UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
______________
FORM 8-K/A
AMENDMENT OR REPORT FILED
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported):
October 7, 1997 ( August 1, 1997)
McWhorter Technologies, Inc.
(Exact Name of Registrant as Specified in Charter)
Amendment No. 1
Delaware 1-12854 36-3919940
(State or Other Jurisdiction (Commission (IRS Employer
of Incorporation) File Number) Identification No.)
400 East Cottage Place, Carpentersville, Illinois
60110
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code:
847-428-2657
(Former Name or Former Address, if Changed Since Last Report)
The undersigned registrant hereby amends the following
item, financial statements, exhibits or other portions
of its Form 8-K dated August 11, 1997 as set forth in
the pages attached hereto:
Item 2. Acquisition or Disposition of Assets
Item 7. Financial Statements, Pro Forma
Financial Information, and Exhibits
<PAGE>
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS.
On August 1, 1997, McWhorter Technologies, Inc.
(the "Company") completed the acquisition of Syntech
S.p.A. and its affiliated entities and subsidiaries.
The aggregate consideration paid was $47,107,128 in cash
and approximately $15,500,000 of debt assumed. The cash
portion of the purchase consideration was made available
from the Company's $150,000,000 credit facility.
The transaction involved the acquisition of all of
the outstanding stock and warrants of Synthetic Resin
Technologies S.A., the Luxembourg holding company of
Syntech S.p.A. , and all of the stock of Syntech, Inc.
from Antonio Napoli & C.s.a.p.a., Gestin S.r.l. and
Cable Beach Holdings Ltd. Upon completion of the
transaction, the Company contributed such stock and
warrants to its wholly-owned U.K. subsidiary McWhorter
Holdings Ltd., and the Luxembourg holding company was
liquidated.
The acquisition requires the filing of financial
statements and pro forma financial information pursuant
to Rule 3-05(b) and Article 11 of Regulation S-X.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL
INFORMATION AND EXHIBITS.
(a) Financial statements of business acquired:
Report of Reconta Ernst & Young S.p.A........................ F-2
Consolidated Balance Sheet as of December 31, 1996.......... F-3
Consolidated Statement of Income for the Year Ended
December 31, 1996......................................... F-4
Consolidated Statement of Cash Flows for the Year Ended
December 31, 1996......................................... F-5
Statement of Changes in Shareholders' Equity for the
Year Ended December 31, 1996.............................. F-6
Notes to Consolidated Financial Statements................... F-7
Consolidated Statements of Income for Three Months
Ended March 31, 1997 and 1996 (unaudited)................. F-19
Consolidated Balance Sheet as of March 31, 1997 (unaudited).. F-20
Consolidated Statements of Cash Flows for Three Months Ended
March 31, 1997 and 1996 (unaudited)...................... F-21
<PAGE>
(b) Pro forma financial information
McWhorter Technologies, Inc. and Syntech S.p.A. Pro Forma
Consolidated Financial Statements (unaudited)............ F-22
Pro Forma Consolidated Balance Sheet as of April 30, 1997
(unaudited).............................................. F-23
Pro Forma Consolidated Statement of Income for the Year
Ended October 31, 1996 (unaudited)....................... F-24
Pro Forma Consolidated Statements of Income for the
Six Months Ended April 30, 1997 (unaudited).............. F-25
Notes to Pro Forma Consolidated Balance Sheet................ F-26
Notes to Pro Forma Consolidated Statements of Income......... F-27
The unaudited pro forma consolidated balance sheet as of
April 30, 1997, gives effect to the acquisition of
Syntech S.p.A. by McWhorter Technologies, Inc. as if the
acquisition, accounted for as a purchase, had occurred
on April 30, 1997. The unaudited pro forma consolidated
statements of income for the year ended October 31, 1996,
and the six month period ended April 30, 1997, give
effect to the acquisition as if the acquisition had
occurred at the beginning of the period presented. The
pro forma information is based on historical financial
statements of Syntech S.p.A. and McWhorter Technologies,
Inc. after giving effect to the proposed transaction
using the purchase method of accounting and the
assumptions and adjustments in the accompanying notes to
the pro forma consolidated financial statements.
McWhorter Technologies, Inc. will continue its review to
determine the fair value of the acquired assets and
liabilities. The pro forma consolidated financial
statements have been prepared on the basis of
preliminary estimates.
These pro forma financial statements may not be
indicative of the results that actually would have
occurred if the combination not been in effect on the
dates indicated or which may be obtained in the future.
The pro forma financial statements should be read in
conjunction with the audited financial statements of
McWhorter Technologies, Inc. for the year ended October
31, 1996, and the audited financial statements of Syntech
S.p.A. for the year ended December 31, 1996.
(c) Exhibits.
2.1 Stock Purchase Agreement By and
Between McWhorter Technologies, Inc.
and Antonio Napoli & C.s.a.p.a. and
Gestin S.r.l. (previously filed on
Form 8-K).
2.2 Warrant Purchase Agreement Between
McWhorter Technologies, Inc. and
Cable Beach Holdings Ltd. (previously
filed on Form 8-K).
23.1 Consent of Reconta Ernst & Young S.p.A.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities
Exchange Act of 1934, the registrant has duly caused
this amendment to be signed on its behalf by the
undersigned hereunto duly authorized.
McWhorter Technologies, Inc.
/s/ Louise M. Tonozzi-Frederick
Louise M. Tonozzi- Frederick
Vice President and Chief Financial Officer
Date: October 7, 1997
<PAGE>
SYNTECH S.p.A. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1996
WITH
REPORT OF INDEPENDENT AUDITORS
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors of
Syntech S.p.A.
