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, 1996
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:
Title of Each Class Name of Exchange on
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.
As of December 31, 1996, the aggregate market value of the voting stock
(which excludes stock restricted from voting pursuant to Federal Trade
Commission Order) held by nonaffiliates of McWhorter Technologies, Inc.
(based upon the New York Stock Exchange closing prices) was approximately
$206,723,000.
As of December 31, 1996, 10,469,616 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 8, 1997 ("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 . . . . . . . 7
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. . . . . . . . . . . .12
Item 9.
Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure. . . . . . . . . . . . . . . . . . . . . . . 26
PART III
Item 10.
Directors and Executive Officers of the Registrant. . . . . . . . 26
Item 11.
Executive Compensation. . . . . . . . . . . . . . . . . . . . . . 27
Item 12.
Security Ownership of Certain Beneficial Owners and Management. . 27
Item 13.
Certain Relationships and Related Transactions. . . . . . . . . . 28
PART IV
Item 14.
Exhibits, Financial Statement Schedules, and Reports on Form 8-K..28
Signatures. . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
PART I
Item 1. Business
McWhorter Technologies, Inc. ("McWhorter" or the "Company") is one of the
leading manufacturers of surface coating resins in the United States 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. Resins used
for reinforced fiberglass plastics are a primary component for various
fiberglass products. In September 1996, the Company completed the joint
venture McWhorter Technologies Europe which will provide an opportunity to
enter the European market on a phased basis.
Prior to April 29, 1994, McWhorter was a wholly-owned subsidiary of The
Valspar Corporation ("Valspar"). On April 29, 1994, Valspar distributed
(the "distribution") to its shareholders 100 percent of the outstanding
McWhorter common stock on the basis of one share of common stock for every
two shares of Valspar common stock. The distribution followed the
February 18, 1994, acquisition (the "acquisition") by McWhorter of the Resin
Products Division of Cargill Incorporated ("RPD" and "Cargill," respectively),
and the transfer to Valspar of a portion of the McWhorter assets.
McWhorter's predecessor was incorporated in the State of California on
July 21, 1934 and was merged on February 18, 1994 into the Company, which was
incorporated in Delaware on November 24, 1993.
All references to years are to fiscal years ended October 31 unless otherwise
stated.
Products and Markets
McWhorter's product line focuses 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 purchasing resins and selling 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 manufacturing capabilities
today, increased costs of product reformulation and updating of resin
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, polyure-
thanes, polyester resins, unsaturated polyesters, acrylic emulsions, poly-
vinyl acetate emulsions, solution acrylics, powder resins, powder curing
agents and a number of small volume specialty resins. Various types of resins
are required by customers due to differing application and product perfor-
mance characteristics.
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., traffic-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 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 excellent flexibility. Typical uses for polyesters are coil
coated metal buildings, appliances and metal office furniture.
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.
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 cross-
linkers to form high performance thermoset coatings. Typical applications
include marine and maintenance paints, and automotive topcoats.
Powder Resins. Powder resins are used in the manufacture of industrial
powder coatings. Powder coatings are dry coatings which provide an alterna-
tive to liquid coatings. The principal advantage of powder coatings are that
they emit no solvents, have excellent application and performance character-
istics and have a high degree of transfer efficiency. Powder coatings is the
fastest growing segment of the industrial coatings industry.
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.
Sales and Distribution
McWhorter sells its liquid and powder coating resin products primarily to
customers in the paint and coatings industry through a direct sales force,
with the balance sold through agents or distributors. The majority of
McWhorter's sales of unsaturated polyester resins to the fiberglass resin
products industry are sold through distributors. McWhorter's business has
primarily been focused in North America. However, the completion in
September 1996 of the joint venture McWhorter Technologies Europe provides
the Company with a European presence and provides an opportunity to grow
the current European business both internally and through acquisitions.
McWhorter intends to identify additional channels of distribution outside
North America. These arrangements may take the form of additional export
sales, joint ventures or licensing agreements.
McWhorter's business is somewhat seasonal with sales volume being tradition-
ally the highest during the third quarter of its fiscal year. This seasonal-
ity 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 degrees - 500 degrees
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.
Emulsions are processed differently from solvent-based 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.
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.
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 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 move up and down
due to market conditions in the petrochemical or vegetable oil markets.
After experiencing significant volatility in certain markets in 1995, raw
material prices settled back to more stable levels in 1996. However, raw
material prices still remain higher than pre-1995 levels. Refer to Item 7
"Management's Discussion and Analysis of Results of Operations and Financial
Condition" for further discussion.
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 and other specialty
resins 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
producers are vertically integrated into coatings manufacturers, providing a
captive source of resin 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 suppliers. McWhorter
believes that it competes favorably in each of these areas.
Employees
McWhorter employs approximately 590 full- and part-time employees of which
approximately 53 are covered by collective bargaining agreements.
Item 2. Properties
McWhorter's corporate headquarters is located in Carpentersville, Illinois
and its eight plant facilities are all owned, well maintained, and being
utilized for their intended purposes and have sufficient capacity to meet
their reasonably-anticipated needs. Total practical production capacity of
McWhorter's plant facilities is approximately 581 million wet pounds per
annum. McWhorter has no material encumbrances on its facilities. The
following table provides certain additional information regarding
McWhorter's properties:
Plant Location Approximate Square Footage
Carpentersville, Illinois 224,277
Philadelphia, Pennsylvania 112,653
Forest Park, Georgia 83,875
Lynwood, California 52,899
Ennis, Texas 45,969
Chicago Heights, Illinois 35,510
Columbus, Georgia 30,325
Portland, Oregon 14,995
The joint venture McWhorter Technologies Europe currently consists of three
plants, one each located in Sweden, Finland and the United Kingdom.
McWhorter leases from Valspar approximately 30,000 square feet of office and
laboratory space in Minneapolis, Minnesota.
Item 3. Legal Proceedings and Environmental Matters
McWhorter is not party to any legal or administrative proceedings, other than
routine litigation incidental to the business or involving claims for
immaterial amounts.
