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, 1998
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 (Registrant's telephone number
offices 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, 1998, 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
$233,891,000.
As of December 31, 1998, 10,351,329 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 December 29, 1998 ("Proxy Statement")
are incorporated in Part III hereof by reference.
MCWHORTER TECHNOLOGIES, INC.
TABLE OF CONTENTS
Page
----
PART I
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 . . . . . . . . . . . . . . . . . . . 9
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 . . . . . . . . . . . . . 34
PART III
Item 10. Directors and Executive Officers of the Registrant. . . . . . 35
Item 11. Executive Compensation. . . . . . . . . . . . . . . . . . . . 36
Item 12. Security Ownership of Certain Beneficial Owners and
Management. . . . . . . . . . . . . . . . . . . . . . . . . . 36
Item 13. Certain Relationships and Related Transactions. . . . . . . . 36
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K .. . . . . . . . . . . . . . . . . . . . . . . . . . 37
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
2
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.
The Company strengthened its global presence with the purchase of the equity
interests of its joint venture partners in McWhorter Technologies Europe in
the first quarter of 1998. As a result, the Company increased its equity
interest in McWhorter Europe from 33% to 100%. On April 1, 1998, the Company
completed the acquisition of Accurate Coatings and Dispersions, Inc.
(Accurate). Accurate, located in South Holland, Illinois, manufactures and
distributes colorants for the coatings industry. The acquisition of Accurate
expands McWhorter's presence in the colorant market and better enables the
Company to serve its customers. McWhorter purchased Arizona Chemical's
customer list and technology related to its European alkyd resin business in
April 1998.
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.
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
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.
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
crosslinkers 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
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 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.
4
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, and coatings for
beverage containers.
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 400DEG. -500DEG. 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.
Colorants are produced by mixing precise amounts of pigment and solvent 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.
McWhorter's research and development activities have emphasized emerging
technologies in the paint and coatings industry, focusing on developing
products designed to comply with
5
environmental laws and maintain the integrity of a product's performance
characteristics. In 1998, McWhorter completed construction of a new 42,000
square-foot corporate technology center in Carpentersville, Illinois, which
accommodates the Company's U.S. product development, information technology,
technical service, and marketing and sales personnel.
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 1,040 full- and part-time employees worldwide.
ITEM 2. PROPERTIES
The Company's principal plants and facilities have an aggregate square footage
of approximately 1,027,000 square feet, of which 73%, or 745,000 square feet, is
located in the U.S., and approximately 27%, or 282,000 square feet, is located
outside the U.S., primarily in
6
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.
ITEM 3. LEGAL PROCEEDINGS AND ENVIRONMENTAL MATTERS
McWhorter is involved in an administrative proceeding with the California
Department of Toxic Substances Control (DTSC). McWhorter is appealing a
Corrective Action Order issued by the DTSC. Because of the subjective nature
of the Order's requirements and the pending ruling upon the Order's merits
and validity, it is impossible to quantify any potential resulting impact to
liabilities. Other than the above, 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 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, 1998 the estimated amount of probable environmental liability of
McWhorter is approximately $3,420,000. 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. As a result of the
probable recoveries under these indemnification agreements of $2,722,000,
McWhorter's net estimated environmental liability is approximately $698,000.
There are a total of twelve sites at which McWhorter believes it has probable
environmental liability, including three sites for which the estimated liability
is
7
less than $10,000 per site. The maximum estimated amount of environmental
liability attributable to any individual site is approximately $945,000, of
which a significant portion is expected to be reimbursed. During 1998,
McWhorter spent approximately $693,000 on remediation costs, of which
$584,000 was spent for on-site liabilities and has been or is expected to be
reimbursed. During 1999, McWhorter expects to spend approximately $1,854,000
on remediation costs, of which $1,416,000 is expected to be reimbursed under
the indemnification agreeements. During 1998, McWhorter spent approximately
$1,279,000 on capital expenditures to comply with environmental laws and
regulations and during 1999 McWhorter expects to spend approximately
$2,200,000 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 1998.
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 1998 and 1997. The Company did not declare any
cash dividends on its common stock in either fiscal year.
1998 1997
- ----------------------------------------------------------------------------------
LOW HIGH LOW HIGH
First quarter $23.63 $26.38 $13.13 $15.63
Second quarter 24.31 26.50 13.38 18.13
Third quarter 24.00 28.38 16.38 19.38
Fourth quarter 18.88 24.75 17.13 20.13
- ----------------------------------------------------------------------------------
As of December 31, 1998, there were 1,268 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.
8
ITEM 6. SELECTED FINANCIAL DATA
YEAR ENDED
----------------------------------------------------------------------------
IN THOUSANDS, OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31,
EXCEPT PER SHARE AMOUNTS 1998(a) 1997(c) 1996 1995 1994(d)
- --------------------------------------------------------------------------------------------------------------
Net sales $454,930 $331,456 $315,925 $311,398 $242,331
Net income 12,844(b) 15,418(b) 13,833 11,070 8,444(e)
Earnings per share-diluted 1.24(b) 1.48(b) 1.32 1.02 .78(e)
Total assets 362,465 259,182 153,254 138,127 138,563
Long-term debt 130,128 57,152 13,145 19,182 30,087
- --------------------------------------------------------------------------------------------------------------
(a) REFLECTS THE ACQUISITION OF THE MCWHORTER EUROPE JOINT VENTURE AND ACCURATE
SINCE THE DATES OF ACQUISITION
(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
(d) MCWHORTER TECHNOLOGIES, INC. WAS FORMED AS A RESULT OF THE SPIN-OFF ON
APRIL 29, 1994 BY THE VALSPAR CORPORATION OF ITS WHOLLY-OWNED SUBSIDIARY
MCWHORTER INC. INCLUDING THE RESIN PRODUCTS DIVISION (RPD) OF CARGILL
INCORPORATED THAT WAS ACQUIRED BY MCWHORTER ON FEBRUARY 18, 1994. THE PRO
FORMA INFORMATION DOES NOT NECESSARILY REFLECT WHAT THE RESULTS FOR THE
COMPANY WOULD HAVE BEEN HAD IT BEEN AN INDEPENDENT COMPANY OR HAD THE
BUSINESS OF THE COMPANY AND THE RPD BUSINESS BEEN COMBINED DURING THE PRO
FORMA PERIOD.