We have audited the accompanying consolidated balance sheet of Syntech S.p.A.
and Subsidiaries as of December 31, 1996, and the related consolidated
statements of income, shareholders' equity and cash flows for the year then
ended. These financial statements are the responsibility of the companies'
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. 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
audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Syntech S.p.A. and Subsidiaries at December 31, 1996 and the results of their
operations and their cash flows for the year then ended, in conformity with
accounting principles generally accepted in the United States of America.
/s/ Reconta Ernst & Young S.p.A.
RECONTA ERNST & YOUNG S.p.A.
Milan, Italy
July 24, 1997
<PAGE>
<TABLE>
Syntech S.p.A. and Subsidiaries
Consolidated Balance Sheet
as of December 31, 1996
<CAPTION>
Millions of Thousands of
ASSETS Lire U.S. Dollars (1)
<S> <C> <C>
Current assets
Cash 2,626 1,545
Accounts receivable, less
allowance for doubtful
accounts of Lire 2,163 40,930 24,076
Inventories
Finished products 5,355 3,150
Raw materials 5,879 3,458
11,234 6,608
Accounts receivable -
affiliates 938 552
Taxes receivable 461 271
Deferred income taxes (Note 9) 1,152 678
Other current assets 792 466
Total current assets 58,133 34,196
Property, plant and equipment
(Note 3) 61,620 36,247
Less accumulated depreciation (32,348) (19,028)
29,272 17,219
Investments in, and advances to,
equity investees 2,696 1,586
90,101 53,001
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Short-term borrowings (Note 4):
From banks 22,435 13,197
From Gestin S.r.l. 1,300 765
Trade accounts payable 32,087 18,875
Current portion of long-term
debt (Note 5) 2,861 1,683
Current portion of capital
lease obligation (Note 10) 931 548
Income taxes payable 1,260 741
Debentures held by Gestin
(Note 6) 1,200 706
Payable to affiliates 385 226
Accrued expenses 1,874 1,102
Other current liabilities 1,970 1,159
Total current liabilities 66,303 39,002
Long-term debt, less current
portion (Note 5) 3,094 1,820
Capital lease obligations, less
current portion (Note 10) 1,617 951
Termination indemnities (Note 7) 3,212 1,889
Deferred income taxes (Note 9) 5,132 3,019
Shareholders' equity (Notes 1 and 8)
Common stock, Lire 1,000 par
value: authorized, issued and
outstanding 5,220,000 shares 5,220 3,071
Additional paid-in capital 26 15
Retained earnings 5,497 3,234
10,743 6,319
90,101 53,001
(1) Exchange rate: Lire 1,700 = 1 U.S. dollar as of July 1, 1997
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE>
<TABLE>
Syntech S.p.A. and Subsidiaries
Consolidated Statement of Income
for the year ended December 31, 1996
<CAPTION>
Millions of Thousands of
Lire U.S. Dollars (1)
<S> <C> <C>
Net sales 142,060 83,565
Other revenues:
- equity in earnings of investees 219 129
- royalties 269 158
- other services 447 935 263 550
142,995 84,115
Costs and expenses
Cost of sales 113,597 66,822
Research 2,303 1,355
Selling 11,777 6,928
General and administrative 7,136 4,198
Other (income) expense, net 266 156
Income from operations 7,916 4,656
Interest expense, net of interest
income of Lire 297 3,487 2,051
Income before provision for income
taxes 4,429 2,605
Provision for income taxes (Note 9) 1,795 1,056
Net income for the year 2,634 1,549
(1) Exchange rate: Lire 1,700 = 1 U.S. dollar as of July 1, 1997
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE>
<TABLE>
Syntech S.p.A. and Subsidiaries
Consolidated Statement of Cash Flows
for the year ended December 31, 1996
<CAPTION>
Millions of Thousands of
Lire U.S. Dollars (1)
<S> <C> <C>
Operating activities
Net income 2,634 1,549
Adjustments to reconcile net income
to net cash provided (used) by
operating activities:
Depreciation and amortization 3,460 2,035
Deferred income taxes 735 432
Provision for termination indemnities 651 383
Provision for doubtful accounts 551 324
Equity in earnings of equity investees (221) (130)
Changes of operating assets and liabilities:
Accounts receivable 3,373 1,984
Inventories 1,526 898
Trade accounts payable (1,518) (893)
Decrease in other current assets 763 449
Increase in current liabilities 1,918 1,128
Payment of termination indemnities (57) (34)
Net cash provided by operating activities 13,815 8,126
Investing activities
Additions to property, plant and equipment (3,074) (1,808)
Investment in and advances to equity
investee (1,876) (1,104)
Net cash used in investing activities (4,950) (2,912)
Financing activities
Net change in short-term borrowings (6,975) (4,103)
Net increase in short-term borrowings
from Gestin S.r.l. 800 471
Payments on long-term debt and capital
lease obligation (4,444) (2,614)
Proceeds from long-term debt 1,850 1,088
Dividends paid (300) (176)
Net cash used in financing activities (9,069) (5,335)
Net decrease in cash and cash equivalents (204) (120)
Cash at beginning of year 2,830 1,665
Cash at end of year 2,626 1,545
Supplementary information:
Interest paid 3,917 2,304
Income taxes paid 398 234
(1) Exchange rate: Lire 1,700 = 1 U.S. dollar as of July 1, 1997
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE>
<TABLE>
Syntech S.p.A. and Subsidiaries
Statement of Changes in Shareholders' Equity
for the year ended December 31, 1996
(in millions of Italian Lire unless indicated otherwise)
<CAPTION>
Additional
Common paid in Retained
Stock capital earnings Total
<S> <C> <C> <C> <C>
Balance, December 31, 1995 5,220 26 3,163 8,409
Net income for the year 2,634 2,634
Dividends paid (300) (300)
Balance, December 31, 1996 5,220 26 5,497 10,743
Balance, December 31, 1996
in thousands of U.S. Dollars(1) 3,071 15 3,234 6,319
(1) Exchange rate: Lire 1,700 = 1 U.S. dollar as of July 1, 1997
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE>
Syntech S.p.A. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1996
(in millions of Italian Lire unless indicated otherwise)
1. Background and Basis of Presentation
At December 31, 1996, Syntech S.p.A. (the Company) was a wholly-owned subsidiary
of Gestin S.r.l.(Gestin). It was formed by Gestin in 1992 through the merger
of two of its wholly-owned subsidiaries (ICS Resine Sintetiche S.p.A. and
Novaresine S.p.A.). This consolidation of interests has been accounted for
in the accompanying consolidated financial statements as a reorganization
under common control under which it is assumed that the companies have been
combined since they were formed or acquired by Gestin. Consequently, the
carrying amounts of the assets and liabilities of the combined entities were
not adjusted at their transfer dates in accounting for the reorganization
and the equity sections of the two companies were combined.
