 1999 compared to $23,696,000 in
1998. The cash flow improvement in 1999 was primarily from a lower year over
year increase in net working capital.
Investing activities used cash of $24,279,000 in 1999 versus
$82,320,000 in 1998. The decrease was a result of the 1998 acquisitions. Capital
expenditures increased to $26,315,000 in 1999 from $25,663,000 in 1998. The 1999
capital expenditures were primarily for implementation of an Enterprise Resource
Planning (ERP) package, productivity improvements, and capacity expansion.
Capital expenditures for 1998 were primarily for the construction of the new
research and development facility, powder capacity expansion, the implementation
of the ERP package, and productivity improvements. Capital spending for 2000 is
expected to be
12
approximately $20,000,000, primarily for capacity expansion for colorants,
composite polymers, and solution acrylics, the ERP project, and a pilot
facility.
Financing activities used cash of $8,486,000 in 1999 compared to cash
provided of $58,794,000 in 1998. The change was primarily attributed to
borrowings in the first and second quarter of 1998 to fund acquisitions. Debt as
a percentage of invested capital decreased to 57.5 percent at October 31, 1999
from 59.3 percent at October 31, 1998. Total debt decreased to $150,585,000 at
October 31, 1999 from $156,602,000 at October 31, 1998.
The Company has a $150,000,000 unsecured revolving credit facility that
terminates on July 30, 2002. At October 31, 1999, $21,434,000 was available
under this facility. The Company's European subsidiaries, primarily the Italian
subsidiary, have short-term lines of credit that are cancellable at any time in
the amount of $23,278,000, of which $12,693,000 was available for future use at
October 31, 1999. These credit facilities and internally generated funds are
expected to be adequate to finance McWhorter capital expenditures and other
operating requirements. Refer to Note 6 of the Notes to Consolidated Financial
Statements for discussion of the Company's debt.
The Company repurchased 302,700 shares at a cost of $4,376,000 in 1999.
Under a resolution adopted by the Board of Directors in May 1999, the Company is
authorized to repurchase 500,000 shares of its common stock. Under this
resolution, which expires in May 2000, repurchases of 32,000 shares of common
stock have been made as of October 31, 1999.
Refer to Note 9 of the Notes to Consolidated Financial Statements for
discussion of environmental liabilities. Refer to Note 1 of the Notes to
Consolidated Financial Statements for a discussion of new accounting
pronouncements.
YEAR 2000 During 1999, the Company continued its program to prepare its
information technology (IT) and non-information technology (non-IT) systems for
year 2000 compliance. The year 2000 issue relates to computer systems that use
two digits rather than four to define the applicable year and whether such
systems will properly process information when the year changes to 2000. The
Company did not experience any significant issues as a result of the millennium
change. The Company does not anticipate any continued business impact related to
this issue. The costs related to testing and modifying existing systems for year
2000 compliance were approximately $668,000. Approximately $618,000 of the total
compliance costs were capital expenditures.
EURO CURRENCY CONVERSION On January 1, 1999, eleven of the fifteen
members of the European Union adopted a new European currency unit (the Euro) as
their common legal currency. The participating countries' national currencies
will remain legal tender as denominations of the Euro from January 1, 1999
through January 1, 2002, and the exchange rates between the Euro and such
national currency units will be fixed. The Company has assessed the potential
impact of the Euro currency conversion on its operating results and financial
condition and it is not expected to be material. The Company intends to convert
its European operations to the Euro currency basis over the next two years.
13
CAUTIONARY STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM
ACT Management's discussion and analysis of McWhorter's operations contains
forward-looking statements within the meaning of Section 27A of the
Securities Act and Section 21E of the Exchange Act. Such statements relate
to, among other things, expenditures, costs, cost reductions or savings, cash
flow, operating improvements, and year 2000 compliance, and are indicated by
words such as "optimistic", "anticipates", "believes", "plans", "estimates",
"expects", "intends", and similar words and phrases. Such statements are
subject to inherent uncertainties and risks which could cause actual results
to vary materially from expected results, including but not limited to the
following: levels of industrial activity and economic conditions in the U.S.
and other countries around the world, pricing pressures and other competitive
factors, and levels of capital spending in certain industries, all of which
could have a material impact on the Company's order rates and product sale
prices; McWhorter's ability to integrate and operate acquired businesses on a
profitable basis; the relationship of the U.S. dollar to other currencies and
its impact on pricing and cost competitiveness; interest rates; utilization
of McWhorter's capacity and the effect of capacity utilization on McWhorter's
costs; labor market conditions and raw material costs; developments with
respect to contingencies, such as environmental matters and litigation; year
2000 compliance; and other risks detailed from time to time in the Company's
filings with the Securities and Exchange Commission.
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company is exposed to market risk from changes in interest rates,
foreign exchange rates, and commodity prices.
Interest rate market risk is principally limited to the $135,100,000 in
long-term debt of the Company outstanding at October 31, 1999. Approximately
$85,100,000 of the debt is priced at interest rates that float with the market.
At this borrowing level, a 100 basis point (1 percent) increase in interest
rates from October 31, 1999 rates would have a negative impact of approximately
$850,000 on pretax earnings and cash flows. At October 31, 1999, approximately
$50,000,000 of debt was covered by interest rate swaps. The swaps are variable
to fixed terminating in November and December of 2003. At October 31, 1999, the
variable rates ranged from 5.4 percent to 5.5 percent and the fixed rates ranged
from 5.1 percent to 5.2 percent. The Company does not use derivative financial
instruments for trading purposes.
The Company and its subsidiaries generally enter into transactions
denominated in their respective functional currencies. As a result, foreign
currency exposures arising from transactions are not material to the Company.
The primary foreign currency exposure arises from the translation of the
Company's net equity investment in its foreign subsidiaries to U.S. dollars. The
Company generally views as long-term its investments in foreign subsidiaries
with functional currencies other than the U.S. dollar. The primary currencies to
which the Company is exposed are the Euro, British pound, and Swedish krona. The
carrying value of the Company's foreign net assets would be negatively impacted
by $5,973,000 as a result of a 10 percent adverse change in foreign currency
exchange rates from October 31, 1999 levels.
14
The Company is a purchaser of certain commodity products which are
procured at market prices established with the vendor at the time of purchase.
The Company does not use significant levels of commodity financial instruments
to hedge commodity prices due to a high correlation between the commodity cost
and the ultimate selling price of the Company's products.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA PAGE
----
Report of Independent Auditors. . . . . . . . . . . . . . . . . . . . . . . . . . 17
Consolidated Statements of Income for the Years Ended October 31, 1999,
1998, and 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Consolidated Statements of Changes in Shareholders' Equity for the Years Ended
October 31, 1999, 1998, and 1997 . . . . . . . . . . . . . . . . . . . . . . 19
Consolidated Balance Sheets as of October 31, 1999 and 1998 . . . . . . . . . . . 20
Consolidated Statements of Cash Flows for the Years Ended October 31, 1999,
1998, and 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Notes to Consolidated Financial Statements. . . . . . . . . . . . . . . . . . . . 22
REPORT OF INDEPENDENT AUDITORS
TO THE SHAREHOLDERS AND BOARD OF DIRECTORS OF MCWHORTER TECHNOLOGIES, INC.:
We have audited the accompanying consolidated balance sheets of McWhorter
Technologies, Inc. and subsidiaries, as of October 31, 1999 and 1998, and the
related consolidated statements of income, shareholders' equity and cash flows
for each of the three years in the period ended October 31, 1999. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these 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 financial statements referred to above present fairly,
in all material respects, the consolidated financial position of McWhorter
Technologies, Inc. and subsidiaries, at October 31, 1999 and 1998, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended October 31, 1999, in conformity with generally
accepted accounting principles.