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 and certain state agencies under
various federal and state environmental laws. 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 ultimately
determined to 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, 1996 the estimated amount of probable environmental liability
of McWhorter is approximately $4,247,000. Cargill has agreed to indemnify
McWhorter, subject to certain limitations, for damages resulting from certain
environmental matters relating to RPD. As a result of the probable recovery
of $2,936,000 from Cargill, McWhorter's net estimated environmental liability
is approximately $1,311,000. There are a total of thirteen sites at which
McWhorter believes it has probably environmental liability, including eight
sites for which the estimated liablity is less than $10,000 per site. The
maximum estimated amount of environmental liability attributable to any
individual site is approximately $1,177,000, of which a significant portion
is expected to be reimbursed by Cargill. During 1996, McWhorter spent
approximately $1,062,000 on remediation costs of which $705,000 was spent on
on-site liability attributable to RPD and has been or is expected to be
reimbursed by Cargill. During 1997, McWhorter expects to spend approximately
$1,210,000 on remediation costs, of which $850,000 is expected to be reimbursed
by Cargill. During 1996, McWhorter spent approximately $1,000,000 on capital
expenditures to comply with environmental laws and regulation and during 1997
McWhorter expects to spend approximately $1,300,000 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 1996.
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 sets forth the high and low bid and ask sales prices for
the common stock for fiscal 1996 and 1995. The Company did not declare any
cash dividends on its common stock in either fiscal year.
1996 1995
Low High Low High
First quarter 13 1/8 15 5/8 14 1/8 18 1/8
Second quarter 13 3/8 18 1/8 14 1/2 16
Third quarter 16 3/8 19 3/8 14 5/8 15 7/8
Fourth quarter 17 1/8 20 1/8 14 5/8 16 1/8
As of December 31, 1996, there were 1,463 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
Dollars in thousands, except per share amounts
October 31, October 31, October 31, October 29, October 30,
1996 1995 1994(a) 1993(a) 1992(a)
Net sales $315,925 $311,398 $242,331 $109,839 $107,729
Net income 13,833 11,070 8,444(b) 7,095 4,748
Net income per
share 1.32 1.02 .78 .65 .43
Total assets 153,254 138,127 138,563 71,196 61,520
Total debt 23,140 31,764 38,618 150 180
(a) See Note 2 of Notes to Financial Statements.
(b) See Note 12 of Notes to Financial Statements.
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 thereto. Except for
historical information contained herein, certain matters set forth in this
Annual Report are forward looking statements that involve certain risks and
uncertainties that could cause actual results to differ materially from those
in the forward looking statements. All references to years are to fiscal
years ended October 31 unless otherwise stated.
Results of Operations 1996 vs. 1995 Net sales for 1996 were $315,925,000
compared to $311,398,000 in the prior year. Volume increases of 4 percent
were partially offset by a 2 percent price decrease. The volume comparison
is impacted by the September 1, 1995 acquisition of The Glidden Company's
resin producing facility in Columbus, Georgia. On a comparable basis without
the acquisition, volume was flat. Volume improved significantly during the
second half of 1996 and the Company is cautiously optimistic about continued
volume growth in 1997. In the fourth quarter, volume in all businesses was
strong. In 1996, the Company experienced a decline in raw material costs
which resulted in the lowering of prices across businesses. The Company
expects raw material costs to remain relatively stable in 1997.
The Company's gross profit margin was 15.4 percent in 1996 compared to
13.5 percent in 1995. Declining raw material pricing and ongoing internal
process improvements implemented in 1995 led to a significant improvement in
gross margin percent for the year. As a result of the raw material price
decreases, the last-in, first-out ("LIFO") inventory valuation method had the
net effect of decreasing cost of sales by $1,358,000 pretax, $808,000 after
taxes, or 8 cents per share, in 1996 compared to 1995 when raw material price
increases had the net effect of increasing cost of sales by $1,090,000 pretax,
$649,000 after taxes, or 6 cents per share. Such charges increased gross
margin percent by .4 percent in 1996 and decreased gross margin percent by
.4 percent in 1995.
Operating expenses (research, selling, general and administrative) were 7.5
percent of sales in 1996 compared to 6.8 percent in 1995. Higher expenses
compared to 1995 primarily reflected higher costs associated with incentive
plans tied to the Company's performance.
In September 1996 we completed the joint venture in McWhorter Technologies
Europe ("McWhorter Europe"). This investment is accounted for on the equity
method with earnings reflected as a component of other expense (income), net
in 1996. The current year effects of the investment did not have a material
impact on earnings for the year.
Net interest expense was $1,653,000 in 1996 compared to $2,310,000 last year.
This comparison reflects reduced debt levels and lower average borrowing
rates from a year ago.
The effective tax rate was 40.5 percent in 1996 and 1995.
Net income in 1996 was $13,833,000, or $1.32 per share, compared to
$11,070,000, or $1.02 per share, last year. This comparison is impacted by
the Company's share repurchase program, which had a favorable impact of
5 cents per share in 1996.
Results of Operations 1995 vs. 1994 Net sales for 1995 were $311,398,000
compared to $242,331,000 in 1994. This comparison is impacted by the
February 18, 1994 acquisition of the Resin Products Division of Cargill
Incorporated ("RPD") and the transfer of a portion of McWhorter's assets to
The Valspar Corporation ("Valspar"). The 1995 net sales increased 11 percent
over 1994 pro forma net sales of $281,340,000.
Refer to Note 2 of Notes to Financial Statements for discussion of the RPD
acquisition and spin-off.
Price increases of 14 percent were partially offset by a 2 percent volume
decrease and a 1 percent decrease from an unfavorable change in product mix.