On June 4, 1997, Gestin S.r.l. transferred 50% of its shares in Syntech S.p.A.
to a third party, Fintes S.r.l. Effective July 15 and 16, 1997 Gestin S.r.l.
and Fintes S.r.l. transferred their ownership of the Syntech shares to a
newly formed Company, Syntech Resin Technologies S.A. located in Luxembourg,
who became the 100% owner of Syntech S.p.A.. The agreement between Syntech
Resin Technologies S.A. and Fintes S.r.l. includes an irrevocable re-acquisition
right by the latter of the same shares sold, exercisable at any time and for
the same price, by Fintes S.r.l. up to December 15, 1997. In addition, the
shares of Syntech S.p.A. sold by Fintes S.r.l. remain pledged in favor of the
former shareholder up to December 15, 1997. Fintes S.r.l. may, at its own
decision, relinquish the re-acquisition right and the pledge on the Syntech
shares at any time before December 15, 1997.
The Company operates in one business segment for the research, development,
production and distribution of industrial synthetic resins used primarily in
the production of liquids and powder paints. Production activity is
conducted in two plants located in Italy. As indicated in Note 13,
approximately 43% of sales are for the export market.
The consolidated financial statements include the accounts of Syntech S.p.A.
and its wholly-owned selling subsidiaries, Syntech France and Syntech Inc.
The interest in the latter subsidiary has been increased in 1996 from 67% to
100% with the acquisition of the 33% minority interest from a third
party. The acquisition has been accounted for using the purchase method of
accounting and the results of operations reflect the increased ownership from
the date of acquisition. The acquisition did not have a significant effect on
the 1996 operating results.
The Company also has a 50% equity interest in Syntech Far East, a company based
in China, and a 49% equity interest in Raisio S.r.l., a sales company based in
Italy. These investments are accounted for under the equity method of
accounting. At December 31, 1996, the equity in accumulated earnings of these
companies since date of acquisition was immaterial because the
investee companies have recently commenced operations.
<PAGE>
Syntech S.p.A. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1996
(in millions of Italian Lire unless indicated otherwise)
The Companies maintain their accounting records in order to prepare financial
statements for local reporting purposes in the countries in which they operate.
Adjustments have been made to such financial statements to present them, on a
consolidated basis, in conformity with generally accepted accounting principles
in the United States of America (U.S. GAAP). These adjustments relate
principally to different methods of reporting inventories, property plant and
equipment, depreciation, intangibles, accruals and provisions, recording
leases and deferred income taxes in addition to the consolidation adjustments.
The net effect of these adjustments is to increase net income for the
current year by Lire 970 and net equity at December 31, 1996, by Lire 2,970.
2. Significant Accounting Policies
Principles of Consolidation. All significant intercompany transactions have
been 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.
Revenue Recognition. Sales are recorded as revenue when ownership is
transferred to customers, generally upon the shipment of products.
Inventories. Inventories are valued at the lower of cost or market. Cost is
determined on a FIFO basis.
Property, Plant and Equipment. Property, plant and equipment is recorded at
their historical cost. All expenditures for additions and improvements are
capitalized. Normal maintenance and repair costs for property, plant and
equipment are charged to expense as incurred.
Depreciation is provided on a straight-line basis over the estimated economic
lives of the assets as follows:
Buildings 33 years
Machinery and equipment 15 years
Tools, fittings, furniture and fixtures 4 to 8 years
Foreign Currency Translation. The financial statements of foreign subsidiaries
and equity investments have been translated into Italian Lire in accordance
with FASB Statement No. 52, Foreign Currency Translation. All balance sheet
accounts have been translated at the exchange rate
<PAGE>
Syntech S.p.A. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1996
(in millions of Italian Lire unless indicated otherwise)
in effect at year-end. Income statement accounts have been translated using the
average exchange rate for the year. The accumulated effect of the gains and
losses resulting from changes in exchange rate through December 31, 1996, has
been insignificant.