ERNST & YOUNG LLP
Chicago, Illinois
November 17, 1999
MCWHORTER TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED OCTOBER 31,
- --------------------------------------------------------------------------------------------------------------------------
IN THOUSANDS, EXCEPT PER SHARE AMOUNTS 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------------
Net sales $443,797 $454,930 $331,465
Costs and expenses:
Cost of sales (Note 14) 371,284 380,971 277,372
Research 12,055 10,818 8,384
Selling, general and administrative 31,138 30,063 17,637
Other expense, net (Note 14) 1,019 7,395 923
------------------------------------------------------
Income from operations
28,301 25,683 27,149
Interest expense, net 7,810 7,737 2,166
------------------------------------------------------
Income before income taxes 20,491 17,946 24,983
Income tax expense (Note 8) 8,590 5,102 9,565
------------------------------------------------------
Net income $ 11,901 $ 12,844 $ 15,418
------------------------------------------------------
------------------------------------------------------
Earnings per share - basic $ 1.18 $ 1.25 $ 1.50
------------------------------------------------------
------------------------------------------------------
Earnings per share - diluted $ 1.17 $ 1.24 $ 1.48
------------------------------------------------------
------------------------------------------------------
See Notes to Consolidated Financial Statements
MCWHORTER TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Common Stock Additional Accumulated Other Total
------------------ Paid-In Retained Comprehensive Treasury Shareholders'
Shares Amount Capital Earnings Income(Loss) Stock Other Equity
- ------------------------------- ---------- ------- ---------- -------- ----------------- -------- -------- ------------
Balance at October 31, 1996 10,465,940 $ 110 $ 10,803 $ 77,562 $ (74) $ (7,214) $(1,463) $ 79,724
Net income 15,418 15,418
Currency translation
adjustments (866) (866)
---------
Comprehensive income 14,552
Issuance of common stock for
restricted stock awards 8,993 69 131 (170) 30
Exercise of stock options 3,376 (5) 50 45
Purchase of treasury stock (125,222) (2,683) (2,683)
---------- ------- --------- -------- ----------------- -------- ------- ---------
Balance at October 31, 1997 10,353,087 $ 110 $ 10,867 $ 92,980 $ (940) $ (9,716) $(1,633) $ 91,668
Net income 12,844 12,844
Currency translation
adjustments 3,321 3,321
---------
Comprehensive income 16,165
Issuance of common stock for
restricted stock awards 6,300 55 100 (94) 61
Deferred compensation
stock plan (13,444) (322) 396 74
Exercise of stock options 8,753 9 139 148
Purchase of treasury stock (33,600) (672) (672)
---------- ------- --------- -------- ----------------- -------- ------- ---------
Balance at October 31, 1998 10,321,096 $ 110 $ 10,931 $105,824 $ 2,381 $(10,471) $(1,331) $ 107,444
Net income 11,901 11,901
Currency translation
adjustments (4,669) (4,669)
---------
Comprehensive income 7,232
Issuance of common stock for
restricted stock awards 31,382 179 504 683
Forfeitures of restricted
stock awards (105,647) (1) (1,462) (264) 1,727
Deferred compensation
stock plan 148 13 (17) 66 62
Exercise of stock options 1,906 87 31 118
Purchase of treasury stock (302,700) (4,376) (4,376)
---------- ------- --------- -------- ----------------- -------- ------- ---------
Balance at October 31, 1999 9,946,185 $ 109 $ 9,748 $117,725 $(2,288) $(14,593) $ 462 $ 111,163
---------- ------- --------- -------- ----------------- -------- ------- ---------
---------- ------- --------- -------- ----------------- -------- ------- ---------
MCWHORTER TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
OCTOBER 31,
--------------------------------
IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS 1999 1998
- -------------------------------------------------------------------------------------------------------
ASSETS
Current assets
Cash $ 3,665 $ 4,099
Accounts receivable less allowances for doubtful
accounts of $1,676 in 1999 and $1,909 in 1998 82,174 82,765
Inventories (Note 3) 42,243 40,207
Other current assets 12,404 12,193
-------------------------------
140,486 139,264
Property, plant and equipment (Note 4) 220,307 198,900
Less accumulated depreciation 73,184 58,384
-------------------------------
Net property, plant and equipment 147,123 140,516
Intangibles, net (Notes 2 and 5) 71,176 76,117
Other assets 3,277 6,568
-------------------------------
$ 362,062 $ 362,465
-------------------------------
-------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Short-term debt (Note 6) $ 16,549 $ 26,474
Trade accounts payable 54,052 49,808
Accrued liabilities (Notes 5 and 9) 14,848 17,812
-------------------------------
85,449 94,094
Long-term debt, less current portion (Note 6) 134,036 130,128
Deferred income taxes (Note 8) 25,130 23,695
Accrued environmental liabilities (Note 9) 1,425 1,566
Other liabilities 4,859 5,538
Shareholders' equity
Common stock (par value $.01 per share; authorized
30,000,000 shares; issued 10,871,193
shares in 1999 and 10,965,547 shares in 1998) 109 110
Additional paid-in capital
9,748 10,931
Retained earnings 117,725 105,824
Accumulated other comprehensive income (loss) (2,288) 2,381
Treasury stock, at cost (925,008 shares in 1999 and 644,451
shares in 1998) (14,593) (10,471)
Other (Note 10) 462 (1,331)
-------------------------------
111,163 107,444
-------------------------------
$ 362,062 $ 362,465
-------------------------------
-------------------------------
See Notes to Consolidated Financial Statements
MCWHORTER TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED OCTOBER 31,
-----------------------------------------
1999 1998 1997
-----------------------------------------
IN THOUSANDS
OPERATING ACTIVITIES
Net income $ 11,901 $ 12,844 $ 15,418
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 18,227 16,404 10,353
Deferred income taxes 1,828 (2,846) 711
Provision for plant closure and joint venture losses 1,000 7,267
Other, net 1,191 607 906
Changes in working capital:
Accounts receivable (2,238) (2,650) 8,674
Inventories (2,878) (3,537) (2,218)
Trade accounts payable and accrued liabilities 4,043 (3,340) (5,364)
Other current assets (743) (1,053) (897)
--------------------------------------------
Net cash provided by operating activities 32,331 23,696 27,583
--------------------------------------------
INVESTING ACTIVITIES
Capital expenditures (26,315) (25,663) (11,203)
Acquisition spending, net of cash acquired (55,231) (48,318)
Investment in joint ventures (1,194) (2,915)
Sale of interest in joint venture 2,000
Other, net 36 (232) 34
--------------------------------------------
Net cash used by investing activities (24,279) (82,320) (62,402)
--------------------------------------------
FINANCING ACTIVITIES
Increase (decrease) in debt, net (4,228) 59,318 40,326
Purchase of treasury stock (4,376) (672) (2,683)
Other, net 118 148 45
--------------------------------------------
Net cash provided (used) by financing activities (8,486) 58,794 37,688
--------------------------------------------
Increase (decrease) in cash (434) 170 2,869
Cash at beginning of period 4,099 3,929 1,060
--------------------------------------------
Cash at end of period $ 3,665 $ 4,099 $ 3,929
--------------------------------------------
--------------------------------------------
21
MCWHORTER TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the
accounts of the parent company and its subsidiaries. Investments in 50 percent
or less owned companies and joint ventures are carried on the equity basis with
the Company's share of earnings reflected as a component of other expense, net.
All significant intercompany accounts and transactions are eliminated in
consolidation.