Liquid and powder coatings volume was down 6 percent reflecting softness in
the industrial and architectural coatings markets in addition to in sourcing
by some major customers with resin producing capability. The composite
polymer volume was up 16 percent. The acquisition of The Glidden Company's
resin producing facility in Columbus, Georgia was completed on September 1,
1995. The incremental sales from this facility did not have a material impact
on the year. Average raw material cost increases approximated 20 percent
year over year. The Company experienced some softening and stability of the
raw material markets late in the year. The Company raised its prices several
times during the year and covered the majority of the increases in raw
material costs.
The Company's gross profit margin was 13.5 percent in 1995 compared to
15.5 percent in 1994. After taking into account the impacts of the RPD
acquisition and the transfer of certain assets to Valspar, the 1994 gross
margin was 15.9 percent. The 1995 gross margin reflects the compression on a
percentage basis from correspondingly higher selling prices and higher raw
material costs. Additionally, the 1995 gross margin percent was negatively
impacted by under absorption at the Company's production facilities due to
lower production levels. As a result of the raw material price increases,
the LIFO inventory valuation method had the net effect of increasing cost of
sales by $1,090,000 pretax, $649,000 after taxes, or 6 cents per share, in
1995 and by $1,522,000 pretax, $921,000 after taxes, or 8 cents per share, in
1994. Such charges decreased gross margin percent by .4 percent and
.6 percent in 1995 and 1994, respectively.
Operating expenses (research, selling, general and administrative) were
6.8 percent of sales in 1995 compared to 8.2 percent in 1994. Lower expenses
compared to 1994 reflected lower costs associated with incentive plans tied
to the Company's performance, tighter expense controls and significantly
higher spending in 1994 for expenses associated with being a new independent
public company.
Other expense in 1994 included $2,474,000 pretax, $1,497,000 after taxes, or
14 cents per share, of expenses associated with the write-down of the Los
Angeles resin facility, which was transferred to Valspar during the second
quarter. The write-down relates to an impairment in value of the facility
as determined by an independent appraisal.
Net interest expense was $2,310,000 in 1995 compared to $1,138,000 in 1994.
This comparison reflects the higher borrowing to fund the RPD acquisition,
the payment of the interest-bearing intercompany receivable by Valspar in the
second quarter of 1994 and higher overall interest rates.
The effective tax rate was 40.5 percent in 1995 compared to 39.5 percent in
1994.
Net income in 1995 was $11,070,000, or $1.02 per share, compared to
$8,444,000, or $.78 per share in 1994, including the after-tax charge for the
write-down of the Los Angeles facility. This comparison is impacted by the
February 18, 1994 RPD acquisition and the transfer of a portion of
McWhorter's assets to Valspar. Pro forma net income for 1994 was
$11,507,000, or $1.06 per share, excluding the after-tax charge discussed
above.
Financial Condition In 1996 operations generated cash of $25,778,000
compared to $24,141,000 in 1995. Working capital levels increased slightly
from the prior year primarily because an aggressive inventory management plan
significantly reduced inventory levels in the prior year. This plan was
implemented by the Company early in the fourth quarter of 1995 in
anticipation of falling raw material costs. The Company's current ratio was
1.5 at the end of 1996 compared to 1.6 at the end of 1995.
Investing activities used cash of $12,417,000 in 1996 compared to $8,994,000
in 1995. The increase relates primarily to the investment in McWhorter
Europe in the fourth quarter. Refer to Note 1 and Note 5 of Notes to
Financial Statements for discussion of the investment in McWhorter Europe.
Capital expenditures were $6,991,000 in 1996 versus $6,469,000 in 1995. The
1996 and 1995 expenditures were primarily for productivity improvements.
Capital spending for 1997 is budgeted to be approximately $9,000,000.
Financing activities used cash of $14,205,000 in 1996 compared to $14,619,000
in 1995. Debt as a percentage of invested capital was 22.5 percent at
October 31, 1996, reduced from 30.8 percent a year ago. Total debt decreased
to $23,140,000 at October 31, 1996 from $31,764,000 a year ago. Strong cash
flow from operations provided sufficient cash to reduce the revolving credit
facility debt by $9,000,000.
During 1996 and 1995, the Company completed the repurchase of 500,000 shares
of its common stock from the 1995 authorization. The total cost of those
shares repurchased was $7,194,000. Also, in February 1996 the Company
announced that its Board of Directors passed a resolution authorizing the
repurchase by the Company of up to an aggregate of 500,000 additional shares
of its common stock over a twelve month period. As of October 31, 1996, the
Company had acquired 14,300 of these shares at a total cost of $236,000.
The Company has a $60,000,000 unsecured revolving credit facility that
terminates on February 10, 1999. At October 31, 1996, $49,000,000 was
available under this facility. Historically, while sales for McWhorter have
been lowest in the first quarter, monthly fluctuations in working capital
have been modest. The credit facility and internally generated funds are
expected to be adequate to finance McWhorter's capital expenditures and other
operating requirements.
Refer to Item 3 Legal Proceedings and Environmental Matters and Note 9 of
Notes to Financial Statements for discussion of environmental liabilities.
Item 8. Financial Statements and Supplementary Data Page
Report of Independent Auditors. . . . . . . . . . . . . . . . . 13
Statements of Income for the Years Ended October 31,
1996, 1995 and 1994. . . . . . . . . . . . . . . . . . . . . . 14
Balance Sheets as of October 31, 1996 and 1995. . . . . . . . . 15
Statements of Cash Flows for the Years Ended October 31,
1996, 1995 and 1994. . . . . . . . . . . . . . . . . . . . . . 16
Statements of Changes in Shareholders' Equity for the Years
Ended October 31, 1996, 1995 and 1994 . . . . . . . . . . . .17
Notes to Financial Statements. . . . . . . . . . . . . . . . . .18
REPORT OF INDEPENDENT AUDITORS
To the Shareholders and Board of Directors of McWhorter Technologies, Inc.