Foreign Currency Transactions. Transactions denominated in foreign currencies
are recorded at the exchange rate of the relevant transaction dates. Monetary
assets and liabilities denominated in foreign currencies are translated at
the exchange rate in effect at year-end. The translation gains and
losses are included in income.
Income Taxes. Income taxes have been recorded using the liability method in
accordance with FASB Statement No 109, Accounting for Income Taxes.
Accordingly, the deferred income tax assets and liabilities reported in the
balance sheet reflect the tax effects of temporary differences between
reported amounts of assets and liabilities for financial reporting purposes and
those used for income tax purposes. Deferred tax assets are reduced by a
valuation allowance, if based on the weight of evidence available, it is more
likely than not that some portion or all of the deferred tax assets will
not be realized. A valuation allowance has been made for the NOL of the US
subsidiary.
Research and Development Costs. All research and development costs are
charged to earnings as incurred.
Lease agreements. Lease agreements are accounted in accordance with FASB
Statement No. 13, Accounting for Leases. Assets utilized under a lease
agreement classified as a capital lease have been capitalized under property,
plant and equipment. The amount capitalized as property, plant and
equipment represents the purchase cost of the assets which is depreciated over
their estimated economic lives and the amount of the obligation reported as a
liability in the balance sheet represents the present value of the lease
obligation. Rentals for lease agreements classified as operating leases
are charged to expense over the lease term.
Long-lived assets. In March 1995, SFAS No. 121, Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed Of, was issued.
That Statement requires impairment losses to be recorded on long-lived
assets used in operations when indicators of impairment are present and the
undiscounted cash flows estimated to be generated by those assets
are less than the assets' carrying amount. Statement 121 also addresses
the accounting for long-lived assets that are expected to be disposed of.
The Group adopted this Statement starting from 1996 and the effect of the
adoption was not material because the Company s prior impairment recognition
practice was consistent with the major provisions of the recently issued
statement.
<PAGE>
Syntech S.p.A. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1996
(in millions of Italian Lire unless indicated otherwise)
Statement of Cash Flows. The Company's short-term borrowings arise primarily
under its bank overdraft facilities. These short-term obligations are payable
on demand. The cash flows from these items are included under the caption "Net
change in short-term borrowings" in the Consolidated Statement of Cash Flows.
Information Expressed in U.S. Dollars. The consolidated financial statements
are stated in Italian Lire, the currency of the country in which the company
is incorporated and operates. The translation of the Italian Lire amounts to
U.S. Dollar amounts is included solely for the convenience of the
readers and has been made at the rate of Lire 1,700 to 1 U.S. Dollar, the
approximate exchange rate at July 1, 1997. Such translation should not be
construed as a representation that the Italian Lire amounts could be converted
into U.S. Dollars at that or at any other rate.
3. Property, Plant and Equipment
At December 31, 1996, property, plant and equipment consist of the following:
<TABLE>
<S> <C>
Land 953
Buildings 12,431
Machinery and equipment 43,684
Tools, fittings, furniture and fixtures 4,552
61,620
Less accumulated depreciation 32,348
Net property, plant and equipment 29,272
</TABLE>
4. Short-term borrowings
At December 31, 1996, the Company had short-term lines of credit aggregating
Lire 56,800 from banks of which Lire 34,365 were available for future use.
Amounts outstanding under these lines of credits are payable upon demand.
Interest paid in 1996 on bank borrowings amounted to Lit. 2,534.
At year end, the weighted average interest for the bank borrowings
approximated 8%.
A credit line of lire 1,000 from the bank Cassa Rurale Artigiana S. Albano is
guaranteed by Gestin S.r.l. for the same amount.
In addition, at December 31, 1996, the Company had a credit line of Lire 2,000
granted by Gestin S.r.l., of which Lire 1,300 was utilized. The credit line
carried a variable annual interest rate based on the Italian official rate of
discount plus 1.5%. The average interest rate applied in 1996 was 9%.
The full amount utilized was reimbursed by February 1997 and the credit line
subsequently cancelled.
<PAGE>
Syntech S.p.A. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1996
(in millions of Italian Lire unless indicated otherwise)
5. Long-term Debt
Long-term debt consisted of the following at December 31, 1996:
- - Mortgage loan from Banca Mediocredito S.p.A. of original Lire
1,500, repayable from September 15, 1997, to March 15, 2005,
in equal semi-annual installments, bearing annual interest at
variable rate, 8% at December 31, 1996. 1,500
- - Loan from Mediocredito Piemontese S.p.A. of original Lire
1,000, repayable from September 30, 1993 to September 30,
1999 in equal semi-annual installments, bearing annual interest
at variable rate, 8.3% at December 31, 1996. 462
- - Notes payable to Banca Mediocredito S.p.A.- Federbanca of
original Lire 700, repayable from March 7, 1994 to September
7, 1998 in equal semi-annual installments, bearing annual
interest at rate of 11.8% 330
- - Loan from Cassa di Risparmio di Verona of original Lire 350,
repayable from March 31, 1997 to December 31, 1999, in equal
semi-annual installments, bearing annual interest at variable rate,
6.5% at December 31, 1996. 350
- - Mortgage loan from Banca Mediocredito S.p.A. of original Lire
600, repayable from March 31, 1995 to March 31, 2000, in semi-
annual installments, bearing annual interest at variable rate, 7.3%
at December 31, 1996. 429
- - Notes payable issued in accordance with an Italian Government
incentive program (Sabatini notes) repayable on various dates
through May 1998, bearing annual interest of 11%, net of
subsidies from the Italian Government. 2,577
- - Other loans (three, of which one of Lire 169 repaid in January
1997) 307
Total 5,955
Less current portion (2,861)
Long-term portion 3,094
<PAGE>
Syntech S.p.A. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1996
(in millions of Italian Lire unless indicated otherwise)
5. Long-term Debt (cont'd)
Maturities of long-term debt over the next five years and thereafter, at
December, 1996 are as follows:
1997 2,861
1998 1,351
1999 635
2000 263
2001 189
Thereafter 656
Total 5,955
The two long-term loans from Banca Mediocredito S.p.A. (in the aggregate
amount of Lire 1,929 at December 31, 1996) are guaranteed by mortgages on
certain property, plant and equipment. The notes payable under the
Government incentive program (Sabatini notes) are secured by a lien on the
assets acquired by the Company with the proceeds of such loans. The other
loans are secured by guarantees issued by Gestin S.r.l.