(e) INCLUDES A CHARGE OF $2,472,000 PRETAX, $1,497,000 AFTER TAXES, OR $.14 PER
SHARE, TO RECOGNIZE THE IMPAIRMENT IN VALUE OF THE LOS ANGELES RESIN
FACILITY. THIS FACILITY WAS TRANSFERRED TO THE VALSPAR CORPORATION DURING
THE SECOND QUARTER AT THE TIME THE COMPANY ACQUIRED THE RESIN PRODUCTS
DIVISION ASSETS OF CARGILL INCORPORATED.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
The following discussion and analysis 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.
OVERVIEW The Company's net sales surpassed the levels achieved in all prior
years as a result of strategic acquisitions completed in 1998 and 1997. In
April 1998, the Company completed the acquisition of substantially all of the
assets of Accurate Coatings and Dispersions, Inc. (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 Company strengthened its
global presence with the purchase of the equity interests of its joint
venture partners in McWhorter Technologies Europe (McWhorter Europe) for
approximately $8,200,000 in the first quarter of 1998. As a result, the
Company increased its equity interest in McWhorter Europe from 33.3 percent
to 100 percent. In April 1998, the Company purchased Arizona Chemical's
customer
9
list and technology related to its European alkyd resin business. In August
1997, the Company completed the acquisition of Syntech S.p.A. and its
affiliated entities and subsidiaries (Syntech) for $48,300,000 in cash and
approximately $17,100,000 in assumed liabilities. Syntech is an Italian based
resin company with two production facilities in Italy and a joint venture in
China. These acquisitions were accounted for using the purchase method. Refer
to Note 2 of the Notes to Consolidated Financial Statements.
The Company completed the construction of a 42,000 square foot research and
development facility in Carpentersville, Illinois during 1998. As a result of
this project, the Company closed its research and development facility in
Minneapolis, Minnesota. Employees from the product development, technical
support, and information technology groups were relocated to the new facility
to serve McWhorter's liquid coating resins, powder coating resins, and
composite polymers businesses. In total, the Company incurred pretax charges
of $1,546,000, $.09 per share after taxes, related to this move. Refer to
Note 14 of the Notes to Consolidated Financial Statements.
In August 1998, the Company announced plans to close its manufacturing
facility in Chicago Heights, Illinois and to write-off its investment in the
McWhorter Thailand joint venture. Pretax charges related to these plans of
$4,650,000, $.27 per share after taxes, and $2,617,000, $.15 per share after
taxes, respectively, were recorded in the fourth quarter of 1998. Additional
pretax charges of approximately $650,000 related to the retention of
employees at the Chicago Heights facility will be recorded in conjunction
with the closing of the facility. The planned closure of the Chicago Heights
facility was 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 will be transferred to the
Company's other U.S. facilities. This transition is expected to be completed
and the facility closed over the next eighteen months. The Company estimates
savings at approximately $2,800,000 per year when completed. The Company's
decision not to proceed further with the construction of the manufacturing
facility in Thailand was influenced by the poor economic prospects for this
joint venture and the level of additional investment that would have been
required to complete the facility. Refer to Note 14 of the Notes to the
Consolidated Financial Statements.
RESULTS OF OPERATIONS 1998 VS. 1997 Net sales for 1998 were $454,930,000
compared to $331,465,000 in the 1997, an increase of 37 percent.
Acquisitions accounted for the entire increase. Volume decreases in the
Company's liquid coating resins business were offset by strong sales in the
composite polymers and powder coating resins businesses. The Company expects
that the continued global integration of its acquisitions, the introduction
of new products, and expansion efforts will lead to improved performance in
all of the Company's businesses in 1999.
The Company's gross profit margin was 16.3 percent in 1998 and 1997. Margins
were favorably impacted by sales mix , internal process improvements, and raw
material price decreases. This impact was offset by absorption issues in the
Company's liquid coating resins
10
business resulting from lower than anticipated volumes. The Company expects
raw material costs to continue to decrease in 1999 and internal process
improvements to continue to favorably impact margins.
Operating expenses (research, selling, general and administrative) were 9.0
percent of sales in 1998 compared to 7.9 percent of sales in 1997. The higher
expenses compared to 1997 resulted primarily from the businesses acquired in
1998 and 1997.
Other expense in 1998 included pretax charges of $931,000, $4,650,000, and
$2,617,000 for the relocation of the research and development facility, the
closing of the Chicago Heights plant, and the write-off of the Thailand joint
venture, respectively. In 1997, other expense included pretax charges of
$811,000 for the relocation of the research and development facility and the
write-off of a tax related receivable. Refer to Note 14 of the Notes to
Consolidated Financial Statements.
Net interest expense was $7,737,000 in 1998 compared to $2,166,000 in 1997.
This comparison reflects higher debt levels due to the acquisitions.
The effective tax rate was 28.4 percent in 1998 and 38.3 percent in 1997.
Tax rates in both years were affected by adjustments that reduced income 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 for 1998 was $15,752,000, or $1.52 per share, excluding net
after-tax charges related to the nonrecurring items discussed in Note 14 of
the Notes to Consolidated Financial Statements. 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.
RESULTS OF OPERATIONS 1997 VS. 1996 Net sales for 1997 were $331,465,000
compared to $315,925,000 in the 1996. The sales increase of 5 percent was
made up of 4 percent from the acquisition of Syntech in August 1997 and a
3 percent volume increase offset by a 2 percent price decrease. Volume
increases in the Company's large national customers were offset by loss of
low margin industrial toll business and delayed timing of inventory
replenishments by certain customers.
The Company's gross profit margin was 16.3 percent in 1997 compared to 15.4
percent in 1996. The 1997 margins were favorably impacted by an increase of
specialty products in the sales mix combined with the continuing focused
efforts in the area of process improvements.
Operating expenses were 7.9 percent of sales in 1997 compared to 7.5 percent of
sales in 1996. The higher expenses compared to 1996 reflect higher headcount
levels, and the
11
amortization of costs related to the acquisition of Syntech.