We have audited the accompanying balance sheets of McWhorter Technologies,
Inc. as of October 31, 1996 and 1995, and the related statements of income,
shareholders' equity and cash flows for each of the three years in the period
ended October 31, 1996. 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 financial position of McWhorter Technologies,
Inc. at October 31, 1996 and 1995, and the results of its operations and its
cash flows for each of the three years in the period ended October 31, 1996,
in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
ERNST & YOUNG LLP
Chicago, Illinois
November 18, 1996
McWHORTER TECHNOLOGIES, INC.
STATEMENTS OF INCOME
Year Ended
Dollars in thousands,
except per share amounts
October 31, October 31, October 31,
1996 1995 1994
Net sales $315,925 $311,398 $242,331
Costs and expenses:
Cost of sales 267,161 269,233 204,659
Research 7,469 6,758 5,560
Selling, general and
administrative 16,368 14,537 14,255
Other expense (income),
net (Note 12) 25 (45) 2,759
Income from operations 24,902 20,915 15,098
Interest expense, net 1,653 2,310 1,138
Income before income
taxes 23,249 18,605 13,960
Income tax expense
(Note 8) 9,416 7,535 5,516
Net income $ 13,833 $ 11,070 $ 8,444
Net income per share $ 1.32 $ 1.02 $ .78
See Notes to Financial Statements
McWHORTER TECHNOLOGIES, INC.
BALANCE SHEETS
Dollars in thousands, except share amounts
October 31, October 31,
1996 1995
Assets
Current assets
Cash $ 1,060 $ 1,904
Accounts receivable less allowances
for doubtful accounts of $385 in
1996 and $300 in 1995 47,166 41,223
Inventories (Note 3) 18,151 12,020
Other current assets 5,019 5,237
71,396 60,384
Property, plant and equipment (Note 4) 107,119 100,751
Less accumulated depreciation 33,489 24,653
Net property, plant and equipment 73,630 76,098
Other assets (Note 5) 8,228 1,645
$153,254 $138,127
Liabilities and Shareholders' Equity
Current liabilities
Short-term debt (Note 7) $ 9,995 $ 12,582
Trade accounts payable 26,363 16,066
Accrued liabilities (Notes 6 and 9) 10,504 9,808
46,862 38,456
Long-term debt, less current portion
(Note 7) 13,145 19,182
Deferred income taxes (Note 8) 10,486 6,670
Accrued environmental liabilities
(Note 9) 3,037 2,295
Shareholders' equity
Common stock (par value $.01 per share;
authorized 30,000,000 shares; issued
and outstanding 10,465,940 shares in
1996 and 10,847,064 shares in 1995) 110 110
Additional paid-in capital 10,803 10,895
Retained earnings 77,562 63,729
Currency translation adjustments (74)
Restricted stock awards (Note 11) (1,463) (1,463)
Treasury stock, at cost (499,607 shares
in 1996 and 117,000 shares in 1995 ) (7,214) (1,747)
79,724 71,524
$153,254 $138,127
See Notes to Financial Statements
McWHORTER TECHNOLOGIES, INC.
STATEMENTS OF CASH FLOWS
Year Ended
Dollars in thousands
October 31, October 31, October 31,
1996 1995 1994
Operating Activities
Net income $13,833 $11,070 $8,444
Adjustments to reconcile
net income to net cash
provided (used) by operating
activities:
Depreciation and amortization 9,079 7,901 6,195
Deferred income taxes 3,530 3,708 1,459
Loss on property, plant and
equipment 166 344 2,474
Other, net (253) (208) 307
Changes in working capital:
Accounts and notes receivable (5,943) (1,923) (32,208)
Inventories (6,131) 10,118 (3,933)
Trade accounts payable and
accrued liabilities 10,993 (5,652) 18,051
Other current assets 504 (1,217) (1,177)
Net cash provided (used) by operating
activities 25,778 24,141 (388)
Investing Activities
Capital expenditures (6,991) (6,469) (4,694)
Investment in joint venture (5,467)
Acquisition spending (2,558) (75,745)
Proceeds from receivable from Valspar 36,810
Proceeds from asset transfer to Valspar 6,835
Other, net 41 33 161
Net cash used by investing activities (12,417) (8,994) (36,633)
Financing Activities
(Decrease) increase in debt, net (8,624) (12,872) 38,468
Purchase of treasury stock (5,683) (1,747)
Other, net 102 (104)
Net cash (used) provided by financing
activities (14,205) (14,619) 38,364
(Decrease) increase in cash (844) 528 1,343
Cash at beginning of period 1,904 1,376 33
Cash at end of period $ 1,060 $ 1,904 $ 1,376
Noncash Aspects of Acquisitions
The Company's 1995 acquisition spending
involved the following:
Fair value of assets acquired $ 8,576
Note issued by seller (6,018)
See Notes to Financial Statements
McWHORTER TECHNOLOGIES, INC.
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Dollars in thousands,
except share amounts
Common Stock Additional Retained
Shares Amount Paid-in Capital Earnings
Balance October 29, 1993 $300 $ 9,104 $44,215
Net income 8,444
Distribution of common
stock, net 10,854,532 (191) 87
Issuance of common stock
for restricted stock
awards 10,367 168
Balance October 31, 1994 10,864,899 109 9,359 52,659
Net income 11,070
Issuance of common stock
for restricted stock
awards 99,165 1 1,536
Purchase of treasury
stock (117,000)
Balance October 31, 1995 10,847,064 110 10,895 63,729
Net income 13,833
Issuance of common stock
for restricted stock
awards 1,483 22
Exercise of stock options 14,693 (114)
Purchase of treasury stock (397,300)
Currency translation
adjustments
Balance October 31, 1996 10,465,940 $110 $10,803 $77,562
McWhorter Technologies, Inc.