6. Debentures held by Gestin S.r.l.
The debentures held by Gestin S.r.l. due in 2007 were issued at face value in
1987 and could be redeemed at any time by the Company without any premium.
These debentures carried annual interest based on the Italian official
discount rate, plus 0.5%. The average interest rate applied in 1996 was 8.8%.
On January 1, 1997, the Company redeemed the full amount of the debentures
and, accordingly, such debentures have been presented as current liabilities
in the accompanying consolidated financial statements.
7. Termination Indemnities
The liability for termination indemnities relates to the employees of the
Italian operations. In accordance with Italian severance pay statutes, an
employee benefit is accrued for service to date and is payable immediately
upon separation. The termination indemnity liability is calculated in
accordance with local civil and labor laws based on each employee's length of
service, employment category and remuneration. The termination liability
is adjusted annually by a cost-of-living index provided by the Italian
Government. There is no vesting period or funding requirement associated
with the liability.
<PAGE>
Syntech S.p.A. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1996
(in millions of Italian Lire unless indicated otherwise)
7. Termination Indemnities (cont'd)
The liability recorded in the balance sheet is the amount to which, the
employee would be entitled if the employee separates immediately. The charge
to earnings for the year ended December 31, 1996, amounted to Lire 651.
Certain employees of Syntech Inc. operations in the United States participate
in a 401(k) retirement plan. Employees may contribute specified portion of
eligible salary and Syntech must match 50% of those contributions up to
certain limits. Contributions by Syntech for the year ended December
31, 1996, were not significant.
8. Shareholders' Equity
Included in retained earnings at December 31, 1996 is an amount of Lire 188
representing a legal reserve. Italian law requires that a minimum of 5% of
annual net income be set aside as a legal reserve until such reserve equals
20% of share capital. This reserve is not available for distribution.
Dividends are payable to the extent of retained earnings recorded in the
Italian books. The amount available for distribution amounted to Lire 939
at December 31, 1996.
9. Income Taxes
Income before income taxes and the provision for income taxes consisted of
the following for the year ended December 31, 1996:
Income before income taxes, primarily Italy 4,429
Provision for income taxes
Current 1,060
Deferred 735
Total 1,795
<PAGE>
Syntech S.p.A. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1996
(in millions of Italian Lire unless indicated otherwise)
9. Income Taxes (cont'd)
A reconciliation between the tax provision computed at the Italian
statutory tax rate of 53.2% and the consolidated tax provision is as
follows:
Tax provision at the Italian Statutory tax rate of 53.2.% 2,356
Tax benefit of parent company write-down of investment in
foreign subsidiary allowable for Italian current income taxes only (594)
Aggregate effect of different tax rates in foreign jurisdictions (79)
Effect of lower tax rate than 53.2% on equity in earnings of Italian
equity investee (75)
Permanent differences: non-deductible expenses 187
Tax provision in consolidated statement of income 1,795
Effective consolidated tax rate 40.5%
Deferred income taxes reflect the net tax effect of temporary differences
between the tax basis of assets and liabilities and their reported amount
in the financial statements.
Principal items comprising net deferred income tax liabilities as of
December 31, 1996 are:
Net operating loss carryforward of U.S. subsidiary 877
Allowance for wastes disposal 90
Allowance for doubtful accounts 516
Allowance for inventory obsolescence 213
Agents indemnities 106
Lifo-Fifo difference 170
Unrealized intercompany profit in inventory 99
Reduction of write-up of fixed assets 231
Elimination of accelerated depreciation (4,143)
Net effect of capital lease (1,125)
Miscellaneous items (137)
(3,103)
Valuation allowance (877)
(3,980)
<PAGE>
Syntech S.p.A. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1996
(in millions of Italian Lire unless indicated otherwise)
At December 31, 1996, the Company's subsidiary in the United States had a net
operating loss of U.S. $ 1,455 thousand (Lire 2,258) for income tax
purposes. NOL's of U.S. $219 thousand, U.S. $517 thousand, and
U.S. $719 thousand, will expire in the years 2009, 2010 and 2011,
respectively. For financial reporting purposes a valuation allowance has been
recognized for the full amount of the NOL.
A valuation allowance has not been provided against other deferred tax assets
because management believes that such deferred tax assets will be realized
in the future.
No provision for income taxes has been made on undistributed earnings of
the France consolidated subsidiary because of the immateriality of such
earnings.
10. Commitments
The Company leases an industrial site (plant and equipment) of S. Albano Stura
under a capital lease agreement. The assets had been owned by the Company
until October 1990 when they were sold at a price equal to their book value
to a related party who immediately thereafter sold the assets to a third
party, the present owner and lessor of the assets. The gains recognized on the
sale by the related party was not significant. The assets may be acquired
upon expiration of the lease in the year 1999 at a bargain price, and the
Company intends to exercise its option to purchase the assets.