USE OF ESTIMATES The preparation of the financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
INVENTORIES Inventories are stated at the lower of cost or market. At October
31, 1999 and 1998 costs were recorded on the last-in, first-out (LIFO) method
for approximately 65 percent and 63 percent of the inventories, respectively.
Inventory costs not stated on the LIFO method are stated on the first-in,
first-out (FIFO) method.
PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are recorded at
cost. Depreciation is based upon estimated useful lives of 10 to 40 years for
buildings and 3 to 15 years for machinery and equipment, using the straight-line
method.
INTANGIBLE ASSETS Intangible assets are amortized using the straight-line method
over the estimated useful lives; 40 years for goodwill and 15 years for other
intangible assets. Goodwill represents the cost in excess of the fair value of
net assets acquired in purchase transactions.
STOCK-BASED COMPENSATION The Company accounts for stock-based compensation plans
under the provisions of Accounting Principles Board Opinion (APB) No. 25. Refer
to Note 11 for disclosures required by Statement of Financial Accounting
Standard (SFAS) No. 123, "Accounting for Stock-based Compensation".
EARNINGS PER SHARE Basic earnings per share reflect reported net income divided
by the weighted average number of common shares outstanding. Diluted earnings
per share include the dilutive effect of stock equivalents outstanding during
the year. Stock equivalents consist primarily of stock options and are included
in the calculation of weighted average shares outstanding using the treasury
stock method. Basic weighted average shares reconciled to diluted weighted
average shares as follows:
22
IN THOUSANDS 1999 1998 1997
-----------------------------------
Basic weighted average shares 10,120 10,241 10,300
Stock equivalents 47 148 92
-----------------------------------
Diluted weighted average shares 10,167 10,388 10,392
-----------------------------------
-----------------------------------
Options to purchase 334,585 shares of common stock at a weighted average option
price of $16.64 per share were outstanding during 1999 but were not included in
the computation of diluted earnings per share because the exercise price was
greater than the average market price of the common shares and, therefore, the
effect would be antidilutive.
TRANSLATION OF FOREIGN CURRENCIES Assets and liabilities of foreign subsidiaries
are translated at the exchange rate in effect at the balance sheet date while
the income and expenses are translated at the average exchange rates prevailing
during the year. The related translation adjustments are classified as
accumulated other comprehensive income (loss) within the shareholders' equity.
Gains and losses resulting from foreign currency transactions denominated in a
currency other than the entity's functional currency are included in net income.
COMPREHENSIVE INCOME The Company adopted SFAS No. 130, "Reporting Comprehensive
Income" in 1999. SFAS No. 130 requires companies to report all changes in equity
during a period, except those resulting from investment by owners and
distributions to owners, in a financial statement for the period in which they
are recognized. The Company has chosen to disclose comprehensive income, which
encompasses net income and currency translation adjustments, in the Consolidated
Statement of Changes in Shareholders' Equity. Prior years have been restated to
conform with the SFAS No. 130 requirements.
SEGMENT DISCLOSURES The Company adopted SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information", in 1999. SFAS No. 131
establishes standards for the way that companies report information about
operating segments in annual financial statements and requires that those
companies report selected information about operating segments in interim
financial reports. It also establishes standards for related disclosures about
products and services, geographic areas, and major customers. The adoption of
SFAS No. 131 did not affect the results of operations or financial position of
the Company, but did affect the disclosure of segment information. Refer to Note
13 of Notes to Consolidated Financial Statements.
NEW ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards
Board (FASB) issued SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities", which is required to be adopted in years beginning after
June 15, 2000.
SFAS No. 133 will require the Company to recognize all derivatives on the
balance sheet at fair value. Derivatives that are not hedges must be adjusted to
fair value through income. If the derivative is a hedge, depending on the nature
of the hedge, changes in the fair value of the derivatives will either be offset
against the change in fair value of the hedged assets, liabilities, or firm
commitments through earnings or recognized in other accumulated comprehensive
income (loss) until the hedged item is recognized in earnings. The ineffective
portion of a derivative's change in fair value will be immediately recognized in
earnings. The Company
23
does not expect a material adverse impact on its results of operations or
financial condition as a result of the adoption of this pronouncement.
NOTE 2 - ACQUISITIONS
In April 1998, the Company completed the acquisition of substantially all of the
assets of Accurate for approximately $39,400,000 in cash and the assumption of
$6,500,000 of debt. Accurate, located in South Holland, Illinois, manufactures
and distributes dispersed pigments for the coatings industry. The excess of the
purchase price over the net book value of the assets was approximately
$35,000,000, the largest component of which was allocated to goodwill. In the
first quarter of 1998, the Company purchased the equity interests of its joint
venture partners in McWhorter Technologies Europe for approximately $8,200,000
in cash, which approximated the net book value of the identifiable assets. As a
result, the Company increased its equity interest in McWhorter Technologies
Europe from 33.3 percent to 100 percent. Both acquisitions were accounted for
using the purchase method and the results of the acquired companies have been
included in the consolidated results of the Company from the dates of
acquisition. The pro forma operating results including the acquired companies
would not have been significantly different from the consolidated results of the
Company.
In August 1997, the Company completed the acquisition of Syntech for
$48,300,000 in cash and approximately $17,100,000 of assumed debt. Syntech is an
Italian based resin company with two production facilities in Italy. The
acquisition was accounted for using the purchase method. The excess of purchase
price over the net book value of identifiable assets was approximately
$30,800,000, the largest component of which was allocated to goodwill. Syntech
results since the date of acquisition are included in the consolidated results
of the Company. The unaudited proforma 1997 net sales, net income, and earnings
per share were $407,495,000, $14,207,000, and $1.37, respectively. The unaudited
pro forma results for 1997 reflect the purchase price accounting adjustments
assuming the Syntech acquisition occurred at the beginning of the year.
NOTE 3 - INVENTORIES
The major classes of inventories as of October 31 were:
IN THOUSANDS 1999 1998
--------------------------------------------------------------------------------------
Manufactured products $26,057 $26,339
Raw materials, supplies, and work-in-process 16,186 13,868
-----------------------------------
$42,243 $40,207
-----------------------------------
-----------------------------------
Inventories stated at cost as determined by the LIFO method were approximately
$333,000 higher and $905,000 lower at October 31, 1999 and 1998, respectively,
than such costs determined under the FIFO method. Compared to the FIFO method,
the LIFO method increased (decreased) pretax income by $1,238,000, $1,371,000,
and $(125,000) in 1999, 1998, and 1997, respectively, due to decreased
(increased) raw material costs. The related impact on earnings per share after
taxes was $.07, $.08, and $(.01) in 1999, 1998, and 1997, respectively.
NOTE 4 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment classifications as of October 31 were:
IN THOUSANDS
1999 1998
----------------------------
----------------------------
Land $ 10,285 $ 11,084
Buildings 39,117 39,396
Machinery and equipment 151,005 133,716
Construction in progress 19,900 14,704
----------------------------
220,307 198,900
Less accumulated depreciation 73,184 58,384
----------------------------
Net property, plant and equipment $147,123 $140,516
----------------------------
----------------------------
Depreciation expense for 1999, 1998, and 1997 was $15,463,000, $13,993,000, and
$9,962,000, respectively.
