UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(mark one)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED OCTOBER 31, 1997
TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____ TO ____
Commission file number 1-12854
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 (Registrant's telephone
(Address of principal executive number including area code)
offices including zip code)
Securities Registered Pursuant to Section 12(b) of the Act:
Title of Each Class Name of Exchange on
Which Registered
Common Stock, $0.01 par value New York Stock Exchange
Preferred Stock Purchase Rights New York Stock Exchange
Securities Registered Pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant:
(1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such
shorter period that the registrant was required to
file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
Indicate by check mark if disclosure of
delinquent filers pursuant to Item 405 of Regulation
S-K (Section 229.405 of this chapter) 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, 1997, 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 $263,205,000.
As of December 31, 1997, 10,354,087 shares of
common stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of McWhorter Technologies, Inc.'s
Proxy Statement filed with the Securities and Exchange
Commission on January 5, 1998 ("Proxy Statement") are
incorporated in Part III hereof by reference.
<PAGE>
McWHORTER TECHNOLOGIES, INC.
TABLE OF CONTENTS
PART I Page
Item 1. Business. . . . . . . . . . . . . . . . . . . . . 3
Item 2. Properties. . . . . . . . . . . . . . . . . . . . 6
Item 3. Legal Proceedings and Environmental Matters . . . 7
Item 4. Submission of Matters to a Vote of Security Holders 8
PART II
Item 5. Market for the Registrant's Common Equity and
Related Stockholder Matters . . . . . . . . . . . 8
Item 6. Selected Financial Data. . . . . . . . . . . . . . 9
Item 7. Management's Discussion and Analysis of Results of
Operations and Financial Condition . . . . . . . . 9
Item 8. Financial Statements and Supplementary Data. . . . 13
Item 9. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure. . . . . . . . 30
PART III
Item 10. Directors and Executive Officers of the Registrant. 30
Item 11. Executive Compensation. . . .. . . . . . . . . . . 31
Item 12. Security Ownership of Certain Beneficial Owners
and Management. . . . . . . . . . . . . . . . . . . 31
Item 13. Certain Relationships and Related Transactions. . . 32
PART IV
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K. . . . . . . . . . . . . . . . 32
Signatures . . . . . . . . . . . . . . . . . . . . . . . . 36
<PAGE>
PART I
Item 1. Business
McWhorter Technologies, Inc. ("McWhorter" or the
"Company") is one of the leading manufacturers of
surface coating resins in the United States and Europe
and is a manufacturer of resins used in the reinforced
fiberglass plastics industry. Surface coating resins
are a primary component of paint and coatings which
are used for a variety of protective and decorative
purposes. Resins used for reinforced fiberglass
plastics are a primary component for various
fiberglass products. On August 1, 1997, the Company
completed the acquisition of Syntech S.p.A. and its
affiliated entities and subsidiaries (Syntech).
Syntech, based in Italy, is one of Europe's largest
liquid and powder resins companies. The acquisition
of Syntech opens new markets for McWhorter and better
enables the Company to serve its customers on a global
basis.
All references to years are to fiscal years ended
October 31 unless otherwise stated.
Products and Markets
McWhorter's product line focuses on the requirements
of customers in the paint and coatings and reinforced
fiberglass plastics industries. Each of these
industries is highly fragmented with a large number
of competitors.
The paint and coatings industry is a mature market,
growing at an estimated 2% per annum, or about the
same rate as durable goods. Although a number of
paint and coating manufacturers have captive resin
manufacturing capabilities today, increased costs of
product reformulation and updating of resin
manufacturing processes to comply with environmental
regulations are causing a shift from captive
manufacturing to outsourcing. McWhorter believes this
trend will increase its sales opportunities in future
years.
McWhorter produces various products including alkyds,
copolymers, polyurethanes, polyester resins,
unsaturated polyesters, acrylic emulsions, polyvinyl
acetate emulsions, solution acrylics, powder resins,
powder curing agents and a number of small volume
specialty resins. Various types of resins are
required by customers due to differing application and
product 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
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.
<PAGE>
Polyurethane Resins. Oil-modified polyurethane resins
are a form of an alkyd resin used primarily in
varnishes and other clear wood coatings for
application on wood floors, furniture, kitchen
cabinets, etc. Oil-modified polyurethane resins are
also used as additives to floor coatings and other
products to improve a product's performance characteristics.
Polyester Resins. Polyester resins are used in
industrial coatings requiring specific properties such
as gloss and color retention, resistance to corrosion
and excellent flexibility. Typical uses for
polyesters are coil coated metal buildings, appliances
and metal office furniture.
Unsaturated Polyester Resins. Unsaturated polyester
resins are used for various applications in the
reinforced fiberglass plastics industry. The largest
uses are marine applications where unsaturated
polyester resins are used in the manufacture of boats.
Other applications include tub and shower enclosures,
fiberglass tanks and cultured marble surfaces.
Acrylic and Polyvinyl Acetate Emulsion Resins.
Acrylic and polyvinyl acetate emulsion resins are used
primarily in consumer latex paints. Acrylic emulsion
resins are used in trim paints and exterior
applications where weathering, color and gloss
retention are critical. Emulsions are also used in
industrial and special purpose coatings. The major
advantage of acrylic emulsion resins is their ability
to meet or exceed environmental regulations because of
their low solvent content.
Solution Acrylics. Solvent-borne acrylic resins are
used in applications where resistance to weathering is
required. Coatings produced from solvent-borne
acrylic resins may be thermoplastic or may be combined
with cross linkers to form high performance thermoset
coatings. Typical applications include marine and
maintenance paints, and automotive topcoats.
Powder Resins. Powder resins are used in the manufacture
of industrial powder coatings. Powder coatings are dry
coatings which provide an 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 are the fastest growing segment of the
industrial coatings industry.
Powder Curing Agents. Powder curing agents are used
in conjunction with certain powder resins to impart
durability and hardness. McWhorter produces urethane
curing agents, the largest volume category for powder
paint.
Sales and Distribution
McWhorter sells its liquid and powder coating resin
products primarily to customers in the paint and
coatings industry through a direct sales force, with
the balance sold through agents or distributors. The
majority of McWhorter's sales of unsaturated polyester
resins to the fiberglass resin products industry are
sold through distributors. McWhorter's business has
primarily been focused in North America. However, the
acquisition of Italian-based Syntech and the acquisition
of the equity interests of its joint venture partners
in McWhorter Technologies Europe provides a strong base
for McWhorter in 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
<PAGE>
the consumer paint and maintenance coatings
businesses. Since orders are generally filled within
a minimum lead time, McWhorter has no significant backlog.
Manufacturing and Research and Development
McWhorter operates its manufacturing plants 24 hours a
day on a five or seven day schedule, depending on
local work practices, capacity utilization and
customer requirements.
Solvent-based products are generally produced in high
temperature reactors. Raw materials are fed into a
reactor and heated to 400-500 degrees Fahrenheit for
10-30 hours, depending on the formulation. Once the desired
properties are achieved, the product is transferred to
a mixing vessel, where additional materials are added
to complete the batch. Finally, the resin is filtered
and pumped into drums or bulk storage tanks before
shipment to customers.
Emulsions are processed differently from solvent-based
resins. Emulsions are created by exothermic reactions
in reactors designed to control the reaction by
cooling the product. Once the reaction is complete,
material is filtered and transferred to bulk storage
tanks before shipment to customers.
McWhorter manufactures certain proprietary resins
under tolling arrangements, which are common in the
resin industry. Such arrangements are subject to
confidentiality and secrecy agreements which safeguard
the customer's technology.
McWhorter's research and development activities have
emphasized emerging technologies in the paint and
coatings industry, focusing on developing products
designed to comply with environmental laws and
maintain the integrity of a product's performance
characteristics. In August, 1997, McWhorter broke
ground for a new corporate research and development
facility in Carpentersville, Illinois. This 42,000
square-foot facility is scheduled to open in the spring of 1998.
Raw Materials
Materials used in the manufacturing of resins are
procured primarily from domestic suppliers. Most of
the raw materials are derived from either petroleum or
vegetable oil. McWhorter has not experienced
difficulty in recent years in obtaining an adequate
supply of raw materials or other supplies needed in
the manufacturing process. The majority of the
materials purchased are subject to national supply
contracts which generally average one to three years
in length with pricing subject to periodic reviews and adjustment
based on market conditions. Raw material prices move
up and down due to market conditions in the
petrochemical or vegetable oil markets.