Statements of Changes in Shareholders' Equity
Dollars in thousands, except share amounts
Currency Restricted
Translation Stock Treasury
Adjustments Awards Stock
Balance October 29, 1993
Net income
Distribution of common stock, net
Issuance of common stock for
restricted stock awards
Balance October 31, 1994
Net income
Issuance of common stock for
restricted stock awards (1,463)
Purchase of treasury stock (1,747)
Balance October 31, 1995 (1,463) (1,747)
Net income
Issuance of common stock for
restricted stock awards
Exercise of stock options 216
Purchase of treasury stock (5,683)
Currency translation adjustments (74)
Balance October 31, 1996 $(74) $(1,463) $(7,214)
See Notes to Financial Statements
McWHORTER TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of business and basis of presentation The Company operates in
one business segment, the manufacture and distribution of resin used in
coatings and composite polymer industries, and sells primarily to customers
located in the United States.
The financial statements are presented as if the Company had existed as a
free- standing entity for all periods presented and include the historical
assets, liabilities, revenues and expenses that are directly related to the
business that comprises the Company's operations, including the results of
operations relating to the facilities that were transferred to Valspar prior
to the distribution.
For the periods presented prior to February 18, 1994, expenses reflected in
the financial statements include an allocation of certain corporate expenses
from Valspar. These allocations were for general management, treasury, tax,
payroll, financial reporting, benefits administration, insurance,
communication, public affairs and other miscellaneous services. Management
believes that the foregoing allocations were made on a reasonable basis and
are indicative of the costs that would have been incurred by the Company on
a stand-alone basis.
In September of 1996, the Company acquired for cash a one-third interest in
the McWhorter Europe joint venture. The current ownership of McWhorter
Europe is divided equally among the three partners and is accounted for on
the equity method, with the Company's share of the earnings reflected as a
component of other expense (income), net.
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. Costs
are recorded on the LIFO method.
Property, plant and equipment Property, plant and equipment are recorded at
cost. Depreciation is based upon estimated useful lives of 10 to 20 years
for buildings and 3 to 10 years for machinery and equipment, using primarily
the straight-line method.
Stock-based compensation In December 1995, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standard (SFAS)
No. 123, "Accounting for Stock-based Compensation" which establishes a fair
value based method of accounting for stock-based compensation plans. Under
SFAS No.123, the Company has the option of either accounting for its stock-
based compensation plans under the fair value method or continuing under the
accounting provisions of Accounting Principles Board Opinion No. 25 (APB
No. 25). The Company intends to continue accounting for its stock-based
compensation plans under the provisions of APB No. 25.
NOTES TO FINANCIAL STATEMENTS (Continued)
Net income per share Net income per common share amounts were computed on
the basis of the weighted average number of common and common equivalent
shares outstanding. Such weighted average shares used in the computations
were 10,484,279 in 1996; 10,878,326 in 1995; and 10,867,907 in 1994.
NOTE 2 - THE RPD ACQUISITION AND SPIN-OFF
Prior to April 29, 1994, McWhorter Technologies, Inc. was a wholly-owned
subsidiary of The Valspar Corporation. On April 29, 1994, Valspar
distributed to its shareholders 100 percent of the outstanding McWhorter
common stock on the basis of one share of common stock for every two shares
of Valspar common stock. The distribution followed the February 18, 1994
acquisition by McWhorter of the Resin Products Division of Cargill
Incorporated, and the transfer to Valspar of a portion of the McWhorter
assets. Financial results reflect the RPD operations subsequent to the
acquisition date, and include, until their February 18, 1994 transfer to
Valspar, the results of the portion of McWhorter's assets that were retained
by Valspar.
The RPD acquisition included substantially all of the RPD assets, consisting
primarily of inventory and fixed assets but excluding accounts receivable.
The acquisition was accounted for as a purchase. The entire purchase price
of $75,385,000 has been allocated to net tangible assets. The purchase
agreement also contains provisions dealing with the assumption or retention
of environmental obligations in connection with the assets acquired from RPD.
The assets that the Company transferred to Valspar on February 18, 1994
included tangible and intangible assets related to facilities in Los Angeles,
California; Rockford, Illinois; Kankakee, Illinois; and Garland, Texas.
Valspar also assumed substantially all related liabilities.
Pro forma information for the year ended October 31, 1994, assuming the
acquisition and distribution had occurred at October 29, 1993, was net sales
$281,340,000, net income $10,010,000 and net income per share $.92. The
information does not necessarily indicate what the results for McWhorter
would have been had McWhorter been an independent company or had the business
of McWhorter and the RPD business been combined during the pro forma period.
Net sales to Valspar from October 30, 1993 to the April 29, 1994 distribution
date were $14,398,000. Subsequent to April 29, 1994, sales to Valspar have
continued but the companies are no longer related parties.
NOTE 3 - INVENTORIES
The major classes of inventories consist of the following:
Dollars in thousands
October 31, October 31,
1996 1995
Manufactured products $11,916 $ 6,565
Raw materials, supplies and
work-in-process 6,235 5,455
$18,151 $12,020
NOTES TO FINANCIAL STATEMENTS (Continued)
Inventories are stated at cost as determined by the LIFO method and are
approximately $2,151,000 and $3,509,000 lower at October 31, 1996 and 1995,
respectively, than such costs determined under the first-in, first-out (FIFO)
method. In 1996, the LIFO valuation method had the net effect of increasing
pretax income as compared to the FIFO method by $1,358,000, $808,000 after
taxes, or $.08 per share. This was due to the impact of declining raw
material costs in 1996 versus 1995. In 1995, the LIFO valuation method had
the net effect of decreasing pretax income as compared to the FIFO method by
$1,090,000, $649,000 after taxes, or $.06 per share. The pretax impact of
raw material cost increases of $3,062,000 was partially offset by the
$1,972,000 pretax effect of a partial inventory liquidation in 1995.