Other expense in 1997 included charges totaling $811,000, $.05 per share
after taxes, for the estimated amount of employee termination benefits
related to the relocation of the Minneapolis research and development
facility to Carpentersville and the write-off of a tax related receivable.
Net interest expense was $2,166,000 in 1997 compared to $1,653,000 in 1996.
This comparison reflects higher debt levels due to the acquisition of
Syntech. Excluding the acquisition, interest expense in 1997 was impacted by
a reduction in debt of approximately $7,500,000.
The effective tax rate was 38.3 percent in 1997 and 40.5 percent in 1996. The
1997 tax rate reflects the tax benefit of an income tax audit of $591,000, or
$.06 per share.
Net income in 1997 was $15,418,000, or $1.48 per share, compared to
$13,833,000, or $1.32 per share, in 1996. Excluding the acquisition of
Syntech, net income for 1997 was $15,746,000, or $1.52 per share, which
represents a 15 percent increase over 1996 earnings per share.
FINANCIAL CONDITION In 1998, operations generated cash of $23,696,000
compared to $27,583,000 in 1997. The Company's current ratio was 1.5 at the
end of 1998 compared to 1.3 at the end of 1997. Working capital increased
$10,580,000 primarily as a result of higher inventories and receivables in
the U.S. and lower payables in Europe. EBITDA increased to $42,087,000 in
1998 from $37,502,000 in 1997, primarily as a result of the acquired
businesses.
Investing activities used cash of $82,320,000 in 1998 compared to $62,402,000
in 1997 due to the 1998 acquisitions and increased capital expenditures.
Capital expenditures were $25,663,000 in 1998 versus $11,203,000 in 1997. The
1998 capital expenditures were primarily for the construction of the new
research and development facility, powder capacity expansion, the
implementation of an Enterprise Resource Planning (ERP) package, and
productivity improvements. Capital spending for 1999 is expected to be
approximately $30,000,000, primarily for the completion of the ERP project
and capacity expansion for powder, solution acrylics, and composite polymers.
Financing activities provided cash of $58,794,000 in 1998 compared to
$37,688,000 in 1997. Total debt increased to $156,602,000 at October 31, 1998
from $80,858,000 a year ago. The increase was primarily due to borrowings to
fund acquisitions. Debt as a percentage of invested capital increased to
59.3 percent at October 31, 1998 from 46.9 percent a year ago as a result of
the acquisitions.
The Board of Directors of the Company adopted a resolution in 1998
authorizing the repurchase by the Company of up to an aggregate of 500,000
shares of its common stock. As
12
of October 31, 1998, the Company had acquired 33,600 shares at a cost of
$672,000. The resolution expires in May 1999.
The Company has a $150,000,000 unsecured revolving credit facility that
terminates on July 30, 2002. At October 31, 1998, $26,653,000 was available
under this facility. The Company's European subsidiaries, primarily the
Italian subsidiary, have short-term lines of credit that are cancelable at
any time of $28,591,000, of which $13,280,000 was available for future use at
October 31, 1998. These credit facilities and internally generated funds are
expected to be adequate to finance McWhorter's capital expenditures and other
operating requirements in 1999. Refer to Note 6 of the Notes to Consolidated
Financial Statements for discussion of the Company's debt.
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 1998, 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 has completed an assessment of the impact of the year 2000 on its
purchased and internally developed IT systems. The current purchased software
and a majority of the internally developed software is year 2000 compliant.
Non-compliant internally developed software is expected to be replaced by
June 1999. The Company is currently in the process of modifying and testing
its non-IT systems to ensure that these systems will function properly with
respect to dates in the year 2000. The Company has begun formal
communications with significant suppliers and customers to determine the
extent to which the Company's activities would be impacted by those third
parties' failure to remediate their own year 2000 issues.
The estimated costs related to testing and modifying existing systems for
year 2000 compliance are approximately $300,000, of which $200,000 has been
spent or committed to date. Approximately $100,000 of the total compliance
costs are expected to be capital expenditures. No significant information
systems projects have been deferred to accommodate the year 2000 issues.
Year 2000 compliance is expected to be achieved no later than June 1999. The
Company believes that with the planned modifications, year 2000 issues will
not have a material impact on operations. However, if these modifications are
not made, or are not completed on a timely basis, year 2000 issues could
result in the temporary inability to process orders, send invoices, or engage
in similar business activities, which would have a material impact on the
Company's operations. Failure by significant suppliers and customers to be
year 2000 compliant could also have a material impact the Company. The
amounts of potential liability and lost revenue
13
resulting from the failure to be year 2000 compliant cannot be reasonably
estimated at this time.
The Company's contingency plans will be finalized as the testing of systems
is completed. Contingency plans are expected to be completed by the first
quarter of 1999 and will include the manual processes required to perform
critical business functions that could be affected by year 2000 issues.
This is a year 2000 readiness disclosure statement within the meaning of the
Year 2000 Information and Readiness Disclosure Act. (P.L. 105-271)
CAUTIONARY STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT
This report on form 10-K 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, cost
reductions, cash flow, operating improvements, and year 2000 compliance, and
are indicated by words such as "estimates", "expects", 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.
As of October 31, 1998, the Company does not use significant levels of
derivative financial instruments to manage this risk.
The Company had $129,630,000 of long-term variable rate debt outstanding at
October 31, 1998. At this borrowing level, a hypothetical 10% adverse change
in interest rates at October 31, 1998 would have a $750,000 unfavorable
impact on the Company's pretax earnings and cash flows. The primary interest
rate exposures on floating rate debt are with respect to U.S. and European
interbank rates. The majority of the Company's long-term obligations are
variable rate debt. Therefore, the Company's exposure to changes in the fair
value of its
14
financial instruments is not significant.
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 Italian lira and
other European currencies. The fair value of the Company's net foreign
investments would not be materially affected by a 10% adverse change in
foreign currency exchange rates from October 31, 1998 levels.
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.