Intellectual Property
McWhorter's business is not materially dependent upon
franchises, licenses or similar rights, or on any
single patent or trademark or group of related patents
or trademarks. The techniques and formulas used to
produce solvent-based resins are mature and well
known. The techniques and formulas used to produce
acrylic emulsions, powder resins, curing agents and
other specialty resins are in some instances not well
known or are protected by patents or as trade secrets.
Competition
McWhorter encounters competition from numerous other
companies with respect to each of the products it
produces. A significant number of resin producers are
vertically integrated into
<PAGE>
coatings manufacturers, providing a captive source of
resin products for such manufacturers. Some of these
captive producers also sell directly to third parties.
Consistent quality, responsive service, technology and
price are the critical elements that customers use to
select their resin suppliers. McWhorter believes that
it competes favorably in each of these areas.
Employees
McWhorter employs approximately 791 full- and part-time employees, of which
approximately 52 are covered by collective bargaining agreements.
Item 2. Properties
McWhorter's corporate headquarters are located in
Carpentersville, Illinois. The Company operates eight
plants in the United States and two plants in Italy.
All plant facilities are owned, well maintained, and
being utilized for their intended purposes and have
sufficient capacity to meet their reasonably anticipated needs. Total
practical production capacity of McWhorter's plant facilities is
approximately 761 million wet pounds per annum.
McWhorter has no material encumbrances on its
facilities. The following table provides certain
additional information regarding McWhorter's properties:
Plant Location Approximate
Square Footage
Carpentersville, Illinois 224,277
Philadelphia, Pennsylvania 112,653
Forest Park, Georgia 83,875
Lynwood, California 52,899
Ennis, Texas 45,969
Chicago Heights, Illinois 35,510
Columbus, Georgia 30,325
Portland, Oregon 14,995
Cola Di Lazise, Italy 42,642
Sant Albano, Italy 102,640
The joint venture McWhorter Technologies Europe
currently consists of three plants, one each located
in Sweden, Finland and the United Kingdom.
McWhorter leases from Valspar approximately 30,000
square feet of office and laboratory space in
Minneapolis, Minnesota.
<PAGE>
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 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
ultimately determined to be attributable to McWhorter
is subject to a number of uncertainties, including,
among others, the number of parties involved with
respect to any given site, the volumetric contribution
which may be attributed to McWhorter relative to that
attributable to other parties, the nature and
magnitude of the wastes involved, and the method and
extent of remediation. McWhorter does not believe
that any potential liability, either individually or
in the aggregate, ultimately determined to be
attributable to McWhorter will have a material adverse
effect on its business or financial condition.
At October 31, 1997 the estimated amount of probable
environmental liability of McWhorter is approximately
$3,489,000. 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 that was acquired by the Company in
1994. As a result of the probable recovery of
$2,289,000 from Cargill, McWhorter's net estimated
environmental liability is approximately $1,200,000.
There are a total of fifteen sites at which McWhorter
believes it has probable environmental liability,
including nine sites for which the estimated liability
is less than $10,000 per site. The maximum estimated
amount of environmental liability attributable to any
individual site is approximately $907,000, of which a
significant portion is expected to be reimbursed by
Cargill. During 1997, McWhorter spent approximately
$643,000 on remediation costs, of which $497,000 was
spent on projects that were or shall be reimbursed by
Cargill. During 1998, McWhorter expects to spend
approximately $1,400,000 on remediation costs, of
which $1,075,000 is expected to be reimbursed by
Cargill. During 1997, McWhorter spent approximately
$3,120,000 on capital expenditures to comply with
environmental laws and regulations and during 1998
McWhorter expects to spend approximately
$4,930,000 on such expenditures.
<PAGE>
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 1997.
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
1997 and 1996. The Company did not declare any cash
dividends on its common stock in either fiscal year.
<TABLE>
<CAPTION>
1997 1996
Low High Low High
<S> <C> <C> <C> <C>
First quarter $18.88 $24.13 $13.13 $15.63
Second quarter 20.13 23.25 13.38 18.13
Third quarter 21.25 24.38 16.38 19.38
Fourth quarter 23.75 27.44 17.13 20.13
</TABLE>
As of December 31, 1997, there were 1,355 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.
<PAGE>
Item 6. Selected Financial Data
<TABLE>
<CAPTION>
Dollars in thousands, except per share amounts
Year Ended
October 31, October 31, October 31, October 31, October 29,
1997(a) 1996 1995 1994(b) 1993 (b)
<S> <C> <C> <C> <C> <C>
Net sales $331,465 $315,925 $311,398 $242,331 $109,839
Net income 15,418 13,833 11,070 8,444(c) 7,905
Net income per share 1.47 1.32 1.02 .78 .65
Total assets 259,182 153,254 138,127 138,563 71,196
Total debt 80,858 23,140 31,764 38,618 150
</TABLE>
(a) Reflects the acquisition of Syntech S.p.A. since the August 1, 1997
acquisition date.
(b) 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.
(c) Includes a charge of $2,472 pretax, $1,497 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 provides
information which management believes is relevant to
an assessment and understanding of the consolidated
results of operations and financial condition of
McWhorter Technologies, Inc. (the "Company" or
"McWhorter"). The discussion should be read in
conjunction with the consolidated financial statements
and notes thereto. Except for historical information
contained herein, certain matters set forth in this
Annual Report are forward looking statements that
involve certain risks and uncertainties that could
cause actual results to differ materially from those
in the forward looking statements. All references to
years are to fiscal years ended October 31 unless
otherwise stated.
Overview On August 1, 1997, the Company completed
the acquisition of Syntech S.p.A. and its affiliated
entities and subsidiaries (Syntech) for $48.3 million
in cash and approximately $17.1 million of assumed
debt of Syntech. Syntech is an Italian-based resin
company with two production facilities in Italy. The
cash portion of the purchase consideration was made
available from the Company's $150 million credit
facility. The acquisition was accounted for under the
purchase method and the results of Syntech since the
date of acquisition have been included in the
consolidated results of the Company. Refer to Note 2
of Notes to Consolidated Financial Statements for
discussion on the acquisition of Syntech.
In February 1997, the Company announced plans to
construct a 42,000 square foot laboratory facility in
Carpentersville, Illinois. The projected cost of this
new facility is $6,800,000. The facility is scheduled
to open in the spring of 1998. As a result of this
project, the Company will be closing the facility that
is currently being leased in Minneapolis. Employees
from the product development and technical support
groups will be relocated to the new facility to serve
<PAGE>
McWhorter's Liquid Coatings, Powder Coatings, and
Composite Polymer businesses. Approximately 36
employees in Research and Development and Information
Technology Services will be impacted by the closing.
In total, the Company expects to incur approximately
$1,300,000 of pretax charges to operating earnings, 7
cents per share after taxes, related to this move. In
1997, $615,000 has been charged to operations, 4 cents
per share after taxes, primarily for costs associated
with the estimated amount of termination benefits to
be paid to certain employees. The remaining costs to
be charged in 1998, primarily in the second quarter,
are for costs to be incurred in connection with
relocation of existing employees, hiring of new
employees, and moving equipment from Minneapolis to
Carpentersville.
The Company purchased the equity interest of its joint
venture partners in McWhorter Technologies Europe
(McWhorter Europe). The purchase occurred in separate
transactions during November 1997 and January 1998 for
$9,534,000. As a result, the Company increased its
equity interest in McWhorter Europe from 33.3 percent
to 100 percent.
Results of Operations 1997 vs. 1996 Net sales for
1997 were $331,465,000 compared to $315,925,000 in the
prior year. 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 expects that the global
consolidation of McWhorter and Syntech combined with
other expansion efforts will result in improved
performance in all of the Company's businesses in
1998.
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. The Company expects raw material costs
to remain relatively stable for 1998 and internal
process improvements in the U.S. to continue to
favorably impact margins.
Operating expenses (research, selling, general and
administrative) 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 amortization of costs related to the
acquisition of Syntech.
Other expense in 1997 included charges totaling
$811,000 (5 cents per share after taxes) for the
estimated amount of termination benefits to be paid to
employees related to the upcoming relocation of the
Minneapolis research facility to Carpentersville in
the spring of 1998 and the write-off of a tax-related
receivable.
Net interest expense was $2,166,000 in 1997 compared
to $1,653,000 last year. 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.
<PAGE>
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 (6 cents per share).
Net income in 1997 was $15,418,000, or $1.47 per
share, compared to $13,833,000, or $1.32 per share
last year. Excluding the acquisition of Syntech, net
income for 1997 was $15,746,000 or $1.50 per share
which represents a 14 percent increase over 1996 net
income per share.