Property, plant and equipment includes the following amounts that have been
capitalized at December 31, 1996, in connection with the capital lease
described above. The amounts capitalized and the
accumulated amortization thereof as of December 31, 1996 are:
Land 771
Buildings 8,162
Machinery and equipment 235
9,168
Less allowance for amortization 4,351
4,817
Amortization of leased assets is included in depreciation and amortization
expense and accumulated depreciation.
The Company leases certain equipment under noncancellable operating lease
arrangements. These leases expire in 1997 and 1998.
Future minimum payments under the capital lease and noncancellable operating
leases with initial terms of one year or more consisted of the following at
December 31, 1996.
<PAGE>
Syntech S.p.A. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1996
(in millions of Italian Lire unless indicated otherwise)
10. Commitments (Cont'd)
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
<S> <C> <C>
1997 1,250 324
1998 1,250 110
1999 548
Total minimum lease payments 3,048 434
Amounts representing interest 503
Present value of net minimum lease payment
(including current portion of Lire 931) 2,545
</TABLE>
11. Contingencies
The Company, in June 1997, received a claim for unfair competition from its
major Italian competitor in the field of powder resins for an amount of Lire
1,000 due to the hiring, in 1996, of the production manager and of the
quality control manager of the competitor.
The Company is also involved in few other legal proceedings arising in the
normal course of business. Management believes that, based on advise of legal
counsel, the outcome of all of those proceedings will not have any material
adverse effect on the Company s financial statements.
12. Foreign Operations and Exports
Approximately 95% of the Company's consolidated identifiable assets are
dedicated to operations in Italy, and approximately 94% of the consolidated
sales were generated by the Company's operations in Italy.
Export sales from Italy for the year ended December 31, 1996, amounted to
Lit. 61,300, approximately 43% of consolidated sales. Export sales were
made to unaffiliated customers in the following geographic areas:
<TABLE>
<S> <C> <C>
Europe, excluding Italy 49,500 34.8%
United States 7,800 5.5%
Rest of the world 4,000 2.8%
Total 61,300 43.1%
</TABLE>
<PAGE>
Syntech S.p.A. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1996
(in millions of Italian Lire unless indicated otherwise)
13. Financial instruments
Concentration of credit risks
With respect to trade accounts receivable, the risks are limited due to the
credit worthiness of its customers and the relatively large number of entities
comprising the Company's customer base. The Company has not experienced
significant losses from uncollectible accounts. There is no
single customer that accounts for more than 10% of consolidated sales.
Fair value of financial instruments
The following methods and assumptions were used by the Company in estimating
its fair value disclosures for financial instruments:
Accounts receivable and accounts payable. The carrying amounts reported in
the balance sheet for accounts receivable and payable approximate their fair
value.
Bank borrowings and long-term debt. The carrying amounts of the Company's
borrowings under its short-term revolving credit arrangements approximate
their fair value due to the short-term nature of these instruments. The fair
values of the Company's long-term debt are estimated using discounted cash
flow analyses, based on the Company's current borrowing rates for similar
types of borrowing arrangements.
The carrying amounts and fair values of the Company s financial instruments at
December 31, 1996, are as follows:
<TABLE>
<CAPTION>
Carrying Fair
Amount Value
<S> <C> <C>
Cash 2,626 2,626
Accounts receivable 40,930 40,930
Accounts payable 32,087 32,087
Bank borrowings, including
related parties 23,735 23,735
Debentures held by Gestin S.r.l. 1,200 1,200
Long-term debt 5,955 6,020
</TABLE>
14. Agreement not to compete
The Company acquired from a competitor the trademarks, the trade names and
certain rights to a customer list, accompanied by an agreement not to compete
for a stipulated period of time. The agreement not to compete will expire in
1997. When such agreement expires the Company
<PAGE>
Syntech S.p.A. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1996
(in millions of Italian Lire unless indicated otherwise)
will be able to continue to sell on a nonexclusive basis. Revenue recorded
in 1996 deriving from such agreement amount to approximately
Lire 8,400. Amortization of the costs capitalized for the
acquisition of such rights was Lire 290 in 1996.
15. Subsequent Events
On March 4, 1997, the Company obtained a loan from Banca Mediocredito S.p.A.,
for a total amount of Lire 1,300, repayable in semiannual installments to
December 10, 2001; the loan bears variable interest rate indexed to the
market. The loan is guaranteed by a mortgage of Lire 2,600 on the property
of Cola di Lazise.
<PAGE>
The accompanying interim financial statements of Syntech S.p.A. and
subsidiaries (Syntech) do not include all disclosures normally provided in
annual financial statements. These financial statements, which should be
read in conjunction with the financial statements contained in Syntech's
consolidated financial statements for the year ended December 31, 1996, are
unaudited but include all adjustments that Syntech's management considers
necessary for a fair presentation. These adjustments consist of normal
recurring accruals. Interim results are not necessarily indicative of the
results for the year.