NOTE 4 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment classifications are as follows:
Dollars in thousands
October 31, October 31,
1996 1995
Land $ 3,868 $ 3,868
Buildings 18,849 18,090
Machinery and equipment 84,402 78,793
107,119 100,751
Less accumulated depreciation 33,489 24,653
Net property, plant and equipment $ 73,630 $ 76,098
NOTE 5 - OTHER ASSETS
Other assets include the following:
Dollars in thousands
October 31, October 31,
1996 1995
Investment in McWhorter Europe $5,428
Other 2,800 $1,645
$8,228 $1,645
NOTES TO FINANCIAL STATEMENTS (Continued)
NOTE 6 - ACCRUED LIABILITIES
Accrued liabilities include the following:
Dollars in thousands
October 31, October 31,
1996 1995
Employee compensation $ 4,797 $ 2,832
Accrued environmental liabilities 1,210 1,145
Other 4,497 5,831
$10,504 $ 9,808
NOTE 7 - DEBT
Long-term debt consists of the following:
Dollars in thousands
October 31, October 31,
1996 1995
Revolving credit borrowings $11,000 $15,000
6% note payable in annual installments
with final payment due in 1998 4,187 6,078
Other 53 86
15,240 21,164
Less current maturities 2,095 1,982
$13,145 $19,182
The Company has $60,000,000 available under a revolving credit facility that
enables the Company to borrow funds on an unsecured basis. Under the terms
of the agreement, interest rates are determined at the time of borrowing and
are based on London Interbank Offered Rates plus an applicable margin up to
.5% or other alternative rates. This facility terminates on February 10,
1999. At October 31, 1996, borrowings totaling $11,000,000, approximating
fair value, were outstanding under this agreement 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, 1997. In addition, the
Company had $7,900,000 outstanding at October 31, 1996, under an overnight
credit facility. At October 31, 1996, the weighted average interest rate
on outstanding short-term borrowings was 6.1%. The aggregate payments of
long-term debt outstanding plus interest accrued to date on the 6% note
payable at October 31, 1996 for the next five years, excluding revolving
credit borrowings, are as follows: 1997--$2,095,000; and 1998--$2,145,000.
NOTES TO FINANCIAL STATEMENTS (Continued)
Interest paid during 1996, 1995 and 1994 was $1,725,000, $2,261,000 and
$1,208,000, respectively.
At October 31, 1996 the Company had outstanding $3,977,000 in unissued
letters of credit.
NOTE 8 - INCOME TAXES
The components of the provision for income taxes are as follows:
Year Ended
Dollars in thousands
October 31, October 31, October 31,
1996 1995 1994
Current:
Federal $4,568 $3,334 $3,517
State 1,318 493 540
Total current income taxes 5,886 3,827 4,057
Deferred income taxes 3,530 3,708 1,459
Total income taxes $9,416 $7,535 $5,516
Income taxes paid during 1996, 1995 and 1994 were $5,315,000, $3,227,000 and
$3,505,000, 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 are as
follows:
Dollars in thousands
October 31, October 31,
1996 1995
Deferred tax assets:
Alternative minimum tax credit carryforward $ 316 $1,633
Accrued environmental liabilities 361 677
Accrued employee compensation 531 386
Workers' compensation 202 106
Other 414 256
Total deferred tax assets 1,824 3,058
Deferred tax liabilities:
Tax over book depreciation 11,179 8,883
Net deferred tax liability $ 9,355 $5,825
NOTES TO FINANCIAL STATEMENTS (Continued)
The principal items comprising the difference between income tax expense
computed at the Federal statutory rate and the actual provision for income
taxes are as follows:
Year Ended
Dollars in thousands
October 31, October 31, October 31,
1996 1995 1994
Statutory rate applied to pretax income
(35%--1996; 34%--1995; 34%--1994) $8,138 $6,326 $4,746
Add:
State taxes
(net of federal tax benefit) 1,170 1,016 586
Other, net 108 193 184
$9,416 $7,535 $5,516
Effective tax rate 40.5% 40.5% 39.5%
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.
Pursuant to the terms of the distribution agreement, McWhorter will retain
liability for all costs or liabilities arising from existing or future
environmental claims relating to its plants located in Philadelphia,
Pennsylvania; Portland, Oregon; and Carpentersville, Illinois. Currently,
McWhorter is involved with remedial and other environmental compliance
activities at these plant sites. Additionally, McWhorter has been named a
potentially responsible party for the remediation of independently operated
waste disposal sites previously used by these plants.
At October 31, 1996 the estimated amount of probable environmental liability
of the Company is approximately $4,247,000. Cargill has agreed to indemnify
McWhorter, subject to certain limitations, for damages resulting from certain
environmental matters relating to RPD. As a result of the probable recovery
of $2,936,000 from Cargill, McWhorter's net estimated environmental liability
is approximately $1,311,000.
NOTE 10 - RETIREMENT BENEFIT PROGRAMS
In February 1994, McWhorter adopted an Employee Stock Ownership Plan (ESOP)
and an Employee Savings Plan. These primary retirement benefit programs are
defined contribution plans covering the majority of the employees. The
total costs of the ESOP were $1,556,000, $570,000 and $1,075,000
NOTES TO FINANCIAL STATEMENTS (Continued)
in 1996, 1995 and 1994, respectively. The total costs of the Employee
Savings Plan were $515,000, $457,000 and $294,000 in 1996, 1995 and 1994,
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.
The Company also sponsors a defined benefit plan for certain hourly
employees. The related pension costs and obligations are not material.
NOTE 11 - STOCK PLANS
The Companys' 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 472,427 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 will expire over a period
ending no later than September 1, 2006.
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 October 29, 1993
Granted 389,293 $15.95
Options outstanding October 31, 1994 389,293 15.95
Granted 41,935 15.38
Cancelled (21,984) 16.62
Options outstanding October 31, 1995 409,244 15.86
Granted 55,636 15.49
Exercised (14,693) 7.03
Cancelled (3,802) 18.61
Options outstanding October 31, 1996 446,385 16.09
Options exercisable at October 31, 1996 196,040
Restricted stock performance awards have been granted to key officers under
the 1994 plan. These restricted stock awards will vest only if the Company
achieves certain financial goals over a three-year performance period. A
total of 94,354 restricted shares were issued in 1995 under the performance
plan at an average market value of $15.50 per share. The awards were
recorded at the market value of the shares at the time the shares were
awarded. The total market value of the shares will be charged to compensation
expense based on achievement of the related financial goals. After comparing
the Company's performance to the financial goals, $250,000 was charged to
expense in 1996 and no expense was recorded in 1995.