Results of Operations 1996 vs. 1995 Net sales for
1996 were $315,925,000 compared to $311,398,000 in
1995. Volume increases of 4 percent were partially
offset by a 2 percent price decrease. The volume
comparison is impacted by the September 1, 1995
acquisition of The Glidden Company's resin producing
facility in Columbus, Georgia. On a comparable basis
without the acquisition, volume was flat. Volume
improved significantly during the second half of 1996.
In the fourth quarter of 1996, volume in all
businesses was strong. In 1996, the Company
experienced a decline in raw material costs which
resulted in the lowering of prices across businesses.
The Company's gross profit margin was 15.4 percent in
1996 compared to 13.5 percent in 1995. Declining raw
material pricing and ongoing internal process
improvements implemented in 1995 led to a significant
improvement in gross margin percent in 1996. As a
result of the raw material price decreases, the last-in,
first-out (LIFO) inventory valuation method had the net
effect of decreasing cost of sales by
$1,358,000 pretax, $808,000 after taxes, or 8 cents
per share, in 1996 compared to 1995 when raw material
price increases had the net effect of increasing cost
of sales by $1,090,000 pretax, $649,000 after taxes,
or 6 cents per share. Such charges increased gross
margin percent by .4 percent in 1996 and decreased
gross margin percent by .4 percent in 1995.
Operating expenses were 7.5 percent of sales in 1996
compared to 6.8 percent in 1995. Higher expenses
compared to 1995 primarily reflected higher costs
associated with incentive plans tied to the Company's
performance.
In September 1996, the Company completed the joint
venture in McWhorter Technologies Europe. This
investment is accounted for on the equity method with
earnings reflected as a component of other expense
(income), net in 1996. The investment did not have a
material impact on earnings for 1996.
Net interest expense was $1,653,000 in 1996 compared
to $2,310,000 in 1995. This comparison reflects
reduced debt levels and lower average borrowing rates.
The effective tax rate was 40.5 percent in 1996 and
1995.
Net income in 1996 was $13,833,000, or $1.32 per
share, compared to $11,070,000, or $1.02 per share in
1995. This comparison is impacted by the Company's
share repurchase program which had a favorable impact
of 5 cents per share in 1996.
Financial Condition In 1997 operations generated
cash of $27,583,000 compared to $25,778,000 in 1996.
The Company's current ratio was 1.3 at the end of 1997
including the impact of the Syntech acquisition
compared to 1.5 at the end of 1996.
<PAGE>
Investing activities used cash of $62,402,000 in 1997
compared to $12,417,000 in 1996. The increase
primarily relates to the acquisition of Syntech in
1997. In January 1997, the Company made an equity
investment of $2,343,000 for a 40 percent equity
interest in the newly-formed joint venture, McWhorter
Technologies Thailand. Capital expenditures were
$11,203,000 in 1997 versus $6,991,000 in 1996. The
1997 capital expenditures were primarily for
productivity improvements. Capital spending for 1998
is budgeted to be approximately $25,000,000. The
increase from 1997 capital spending is from spending
for two large projects, the new research and
development facility and the implementation of
Enterprise Resource Planning package totaling
approximately $10,000,000, and spending for various
productivity improvements in Company facilities in
Europe of approximately $4,500,000.
Financing activities provided cash of $37,688,000 in
1997 compared to using cash of $14,205,000 in 1996.
Total debt increased to $80,858,000 at October 31,
1997 from $23,140,000 a year ago. The increase was
primarily due to borrowing to fund the Syntech
acquisition, the equity investment in McWhorter
Thailand, and the repurchase of 125,222 shares of
common stock for treasury stock. Debt as a percentage
of invested capital increased to 46.9 percent at
October 31, 1997 as a result of the Syntech
acquisition from 22.5 percent a year ago.
The Board of Directors of the Company adopted a
resolution authorizing the repurchase by the Company
of up to an aggregate of 500,000 shares of its common
stock over a twelve-month period ending February 1998.
As of October 31, 1997, the Company had acquired
139,522 shares at a total cost of $2,919,000. During
1996 and 1995, the Company completed the repurchase of
500,000 shares of its common stock from the 1995
authorization. The total cost of those shares
repurchased was $7,194,000.
The Company has a $150,000,000 unsecured revolving
credit facility that terminates on July 30, 2002. At
October 31, 1997, $95,000,000 was available under this
facility. The Company's Italian subsidiary has short-term
lines of credit of $32,850,000 of which
$18,604,000 is available for future use at October 31,
1997. Historically, while sales for McWhorter have
been lowest in the first quarter, monthly fluctuations
in working capital have been modest. The credit
facility and internally generated funds are expected
to be adequate to finance McWhorter's capital
expenditures and other operating requirements. Refer
to Note 8 of Notes to Consolidated Financial
Statements for discussion on the Company's debt.
Refer to Item 3, Legal Proceedings and Environmental
Matters and Note 11 of Notes to Consolidated Financial
Statements for discussion on environmental
liabilities.
<PAGE>
Item 8. Financial Statements and Supplementary Data Page
Report of Independent Auditors. . . . . . . . . . . . . . 14
Consolidated Statements of Income for the Years Ended
October 31, 1997, 1996 and 1995. . . . . . . . . . . . . 15
Consolidated Balance Sheets as of October 31, 1997
and 1996. . . . . . . . . . . . . . . . . . . . . . . . . 16
Consolidated Statements of Cash Flows for the Years
Ended October 31, 1997, 1996 and 1995. . . . . . . . . . 17
Consolidated Statements of Changes in Shareholders' Equity
for the Years Ended October 31, 1997, 1996 and 1995 . . . 18
Notes to Consolidated Financial Statements. . . . . .. . . . . 19
<PAGE>
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, 1997 and 1996, and the
related consolidated statements of income,
shareholders' equity and cash flows for each of the
three years in the period ended October 31, 1997.
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,
1997 and 1996, and the consolidated results of their
operations and their cash flows for each of the three
years in the period ended October 31, 1997, in
conformity with generally accepted accounting
principles.
/s/ Ernst & Young LLP
ERNST & YOUNG LLP
Chicago, Illinois
November 17, 1997
<PAGE>
<TABLE>
McWHORTER TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF INCOME
<CAPTION>
Dollars in thousands, except per share amounts
Year Ended
October 31, October 31, October 31,
1997 1996 1995
<S> <C> <C> <C>
Net sales $331,465 $315,925 $311,398
Costs and expenses:
Cost of sales 277,372 267,161 269,233
Research 8,384 7,469 6,758
Selling, general and administrative 17,637 16,368 14,537
Other expense (income), net (Note 16) 923 25 (45)
Income from operations 27,149 24,902 20,915
Interest expense, net 2,166 1,653 2,310
Income before income taxes 24,983 23,249 18,605
Income tax expense (Note 10) 9,565 9,416 7,535
Net income $ 15,418 $ 13,833 $ 11,070
Net income per share $ 1.47 $ 1.32 $ 1.02
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE>
<TABLE>
McWHORTER TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
<CAPTION>
Dollars in thousands, except share amounts
October 31, October 31,
1997 1996
<S> <C> <C>
Assets
Current assets
Cash $ 3,929 $ 1,060
Accounts receivable less allowances
for doubtful accounts of $1,812 in
1997 and $385 in 1996 67,762 47,166
Inventories (Note 3) 26,487 18,151
Other current assets 8,743 5,019
106,921 71,396
Property, plant and equipment (Note 4) 148,609 107,119
Less accumulated depreciation 43,315 33,489
Net property, plant and equipment 105,294 73,630
Intangibles, net (Notes 2 and 5) 36,153 279
Other assets (Note 6) 10,814 7,949
$259,182 $153,254
Liabilities and Shareholders' Equity
Current liabilities
Short-term debt (Note 8) $ 23,706 $ 9,995
Trade accounts payable 43,265 26,363
Accrued liabilities (Notes 7 and 11) 15,276 10,504
82,247 46,862
Long-term debt, less current portion (Note 8) 57,152 13,145
Deferred income taxes (Note 10) 22,446 10,486
Accrued environmental liabilities (Note 11) 2,201 3,037
Other liabilities 3,468
Shareholders' equity
Common stock (par value $.01 per share;
authorized 30,000,000 shares; issued
10,965,547 shares in 1997 and 1996) 110 110
Additional paid-in capital 10,867 10,803
Retained earnings 92,980 77,562
Currency translation adjustments (940) (74)
Restricted stock awards (Note 13) (1,633) (1,463)
Treasury stock, at cost (612,460 shares
in 1997 and 499,607 shares in 1996) (9,716) (7,214)
91,668 79,724
$259,182 $153,254
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE>
<TABLE>
McWHORTER TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
Year Ended
Dollars in thousands