NOTE 5 - OTHER BALANCE SHEET COMPONENTS
The components of certain other balance sheet accounts as of October 31 were:
IN THOUSANDS 1999 1998
-------------------------------
-------------------------------
INTANGIBLES
Goodwill $ 61,085 $ 62,885
Other 16,328 16,536
-------------------------------
77,413 79,421
Less accumulated amortization 6,237 3,304
-------------------------------
Intangibles, net
$71,176 $76,117
-------------------------------
-------------------------------
IN THOUSANDS 1999 1998
-------------------------------
-------------------------------
ACCRUED LIABILITIES
Employee compensation $4,799 $5,002
Environmental liabilities 1,422 1,854
Other 8,627 10,956
-------------------------------
Accrued liabilities $14,848 $17,812
-------------------------------
-------------------------------
25
NOTE 6 - DEBT
Long-term debt as of October 31 consisted of the following:
IN THOUSANDS 1999 1998
----------------------------
----------------------------
Revolving credit borrowings $128,566 $123,347
Variable rate note payable due semiannually
with final payment due in 2001 5,293 5,605
Variable rate mortgage loans due semiannually
through March 2005 1,058 1,555
Capital lease obligation (Note 7) 498
Other 183 286
----------------------------
135,100 131,291
Less current maturities 1,064 1,163
----------------------------
Long-term debt $134,036 $130,128
----------------------------
----------------------------
The Company has $150,000,000 available under a revolving credit agreement which
expires on July 30, 2002. The Company can borrow funds on an unsecured basis at
interest rates determined at the time of borrowing. The interest rates are based
on London Interbank Offered Rates plus an applicable margin, including a
facility fee, of up to .875 percent or other alternative rates. At October 31,
1999, borrowings totaling $128,566,000 were outstanding at a weighted average
interest rate of 5.59 percent, all of which were classified with long-term debt
as they are supported by the long-term credit facility and will continue to be
refinanced beyond October 31, 2000. The weighted average interest rate at
October 31, 1999 for the variable rate notes payable and variable rate mortgage
loans were 3.35 percent and 4.30 percent, respectively. The mortgage loans are
guaranteed by mortgages on certain property and equipment.
In November 1998, the Company entered into two interest rate swap
agreements that effectively convert $50,000,000 of variable-rate revolving
credit borrowings into fixed-rate borrowings at rates ranging from 5.07 percent
to 5.20 percent. These swap agreements expire in November and December 2003. The
fair value of these swap agreements was not recognized in the financial
statements. The differential between the fixed and variable rate amounts related
to these agreements was accrued as an adjustment to interest expense. The fair
value of these agreements at October 31, 1999 was approximately $2,400,000.
Maturities of long-term debt, excluding revolving credit borrowings,
are $1,064,000 in 2000, $4,996,000 in 2001, $218,000 in 2002, $104,000 in 2003,
$103,000 in 2004, and $49,000 thereafter.
The Company had $4,900,000 outstanding at October 31, 1999 under an
overnight credit facility with a weighted average interest rate of 6.03 percent
in 1999 versus 5.93 percent in 1998. The Company's European subsidiaries,
principally its Italian subsidiary, have $10,585,000 outstanding at October 31,
1999 on cancellable short-term lines of credit at a weighted average interest
rate of 3.0 percent versus 4.9 percent in 1998.
26
Interest paid during 1999, 1998, and 1997 was $7,915,000, $6,950,000,
and $2,146,000, respectively. At October 31, 1999, the Company had outstanding
letters of credit of $5,655,000. The carrying value of the Company's debt
approximates fair value at October 31, 1999.
NOTE 7 - LEASES
At October 31, 1999, certain property and equipment were leased by the Company
under operating leases. Rental expenses for such leases totaled $745,000 in
1999, $492,000 in 1998, and $427,000 in 1997. Future minimum lease commitments
as of October 31, 1999 for all noncancellable operating leases were $476,000 for
2000, $304,000 for 2001, $123,000 for 2002, $69,000 for 2003, $69,000 for 2004,
and $6,000 thereafter. At October 31, 1998, land, building, and equipment, net
of accumulated depreciation included $4,429,000 for assets recorded under a
capitalized lease. The related obligation for this lease was included in
short-term debt and totaled $498,000 in 1998. In 1999, the Company exercised the
bargain purchase option on this lease. In 1998 and 1997, amortization of these
leased assets was included in depreciation and in accumulated depreciation.
NOTE 8 - INCOME TAXES
The components of the provision for income taxes for the years ended October 31
were:
IN THOUSANDS
1999 1998 1997
---------------------------------------
Current:
Federal $3,671 $5,399 $7,035
State 937 1,175 1,523
Foreign 2,154 1,374 296
---------------------------------------
Total current income taxes 6,762 7,948 8,854
Deferred income taxes 1,828 (2,846) 711
---------------------------------------
Total income taxes $8,590 $5,102 $9,565
---------------------------------------
---------------------------------------
Income taxes paid during 1999, 1998, and 1997 were $7,459,000, $7,350,000, and
$8,416,000, respectively. Foreign operations accounted for 8.9 percent, 20.4
percent, and 2.4 percent of earnings before taxes in 1999, 1998, and 1997,
respectively.
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. Significant
components of the Company's deferred tax assets and liabilities as of October 31
were:
27
IN THOUSANDS
1999 1998
------------------------
Deferred tax assets:
Employee compensation $1,269 $1,079
Chicago Heights closure 1,828 1,860
Thailand capital loss carryover 965 982
Other 2,902 1,735
------------------------
Total deferred tax assets 6,964 5,656
Deferred tax liabilities:
Tax over book depreciation and amortization 26,005 23,287
Other 1,186 1,629
------------------------
Total deferred tax liabilities 27,191 24,916
------------------------
Net deferred tax liability $20,227 $19,260
------------------------
------------------------
The principal items comprising the difference between income tax expense
computed at the federal statutory rate and the actual provision for income taxes
for the years ended October 31 were:
IN THOUSANDS 1999 1998 1997
----------------------------------
Statutory rate applied to pretax income (35%) $7,172 $6,281 $8,744
Effect of:
State income taxes (net of federal tax benefit) 688 531 1,078
Foreign tax rate differential 846 664 111
Adjustment from income tax audit (591)
Foreign tax law changes (2,311)
Other, net (116) (63) 223
----------------------------------
$8,590 $5,102 $ 9,565
----------------------------------
Effective tax rate 41.9% 28.4% 38.3%
----------------------------------
----------------------------------
1998 results included a reduction in income tax expense of $2,311,000, $.22 per
share, relating to the impact on deferred income taxes of changes in the Italian
income tax regulations and rates. 1997 results included a reduction in income
tax expense of $591,000, $.06 per share, that resulted from the conclusion of an
income tax audit for the period prior to the Company's spin-off from The Valspar
Corporation.
NOTE 9- ENVIRONMENTAL LIABILITIES
With respect to environmental liabilities, management reviews each individual
site, taking into consideration the numerous factors that influence the costs
that will likely be incurred. Based on these reviews, McWhorter accrues for
potential environmental liabilities. Reserves are adjusted as additional
information becomes available to better estimate the total remediation costs at
individual sites. While uncertainties exist with respect to the amounts and
timing of McWhorter's ultimate environmental liabilities, management believes
that such costs,
individually and in the aggregate, will not have a material adverse effect on
the Company's financial condition or results of operations.
Relating to Company plants located in Philadelphia, Pennsylvania;
Portland, Oregon; Carpentersville, Illinois; and Italy; the Company has been
named a potentially responsible party for the remediation of independently
operated waste disposal sites previously used by these plants.
At October 31, 1999 the estimated amount of probable environmental
liability of the Company is approximately $2,847,000. Cargill Incorporated has
agreed to indemnify the Company, subject to certain limitations, for damages
resulting from environmental matters relating to its former Resin Products
Division that was acquired by the Company in 1994. Indemnification for
environmental liabilities, subject to certain limitations, related to the
Italian facilities is provided for under the escrow provisions of the Syntech
acquisition agreement. As a result of the probable recoveries of $2,207,000
under the indemnification agreements above, the Company's net estimated
environmental liability is approximately $640,000.