<TABLE>
Syntech S.p.A. and Subsidiaries
Consolidated Statements of Income
(in millions of Italian Lire)
<CAPTION>
Three months ended March 31
1997 1996
<S> <C> <C>
Net sales 37,802 38,465
Other revenues 270 189
38,072 38,654
Costs and expenses
Cost of sales 29,761 31,701
Research 657 542
Selling 3,229 2,952
General and administrative 1,606 1,433
Other (income) expense, net 77 (1)
Income from operations 2,742 2,027
Interest expense, net of interest income 628 1,010
Income before provision for income taxes 2,114 1,017
Provision for income taxes 1,221 519
Net income for the period 893 498
</TABLE>
<PAGE>
<TABLE>
Syntech S.p.A. and Subsidiaries
Consolidated Balance Sheet
(in millions of Italian Lire)
<CAPTION>
March 31,
1997
<S> <C>
ASSETS
Current assets
Cash 1,400
Accounts receivable, less allowances for doubtful accounts 41,147
Inventories
Finished products 6,259
Raw materials 5,090
11,349
Accounts receivable-affiliates 990
Taxes receivable 402
Deferred income taxes 646
Other current assets 1,527
Total current assets 57,461
Property, plant and equipment 62,135
Less accumulated depreciation (33,324)
28,811
Investments in, and advances to, equity investees 2,728
89,000
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Short-term borrowings from banks 20,746
Trade accounts payable 33,849
Current portion of long-term debt 2,840
Current portion of capital lease obligation 968
Income taxes payable 1,009
Payable to affiliates 386
Accrued expenses 2,605
Other current liabilities 2,852
Total current liabilities 65,255
Long term debt less current portion 2,432
Capital lease obligation less current portion 1,361
Termination indemnities 3,334
Deferred income taxes 4,929
Shareholders' equity
Common stock 5,220
Additional paid-in capital 26
Foreign currency translation 53
Retained earnings 5,497
Net income 893
11,689
89,000
</TABLE>
<PAGE>
<TABLE>
Syntech S.p.A. and Subsidiaries
Consolidated Statements of Cash Flows
(in millions of Italian Lire)
<CAPTION>
Three months ended March 31,
1997 1996
<S> <C> <C>
Operating activities
Net income 893 498
Adjustments to reconcile net income to net
cash provided (used) by operating activities:
Depreciation and amortization 976 909
Deferred income taxes 303 201
Provision for termination indemnities, net 122 156
Provision for doubtful accounts 70 79
Equity in earnings of equity investees (32) (23)
Changes of operating assets and liabilities:
Accounts receivable (286) 783
Inventories (115) 835
Trade accounts payable 1,763 1,928
Increase in other current assets (423) (2,820)
Increase in current liabilities 1,292 1,836
Net cash provided by operating activities 4,563 4,382
Investing activities
Additions to property, plant and equipment (515) (1,192)
Net cash used in investing activities (515) (1,192)
Financing activities
Net change in short-term borrowings (1,816) (5,782)
Payments on short-term borrowings from
Gestin S.r.l. (1,300)
Payments on long-term debt and capital
lease obligation (958) (1,213)
Proceeds from long-term debt 1,500
Reimbursement of debenture notes (1,200)
Net cash used in financing activities (5,274) (5,495)
Net decrease in cash and cash equivalents (1,226) (2,305)
Cash at beginning of year 2,626 2,830
Cash at end of year 1,400 525
</TABLE>
<PAGE>
MCWHORTER TECHNOLOGIES, INC.
AND
SYNTECH S.p.A. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
<PAGE>
<TABLE>
McWhorter Technologies, Inc.
Pro Forma Consolidated Balance Sheet
April 30, 1997
(Unaudited)
(Dollars in thousands)
<CAPTION>
McWhorter Syntech S.p.A. Pro Forma Pro Forma
Technologies, Inc. June 30, 1997(a) Adjustments Consolidated
April 20, 1997 DR (CR)
<S> <C> <C> <C> <C>
ASSETS
Current assets
Cash $1,461 $1,379 $2,840
Accounts receivable 46,479 29,168 75,647
Inventories 23,242 7,024 30,266
Other current assets 5,907 2,265 8,172
77,089 39,836 116,925
Net property, plant and
equipment 73,248 16,725 $12,300(c) 102,273
Other assets 9,407 1,571 35,941(c) 46,919
$159,744 $58,132 $48,241 $266,117
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Short-term debt $ 7,697 $16,717 $24,414
Trade accounts payable 25,580 22,190 47,770
Accrued liabilities 10,259 4,286 ($1,893)(b) 16,438
43,536 43,193 (1,893) 88,622
Long-term debt, less current
portion 19,123 2,586 (47,107)(b) 68,816
Deferred income taxes 11,299 3,037 (6,544)(c) 20,880
Other liabilities 2,456 2,013 4,469
Shareholders' equity
Common stock 110 3,076 3,076(c) 110
Additional paid-in
capital 10,805 15 15(c) 10,805
Retained earnings 83,952 4,186 4,186(c) 83,952
Currency translation
adjustments (440) 26 26(c) (440)
Restricted stock awards (1,463) (1,463)
Treasury stock, at cost (9,634) (9,634)
83,330 7,303 7,303 83,330
$159,744 $58,132 ($48,241) $266,117
</TABLE>
See notes to Pro Forma Consolidated Balance Sheet
<PAGE>
<TABLE>
McWhorter Technologies, Inc.