October 31, October 31, October 31,
1997 1996 1995
<S> <C> <C> <C>
Operating Activities
Net income $15,418 $13,833 $11,070
Adjustments to reconcile net
income to net cash provided
by operating activities:
Depreciation and amortization 10,353 9,079 7,901
Deferred income taxes 711 3,530 3,708
Other, net 906 (87) 136
Changes in working capital:
Accounts and notes receivable 8,674 (5,943) (1,923)
Inventories (2,218) (6,131) 10,118
Trade accounts payable and
accrued liabilities (5,364) 10,993 (5,652)
Other current assets (897) 504 (1,217)
Net cash provided by operating
activities 27,583 25,778 24,141
Investing Activities
Acquisition spending, net of
cash acquired (48,318) (2,558)
Capital expenditures (11,203) (6,991) (6,469)
Investments in joint ventures (2,915) (5,467)
Other, net 34 41 33
Net cash used by investing activities (62,402) (12,417) (8,994)
Financing Activities
Increase (decrease) in debt, net 40,326 (8,624) (12,872)
Purchase of treasury stock (2,683) (5,683) (1,747)
Other, net 45 102
Net cash provided (used) by
financing activities 37,688 (14,205) (14,619)
Increase (decrease) in cash 2,869 (844) 528
Cash at beginning of period 1,060 1,904 1,376
Cash at end of period $ 3,929 $ 1,060 $ 1,904
</TABLE>
The Company's 1995 acquisition spending involved the following:
Fair value of assets acquired $ 8,576
Note issued by seller (6,018)
See Notes to Consolidated Financial Statements
<PAGE>
<TABLE>
McWHORTER TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<CAPTION>
Dollars in thousands, except share amounts
Additional
Common Stock Paid-in Retained
Shares Amount Capital Earnings
<S> <C> <C> <C> <C>
Balance October 31, 1994 10,864,899 $109 $9,359 $52,659
Net income 11,070
Issuance of common stock
for restricted stock
awards 99,165 1 1,536
Purchase of treasury stock (117,000)
Balance October 31, 1995 10,847,064 110 10,895 63,729
Net income 13,833
Issuance of common stock
for restricted stock
awards 1,483 22
Exercise of stock options 14,693 (114)
Purchase of treasury stock (397,300)
Currency translation
adjustments
Balance October 31, 1996 10,465,940 110 10,803 77,562
Net income 15,418
Issuance of common stock for
restricted stock awards 8,993 69
Exercise of stock options 3,376 (5)
Purchase of treasury stock (125,222)
Currency translation
adjustments
Balance October 31, 1997 10,353,087 $110 $10,867 $92,980
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE>
<TABLE>
McWhorter Technologies, Inc.
Consolidated Statements of Changes In Shareholders' Equity
<CAPTION>
Dollars in thousands, except share amounts
Currency Restricted
Translation Stock Treasury
Adjustments Awards Stock
<S> <C> <C> <C>
Balance October 31, 1994
Net income
Issuance of common stock for restricted
stock awards (1,463)
Purchase of treasury stock (1,747)
Balance October 31, 1995 (1,463) (1,747)
Net income
Issuance of common stock for restricted
stock awards
Exercise of stock options 216
Purchase of treasury stock (5,683)
Currency translation adjustments (74)
Balance October 31, 1996 (74) (1,463) (7,214)
Net income
Issuance of common stock for restricted
stock awards (170) 131
Exercise of stock options 50
Purchase of treasury stock (2,683)
Currency translation adjustments (866)
Balance October 31, 1997 $(940) $(1,633) $(9,716)
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE>
McWHORTER TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of business and basis of presentation The
Company operates in one business segment, the manufacture
and distribution of resin used in coatings and composite
polymer industries, and sells primarily to customers located
in North America and Western Europe.
The consolidated financial statements include the accounts
of the parent company and its subsidiaries (refer to Note 2
- - Acquisition). 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, 1997, costs are recorded on the
last-in, first-out (LIFO) method for approximately 76
percent of the inventories, and on a first-in, first-out
(FIFO) method for the remainder. At October 31, 1996 costs
are recorded on the LIFO method for all inventories.
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 primarily the
straight-line method.
Intangible assets Intangible assets are recorded at cost.
Amortization is recorded using the straight line method over
40 years for goodwill and over 15 years for other intangible
assets.
Stock-based compensation The Company accounts for stock-based compensation
plans under the provisions of Accounting
Principles Board Opinion No. 25 (APB No. 25). Refer to Note
13 for disclosures required by Statement of Financial
Accounting Standard (SFAS) No. 123, "Accounting for Stock-based
Compensation".
Net income per share Net income per common share amounts
were computed on the basis of the weighted average number of
common and common equivalent shares outstanding. Such
weighted average shares used in the computations were
10,492,875 in 1997; 10,484,279 in 1996; and 10,878,326 in
1995.
In February 1997, the Financial Accounting Standards Board
issued SFAS No. 128, "Earnings Per Share". SFAS No. 128,
which is effective for financial statements issued for
periods ending after December 15, 1997, specifies the
computation, presentation, and disclosure requirements for
earnings
<PAGE>
per share. The Company will adopt SFAS No. 128 in
fiscal 1998. The difference between basic and diluted
earnings per share, as defined by SFAS No. 128, would not be
material for fiscal years 1997, 1996, and 1995.
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
stockholder's 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.
Long-lived assets In 1997, the Company adopted SFAS No. 121
"Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets of be Disposed Of". Accordingly, when
indicators of impairment are present, the Company evaluates
the carrying value of property, plant & equipment and
intangibles in relation to the future undiscounted cash
flows of the underlying businesses. Adoption of the
standard had no impact on the 1997 financial statements.
NOTE 2 - ACQUISITION
On August 1, 1997, the Company completed the acquisition of
Syntech S.p.A. and its affiliated entities and subsidiaries
(Syntech) for $48.3 million in cash and approximately $17.1
million of assumed debt of Syntech. Syntech is an Italian
based resin company with two production facilities in Italy.
The cash portion of the purchase consideration was made
available from the Company's $150 million credit facility.
The acquisition was accounted for under the purchase method
and the results of Syntech since the date of acquisition
have been included in the consolidated results of the
Company. The excess of purchase price over the net book
value of assets was approximately $30.8 million, the largest
component of which was allocated to goodwill. Since the
acquisition was recently completed, finalization of the
allocation of the purchase price is subject to completion.
The pro forma results below are unaudited and reflect the
purchase price accounting adjustments assuming the
acquisition occurred at the beginning of each year
presented.
<TABLE>
Pro Forma Results (Unaudited):
<CAPTION>
Dollars in thousands, except per share amounts
October 31, October 31,
1997 1996
<S> <C> <C>
Net sales $407,495 $408,052
Net income $ 14,207 $ 12,704
Net income per share $ 1.35 $ 1.21
</TABLE>
<PAGE>
NOTE 3 - INVENTORIES
The major classes of inventories consist of the following:
<TABLE>
<CAPTION>
Dollars in thousands
October 31, October 31,
1997 1996
<S> <C> <C>
Manufactured products $16,407 $11,916
Raw materials, supplies and
work-in-progress 10,080 6,235
$26,487 $18,151
</TABLE>
Inventories stated at cost as determined by the LIFO method
are approximately $2,276,000 and $2,151,000 lower at October
31, 1997 and 1996, respectively, than such costs determined
under the FIFO method. In 1997, the LIFO valuation method
had the net effect of decreasing pretax income as compared
to the FIFO method by $125,000, $74,000 after taxes, or $.01
per share. In 1996, the LIFO valuation method had the net
effect of increasing pretax income as compared to the FIFO
method by $1,358,000, $808,000 after taxes, or $.08 per
share. This was due to the impact of declining raw material
costs in 1996 versus 1995. In 1995, the LIFO valuation
method had the net effect of decreasing pretax income as
compared to the FIFO method by $1,090,000, $649,000 after
taxes, or $.06 per share. The pretax impact of raw material
cost increases of $3,062,000 was partially offset by the
$1,972,000 pretax effect of a partial inventory liquidation
in 1995.
NOTE 4 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment classifications are as follows:
<TABLE>
<CAPTION>
Dollars in thousands
October 31, October 31,
1997 1996
<S> <C> <C>
Land $ 9,673 $ 3,868
Buildings 24,257 18,849
Machinery and equipment 114,679 84,402
148,609 107,119
Less accumulated depreciation 43,315 33,489
Net property, plant and equipment $105,294 $ 73,630
</TABLE>
Depreciation expense for 1997, 1996, and 1995 was $9,962,000, $9,002,000, and
$7,825,000, respectively.