NOTE 10- RETIREMENT BENEFIT PROGRAMS
In February 1994, McWhorter adopted an Employee Stock Ownership Plan (ESOP) and
an Employee Savings Plan (ESP). These primary retirement benefit programs are
defined contribution plans covering the majority of the employees in the U.S.
The total costs of the ESOP were $1,000,000, $1,158,000, and $1,557,000 in 1999,
1998, and 1997, respectively. The total costs of the ESP were $759,000,
$575,000, and $568,000 in 1999, 1998, and 1997, respectively. Contributions are
made to the ESOP at the rate of 4 percent of each participant's compensation and
additional contributions can be made at the Company's discretion. Contributions
to the ESP are based on a percentage of each employee's contributions to the
plan.
The Company sponsors defined benefit plans for certain hourly employees
in the U.S. and for its employees at the European locations. The related pension
costs and obligations are not material.
The Company also has a nonqualified deferred compensation plan which
permits key employees to defer certain portions of their compensation. Such
compensation is fully vested at the time of the contribution. The Company can
also make discretionary contributions to the plan which vest upon the completion
of 5 years employment. There have been no such discretionary contributions as of
October 31, 1999. Deferred compensation liability at the end of 1999 was
$1,297,000 of which $462,000 is required to be settled by a fixed number of
shares of the Company's common stock. The Company established an irrevocable
rabbi trust in 1997 to fund this plan. The value of the assets, excluding shares
of the Company's stock, in the trust at October 31, 1999 was $794,000. The
shares of the Company's stock in the trust are classified as treasury stock and
the associated liability of $462,000 is classified as other within the
shareholders' equity.
The Company accrues for its Italian employees' benefits in accordance
with Italian statutes. Such benefits are based on length of service, employment
category, and remuneration and are payable when an employee leaves the Company.
The liability as of October 31, 1999 and 1998 of $2,147,000 and $2,307,000,
respectively, is the amount to which the employee is entitled for services
rendered. Amounts charged to expense in 1999, 1998, and 1997 were $420,000,
$363,000, and $52,000, respectively.
NOTE 11- STOCK PLANS
The Company's two stock incentive plans adopted in 1994 and 1996 provide for the
granting of options and the issuance of restricted stock, deferred stock, and
stock appreciation rights of up to 1,050,000 shares of common stock, of which
187,361 shares are available for future grants. Options issued to date under
these plans have a term of ten years and become fully vested over a period of up
to five years. Outstanding options at October 31, 1999 will expire over a period
ending no later than August 25, 2009. A summary of stock option activity for the
1994 and 1996 Stock Incentive Plans follows:
NUMBER OF AVERAGE OPTION
OPTIONS PRICE PER SHARE
- -------------------------------------------------------------------------------------------
Options outstanding at October 31, 1996 446,385 $ 16.09
Granted 116,258 22.68
Exercised (3,376) 13.09
Cancelled (4,405) 18.18
-----------
Options outstanding at October 31, 1997 554,862 17.47
Granted 92,158 25.33
Exercised (8,753) 16.93
Cancelled (23,429) 24.05
-----------
Options outstanding at October 31, 1998 614,838 18.43
Granted 179,000 19.09
Exercised (1,906) 16.51
Cancelled (15,794) 18.09
-----------
Options outstanding at October 31, 1999 776,138 $ 18.59
-----------
-----------
Options exercisable at
October 31, 1999 443,309 $ 17.02
-----------
-----------
October 31, 1998 349,656 $ 16.47
-----------
-----------
October 31, 1997 265,157 $ 16.15
-----------
-----------
Under APB No. 25, because the exercise price of the Company's employee stock
options equals the market price of the underlying stock on the date of grant, no
compensation expense is recognized. The impact on 1999, 1998, and 1997 net
income and earnings per share under the fair value method required by SFAS No.
123 would have been immaterial based upon fair value at the date of grant for
awards granted since 1996. The weighted average fair value for the 1999, 1998,
and 1997 option grants was $6.39, $8.01, and $7.33, respectively. The fair value
at the date of grant was determined using the Black-Scholes option pricing model
with the following assumptions. In management's opinion, the Company's employee
stock options
30
have characteristics significantly different from those of traded options,
and because changes in the subjective input assumptions can materially affect
the fair value estimate, the existing models do not provide a reliable single
measure of the value of the employee stock options.
1999 1998 1997
----------------------------------------
Assumptions:
Weighted average risk-free interest rate 4.88% 5.67% 5.98%
Expected dividend yield 0% 0% 0%
Expected volatility 27.6% 21. 9% 21.6%
Weighted average expected life of
options (in years) 5 5 5
The exercise price for the options outstanding as of October 31, 1999 ranged
from $12.94 to $27.94 with a weighted average remaining contractual life of
6.5 years segregated as follows:
Range of exercise prices $12.94-$18.61 $19.88-$27.94
- ----------------------------------------------------------------------------------------------------
Outstanding options:
Number 480,422 295,716
Weighted average remaining contractual life (in years) 5.34 8.29
Weighted average exercise price $ 15.92 $22.93
Exercisable options:
Number 387,576 55,733
Weighted average exercise price $ 16.10 $23.39
Restricted stock performance awards were granted to key officers under the
1994 plan. These restricted stock awards would have vested if the Company had
achieved certain financial goals over a five-year performance period ending
October 31, 1999. The 105,647 shares granted under this plan from 1995 to
1998 were forfeited in 1999. Accordingly, $750,000 of accrued compensation as
of October 31, 1998 was reversed in 1999.
The Company also issued 31,382, 2,500, and 1,500, restricted and
deferred shares in 1999, 1998, and 1997, respectively, with vesting periods
of up to three years. Amounts charged to expense were $151,000 in 1999,
$4,000 in 1998, and $30,000 in 1997.
In 1996, the Company established the 1996 Non-employee Director
Stock Option and Award Plan (the 1996 Directors' Plan). The 1996 Directors'
Plan provides for the issuance of up to 50,000 shares of the Company's common
stock of which 21,626 shares are available for future grants. Participation
in the 1996 Directors' Plan is limited to members of the Board of Directors
of the Company who are not salaried officers or employees of the Company or
any of its direct or indirect subsidiaries. Deferred stock awards granted
under this plan were 4,605, 3,884, and 3,814 in 1999, 1998, and 1997,
respectively, and amounts charged to expense were $76,000, $93,000, and
$93,000 in 1999, 1998, and 1997, respectively. In 1999 10,000 options were
granted under this plan at an option price of $16.50. No compensation expense
was recognized as the exercise price was equal to market price at the date of
grant.
31
The options under this plan have a term of 10 years and fully vest and become
exercisable six months after the grant date.
Each outstanding common share includes a right to purchase one
one-hundredth share of Series A Junior Preferred Participating Stock
(Preferred Stock) under certain circumstances. Until exercisable, the rights
are not separable from the underlying common shares. The rights only become
exercisable if a person or group (an acquiring person) acquires, or makes an
offer to acquire, 15 percent or more of the Company's common stock without
the prior approval of the Company's Board of Directors. The exercise price of
each right is $70. If someone becomes an acquiring person, the holder of each
right (other than the acquiring person) will be entitled to purchase common
stock of the Company having a value of twice the exercise price of the right.
In addition, if the Company is acquired in a transaction in which the
Company's common stock is exchanged for cash or securities or more than 50
percent of its consolidated assets or earnings power are sold, each holder
(other than the acquiringperson) will have the right to purchase common stock
of the acquiring company having a market value of twice the exercise price of
the right. The rights may be redeemed by the Company at the price of $.01 per
right at any time prior to anyone becoming an acquiring person. 150,000
shares of Preferred Stock are reserved for issuance upon the exercise of the
rights. The Preferred Stock is nonredeemable, with a $100 liquidation
preference and 100 votes per share, and is entitled to 100 times the per
share dividends on the common stock.