Pro Forma Consolidated Statement of Income
Year Ended October 31, 1996
(Unaudited)
(Dollars in thousands, except per share amounts)
<CAPTION>
McWhorter Syntech S.p.A. Pro Forma
Technologies,Inc. Year ended Adjustments Pro Forma
Year ended December 31, 1996 DR (CR) Consolidated
October 31, 1996 (a) (b)
<S> <C> <C> <C> <C>
Net sales $315,925 $92,127 $408,052
Costs and expenses:
Cost of sales 267,161 73,669 $1,230 (c) 342,060
Research 7,469 1,494 8,963
Selling, general
and administrative 16,368 12,265 1,377 (c) 29,510
(500)(d)
Other expense(income),
net 25 (434) (409)
Income from operations 24,902 5,133 2,107 27,928
Interest expense, net 1,653 2,261 2,874 (e) 6,788
Income before income taxes 23,249 2,872 4,981 21,140
Income tax expense
(benefit) 9,416 1,164 (1,926)(f) 8,654
Net income $13,833 $1,708 $3,055 $12,486
Net income per share $1.32 $1.19
Weighted average shares
outstanding 10,484,279 10,484,279
</TABLE>
See notes to Pro Forma Consolidated Statements of Income
<PAGE>
McWhorter Technologies, Inc.
Pro Forma Consolidated Statement of Income
Six Months Ended April 30, 1997
(Unaudited)
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
McWhorter Syntech,S.p.A. Pro Forma
Technologies, Inc. June 30,1997(a) Adjustments Pro Forma
April 30, 1997 DR(CR)(b) Consolidated
<S> <C> <C> <C> <C>
Net sales $152,416 $46,396 $198,812
Costs and expenses:
Cost of sales 128,831 36,870 $615(c) 166,316
Research 4,124 734 4,858
Selling, general and
administrative 7,957 5,888 689(c) 14,284
(250)(d)
Other expense (income),
net 964 (254) 710
Income from operations 10,540 3,158 1,054 12,644
Interest expense, net 661 742 1,437(e) 2,840
Income (loss) before
income taxes 9,879 2,416 2,491 9,804
Income tax expense 3,489 1,451 (963)(f) 3,977
Net income $6,390 $965 $1,528 $5,827
Net income per share $ .61 $ .56
Weighted average shares
outstanding 10,469,426 10,469,426
</TABLE>
See notes to Pro Forma Consolidated Statements of Income
<PAGE>
Notes to Pro Forma Consolidated Balance Sheet
The unaudited Pro Forma Consolidated Balance Sheet has been prepared from the
unaudited April 30, 1997 balance sheet of McWhorter Technologies, Inc. and
the unaudited June 30, 1997 balance sheet of Syntech S.p.A. and gives effect
to the following:
(a) Translated to U.S. dollars at the June 30, 1997 rate of 1,697
Italian Lire equals one U.S. dollar.
(b) Amount reflects the cash purchase price of $47,107,000 and the debt
and expenses associated with the acquisition.
(c) To reflect the estimated allocation of the purchase price in excess
of net assets acquired to fixed assets, including the deferred
tax effect, and goodwill.
<PAGE>
Notes to Pro Forma Consolidated Statements of Income
Year Ended October 31, 1996 and Six Months Ended April 30, 1997
The unaudited Pro Forma Consolidated Statement of Income for the year ended
October 31, 1996 has been prepared from the audited October 31, 1996 Statement
of Income of McWhorter Technologies, Inc. and the audited December 31, 1996
Statement of Income of Syntech S.p.A. The unaudited Pro Forma Consolidated
Statement of Income for the six months ended April 30, 1997 has been prepared
from the unaudited Statement of Income for the six months ended April 30, 1997
for McWhorter Technologies, Inc., and the unaudited Statement of Income for
the six months ended June 30, 1997 for Syntech S.p.A. The adjustments give
effect to the following:
(a) Translated to U.S. dollars at the average rates of 1,542 and 1,664
Italian Lire equals one U.S. dollar for the periods ended December 31,
1996 and June 30, 1997, respectively.
(b) Pro forma adjustments do not include certain cost synergies that
management believes will be realized as a result of manufacturing certain
products in the U.S., raw material cost savings and integration within
Europe.
(c) Amount reflects the amortization of the excess purchase price over the
net book value of the assets acquired. The step-up of $30,200,000 has
been allocated on an estimated basis between fixed assets and goodwill.
The amount allocated to fixed assets is being amortized over 10 years
and goodwill is amortized over 40 years. Also included is the
amortization of a noncompete agreement over its contractual life of
15 years.
(d) Amount reflects estimated cost savings from the substantially completed
consolidation of Syntech S.p.A. s operations in U.S. with existing
operations of the Company.
(e) Amount reflects pro forma interest on borrowings to fund the acquisition
of Syntech S.p.A.
(f) Amount reflects the tax effect of the pro forma adjustments reflected in
the Unaudited Pro Forma Consolidated Statement of Income. The effective
tax rate reflects the permanent difference for nondeductible amortization
of goodwill.
consent of Independent Certified Public Accountants
We consent to the incorporation by reference in the
Registration Statements (Form S-8 Nos. 33-78412 and
333-4540) pertaining to the McWhorter Technologies,
Inc. 1994 Stock Incentive Plan, McWhorter
Technologies, Inc. Employee 401(k) Savings Plan,
McWhorter Technologies, Inc. 1996 Incentive Stock Plan
and McWhorter Technologies, Inc. 1996 Nonemployee
Director Stock Option and Award Plan of our report
dated July 24, 1997, with respect to the consolidated
financial statements of Syntech S.p.A. and
Subsidiaries for the year ended December 31, 1996,
included in Amendment No. 1 to Current Report (Form 8-
K/A) of McWhorter Technologies, Inc. dated October 7,
1997, filed with the Securities and Exchange
Commission.
Milan, Italy
October 7, 1997
/s/ Reconta Ernst & Young S.p.A.
Reconta Ernst & Young S.p.A.