<PAGE>
NOTE 5 - INTANGIBLES
Intangibles, net include the following:
<TABLE>
<CAPTION>
Dollars in thousands October 31, October 31,
1997 1996
<S> <C> <C>
Goodwill $24,934 $202
Other 11,693 202
36,627 404
Less accumulated amortization 474 125
$36,153 $279
</TABLE>
NOTE 6 - OTHER ASSETS
Other assets include the following:
<TABLE>
<CAPTION>
Dollars in thousands October 31, October 31,
1997 1996
<S> <C> <C>
Investment in equity investees $ 8,449 $5,428
Other 2,365 2,521
$10,814 $7,949
</TABLE>
NOTE 7 - ACCRUED LIABILITIES
Accrued liabilities include the following:
<TABLE>
<CAPTION>
Dollars in thousands October 31, October 31,
1997 1996
<S> <C> <C>
Employee compensation $ 5,263 $ 4,797
Accrued environmental liabilities 1,288 1,210
Other 8,725 4,497
$15,276 $10,504
</TABLE>
<PAGE>
NOTE 8 - DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
Dollars in thousands October 31, October 31,
1997 1996
<S> <C> <C>
Revolving credit borrowings $55,000 $11,000
6% note payable in annual installments with
final payment due in 1998 2,164 4,187
Variable rate mortgage loans due semi-annually
through March 2005 1,764
11% note payable due May 1998 638
Capital lease obligation (Note 9) 1,083
Other 563 53
61,212 15,240
Less current maturities 4,060 2,095
$57,152 $13,145
</TABLE>
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 (5.7% at October
31, 1997) plus an applicable margin up to .575% or other
alternative rates. The weighted average interest rate at
October 31, 1997 was 5.9%. This facility terminates on July
30, 2002. At October 31, 1997, borrowings totaling
$55,000,000 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, 1998. The 11% note
payable was obtained under the Government of Italy's
incentive program and is secured by a lien on the assets
acquired with proceeds of the note. 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 $4,060,000 in 1998, $1,016,000 in 1999,
$359,000 in 2000, $298,000 in 2001, $204,000 in 2002, and
$275,000 thereafter.
In addition, the Company had $5,400,000 outstanding at
October 31, 1997, under an overnight credit facility with a
weighted average interest rate of 6.1%. The Company's
Italian subsidiary has short-term lines of credit that are
cancellable at any time of $32,850,000, at weighted average
interest of 6.5%, of which $14,246,000 is outstanding at
October 31, 1997.
Interest paid during 1997, 1996, and 1995 was $2,146,000,
$1,725,000 and $2,261,000, respectively.
<PAGE>
At October 31, 1997 the Company had outstanding $3,977,000
in unissued letters of credit.
The carrying value of the Company's debt approximates fair
value at October 31, 1997.
NOTE 9 - LEASE COMMITMENTS
The Company leases an industrial site (plant and equipment)
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, 1997 are the following assets
held under this capital lease:
<TABLE>
<CAPTION>
Dollars in thousands October 31, 1997
<S> <C>
Land $1,023
Buildings 2,985
Machinery and equipment 388
4,396
Less allowance for amortization 20
$4,376
</TABLE>
Amortization of leased assets is included in depreciation
and amortization and in accumulated depreciation. Total
capital lease obligation at October 31, 1997, including
current portion of $605,000, is $1,083,000. Total future
minimum payments under the capital lease, including interest
of $144,000, is $1,227,000, payable $726,000 in 1998 and
$501,000 in 1999.
NOTE 10 - INCOME TAXES
The components of the provision for income taxes are as
follows:
<TABLE>
<CAPTION>
Year Ended
Dollars in thousands October 31, October 31, October 31,
1997 1996 1995
<S> <C> <C> <C>
Current:
Federal $7,035 $4,568 $3,334
State 1,523 1,318 493
Foreign 296
Total current income taxes 8,854 5,886 3,827
Deferred income taxes 711 3,530 3,708
Total income taxes $9,565 $9,416 $7,535
</TABLE>
<PAGE>
Income taxes paid during 1997, 1996 and 1995 were $8,416,000, $5,315,000, and
$3,227,000, respectively.
Deferred income taxes reflect the net tax effects of
temporary differences between the carrying amounts of assets
and liabilities for financial reporting purposes and the
amounts used for income tax purposes. Significant
components of the Company's deferred tax assets and
liabilities are as follows:
<TABLE>
<CAPTION>
Dollars in thousands October 31, October 31,
1997 1996
<S> <C> <C>
Deferred tax assets $ 2,609 $ 1,824
Deferred tax liabilities:
Tax over book depreciation 21,711 11,179
Other 1,150
Total deferred tax liabilities 22,861 11,179
Net deferred tax liability $20,252 $ 9,355
</TABLE>
The principal items comprising the difference between income
tax expense computed at the Federal statutory rate and the
actual provision for income taxes are as follows:
<TABLE>
<CAPTION>
Year Ended
Dollars in thousands October 31, October 31, October 31,
1997 1996 1995
<S> <C> <C> <C>
Statutory rate applied to pretax
income (35%--1997; 35%--1996;
34%--1995) $8,744 $8,138 $6,326
Effect of:
State income taxes (net of
federal tax benefit) 1,078 1,170 1,016
Foreign tax rate differential 111
Adjustment from income tax audit (591)
Other, net 223 108 193
$9,565 $9,416 $7,535
Effective tax rate 38.3% 40.5% 40.5%
</TABLE>
Income tax expense for 1997 was impacted by a tax benefit of
$591,000 ($.06 per share) that resulted from the conclusion
of an income tax audit for the period prior to the Company's
spin-off from the Valspar Corporation.
NOTE 11 - 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
<PAGE>
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; and Carpentersville,
Illinois; 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, 1997 the estimated amount of probable
environmental liability of the Company is approximately
$3,489,000. 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. As a result of the probable recovery of $2,289,000
from Cargill, the Company's net estimated environmental
liability is approximately $1,200,000.
NOTE 12 - RETIREMENT BENEFIT PROGRAMS
In February 1994, McWhorter adopted an Employee Stock
Ownership Plan (ESOP) and an Employee Savings Plan. These
primary retirement benefit programs are defined contribution
plans covering the majority of the employees. The total
costs of the ESOP were $1,557,000, $1,556,000 and $570,000
in 1997, 1996, and 1995, respectively. The total costs of
the Employee Savings Plan were $568,000, $515,000 and
$457,000 in 1997, 1996, and 1995, respectively.
Contributions are made to the ESOP at the rate of 4 percent
of each participant's compensation and additional
contributions can be made at the Company's discretion.
The Company also sponsors a defined benefit plan for certain
hourly employees. The related pension costs and obligations
are not material.
The Company also has a nonqualified deferred compensation
plan which permits key employees to defer certain portions
of their compensation. Such compensation is fully vested at
the time of the contribution. The Company can also make
discretionary contributions to the plan which vest upon the
completion of 5 years employment. Deferred compensation
liability at the end of 1997 was $532,000. The Company
established an irrevocable rabbi trust in 1997 to fund this
plan. The value of the assets in the trust at October 31,
1997 was $657,500.
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 recorded in the balance sheet is the amount to
which the employee is entitled for services rendered to
date. Amounts charged to expense in 1997 were $52,000.
NOTE 13 - 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
351,331 shares are available for future grants. Options
<PAGE>
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 August 20, 2007.
A summary of stock option activity for the 1994 and 1996
Stock Incentive Plans follows:
<TABLE>
<CAPTION>
Number of Average Option
Options Price Per Share
<S> <C> <C>
Options outstanding October 31, 1994 389,293 $15.95
Granted 41,935 15.38
Cancelled (21,984) 16.62
Options outstanding October 31, 1995 409,244 15.86
Granted 55,636 15.49
Exercised (14,693) 7.03
Cancelled (3,802) 18.61
Options outstanding October 31, 1996 446,385 16.09
Granted 116,258 22.68
Exercised (3,376) 13.09
Cancelled (4,405) 18.18
Options outstanding October 31, 1997 554,862 17.47
Options exercisable October 31, 1997 265,157 16.15
</TABLE>
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 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
1997 and 1996. The fair value at the date of grant was
determined using the assumptions below. Because 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, in management's
opinion the existing models do not provide a reliable single
measure of the value of the employee stock options.