NOTE 12- CONTINGENCIES
The Company is involved in various legal actions arising in the normal course
of business. Management, after taking into consideration legal counsel's
evaluation of such actions, is of the opinion that the outcome of these
matters will not have a material adverse effect on the Company's financial
position.
NOTE 13- SEGMENTS AND RELATED INFORMATION
The Company adopted SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information", in 1999 which changes the presentation
of information regarding the Company's operating segments. Segment
information for 1998 and 1997 is presented in conformance with the 1999
presentation.
McWhorter Technologies is a global specialty chemical company that
manufactures and sells a broad range of resins and dispersed pigments used in
the coatings and reinforced fiberglass plastics industries. The Company has
two reportable segments: Coating Resins and Colorants, and Composite
Polymers. The Company's liquid coating resins, powder coating resins, and
colorants product lines are aggregated in the Coating Resins and Colorants
segment. The Coating Resins and Colorants segment manufactures and sells
resins and dispersed pigments used in the industrial and consumer paints and
coatings industry. The Composite Polymers segment manufactures and sells
resins used in the reinforced fiberglass plastics industry. Both segments'
products reach their markets through a combination of direct and distributor
sales.
32
The accounting policies of the segments are the same as those
described in the summary of significant accounting policies. In computing
each segment's manufacturing costs, costs of shared production facilities are
allocated to the segments based on budgeted utilization. Adjustments
associated with stating inventories on a LIFO basis are not allocated to the
segments. Certain corporate costs are allocated to the segments using
systematic allocation methods consistently applied. Other income and expense,
including interest cost, is not allocated to the segments. In computing each
segment's total assets, shared assets or assets that are not specifically
assigned to a segment are allocated based on annual utilization. There are no
intercompany sales between the segments. The Company evaluates performance
based on the operating income of the respective segments.
Segment information for the years ended October 31 was:
1999 1998(a) 1997(b)
------------------------------------------------------------------
COATING RESINS AND COLORANTS
Net sales $ 356,784 $ 375,767 $ 259,035
Operating income 22,809 28,153(c) 24,730
Identifiable assets 298,103 308,866 215,852
Capital expenditures 17,116 21,562 9,116
Depreciation and amortization 15,558 13,946 8,233
COMPOSITE POLYMERS
Net sales $ 87,013 $ 79,163 $ 72,430
Operating income 15,066 14,012 11,084
Identifiable assets 29,899 23,708 25,304
Capital expenditures 2,459 1,691 1,813
Depreciation and amortization 2,281 2,006 1,793
CORPORATE
Net expenses and other $ (9,574)(c) $ (16,482)(c) $ (8,665)(c)
Identifiable assets 34,060 29,891 18,026
Capital expenditures 6,740 2,410 274
Depreciation and amortization 388 452 327
CONSOLIDATED
Net sales $ 443,797 $ 454,930 $ 331,465
Operating income 28,301 25,683 27,149
Identifiable assets 362,062 362,465 259,182
Capital expenditures 26,315 25,663 11,203
Depreciation and amortization 18,227 16,404 10,353
33
The geographic net sales information is based on the country from which
product was shipped. Financial information by geographic area for the years
ended October 31 was:
1999 1998(a) 1997(b)
------------------------------------------------------------------
NET SALES
United States $ 344,762 $ 336,920 $ 321,572
Italy 64,987 74,555 9,893
Other countries 34,048 43,455
------------------------------------------------------------------
Consolidated $ 443,797 $ 454,930 $ 331,465
------------------------------------------------------------------
------------------------------------------------------------------
IDENTIFIABLE ASSETS
United States $ 242,223 $ 224,183 $ 167,441
Italy 83,773 94,693 91,741
Other countries 36,066 43,589
------------------------------------------------------------------
Consolidated $ 362,062 $ 362,465 $ 259,182
------------------------------------------------------------------
------------------------------------------------------------------
(a) Reflects the acquisition of the McWhorter Technologies Europe joint venture
and Accurate since the dates of acquisition.
(b) Reflects the acquisition of Syntech since the date of acquisition. Refer to
Note 2 of the Notes to Consolidated Financial Statements.
(c) Refer to Note 14 of the Notes to Consolidated Financial Statements.
NOTE 14- NONRECURRING ITEMS
Third quarter 1999 other expense, net included a charge of $1,000,000, $.06
per share after taxes, primarily for the loss associated with the sale of the
Company's interest in the Chinese joint venture. Fourth quarter 1998 other
expense, net included charges of $4,650,000, $.27 per share after taxes,
related to the planned closure of the Chicago Heights, Illinois facility, and
$2,617,000, $.15 per share after taxes, related to the write-off of the
investment in the McWhorter Thailand joint venture. Third quarter 1998 other
expense, net included a charge of $931,000, $.05 per share after taxes,
related to the relocation of the research and development facility from
Minneapolis to Carpentersville. Second quarter 1998 cost of sales of the
Coating Resins and Colorants segment included a charge of $500,000, $.03 per
share after taxes, related to the one-time write-off of the excess of fair
value over net book value associated with inventories acquired as part of the
purchase of Accurate. 1997 other expense, net included second quarter charges
of $811,000, $.05 per share after taxes, related to costs, primarily
severance, for the research and development facility relocation and the
write-off of a tax related receivable. As discussed in Note 8 of the Notes to
Consolidated Financial Statements, the 1998 second quarter and the 1997
second quarter were impacted by a reduction in income tax expense of
$2,311,000, $.22 per share, and $591,000, $.06 per share, respectively.
The planned closure of the Chicago Heights facility is the result of
an in-depth review of the Company's North American production capabilities as
part of a continuing effort to improve efficiency. Production from the
Chicago Heights facility is being transferred to the Company's other U.S.
facilities. Approximately 36 employees are impacted by the closing. The 1998
charge for the Chicago Heights facility closing was composed of approximately
$4,240,000 for the write-down of plant and equipment with a carrying value of
$4,800,000 to
34
their fair value and approximately $410,000 for severance and other exit
costs. The write-down for the plant and equipment reflects impairment in
their carrying value because the gross undiscounted future cash flows to be
generated by the assets were less than the carrying value. The fair value of
the plant and equipment was based on the estimated future cash flows to be
generated by the facility. Approximately $140,000 of severance and other exit
costs related to the termination of 3 employees were charged to the
previously established reserves in 1999. The implementation of the closure of
the Chicago Heights facility is anticipated to be completed at the end of
June 2000.
NOTE 15 - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
IN THOUSANDS, EXCEPT PER SHARE AMOUNTS NET SALES GROSS PROFIT NET INCOME EPS BASIC EPS DILUTED
- ----------------------------------------- --------------- ----------------- ------------------ --------------- ----------------
Fiscal 1999 quarter ended:
January 31 $ 96,235 $ 14,669 $ 1,208 $ .12 $ .12
April 30 113,494 19,060 3,653 .36 .36
July 31 117,857 21,379 5,023(b) .50(b) .50(b)
October 31 116,211 17,405 2,017 .20 .20
Fiscal 1998 quarter ended:
January 31(a) $ 98,120 $ 12,989 $ 1,209 $ .12 $ .12
April 30 (a) 115,614 18,851(b) 6,360(b) .62(b) .61(b)
July 31 125,770 21,869 4,852(b) .47(b) .47(b)
October 31 115,426 20,250 423(b) .04(b) .04(b)
(a) See Note 2 of the Notes to Consolidated Financial Statements.