15
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA PAGE
----
Report of Independent Auditors. . . . . . . . . . . . . . . . . . . . . 17
Statements of Income for the Years Ended October 31, 1998,
1997 and 1996.. . . . . . . . . . . . . . . . . . . . . . . . . . .18
Balance Sheets as of October 31, 1998 and 1997 . . . . . . . . . . . . .19
Statements of Cash Flows for the Years Ended October 31, 1998,
1997 and 1996.. . . . . . . . . . . . . . . . . . . . . . . . . . .20
Statements of Changes in Shareholders' Equity for the Years Ended
October 31, 1998, 1997 and 1996 . . . . . . . . . . . . . . . . . .21
Notes to Financial Statements. . . . . . . . . . . . . . . . . . . . . .22
16
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, 1998 and 1997, and the
related consolidated statements of income, shareholders' equity and cash
flows for each of the three years in the period ended October 31, 1998.
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, 1998 and 1997, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended October 31, 1998, in conformity with
generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
Chicago, Illinois
November 18, 1998
17
MCWHORTER TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED OCTOBER 31,
- ---------------------------------------------------------------------------------------
IN THOUSANDS, EXCEPT PER SHARE AMOUNTS 1998 1997 1996
- ---------------------------------------------------------------------------------------
Net sales $454,930 $331,465 $315,925
Costs and expenses:
Cost of sales (Note 14) 380,971 277,372 267,161
Research 10,818 8,384 7,469
Selling, general and administrative 30,063 17,637 16,368
Other expense (income), net (Note 14) 7,395 923 25
--------------------------------
Income from operations 25,683 27,149 24,902
Interest expense, net 7,737 2,166 1,653
--------------------------------
Income before income taxes 17,946 24,983 23,249
Income tax expense (Note 8) 5,102 9,565 9,416
--------------------------------
Net income $ 12,844 $ 15,418 $ 13,833
--------------------------------
--------------------------------
Earnings per share - basic $ 1.25 $ 1.50 $ 1.32
--------------------------------
--------------------------------
Earnings per share - diluted $ 1.24 $ 1.48 $ 1.32
--------------------------------
--------------------------------
18
See Notes to Consolidated Financial Statements
MCWHORTER TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
YEAR ENDED OCTOBER 31,
------------------------
IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS 1998 1997
- -----------------------------------------------------------------------------
ASSETS
Current assets
Cash $ 4,099 $ 3,929
Accounts receivable less allowances for
doubtful accounts of $1,909 in 1998 and
$1,812 in 1997 82,765 67,762
Inventories (Note 3) 40,207 26,487
Other current assets 12,193 8,743
-----------------------
139,264 106,921
Property, plant and equipment (Note 4) 198,900 148,609
Less accumulated depreciation 58,384 43,315
-----------------------
Net property, plant and equipment 140,516 105,294
Intangibles, net (Notes 2 and 5) 76,117 36,153
Other assets 6,568 10,814
-----------------------
$362,465 $259,182
-----------------------
-----------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Short-term debt (Note 6) $ 26,474 $ 23,706
Trade accounts payable 49,808 43,265
Accrued liabilities (Notes 5 and 9) 17,812 15,276
-----------------------
94,094 82,247
Long-term debt, less current portion (Note 6) 130,128 57,152
Deferred income taxes (Note 8) 23,695 22,446
Accrued environmental liabilities (Note 9) 1,566 2,201
Other liabilities 5,538 3,468
Shareholders' equity
Common stock (par value $.01 per share;
authorized 30,000,000 shares; issued
10,965,547 shares in 1998 and 1997) 110 110
Additional paid-in capital 10,931 10,867
Retained earnings 105,824 92,980
Currency translation adjustments 2,381 (940)
Treasury stock, at cost (644,451 shares
in 1998 and 612,460 shares in 1997) (10,471) (9,716)
Other (Note 10) (1,331) (1,633)
-----------------------
107,444 91,668
-----------------------
$362,465 $259,182
-----------------------
-----------------------
19
See Notes to Consolidated Financial Statements
MCWHORTER TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED OCTOBER 31,
- -------------------------------------------------------------------------------------------
IN THOUSANDS 1998 1997 1996
- -------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $ 12,844 $ 15,418 $ 13,833
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 16,404 10,353 9,079
Deferred income taxes (2,846) 711 3,530
Provision for plant closure and joint venture
write-down 7,267
Other, net 607 906 (87)
Changes in working capital:
Accounts and notes receivable (2,650) 8,674 (5,943)
Inventories (3,537) (2,218) (6,131)
Trade accounts payable and accrued
liabilities (3,340) (5,364) 10,993
Other current assets (1,053) (897) 504
---------------------------------------
Net cash provided by operating activities 23,696 27,583 25,778
---------------------------------------
INVESTING ACTIVITIES
Acquisition spending, net of cash acquired (55,231) (48,318)
Capital expenditures (25,663) (11,203) (6,991)
Investment in joint ventures (1,194) (2,915) (5,467)
Other, net (232) 34 41
---------------------------------------
Net cash used by investing activities (82,320) (62,402) (12,417)
---------------------------------------
FINANCING ACTIVITIES
Increase (decrease) in debt, net 59,318 40,326 (8,624)
Purchase of treasury stock (672) (2,683) (5,683)
Other, net 148 45 102
---------------------------------------
Net cash provided (used) by financing activities 58,794 37,688 (14,205)
---------------------------------------
Increase (decrease) in cash 170 2,869 (844)
Cash at beginning of period 3,929 1,060 1,904
---------------------------------------
Cash at end of period $ 4,099 $ 3,929 $ 1,060
---------------------------------------
---------------------------------------
20
See Notes to Consolidated Financial Statements
MCWHORTER TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
COMMON STOCK ADDITIONAL CURRENCY
-------------------- PAID-IN RETAINED TRANSLATION TREASURY
IN THOUSANDS, EXCEPT SHARE AMOUNTS SHARES AMOUNT CAPITAL EARNINGS ADJUSTMENTS STOCK OTHER
- -----------------------------------------------------------------------------------------------------------------------------
Balance October 31, 1995 10,847,064 $110 $10,895 $63,729 $(1,747) $(1,463)
Net income 13,833
Issuance of common stock for
restricted stock awards 1,483 22
Exercise of stock options 14,693 (114) 216
Purchase of treasury stock (397,300) (5,683)
Currency translation
adjustments $ (74)
--------------------------------------------------------------------------------------
Balance October 31, 1996 10,465,940 110 10,803 77,562 (74) (7,214) (1,463)
Net income 15,418
Issuance of common stock for
restricted stock awards 8,993 69 131 (170)
Exercise of stock options 3,376 (5) 50
Purchase of treasury stock (125,222) (2,683)
Currency translation
adjustments (866)
--------------------------------------------------------------------------------------
Balance October 31, 1997 10,353,087 110 10,867 92,980 (940) (9,716) (1,633)
Net income 12,844
Issuance of common stock for
restricted stock awards 6,300 55 100 (94)
Deferred compensation
stock plan (13,444) (322) 396
Exercise of stock options 8,753 9 139
Purchase of treasury stock (33,600) (672)
Currency translation
adjustments 3,321
--------------------------------------------------------------------------------------
Balance October 31, 1998 10,321,096 $110 $10,931 $105,824 $2,381 $(10,471) $(1,331)
--------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------
21
See Notes to Consolidated Financial Statements
MCWHORTER TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS The Company operates in one business segment, the manufacture and
distribution of resin and colorants used in coatings and composite polymer
industries, and sells primarily to customers located in North America and
Europe.