NOTES TO FINANCIAL STATEMENTS (Continued)
The Company also issued 1,483, 10,291 and 10,367 restricted and deferred
shares in 1996, 1995 and 1994, respectively, with vesting periods of up to
three years. Amounts charged to expense were $22,000 in 1996, $159,000 in
1995 and $168,000 in 1994.
In 1996 the Company also established the 1996 Nonemployee 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 43,929 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.
At October 31, 1996, 6,071 deferred stock awards had been granted under this
plan, and $110,000 was charged to expense in 1996.
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% 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% of its consolidated
assets or earnings power are sold, each holder (other than the acquiring
person) 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 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 - OTHER EXPENSE
Other expense for the first quarter of 1994 included $2,474,000 pretax,
$1,497,000 after taxes, or $.14 per share, of expenses associated with the
write- down of the Los Angeles resin facility, which was transferred to
Valspar during the second quarter at the time the Company acquired the Resin
Products Division assets of Cargill Incorporated. The write-down of this
facility relates to an impairment in value of the facility and was supported
by an independent appraisal.
NOTE 13 - 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.
NOTES TO FINANCIAL STATEMENTS (Continued)
NOTE 14 - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
Dollars in thousands,
except per share amounts
Net Net Income
Net Sales Gross Profit Income Per Share
>
Fiscal 1996 quarter ended:
January 31 $ 65,240 $ 9,755 $ 2,128 $ .20
April 30 76,917 11,632 3,187 .31
July 31 87,144 13,996 4,360 .42
October 31 86,624 13,381 4,158 .40
$315,925 $48,764 $13,833 $1.32
Fiscal 1995 quarter ended:
January 31 $ 67,309 $ 9,016 $ 1,819 $ .17
April 30 79,120 11,024 2,794 .26
July 31 82,974 11,269 3,294 .30
October 31 81,995 10,856 3,163 .29
$311,398 $42,165 $11,070 $1.02
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
Inapplicable.
PART III
Item 10. Directors and Executive Officers of the Registrant
(a) Identification of Directors
Incorporated by reference from pages 2-4 of the Proxy Statement section
entitled "Election of Directors."
(b) Identification of Executive Officers
Set forth below are the names, ages and titles of the persons who serve as
executive officers of McWhorter:
Name Age Positions
John R. Stevenson 54 Chairman and Chief Executive Officer
Jeffrey M. Nodland 41 President, Chief Operating Officer and
Secretary
Patrick T. Heffernan 47 Senior Vice President, Coatings Resins
Kevin W. Brolsma 42 Vice President, Powder
Douglas B. Rahrig 45 Vice President, Technology
Louise M. Tonozzi-Frederick 40 Vice President and Chief Financial Officer
JOHN R. STEVENSON is Chairman and Chief Executive Officer of the Company.
Prior to being named in January 1997 to his current position, Mr. Stevenson
was President and Chief Executive Officer of the Company beginning in
February 1994. 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, Chief Operating Officer, and Secretary of
the Company. Prior to being named in January 1997 to his current position,
Mr. Nodland was Executive Vice President, Chief Operating Officer, and
Secretary of the Company beginning in May 1995. 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.
PATRICK T. HEFFERNAN is Senior Vice President, Coatings Resins of the
Company. Prior to being named in February 1994 to his current position, Mr.
Heffernan was an Assistant Vice President and General Manager of the Midwest
Region of the Resin Products Division of Cargill beginning in January 1986.
Mr. Heffernan held various positions with Cargill since January 1968.
KEVIN W. BROLSMA is Vice President, Powder of the Company. Prior to being
named in May 1996 to his current position, Mr. Brolsma was Vice President,
Operations of the Company beginning in February 1994. 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 January 1990, Mr.
Brolsma was the National Accounts Manager and General Sales Manager of the
Resin Products Division.
DOUGLAS B. RAHRIG is Vice President, Technology of the Company. Prior to
being named in February 1994 to his current position, Dr. Rahrig was
Department Manager of the Technology Department of S.C. Johnson & Son, Inc.
beginning in February 1993. Dr. Rahrig held various technical and management
positions with S.C. Johnson & Son, Inc. since 1985.
LOUISE M. TONOZZI-FREDERICK is Vice President and Chief Financial Officer
of the Company. Prior to being named in September 1996 to her current
position, Ms. Tonozzi-Frederick was Treasurer and Controller beginning in
May 1995. Previously, she was Controller beginning in May 1994, and
prior to then was associated with Mallinckrodt Group, Inc. for seven years
in various financial positions, most recently as Assistant Controller.
Item 11. Executive Compensation
Incorporated by reference from pages 6-8 of the Proxy Statement section
entitled "Executive Compensation."
Item 12. Security Ownership of Certain Beneficial Owners and Management
Incorporated by reference from pages 4-6 of the Proxy Statement section
entitled "Security Ownership of Certain Beneficial Owners."
Item 13. Certain Relationships and Related Transactions
Incorporated by reference from pages 2-8 of the Proxy Statement sections
entitled "Election of Directors," "Security Ownership of Certain Beneficial
Owners" and "Executive Compensation."
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8- K
(a) (1) Financial Statements commence on page 14.
(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:
# 3.1 Certificate of Incorporation, as amended
3.2 By-Laws, as amended
# 4.1 Form of Common Stock Certificate
# 4.2 Rights Agreement
*10.1 Distribution Agreement
*10.2 Environmental Matters Agreement
#10.3 Amended and Restated Technology License Agreement
*10.4 Tax Sharing Agreement
#10.5 Amended and Restated Master Tolling Agreement
*10.8 1994 Stock Incentive Plan
##10.8.1 Amendment to 1994 Stock Incentive Plan
#10.9 Employee Stock Ownership Plan and Trust
#10.10 Employee 401(k) Savings Plan and Trust
**10.11 Sale and Purchase of Assets Agreement between Cargill,
Incorporated and McWhorter, Inc. dated as of May 19, 1993, as
subsequently modified and amended
**10.12 Agreement Containing Consent Order executed as of September 30,
1993 by the Federal Trade Commission, The Valspar Corporation
and McWhorter, Inc.