<TABLE>
<CAPTION>
1997 1998
<S> <C> <C>
Assumptions:
Option pricing model Black-Scholes Black-Scholes
Weighted average risk-free interest rate 5.98% 5.98%
Expected dividend yield 0% 0%
Expected volatility 21.6% 21.6%
Weighted average expected life of options
(in years) 5 5
</TABLE>
<PAGE>
The exercise price for the options outstanding as of October
31, 1997 ranged from $13.78 to $24.69 with a weighted
average remaining contractual life of 7.4 years segregated
as follows:
<TABLE>
<CAPTION>
Range of exercise prices $13.78 - $18.61 $20.13 - $24.69
<S> <C> <C>
Outstanding options:
Number 439,604 115,258
Weighted average remaining contractual life
(in years) 7 9.5
Weighted average exercise price $16.10 $22.70
Exercisable options:
Number 265,157 0
Weighted average exercise price $16.15 0
</TABLE>
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 7,493 in 1997 at market
value of $22.75 and 94,354 in 1995 at market value of
$15.50. 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 1997 and in 1996
and no expense was recorded in 1995.
The Company also issued 1,500, 1,483, and 10,541 restricted
and deferred shares in 1997, 1996 and 1995, respectively,
with vesting periods of up to three years. Amounts charged
to expense were $30,000 in 1997, $22,000 in 1996, and
$159,000 in 1995.
In 1996 the Company also established the 1996 Nonemployee
Director Stock Option and Award Plan (the "1996 Directors'
Plan"). The 1996 Directors' Plan provides for the issuance
of up to 50,000 shares of the Company's common stock of
which 40,115 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 3,814 and 6,071 in 1997 and
1996, respectively, and amounts charged to expense were
$93,000 and $110,000 in 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
<PAGE>
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 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 14 - 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 15 - 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 United States. Inter-geographic
sales are not significant. In 1997, the Company operated
facilities in the United States and Europe. Sales,
operating income, and identifiable assets for the European
operations in 1997 were 3 percent, 3 percent, and 35 percent
of the respective totals.
NOTE 16 - OTHER EXPENSE
Other expense (income), net includes second quarter charges
of $811,000 ($.05 per share after taxes) related to costs,
primarily severance, pursuant to Company's decision to
relocate its research facility from Minneapolis to
Carpentersville and the write-off of a tax-related
receivable.
<PAGE>
NOTE 17 - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
Dollars in thousands, Gross Net Net Income
except per share amounts Net Sales Profit Income Per Share
<S> <C> <C> <C> <C>
Fiscal 1997 quarter ended:
January 31 $ 71,534 $10,848 $ 2,514 $ .24
April 30 (a) 80,882 12,737 3,876 .37
July 31 85,581 14,563 4,832 .46
October 31 (b) 93,468 15,945 4,196 .40
$331,465 $54,093 $15,418 $1.47
Fiscal 1996 quarter ended:
January 31 $ 65,240 $ 9,755 $ 2,128 $ .20
April 30 76,917 11,632 3,187 .31
July 31 87,144 13,996 4,360 .42
October 31 86,624 13,381 4,158 .40
$315,925 $48,764 $13,833 $1.32
</TABLE>
(a) See Note 16 of Notes to Consolidated Financial Statements
(b) Reflects the acquisition of Syntech S.p.A. since the August 1, 1997
acquisition date
Item 9. Changes in and Disagreements With Accountants
on Accounting and Financial Disclosure
Inapplicable.
PART III
Item 10. Directors and Executive Officers of the Registrant
(a) Identification of Directors
Incorporated by reference from pages 2-4 of the Proxy
Statement section entitled "Election of Directors."
(b) Identification of Executive Officers
Set forth below are the names, ages and titles of the
persons who serve as executive officers of McWhorter:
Name Age Positions
John R. Stevenson 55 Chairman and Chief Executive Officer
Jeffrey M. Nodland 42 President and Chief Operating Officer
Patrick T. Heffernan 48 Senior Vice President, Coatings Resins
Kevin W. Brolsma 43 Vice President, Acquisitions Integration/
Environmental, Health and Safety
Douglas B. Rahrig 46 Vice President, Technology
Louise M. Tonozzi-Frederick 41 Vice President, Chief Financial Officer and
Secretary
<PAGE>
JOHN R. STEVENSON is Chairman and Chief Executive Officer of
the Company. Prior to being named in January 1997 to his
current position, Mr. Stevenson was President and Chief
Executive Officer of the Company beginning in February 1994.
Previously he held the position of Vice President, Special Products
Group and Administration of Valspar beginning in August 1992 and Vice
President, Administration of Valspar beginning in February
1991.
JEFFREY M. NODLAND is President and Chief Operating Officer
of the Company. Prior to being named in January 1997 to his
current position, Mr. Nodland was Executive Vice President,
Chief Operating Officer, and Secretary of the Company beginning in May 1995.
Previously he held the position of Senior Vice President, Chief
Financial Officer, Secretary, and Treasurer of the Company beginning in
February 1994, and President of McWhorter, Inc. beginning in June 1991.
PATRICK T. HEFFERNAN is Senior Vice President, Coatings
Resins of the Company. Prior to being named in February
1994 to his current position, Mr. Heffernan was an Assistant
Vice President and General Manager of the Midwest Region of
the Resin Products Division of Cargill beginning in January
1986. Mr. Heffernan held various positions with Cargill
since January 1968.
KEVIN W. BROLSMA is Vice President, Acquisitions
Integration/Environment, Health and Safety of the Company.
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.
Item 11. Executive Compensation
Incorporated by reference from pages 6-8 of the Proxy
Statement section entitled "Executive Compensation."
Item 12. Security Ownership of Certain Beneficial Owners and Management
Incorporated by reference from pages 4-6 of the Proxy Statement section
entitled "Security Ownership of Certain Beneficial Owners."
<PAGE>
Item 13. Certain Relationships and Related Transactions
Incorporated by reference from pages 2-8 of the Proxy
Statement sections entitled "Election of Directors,"
"Security Ownership of Certain Beneficial Owners" and
"Executive Compensation."
PART IV
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K
(a)(1) Financial Statements commence on page 13.
(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:
<TABLE>
<CAPTION>
Exhibit Incorporated Herein
Number Description by Reference to
<S> <C> <C>
3.1 Certificate of Incorporation, Form 10-K Registration Statement
as amended 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 Statement
License Agreement 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 Form 10-K Registration Statement
Tolling Agreement for the fiscal year ended
October 31, 1994
<PAGE>
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 Form 10-Q for the quarterly
Incentive Plan period ended April 30, 1995
10.9 Employee Stock Ownership Plan Form 10-K Registration Statement
and Trust for the fiscal year ended
October 31, 1994
10.10 Employee 401(k) Savings Plan Form 10-K Registration Statement
and Trust for the fiscal year ended
October 31, 1994
10.11 Sale and Purchase of Assets Registration Statement on Form 10
Agreement between Cargill, Inc. (File No. 1-12638) filed on
and McWhorter, Inc. dated as December 3, 1993
of May 19, 1993, as subsequently
modified and amended
10.12 Agreement Containing Consent Registration Statement on Form 10
Order executed as of September (File No. 1-12638) filed on
30, 1993 by the Federal Trade December 3, 1993
Commission, The Valspar
Corporation and McWhorter, Inc.
10.15 Lease Agreement between Form 10-K Registration Statement
McWhorter Technologies, Inc. for the fiscal year ended
and the Valspar Corporation for October 31, 1994
the lease to Valspar of
manufacturing, warehousing,
laboratory and office space in
Philadelphia, Pennsylvania
10.16 Indemnification Agreement dated Form 10-Q for the quarterly
May 17, 1995 between McWhorter period ended April 30, 1995
Technologies, Inc. and
John R. Stevenson
10.16.1 Amendment to Indemnification Form 10-Q for the quarterly
Agreement dated May 17, 1995 period ended July 31, 1996
between McWhorter Technologies,
Inc. and John R. Stevenson
10.17 Indemnification Agreement dated Form 10-Q for the quarterly
May 17, 1995 between McWhorter period ended April 30, 1995
Technologies, Inc. and
Jeffrey M. Nodland.