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 (income), 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, 1998 and 1997 costs were recorded on the last-in, first-out
(LIFO) method for approximately 63 percent and 76 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 The Company adopted SFAS No. 128, "Earnings Per Share"
in 1998 which requires the disclosure of two earnings per share computations:
basic and diluted. Earnings per share (EPS) is computed by dividing net
income by the weighted average number of shares of stock (basic) plus stock
equivalents (diluted) outstanding during the year. Stock
22
equivalents consist primarily of stock options and are included in the
calculation of weighted average shares outstanding using the treasury stock
method. EPS computations for prior years have been restated to reflect this
new standard.
The basic weighted average shares reconciles to diluted weighted average
shares as follows:
1998 1997 1996
-----------------------------------
Basic weighted average shares outstanding 10,240,720 10,299,873 10,441,102
Dilutive effect of common stock equivalents 147,870 92,027 28,689
-----------------------------------
Diluted weighted average shares outstanding 10,388,590 10,391,900 10,469,791
-----------------------------------
-----------------------------------
Options to purchase 102,352 shares of common stock at a weighted average
option price of $25.13 per share were outstanding during 1998 but were not
included in the computation of diluted earnings per share because the options
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 reflected as a separate component of 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.
NEW ACCOUNTING PRONOUNCEMENTS The Financial Accounting Standards Board
(FASB) issued SFAS No. 130, "Reporting Comprehensive Income", SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information", and
SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement
Benefits". SFAS No. 130 establishes standards for reporting and display of
comprehensive income and its components. SFAS No. 131 establishes standards
for reporting information about operating segments and related disclosures
about products and services, geographic areas and major customers. SFAS No.
132 revises current disclosure requirements for employers' pensions and other
retiree benefits. These standards are effective for fiscal years beginning
after December 15, 1997. These standards expand or modify current
disclosures and, accordingly, will have no impact on the Company's reported
financial position, results of operations, or cash flows. The FASB also
issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities". This standard is effective for fiscal years beginning after
June 15, 1999. As of October 31, 1998, the Company had no derivative
instruments. The Company adopted Statement of Position (SOP) 98-1
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use" in 1998. In accordance with SOP 98-1, internal and external
costs incurred to develop internal use software are expensed during the
preliminary project stage and capitalized during the application development
stage and amortized over five to seven years. Costs of computer software
developed or obtained for internal use were immaterial in 1997 and 1996.
23
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 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 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 finalization of the purchase
price for both acquisitions is subject to completion. 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 and
a joint venture in China. 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 pro forma results for 1997 and 1996 below reflect the purchase
price accounting adjustments assuming the Syntech acquisition occurred at the
beginning of each year presented.
Pro Forma Results (Unaudited)
IN THOUSANDS EXCEPT PER SHARE AMOUNTS 1997 1996
- -----------------------------------------------------------------------------
Net Sales $407,495 $408,052
Net Income $ 14,207 $ 12,704
Earnings per Share $ 1.37 $ 1.21
NOTE 3 - INVENTORIES
The major classes of inventories as of October 31 were:
IN THOUSANDS 1998 1997
- ------------------------------------------------------------------------------
Manufactured products $ 26,339 $ 16,407
Raw materials, supplies and work-in-process 13,868 10,080
-----------------------
$ 40,207 $ 26,487
-----------------------
-----------------------
24
Inventories stated at cost as determined by the LIFO method were
approximately $905,000 and $2,276,000 lower at October 31, 1998 and 1997,
respectively, than such costs determined under the FIFO method. Compared to
the FIFO method, the LIFO method increased (decreased) pretax income by
$1,371,000, $(125,000), and $1,358,000 in 1998, 1997, and 1996, respectively,
due to decreased (increased) raw material costs. The related impact on
earnings per share after taxes was $.08, $(.01), and $.08, in 1998, 1997,
and 1996, respectively.
NOTE 4 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment classifications as of October 31 were:
IN THOUSANDS 1998 1997
- ----------------------------------------------------------------------------
Land $ 11,084 $ 9,673
Buildings 39,396 24,257
Machinery and equipment 133,716 108,426
Construction in progress 14,704 6,253
------ -----
198,900 148,609
Less accumulated depreciation 58,384 43,315
------------------------
Net property, plant and equipment $140,516 $105,294
------------------------
------------------------
Depreciation expense for 1998, 1997, and 1996 was $13,993,000, $9,962,000,
and $9,002,000, respectively.