*10.13 $60,000,000 Credit Agreement dated as of February 1, 1994 among
McWhorter, Inc., McWhorter Technologies, Inc., the Banks listed
therein and Wachovia Bank of Georgia, N.A., as Agent
#10.14 Lease Agreement between McWhorter Technologies, Inc. and The
Valspar Corporation for the lease to McWhorter of office and
laboratory space in Minneapolis, Minnesota
#10.15 Lease Agreement between McWhorter Technologies, Inc. and The
Valspar Corporation for the lease to Valspar of manufacturing,
warehousing, laboratory and office space in Philadelphia,
Pennsylvania
##10.16 Indemnification Agreement dated May 17, 1995 between McWhorter
Technologies, Inc. and John R. Stevenson
####10.16.1 Amendment to Indemnification Agreement dated May 17, 1995
between McWhorter Technologies, Inc. and John R. Stevenson
##10.17 Indemnification Agreement dated May 17, 1995 between McWhorter
Technologies, Inc. and Jeffrey M. Nodland.
####10.17.1 Amendment to Indemnification Agreement dated May 17, 1995
between McWhorter Technologies, Inc. and Jeffrey M. Nodland
##10.18 Indemnification Agreement dated May 17, 1995 between McWhorter
Technologies, Inc. and Michelle L. Collins
####10.18.1 Amendment to Indemnification Agreement dated May 17, 1995
between McWhorter Technologies, Inc. and Michelle L. Collins
##10.19 Indemnification Agreement dated May 17, 1995 between McWhorter
Technologies, Inc. and Edward M. Giles
####10.19.1 Amendment to Indemnification Agreement dated May 17, 1995
between McWhorter Technologies, Inc. and Edward M. Giles
##10.20 Indemnification Agreement dated May 17, 1995 between McWhorter
Technologies, Inc. and D. George Harris
####10.20.1 Amendment to Indemnification Agreement dated May 17, 1995
between McWhorter Technologies, Inc. and D. George Harris
##10.21 Indemnification Agreement dated May 17, 1995 between McWhorter
Technologies, Inc. and Heinn F. Tomfohrde III
####10.21.1 Amendment to Indemnification Agreement dated May 17, 1995
between McWhorter Technologies, Inc. and Heinn F. Tomfohrde III
###10.23 Indemnification Agreement dated December 13, 1995 between
McWhorter Technologies, Inc. and John G. Johnson, Jr.
####10.23.1 Amendment to Indemnification Agreement dated December 13, 1995
between McWhorter Technologies, Inc. and John G. Johnson, Jr.
10.24 1996 Incentive Stock Plan
10.25 1996 Nonemployee Director Stock Option and Award Plan
10.26 Stockholders Agreement for McWhorter Technologies Europe
10.27 Deferred Compensation Plan
11.1 Statement regarding computation of net income per share
23.1 Consent of Independent Auditors
27 Financial Data Schedules
#### Previously filed as exhibit to the Registrant's Form 10-Q for the
quaterly period ended July 31, 1996
### Previously filed as exhibit to the Registrant's Form 10-K Registration
Statement for the fiscal year ended October 31, 1995
## Previously filed as exhibit to the Registrant's Form 10-Q for the
quarterly period ended April 30, 1995.
# Previously filed as exhibit to the Registrant's Form 10-K Registration
Statement for the fiscal year ended October 31, 1994
* Previously filed as exhibit to the Registrant's Form S-1 Registration
Statement (Registration No. 33-75726) originally filed on February 25,
1994
** Previously filed as exhibit to the Registrant's Registration Statement
on Form 10 (File No. 1-12638) filed on December 3, 1993
(b) No reports on Form 8-K were filed during the fourth quarter of 1996.
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, 1997
By: /s/ John R. Stevenson
JOHN R. STEVENSON
Chairman and Chief Executive Officer
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, 1997
JOHN R. STEVENSON
Chairman, Chief Executive Officer and Director
(Principal Executive Officer)
/s/ Jeffrey M. Nodland January 27, 1997
JEFFREY M. NODLAND
President, Chief Operating Officer,
Secretary and Director
/s/ Louise M. Tonozzi-Frederick January 27, 1997
LOUISE M. TONOZZI-FREDERICK
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
/s/ D. George Harris January 27, 1997
D. GEORGE HARRIS
Director
/s/ Michelle L. Collins January 27, 1997
MICHELLE L. COLLINS
Director
/s/ Edward M. Giles January 27, 1997
EDWARD M. GILES
Director
/s/ Heinn F. Tomfohrde, III January 27, 1997
HEINN F. TOMFOHRDE, III
Director
/s/ John G. Johnson, Jr. January 27, 1997
JOHN G. JOHNSON, JR.
Director
EXHIBIT 11.1 - Statement regarding computation of net income per share
Year Ended
October 31, October 31,
1996 1995
Primary
Average common shares outstanding 10,535,456 10,912,348
Less: Shares of restricted stock
awards issued, not yet vested (94,354) (44,604)
Net effect of dilutive stock options--
based on the treasury stock method
using average market price 43,177 10,582
Total 10,484,279 10,878,326
Net income $13,833,000 $11,070,000
Net income per share $ 1.32 $ 1.02
Fully Diluted
Average common shares outstanding 10,535,456 10,912,348
Net effect of dilutive stock
options--based on the treasury
stock method using the year-end
market price, if higher than
average market price 80,778 10,582
Total 10,616,234 10,922,930
Net income $13,833,000 $11,070,000
Net income per share $ 1.30 $ 1.01