10.17.1 Amendment to Indemnification Form 10-Q for the quarterly
Agreement dated May 17, 1995 period ended July 31, 1996
between McWhorter Technologies,
Inc. and Jeffrey M. Nodland
<PAGE>
10.18 Indemnification Agreement dated Form 10-Q for the quarterly
May 17, 1995 between McWhorter period ended April 30, 1995
Technologies, Inc. and
Michelle L. Collins
10.18.1 Amendment to Indemnification Form 10-Q for the quarterly
Agreement dated May 17, 1995 period ended July 31, 1996
between McWhorter Technologies,
Inc. and Michelle L. Collins
10.19 Indemnification Agreement dated Form 10-Q for the quarterly
May 17, 1995 between McWhorter period ended April 30, 1995
Technologies, Inc. and
Edward M. Giles
10.19.1 Amendment to Indemnification Form 10-Q for the quarterly
Agreement dated May 17, 1995 period ended July 31, 1996
between McWhorter Technologies,
Inc. and Edward M. Giles
10.20 Indemnification Agreement dated Form 10-Q for the quarterly
May 17, 1995 between McWhorter period ended April 30, 1995
Technologies, Inc. and
D. George Harris
10.20.1 Amendment to Indemnification Form 10-Q for the quarterly
Agreement dated May 17, 1995 period ended July 31, 1996
between McWhorter Technologies,
Inc. and D. George Harris
10.21 Indemnification Agreement dated Form 10-Q for the quarterly
May 17, 1995 between McWhorter period ended April 30, 1995
Technologies, Inc. and
Heinn F. Tomfohrde III
10.21.1 Amendment to Indemnification Form 10-Q for the quarterly
Agreement dated May 17, 1995 period ended July 31, 1996
between McWhorter Technologies,
Inc. and Heinn F. Tomfohrde III
10.23 Indemnification Agreement dated Form 10-K Registration Statement
December 13, 1995 between for the fiscal year ended
McWhorter Technologies, Inc. October 31, 1995
and John G. Johnson, Jr.
10.23.1 Amendment to Indemnification Form 10-Q for the quarterly
Agreement dated December 13, period ended July 31, 1996
1995 between McWhorter
Technologies, Inc. and
John G. Johnson, Jr.
10.24 1996 Incentive Stock Plan Form 10-K Registration Statement
for the fiscal year ended
October 31, 1996
10.25 1996 Nonemployee Director Stock Form 10-K Registration Statement
Option and Award Plan for the fiscal year ended
October 31, 1996
<PAGE>
10.26 Stockholders Agreement for Form 10-K Registration Statement
McWhorter Technologies Europe 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
10.28 $150,000,000 Credit Agreement Form 10-Q for the quarterly
dated July 30, 1997 among period ended July 31, 1997
McWhorter Technologies, Inc.,
the banks listed therein and
Wachovia Bank of Georgia, N.A.,
as agent
10.29 Stock Purchase Agreement By and Form 8-K dated August 11, 1997
Between McWhorter Technologies,
Inc. and Antonio Napoli &
C.s.a.p.a. and Gestin S.r.l.
10.30 Warrant Purchase Agreement Form 8-K dated August 11, 1997
Between McWhorter Technologies,
Inc. and Cable Beach Holdings Ltd.
10.31 Waiver and First Amendment to the
$150,000,000 Credit Agreement
11.1 Statement regarding computation
of net income per share
21.1 Subsidiaries of Registrant
23.1 Consent of Independent Auditors
27 Financial Data Schedules
(b) Following reports on Form 8-K were filed in the
fourth quarter of 1997:
(i) Report dated August 11, 1997 on Item 2,
Acquisition or Disposition of Assets, and
Item 7, Financial Statements, Pro forma
Financial Information, and Exhibits.
(ii) Report dated October 7, 1997 on Item 2,
Acquisition on Disposition of Assets, and
Item 7, Financial Statements, Pro forma
Financial Information, and Exhibits. This
report amended the report dated August 11, 1997.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly
caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
McWHORTER TECHNOLOGIES, INC.
January 27, 1998
By: /s/John R. Stevenson
JOHN R. STEVENSON
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act
of 1934, this report has been signed below by the following
persons on behalf of the Registrant and in the capacities
and on the date indicated.
/s/ John R. Stevenson January 27, 1998
JOHN R. STEVENSON
Chairman, Chief Executive Officer and Director
(Principal Executive Officer)
/s/ Jeffrey M. Nodland January 27, 1998
JEFFREY M. NODLAND
President, Chief Operating Officer and Director
/s/ Louise M. Tonozzi-Frederick January 27, 1998
LOUISE M. TONOZZI-FREDERICK
Vice President, Chief Financial Officer and Secretary
(Principal Financial and Accounting Officer)
/s/ D. George Harris January 27, 1998
D. GEORGE HARRIS
Director
/s/ Michelle L. Collins January 27, 1998
MICHELLE L. COLLINS
Director
/s/ Edward M. Giles January 27, 1998
EDWARD M. GILES
Director
/s/ Heinn F. Tomfohrde, III January 27, 1998
HEINN F. TOMFOHRDE, III
Director
/s/ John G. Johnson, Jr. January 27, 1998
JOHN G. JOHNSON, JR.
Director
<PAGE>
EXHIBIT 11.1 - Statement regarding computation of net income
per share
</TABLE>
<TABLE>
<CAPTION>
Year Ended
October 31, October 31,
1997 1996
<S> <C> <C>
Primary
Average common shares outstanding 10,446,540 10,535,456
Less: Shares of restricted stock
awards issued, not yet vested (99,589) (94,354)
Net effect of dilutive stock options--
based on the treasury stock method
using average market price 145,924 43,177
Total 10,492,875 10,484,279
Net income $15,418,000 $13,833,000
Net income per share $ 1.47 $ 1.32
Fully Diluted
Average common shares outstanding 10,446,540 10,535,456
Net effect of dilutive stock
options--based on the treasury
stock method using the year-end
market price, if higher than
average market price 189,966 80,778
Total 10,636,506 10,616,234
Net income $15,418,000 $13,833,000
Net income per share $ 1.45 $ 1.30
</TABLE>
<PAGE>
EXHIBIT 21.1 - Subsidiaries of the Registrant
McWhorter Holdings Ltd. (United Kingdom)
McWhorter Technologies Sales Corporation ( Bermuda)
McWhorter Technologies, S.p.A. (Italy)
Syntech France S.a.r.l.
<PAGE>
EXHIBIT 23.1 - Consent of Independent Auditors
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 November 17, 1997, with respect
to the consolidated financial statements of McWhorter Technologies, Inc.
included in the Annual Report (Form 10-K) for the year ended October 31, 1997.
/s/ Ernst & Young
ERNST & YOUNG
Chicago, Illinois
January 27, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Statements of Income, Balance Sheets, and Cash Flows and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> NOV-01-1996
<PERIOD-END> OCT-31-1997
<CASH> 3,929
<SECURITIES> 0
<RECEIVABLES> 69,574
<ALLOWANCES> (1,812)
<INVENTORY> 26,487
<CURRENT-ASSETS> 106,921
<PP&E> 148,609
<DEPRECIATION> 43,315
<TOTAL-ASSETS> 259,182
<CURRENT-LIABILITIES> 82,247
<BONDS> 6,212
0
0
<COMMON> 110
<OTHER-SE> 91,558
<TOTAL-LIABILITY-AND-EQUITY> 259,182
<SALES> 331,465
<TOTAL-REVENUES> 331,465
<CGS> 277,372
<TOTAL-COSTS> 277,372
<OTHER-EXPENSES> 26,944
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,166
<INCOME-PRETAX> 24,983
<INCOME-TAX> 9,565
<INCOME-CONTINUING> 15,418
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 15,418
<EPS-PRIMARY> 1.47
<EPS-DILUTED> 0
</TABLE>
EXHIBIT 10.31 - WAIVER AND FIRST AMENDMENT TO CREDIT AGREEMENT
THIS WAIVER AND FIRST AMENDMENT TO CREDIT AGREEMENT (this
"Waiver and First Amendment") is dated as of the 12th day of
November, 1997 among MCWHORTER TECHNOLOGIES, INC. (the
"Borrower"), WACHOVIA BANK, N.A., as Agent (the "Agent") and
WACHOVIA BANK, N.A.; BANK OF AMERICA; BANK OF TOKYO-MITSUBISHI,
LTD., CHICAGO BRANCH; THE SAKURA BANK, LIMITED; HARRIS BANK; THE
FIRST NATIONAL BANK OF CHICAGO; THE NORTHERN TRUST COMPANY;
MELLON BANK, N.A.; and MERITA BANK LTD, NEW YORK BRANCH,
(collectively, the "Banks");
W I T N E S S E T H:
WHEREAS, the Borrower, the Agent and the Banks executed and
delivered that certain Credit Agreement, dated as of July 30,
1997 (as amended, the "Credit Agreement");
WHEREAS, the Borrower has requested certain waivers under
and amendments to the Credit Agreement and the Agent and the
Banks are willing to agree to the Borrower's requests, subject to
the terms and conditions of this Waiver and First Amendment;
NOW, THEREFORE, for and in consideration of the above
premises and other good and valuable consideration, the receipt
and sufficiency of which hereby is acknowledged by the parties
hereto, the Borrower, the Agent and the Banks hereby covenant and
agree as follows:
1. Definitions. Unless otherwise specifically defined
herein, each term used herein which is defined in the Credit
Agreement has the meaning assigned to such term in the Credit
Agreement. Each reference to "hereof", "hereunder", "herein" and
"hereby" and each other similar reference and each reference to
"this Agreement" and each other similar reference contained in
the Credit Agreement from and after the date hereof refer to the
Credit Agreement as amended hereby.