NOTE 5 - OTHER BALANCE SHEET COMPONENTS
The components of certain other balance sheet accounts as of October 31 were:
INTANGIBLES IN THOUSANDS 1998 1997
- ----------------------------------------------------------------------------
Goodwill $ 62,885 $ 24,934
Other 16,536 11,693
------------------------
79,421 36,627
Less accumulated amortization 3,304 474
------------------------
$ 76,117 $ 36,153
------------------------
------------------------
25
ACCRUED LIABILITIES IN THOUSANDS 1998 1997
- ------------------------------------------------------------------
Employee compensation $ 5,002 $ 5,263
Environmental liabilities 1,854 1,288
Other 10,956 $ 8,725
-----------------------
$17,812 $15,276
-----------------------
-----------------------
NOTE 6 - DEBT
Long-term debt as of October 31, consists of the following:
IN THOUSANDS 1998 1997
- --------------------------------------------------------------------
Revolving credit borrowings $123,347 $55,000
Variable rate note payable due semiannually
with final payment due in 2001 5,605
6% note payable due in annual installments with
final payment in 1998 2,164
Variable rate mortgage loans due semiannually
through March 2005 1,555 1,764
11% note payable due in 1998 638
Capital Lease Obligation (Note 7) 498 1,083
Other 286 563
--------------------
131,291 61,212
Less current maturities 1,163 4,060
--------------------
$130,128 $57,152
--------------------
--------------------
The Company has $150,000,000 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, including
facility fee, of up to .875 percent or other alternative rates. The weighted
average interest rate at October 31, 1998 was 5.8 percent. This facility
terminates on July 30, 2002. At October 31, 1998, borrowings totaling
$123,347,000 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, 1999. The weighted average
interest rate at October 31, 1998 for the variable rate note payable and
variable rate mortgage loans was 3.90 percent and 6.56 percent, respectively.
The mortgage loans are guaranteed by mortgages on certain property and
equipment.
The aggregate payments of long-term debt outstanding for the next five years and
thereafter, excluding revolving credit borrowings, are $1,163,000 in 1999,
$1,145,000 in 2000, $5,127,000 in 2001, $212,000 in 2002, $113,000 in 2003, and
$184,000 thereafter.
26
In addition, the Company had $10,000,000 outstanding at October 31, 1998, under
an overnight credit facility with a weighted average interest rate of 5.93
percent. The Company's European subsidiaries, primarily its Italian subsidiary,
have short-term lines of credit that are cancelable at any time of $28,591,000,
at a weighted average interest rate at October 31, 1998 of 4.90 percent, of
which $15,311,000 was outstanding at October 31, 1998.
Interest paid during 1998, 1997, and 1996 was $6,950,000, $2,146,000, and
$1,725,000, respectively. At October 31, 1998, the Company had $4,307,000 in
unissued letters of credit. The carrying value of the Company's debt
approximates fair value at October 31, 1998.
NOTE 7- LEASE COMMITMENTS
The Company leases an industrial site in Italy under a capital lease agreement.
The lease agreement provides the Company with a bargain purchase option at lease
expiration in 1999 and the Company intends to exercise this option. Included in
property, plant, and equipment as of October 31, were the following assets held
under this capital lease:
IN THOUSANDS 1998 1997
- -----------------------------------------------------------------------
Land $1,067 $1,023
Buildings 3,113 2,985
Machinery and equipment 404 388
------------------
4,584 4,396
Less accumulated depreciation 155 20
------------------
$4,429 $4,376
------------------
------------------
Amortization of leased assets is included in depreciation and amortization and
in accumulated depreciation. The total and current capital lease obligation at
October 31, 1998 is $498,000. Total future minimum payments under the capital
lease, including interest of $24,000, is $522,000, payable in 1999.
NOTE 8 - INCOME TAXES
The components of the provision for income taxes for the years ended October 31
were:
IN THOUSANDS 1998 1997 1996
- ----------------------------------------------------------------
Current:
Federal $5,399 $7,035 $4,568
State 1,175 1,523 1,318
Foreign 1,374 296
-----------------------------
Total current income taxes 7,948 8,854 5,886
Deferred income taxes (2,846) 711 3,530
------------------------------
Total income taxes $5,102 $9,565 $9,416
------------------------------
------------------------------
27
Income taxes paid during 1998, 1997 and 1996 were $7,350,000, $8,416,000 and
$5,315,000, 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 as of October 31, were:
IN THOUSANDS 1998 1997
- ------------------------------------------------------------------------
Deferred tax assets:
Employee compensation $ 1,079 $ 798
Chicago Heights closure 1,860
Thailand capital loss carryover 982
Other 1,735 1,811
------------------------
Total deferred tax assets 5,656 2,609
Deferred tax liabilities:
Tax over book depreciation 22,869 21,711
Other 2,047 1,150
------------------------
Total deferred tax liabilities 24,916 22,861
Net deferred tax liability $19,260 $20,252
------------------------
------------------------
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:
DOLLARS IN THOUSANDS 1998 1997 1996
- --------------------------------------------------------------------------
Statutory rate applied to
pretax income (35%) $6,281 $8,744 $8,138
Effect of:
State income taxes (net of
federal tax benefit) 531 1,078 1,170
Foreign tax rate differential 664 111
Adjustment from income tax audit (591)
Foreign tax law changes (2,311)
Other, net (63) 223 108
------------------------------------
$5,102 $ 9,565 $9,416
------------------------------------
------------------------------------
Effective tax rate 28.4% 38.3% 40.5%
------------------------------------
------------------------------------
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.
28
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, 1998 the estimated amount of probable environmental liability of
the Company is approximately $3,420,000. 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 $2,722,000 under the
indemnification agreements above, the Company's net estimated environmental
liability is approximately $698,000.
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 $1,158,000, $1,557,000, and $1,556,000 in 1998,
1997, and 1996, respectively. The total costs of the ESP were $575,000,
$568,000, and $515,000 in 1998, 1997, and 1996, 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
29
plan which vest upon the completion of 5 years employment. Deferred
compensation liability at the end of 1998 was $974,000 of which $396,000 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, 1998 was $357,000. The shares of the Company's
stock in the trust are classified as treasury stock and the associated
liability of $396,000 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, 1998 and 1997 of $2,307,000 and $2,015,000,
respectively, is the amount to which the employee is entitled for services
rendered to date. Amounts charged to expense in 1998 and 1997 were $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
276,302 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 June 1, 2008. 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 31, 1995 409,244 $15.86
Granted 55,636 15.49
Exercised (14,693) 7.03
Canceled (3,802) 18.61
-----------
Options outstanding October 31, 1996 446,385 16.09
Granted 116,258 22.68
Exercised (3,376) 13.09
Canceled (4,405) 18.18
-----------
Options outstanding October 31, 1997 554,862 17.47
Granted 92,158 25.33
Exercised (8,753) 16.93
Canceled (23,429) 24.05
-----------
Options outstanding October 31, 1998 614,838 18.43
-----------
-----------
Options exercisable at October 31, 1998 349,656 16.47
-----------
-----------
30
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 1998, 1997 and 1996 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 in 1998, 1997, and 1996. The weighted average fair value for the 1998,
1997, and 1996 option grants was $8.01, $7.33, and $4.95, respectively. The
fair value at the date of grant was determined using the Black-Scholes option
pricing model with the assumptions below. In management's opinion, the
Company's employee stock options 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.