(b) See Note 14 of the Notes to Consolidated Financial Statements.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
INAPPLICABLE.
35
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(a) IDENTIFICATION OF DIRECTORS
Incorporated by reference from pages 2-3 of the Proxy Statement section
entitled "Election of Directors."
(b) IDENTIFICATION OF EXECUTIVE OFFICERS
Below are the names, ages and titles of the persons who serve as
executive officers of McWhorter:
Name Age Positions
---- --- ---------
John R. Stevenson 57 Chairman
Jeffrey M. Nodland 44 President and Chief Executive Officer
Kevin W. Brolsma 45 Vice President
Louise M. Tonozzi-Frederick 43 Vice President, Chief Financial Officer and
Treasurer
Warren B. Grayson 49 Vice President, General Counsel and
Secretary
Donald J. Crawford, Jr. 47 Vice President, Global Coating Resins
Douglas J. Graff 48 Vice President, Composite Polymers
Doug R. Rahrig 48 Vice President, Global Technical Marketing
JOHN R. STEVENSON is Chairman of the Company. Mr. Stevenson was Chairman and
Chief Executive Officer of the Company from January 1997 to January 1999. Mr.
Stevenson was President and Chief Executive Officer of the Company from February
1994 to December 1996. Previously he held the position of Vice President,
Special Products Group and Administration of Valspar beginning in August 1992
and Vice President, Administration of Valspar beginning in February, 1991.
JEFFREY M. NODLAND is President and Chief Executive Officer of the Company.
Prior to being named to his current position in February 1999, Mr. Nodland was
President and Chief Operating Officer of the Company beginning in January 1997.
Mr. Nodland was Executive Vice President, Chief Operating Officer, and Secretary
of the Company from May 1995 to January 1997. Previously he held the position of
Senior Vice President, Chief Financial Officer, Secretary, and Treasurer of the
Company beginning in February 1994, and President of McWhorter, Inc. beginning
in June 1991.
36
KEVIN W. BROLSMA is Vice President responsible for special projects. Prior to
being named to his current position in October 1999, Mr. Brolsma was Vice
President, Global Operations beginning in February 1999 and Vice President,
Acquisitions Integration/Environment, Health, and Safety beginning in August
1997. Mr. Brolsma was Vice President, Powder from May 1996 to August 1997 and
Vice President, Operations from February 1994 to April 1996. Previously he
was the General Manager of the Southeast Region of the Resin Products
Division of Cargill beginning in January 1990. From January 1988 to December
1989, Mr. Brolsma was the National Accounts Manager and General Sales Manager
of the Resin Products Division.
LOUISE M. TONOZZI-FREDERICK is Vice President, Chief Financial Officer and
Treasurer of the Company. Prior to being named to her current position, Ms.
Tonozzi-Frederick was Treasurer and Controller from May 1995 to September
1996. She was Controller from May 1994 to May 1995. Prior to May 1995, Ms.
Tonozzi-Frederick held various financial positions with Mallinkrodt Group,
Inc. for several years, most recently as Assistant Controller.
WARREN B. GRAYSON is Vice President, General Counsel and Secretary. Prior to
joining the Company in May 1999, Mr. Grayson was Assistant General Counsel of
Monsanto Company beginning in 1989. Mr. Grayson held the position of Division
General Counsel for Carson Pirie Scott & Company from 1980 to 1989.
DONALD J. CRAWFORD, JR. is Vice President, Global Coating Resins. Prior to
joining the Company in January 1999, Mr. Crawford was Vice President and
General Manager for North America for Betz Dearborn Inc. beginning in 1996.
Mr. Crawford held various positions with Betz Dearborn Inc. for twenty years,
most recently as Vice President and General Manager.
DOUGLAS J. GRAFF is Vice President, Composite Polymers of the Company. Prior
to his current position, Mr. Graff held the position of Assistant Vice
President and General Manager of the West Region of the Resin Products
Division of Cargill beginning in October 1981. Mr. Graff has held various
positions with Cargill since July 1973.
DOUGLAS B. RAHRIG is Vice President, Global Technical Marketing. Prior to
being named to his current position in May 1999, Mr. Rahrig was Vice
President, Technology beginning in February 1994. Mr. Rahrig was Department
Manager of the Technology Department of S.C. Johnson & Son, Inc. beginning in
February 1993. Mr. Rahrig has held various technical and management positions
with S.C. Johnson & Son, Inc. since 1985.
37
ITEM 11. EXECUTIVE COMPENSATION
Incorporated by reference from pages 9-11 of the Proxy Statement section
entitled "Executive Compensation."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated by reference from pages 7-8 of the Proxy Statement section
entitled "Security Ownership of Certain Beneficial Owners."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated by reference from pages 2-11 of the Proxy Statement sections
entitled "Election of Directors," "Security Ownership of Certain Beneficial
Owners" and "Executive Compensation."
38
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) (1) Financial Statements commence on page 16.
(2) Financial Statement Schedules. All schedules for which provision is
made in the applicable accounting regulation of the Securities and
Exchange Commission are not required under the related instructions
or are inapplicable and therefore have been omitted.
(3) Exhibits:
Exhibit Incorporated Herein
Number Description by Reference to
- --------------- ----------------------------------------------------------------------------------------------------
3.1 Certificate of Incorporation, as amended Form 10-K Registration Statement for the fiscal
year ended October 31, 1994
3.2 By-Laws, as amended Form 10-K Registration Statement for the fiscal
year ended October 31, 1996
4.1 Form of Common Stock Certificate Form 10-K Registration Statement for the fiscal
year ended October 31, 1994
4.2 Rights Agreement Form 10-K Registration Statement for the fiscal
year ended October 31, 1994
4.2.1 First Amendment to Rights Agreement Form 10-K for the quarterly period ended April
30, 1999
4.2.2 Second Amendment to Rights Agreement Form 10-Q for the quarterly period ended July
31, 1999.
10.1 Distribution Agreement Form S-1 Registration Statement (Registration
No. 33-75726) originally filed on February 25,
1994
10.2 Environmental Matters Agreement Form S-1 Registration Statement (Registration
No. 33-75726) originally filed on February 25,
1994
10.3 Amended and Restated Technology License Agreement Form 10-K Registration Statement for the fiscal
year ended October 31, 1994
39
Exhibit Incorporated Herein
Number Description by Reference to
- -----------------------------------------------------------------------------------------------------------------------
10.4 Tax Sharing Agreement Form S-1 Registration Statement
(Registration No. 33-75726) originally filed
on February 25, 1994
10.5 Amended and Restated Master Form 10-K Registration Statement for
Tolling Agreement the fiscal year ended October 31, 1994
10.8 1994 Stock Incentive Plan Form S-1 Registration Statement
(Registration No. 33-75726) originally
filed on February 25, 1994
10.8.1 Amendment to 1994 Stock Incentive Plan Form 10-Q for the quarterly period ended
April 30, 1995
10.9 Employee Stock Ownership Plan and Trust Form 10-K Registration Statement for the
fiscal year ended October 31, 1994
10.9.1 Amendment to Employee Stock Ownership Trust Form 10-K Registration Statement for the
fiscal year ended October 31, 1998
10.10 Employee 401(k) Savings Plan and Trust Form 10-K Registration Statement for the
fiscal year ended October 31, 1994
10.10.1 Amendment to 401(k) Savings Plan Trust Form 10-K Registration Statement for the
fiscal year ended October 31, 1998
10.11 Sale and Purchase of Assets Agreement between Registration Statement on Form 10
Cargill, Incorporated and McWhorter, Inc. dated (File No. 1-12638) filed on December 3, 1993
as of May 19, 1993, as subsequently modified
and amended
10.12 Agreement Containing Consent Order executed as of Registration Statement on Form 10
September 30, 1993 by the Federal Trade Commission, (File No. 1-12638) filed on December 3, 1993
The Valspar Corporation and McWhorter, Inc.