1998 1997 1996
----------------------------------
Assumptions:
Weighted average risk-free interest rate 5.67% 5.98% 5.98%
Expected dividend yield 0% 0% 0%
Expected volatility 21.9% 21.6% 21.6%
Weighted average expected life of
options (in years) 5 5 5
The exercise price for the options outstanding as of October 31, 1998 ranged
from $13.78 to $27.94 with a weighted average remaining contractual life of 6.9
years segregated as follows:
Range of exercise prices $13.78-$18.61 $20.13-$27.94
- -------------------------------------------------------------------------------
Outstanding options:
Number 429,622 185,216
Weighted average remaining contractual life
(in years) 5.92 9.05
Weighted average exercise price $16.09 $23.75
Exercisable options:
Number 330,507 19,149
Weighted average exercise price $16.13 $22.39
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 five-year performance period. Restricted shares
granted under the plan were 3,800 in 1998 at a market value of $24.81 per share;
7,493 in 1997 at market value of $22.75 per share; and 94,354 in 1995 at a
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 1998, 1997 and 1996.
31
The Company also issued 2,500, 1,500, and 1,483 restricted and deferred shares
in 1998, 1997 and 1996, respectively, with vesting periods of up to three years.
Amounts charged to expense were $4,000 in 1998, $30,000 in 1997, and $22,000 in
1996.
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
36,231 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
3,884, 3,814 and 6,071 in 1998, 1997 and 1996, respectively, and amounts charged
to expense were $93,000, $93,000 and $110,000 in 1998, 1997, and 1996,
respectively.
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 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 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- GEOGRAPHIC SEGMENTS INFORMATION
The Company's operations include foreign subsidiaries beginning in August 1997.
Prior to that, all the Company's facilities were in the U. S. Inter-geographic
sales are not significant. The Company operates facilities in the U. S. and
Europe. Sales, operating income, and identifiable assets for the European
operations in 1998 were 26 percent, 25 percent, and 37
32
percent of the consolidated totals, respectively. In 1997, the comparable
percentages were 3 percent, 3 percent, and 35 percent of the consolidated
totals.
NOTE 14- NONRECURRING ITEMS
Fourth quarter 1998 expense (income), 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 (income), 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 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 (income), net includes a second quarter charge 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, 1998 second quarter and 1997 second quarter were impacted by
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 will be transferred to the Company's other U.S. facilities.
Approximately 36 employees will be impacted by the closing. The 1998 charge for
the Chicago Heights facility closing is composed of approximately $4,240,000 for
the write-down of plant and equipment with a carrying value of $4,800,000 to
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. The Company's decision not to proceed further with the construction
of the manufacturing facility in Thailand was influenced by the poor economic
prospects for this joint venture and the level of additional investment that
would have been required to complete the facility.
33
NOTE 15 - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
IN THOUSANDS, NET SALES GROSS NET EPS EPS
EXCEPT PER SHARE AMOUNTS PROFIT INCOME BASIC DILUTED
- ---------------------------------------------------------------------------------------
Fiscal 1998 quarter ended (a):
January 31 $ 98,120 $ 12,989 $ 1,209 $ .12 $ .12
April 30 (b) 115,614 18,851 6,360 .62 .61
July 31 (b) 125,770 21,869 4,852 .47 .47
October 31 (b) 115,426 20,250 423 .04 .04
--------------------------------------------------------
$454,930 $73,959 $12,844 $1.25 $1.24
--------------------------------------------------------
--------------------------------------------------------
Fiscal 1997 quarter ended:
January 31 $ 71,534 $10,848 $ 2,514 $ .24 $ .24
April 30 (b) 80,882 12,737 3,876 .38 .37
July 31 85,581 14,563 4,832 .47 .47
October 31 (a) 93,468 15,945 4,196 .41 .40
--------------------------------------------------------
$331,465 $54,093 $15,418 $1.50 $1.48
--------------------------------------------------------
--------------------------------------------------------
(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.
34
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
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 56 Chairman and Chief Executive Officer
Jeffrey M. Nodland 43 President and Chief Operating Officer
Patrick T. Heffernan 49 Senior Vice President, Liquid Coating Resins
Kevin W. Brolsma 44 Vice President, Acquisitions Integration/
Environmental, Health and Safety
Douglas B. Rahrig 47 Vice President, Technology
Louise M. Tonozzi-Frederick 42 Vice President and Chief Financial Officer
and Secretary
Douglas J. Graff 47 Vice President, Composite Polymers
JOHN R. STEVENSON is Chairman and Chief Executive Officer of the Company.
Effective February 1999, Mr. Stevenson's Chief Executive Officer
responsibilities will be assumed by Jeffrey M. Nodland, current President and
Chief Operating Officer. Mr. Stevenson will retain his responsibilities as
Chairman. 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 and Chief Operating Officer of the Company.
Effective February 1999, Mr. Nodland will assume Chief Executive Officer
responsibilities. 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, Liquid Coating 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
35
Cargill beginning in January 1986. Mr. Heffernan held various positions with
Cargill since January 1968.
KEVIN W. BROLSMA is Vice President, Acquisitions Integration/Environment, Health
and Safety of the Company. Effective February 1999, Mr. Brolsma will assume
Vice President Global Operations duties which include responsibility for
worldwide manufacturing. Prior to being named in August 1997 to his current
position, Mr. Brolsma was Vice President, Powder of the Company beginning in May
1996 and 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, Chief Financial Officer and
Secretary 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 Mallinkrodt Group, Inc. for seven years in various financial
positions, most recently as Assistant Controller.
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 held various positions with Cargill since
July 1973.
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."
36
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 Form 10-K Registration
amended 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
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 Form 10-K Registration
License Agreement Statement for the fiscal
year ended October 31, 1994
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 Tolling Form 10-K Registration
Agreement Statement for the fiscal
year ended October 31, 1994
37
Exhibit Incorporated Herein
Number Description by Reference to
- ----------------------------------------------------------------------------------
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
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
10.11 Sale and Purchase of Assets Agreement Registration Statement on
between Cargill, Incorporated and Form 10 (File No. 1-12638)
McWhorter, Inc. dated as of May 19, filed on December 3, 1993
1993, as subsequently modified and
amended
10.12 Agreement Containing Consent Order Registration Statement on
executed as of September 30, 1993 by the Form 10 (File No. 1-12638)
Federal Trade Commission, The Valspar filed on December 3, 1993
Corporation and McWhorter, Inc.
10.16.2 Indemnification Agreement dated November
12, 1998 between McWhorter Technologies,
Inc. and John R. Stevenson
10.17 Indemnification Agreement dated May 17, Form 10-Q for the
1995 between McWhorter Technologies, quarterly period ended
Inc. and Jeffrey M. Nodland. April 30, 1995
10.17.1 Amendment to Indemnification Agreement Form 10-Q for the
dated May 17, 1995 between McWhorter quarterly period ended
Technologies, Inc. and Jeffrey M. July 31, 1996
Nodland
38
Exhibit Incorporated Herein
Number Description by Reference to
- ----------------------------------------------------------------------------------
10.18.1 Amendment to Indemnification Agreement Form 10-Q for the
dated May 17, 1995 between McWhorter quarterly period ended
Technologies, Inc. and Michelle L. July 31, 1996
Collins
10.19 Indemnification Agreement dated May 17, Form 10-Q for the
1995 between McWhorter Technologies, quarterly period ended
Inc. and Edward M. Giles April 30, 1995
10.19.1 Amendment to Indemnification Agreement Form 10-Q for the
dated May 17, 1995 between McWhorter quarterly period ended
Technologies, Inc. and Edward M. Giles July 31, 1996
10.20 Indemnification Agreement dated May 17, Form 10-Q for the
1995 between McWhorter Technologies, quarterly period ended
Inc. and D. George Harris April 30, 1995
10.20.1 Amendment to Indemnification Agreement Form 10-Q for the
dated May 17, 1995 between McWhorter quarterly period ended
Technologies, Inc. and D. George Harris July 31, 1996
10.21 Indemnification Agreement dated May 17, Form 10-Q for the
1995 between McWhorter Technologies, quarterly period ended
Inc. and Heinn F. Tomfohrde III April 30, 1995
10.21.1 Amendment to Indemnification Agreement Form 10-Q for the
dated May 17, 1995 between McWhorter quarterly period ended
Technologies, Inc. and Heinn F. July 31, 1996
Tomfohrde III
10.23 Indemnification Agreement dated December Form 10-K Registration
13, 1995 between McWhorter Technologies, Statement for the fiscal
Inc. and John G. Johnson, Jr. year ended October 31,
1995
10.23.1 Amendment to Indemnification Agreement Form 10-Q for the
dated December 13, 1995 between quarterly period ended
McWhorter Technologies, Inc. and John G. July 31, 1996
Johnson, Jr.
10.24 1996 Incentive Stock Plan Form 10-K Registration
Statement for the fiscal
year ended October 31,
1996
39
Exhibit Incorporated Herein
Number Description by Reference to
- ----------------------------------------------------------------------------------
10.25 1996 Nonemployee Director Stock Option Form 10-K Registration
and Award Plan Statement for the fiscal
year ended October 31,
1996
10.26 Stockholders Agreement for McWhorter Form 10-K Registration
Technologies Europe Statement for the fiscal
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 Form 10-Q for the
July 30, 1997 among McWhorter quarterly period ended
Technologies, Inc., the banks listed July 31, 1997
therein and Wachovia Bank of Georgia,
N.A., as agent
10.29 Stock Purchase Agreement By and Between Form 8-K dated August 11,
McWhorter Technologies, Inc. and 1997
Antonio Napoli & C.s.a.p.a. and Gestin
S.r.l.
10.30 Warrant Purchase Agreement Between Form 8-K dated August 11,
McWhorter Technologies, Inc. and Cable 1997
Beach Holdings Ltd.
10.31 Waiver and First Amendment to the Form 10-K Registration
$150,000,000 Credit Agreement Statement for fiscal year
ended October 31, 1997
10.32 Asset Purchase Agreement by and among Form 10-Q for the
Accurate Coatings & Dispersions, Inc., quarterly period ended
the principal stockholders thereof and April 30, 1998
McWhorter Technologies, Inc. dated as
of March 23, 1998
21.1 Subsidiaries of Registrant
23.1 Consent of Independent Auditors
27.1 Financial Data Schedules
40
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 25, 1999
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 25, 1999
- -------------------------------------
JOHN R. STEVENSON
Chairman, Chief Executive Officer and Director (Principal Executive Officer)
/s/ Jeffrey M. Nodland January 25, 1999
- -------------------------------------
JEFFREY M. NODLAND
President, Chief Operating Officer, and Director
/s/ Louise M. Tonozzi-Frederick January 25, 1999
- -------------------------------------
LOUISE M. TONOZZI-FREDERICK
Vice President, Chief Financial Officer and Secretary (Principal Financial
and Accounting Officer)
/s/ D. George Harris January 25, 1999
- -------------------------------------
D. GEORGE HARRIS
Director
/s/ Michelle L. Collins January 25, 1999
- -------------------------------------
MICHELLE L. COLLINS
Director
/s/ Edward M. Giles January 25, 1999
- -------------------------------------
EDWARD M. GILES
Director
/s/ Heinn F. Tomfohrde, III January 25, 1999
- -------------------------------------
HEINN F. TOMFOHRDE, III
Director
/s/ John G. Johnson, Jr. January 25, 1999
- -------------------------------------
JOHN G. JOHNSON, JR.
Director
41