10.16.2 Indemnification Agreement dated November 12, 1998 Form 10-K Registration Statement for
between McWhorter Technologies, Inc. and John R. the fiscal year ended October 31, 1998
Stevenson
40
Exhibit Incorporated Herein
Number Description by Reference to
- --------------- -------------------------------------------------------- --------------------------------------------------
10.17 Indemnification Agreement dated May 17, 1995 between Form 10-Q for the quarterly period ended April
McWhorter Technologies, Inc. and Jeffrey M. Nodland. 30, 1995
10.17.1 Amendment to Indemnification Agreement dated May 17, Form 10-Q for the quarterly period ended July
1995 between McWhorter Technologies, Inc. and Jeffrey 31, 1996
M. Nodland
10.18.1 Amendment to Indemnification Agreement dated May 17, Form 10-Q for the quarterly period ended July
1995 between McWhorter Technologies, Inc. and Michelle 31, 1996
L. Collins
10.19 Indemnification Agreement dated May 17, 1995 between Form 10-Q for the quarterly period ended April
McWhorter Technologies, Inc. and Edward M. Giles 30, 1995
10.19.1 Amendment to Indemnification Agreement dated May 17, Form 10-Q for the quarterly period ended July
1995 between McWhorter Technologies, Inc. and Edward M. 31, 1996
Giles
10.20 Indemnification Agreement dated May 17, 1995 between Form 10-Q for the quarterly period ended April
McWhorter Technologies, Inc. and D. George Harris 30, 1995
10.20.1 Amendment to Indemnification Agreement dated May 17, Form 10-Q for the quarterly period ended July
1995 between McWhorter Technologies, Inc. and D. George 31, 1996
Harris
10.21 Indemnification Agreement dated May 17, 1995 between Form 10-Q for the quarterly period ended April
McWhorter Technologies, Inc. and Heinn F. Tomfohrde III 30, 1995
10.21.1 Amendment to Indemnification Agreement dated May 17, Form 10-Q for the quarterly period ended July
1995 between McWhorter Technologies, Inc. and Heinn F. 31, 1996
Tomfohrde III
10.23 Indemnification Agreement dated December 13, 1995 Form 10-K Registration Statement for the fiscal
between McWhorter Technologies, Inc. and John G. year ended October 31, 1995
Johnson, Jr.
41
Exhibit Incorporated Herein
Number Description by Reference to
- --------------- -------------------------------------------------------- --------------------------------------------------
10.23.1 Amendment to Indemnification Agreement dated December Form 10-Q for the quarterly period ended July
13, 1995 between McWhorter Technologies, Inc. and John 31, 1996
G. Johnson, Jr.
10.23.5 Indemnification Agreement dated February 18, 1999
between McWhorter Technologies, Inc. and David I.
Barton.
10.24 1996 Incentive Stock Plan Form 10-K Registration Statement for the fiscal
year ended October 31, 1996
10.25 1996 Nonemployee Director Stock Option and Award Plan Form 10-K Registration Statement for the fiscal
year ended October 31, 1996
10.26 Stockholders Agreement for McWhorter Technologies Form 10-K Registration Statement for the fiscal
Europe year ended October 31, 1996
10.27 Deferred Compensation Plan Form 10-K Registration Statement for the fiscal
year ended October 31, 1996
10.27.1 Amendment to Deferred Compensation Plan
10.28 $150,000,000 Credit Agreement dated July 30, 1997 Form 10-Q for the quarterly period ended July
among McWhorter Technologies, Inc., the banks listed 31, 1997
therein and Wachovia Bank of Georgia, N.A., as agent
10.29 Stock Purchase Agreement By and Between McWhorter Form 8-K dated August 11, 1997
Technologies, Inc. and Antonio Napoli & C.s.a.p.a. and
Gestin S.r.l.
10.30 Warrant Purchase Agreement Between McWhorter Form 8-K dated August 11, 1997
Technologies, Inc. and Cable Beach Holdings Ltd.
10.31 Waiver and First Amendment to the $150,000,000 Credit Form 10-K Registration Statement for fiscal year
Agreement ended October 31, 1997
10.32 Asset Purchase Agreement by and among Accurate Form 10-Q for the quarterly period ended April
Coatings & Dispersions, Inc., the principal 30, 1998
stockholders thereof and McWhorter Technologies, Inc.
dated as of March 23, 1998
42
Exhibit Incorporated Herein
Number Description by Reference to
- -------------------------------------------------------------------------------------------------------------------------
10.40 Change of Control Agreement dated February 17, 1999 Form 10-Q for quarterly period ended April 30,
between McWhorter Technologies, Inc. and Jeffrey M. 1999
Nodland
10.41 Change of Control Agreement dated February 17, 1999 Form 10-Q for quarterly period ended April 30,
between McWhorter Technologies, Inc. and Louise M. 1999
Tonozzi-Frederick
10.42 Change of Control Agreement dated February 17, 1999 Form 10-Q for quarterly period ended April 30,
between McWhorter Technologies, Inc. and Douglas B. 1999
Rahrig
10.43 Change of Control Agreement dated February 17, 1999 Form 10-Q for quarterly period ended April 30,
between McWhorter Technologies, Inc. and Douglas J. 1999
Graff
10.44 Change of Control Agreement dated February 17, 1999 Form 10-Q for quarterly period ended April 30,
between McWhorter Technologies, Inc. and Patrick T. 1999
Heffernan
10.45 Change of Control Agreement dated February 17, 1999 Form 10-Q for quarterly period ended April 30,
between McWhorter Technologies, Inc. and Donald J. 1999
Crawford, Jr.
10.46 Change of Control Agreement dated May 1, 1999 between Form 10-Q for quarterly period ended April 30,
McWhorter Technologies, Inc. and Warren B. Grayson 1999
10.47 Change of Control Agreement dated February 17, 1999 Form 10-Q for quarterly period ended July 31,
between McWhorter Technologies, Inc. and Kevin W. 1999
Brolsma
21.1 Subsidiaries of Registrant
23.1 Consent of Independent Auditors
27.1 Financial Data Schedules
43
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.
McWHORTER TECHNOLOGIES, INC.
January 27, 2000
By: /s/ John R. Stevenson
------------------------------
JOHN R. STEVENSON
Chairman
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 date indicated.
/s/ John R. Stevenson January 27, 2000
- ------------------------------------------------------------
JOHN R. STEVENSON
Chairman
/s/ Jeffrey M. Nodland January 27, 2000
- ------------------------------------------------------------
JEFFREY M. NODLAND
President, Chief Executive Officer, and Director (Principal Executive Officer)
/s/ Louise M. Tonozzi-Frederick January 27, 2000
- ------------------------------------------------------------
LOUISE M. TONOZZI-FREDERICK
Vice President, Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer)
/s/ D. George Harris January 27, 2000
- -------------------------------------------------------------
D. GEORGE HARRIS
Director
/s/ David I. Barton January 27, 2000
- ------------------------------------------------------------
DAVID I. BARTON
Director
/s/ Edward M. Giles January 27, 2000
- ------------------------------------------------------------
EDWARD M. GILES
Director
/s/ Heinn F. Tomfohrde, III January 27, 2000
- ------------------------------------------------------------
HEINN F. TOMFOHRDE, III
Director
/s/ John G. Johnson, Jr. January 27, 2000
- -----------------------------------------------------------
JOHN G. JOHNSON, JR.
Director
44