2. Amendment to Section 1.01. The following new definition
is hereby added to Section 1.01 of the Credit Agreement:
<PAGE>
"MTL/MTOy Acquisition" means those certain transactions
described in that certain memorandum from Louise Tonozzi-
Frederick to representatives of the Agent dated November 4,
1997, a copy of which has been delivered to the Agent and
the Banks.
3. Amendments to Section 4.08. Section 4.08 of the Credit
Agreement is hereby amended by deleting the term "McWhorter
Technological Sales Corporation" therein and substituting
therefor the term "McWhorter International Sales Corporation."
4. Amendment to Section 5.07. Section 5.07 of the Credit
Agreement hereby is amended by: (A) deleting the word "and"
immediately before clause (iv) therein; (B) deleting the text
"provided that after giving effect to the making of any loans,
advances or deposits permitted by this Section, the Borrower will
be in full compliance with all the provisions of this Agreement"
at the end of clause (iv) therein; and (C) inserting the
following immediately after clause (iv) therein:
(v) loans or advances made by the Borrower or any of its
Subsidiaries to Persons (other than Guarantors or
Subsidiaries described in clauses (iii) and (iv) above)
provided that immediately after the making of each such loan
or advance, the sum of such loans or advances and
Investments made under Section 5.08(iii) hereunder, does not
exceed the amount set forth in Section 5.08(iii) hereunder;
and (vi) loans or advances, in no event greater than 11.7
million Swedish kroner in the aggregate, made by McWhorter
Technologies AB to Newco (as described in the memorandum
referenced in the definition of MTL/MTOy Acquisition) in
connection with the MTL/MTOy Acquisition; provided that
after giving effect to the making of any loans, advances or
deposits permitted by this Section, the Borrower will be in
full compliance with all the provisions of this Agreement.
5. Amendment to Section 5.08. Section 5.08 of the Credit
Agreement hereby is deleted in its entirety, and the following is
substituted therefor as Section 5.08:
SECTION 5.08. Investments. Neither the Borrower
nor any of its Subsidiaries shall make Investments in any
Person except Investments: (i) as of the Closing Date
(including minority Investments to be made pursuant to the
Acquisition Agreements not exceeding $2,000,000 in the
aggregate) listed on Schedule 1.01(a); (ii) in Subsidiaries
which timely become and thereafter remain (A) Guarantors
pursuant to Section 5.24, or (B) Eligible First Tier Foreign
Subsidiaries pursuant to Section 5.25; (iii) consisting of
equity in Persons (exclusive of Investments made in
connection with the MTL/MTOy Acquisition) which do not
timely become and thereafter remain (A) Guarantors pursuant
to Section 5.24, or (B) Eligible First Tier Foreign
<PAGE>
Subsidiaries pursuant to Section 5.25, provided that such
Investments do not exceed (x) from the Closing Date through
and including January 29, 1998, $25,000,000 in the
aggregate, or (y) after January 29, 1998, the greater of
$20,000,000 or 20% of Stockholder's Equity; (iv) as
permitted by Section 5.07; (v) in connection with the
MTL/MTOy Acquisition in an amount not exceeding $12,500,000
in the aggregate; and (vi) in (A) direct obligations of the
United States Government maturing within one year, (B)
certificates of deposit issued by a commercial bank whose
credit is reasonably satisfactory to the Agent, (C)
commercial paper rated A1 or the equivalent thereof by
Standard & Poor's Corporation or P1 or the equivalent
thereof by Moody's Investors Service, Inc. and in either
case maturing within 6 months after the date of acquisition
and/or (D) tender bonds the payment of the principal of and
interest on which is fully supported by a letter of credit
issued by a United States bank whose long-term certificates
of deposit are rated at least AA or the equivalent thereof
by Standard & Poor's Corporation and Aa or the equivalent
thereof by Moody's Investors Service, Inc.; provided,
however, with respect to clauses (ii), (iii) and (iv) in
this Section 5.08, no Investments shall be permitted to be
made after the Closing Date (A) in the event that a Default
or Event of Default is in effect or will be caused by such
Investment, and (B) unless the Borrower certifies to the
Agent in writing prior to making any such Investment the
Borrower's pro forma compliance with the financial covenants
set forth in Sections 5.03 and 5.06 of this Agreement, such
written certification and pro forma calculations to be in
form and substance satisfactory to the Agent in all
respects.
6. Amendments to Section 5.24. Section 5.24 of the Credit
Agreement hereby is amended by: (A) deleting the clause "within
20 Foreign Currency Business Days" appearing in subsection (b)
therein, and substituting therefor the clause "within 45 Foreign
Business Days;" and (B) deleting the term "McWhorter
Technological Sales Corporation" appearing in subsection (b)
therein, and substituting therefor the term "McWhorter
International Sales Corporation."
<PAGE>
7. Amendment to Section 5.25. Section 5.25 of the Credit
Agreement hereby is amended by deleting the clause "within 20
Euro-Dollar Business Days" appearing therein, and substituting
therefor the clause "within 45 Euro-Dollar Business Days;"
8. Amendment to Schedule 1.01(a). Schedule 1.01(a) of the
Credit Agreement hereby is amended by adding the following in the
numerical order indicated to that portion of the Schedule which
is titled "Investments as of the Closing Date":
4. On August 1, 1997, McWhorter Technologies, Inc.
(the "Company") will complete the acquisition of
Syntech S.p.A. and its affiliated entities and
subsidiaries. The aggregate consideration paid
will be $47,107,128 in cash and approximately
$15,500,000 of debt assumed. The cash portion of
the purchase consideration will be made available
from the Company's $150,000,000 credit facility.
The transaction will involve the acquisition of
all the outstanding stock and warrants of
Synthetic Resin Technologies S.A., the Luxembourg
holding company of Syntech S.p.A., and all the
stock of Syntech, Inc. from Antonio Napoli &
C.s.p.a., Gestin S.r.l. and Cable Beach Holdings
Ltd. Upon completion of the transaction, the
Company will contribute such stock and warrants to
its wholly-owned U.K. subsidiary McWhorter
Holdings Ltd., and the Luxembourg holding company
will be liquidated.
9. Default Waiver. The Borrower has informed the Agent
and the Banks that (i) Syntech S.p.A., a Subsidiary, has made a
loan of 4,250,000 Hong Kong Dollars to a Person in violation of
Section 5.07 of the Credit Agreement (the "Loan Default"), and
(ii) that the Borrower has not complied with the obligations set
forth under Sections 5.24 and 5.25 of the Credit Agreement with
respect to the execution and delivery of certain Loan Documents
described therein regarding the Borrower, McWhorter International
Sales Corporation, Syntech, Inc., Syntech France S.a.r.l.,
Syntech S.p.A., and McWhorter Holdings Ltd. (the "Delivery
Default"). The Borrower acknowledges and agrees that the Loan
Default and the Delivery Default constitute Events of Default
under Section 6.01 of the Credit Agreement. In reliance upon the
foregoing, the Agent and the Banks hereby waive the Loan Default
and the Delivery Default. The waiver of the Loan Default and the
Delivery Default does not constitute a waiver of any other
Default or Event of Default under the Credit Agreement whether
now existing or hereafter occurring.
<PAGE>
10. Acquisition Waiver. The Borrower has informed the
Agent and the Banks that it seeks to acquire three new
subsidiaries in connection with the MTL/MTOy Acquisition.
Because of certain legal requirements existing in foreign
countries, the Borrower believes that it and the new subsidiaries
will be unable to comply with the requirements of Section 5.25 of
the Credit Agreement. The Agent and the Banks do hereby waive
compliance with the requirements set forth in Section 5.25 of the
Credit Agreement, solely with respect to those subsidiaries to be
acquired under the MTL/MTOy Acquisition, until forty-five days
after the date of consummation of the MTL/MTOy Acquisition, or
March 15, 1998, whichever occurs first.
11. Restatement of Representations and Warranties. The
Borrower hereby restates and renews each and every representation
and warranty heretofore made by it in the Credit Agreement and
the other Loan Documents as fully as if made on the date hereof
and with specific reference to this Waiver and First Amendment
and all other loan documents executed and/or delivered in
connection herewith.
12. Effect of Waiver and First Amendment. Except as set
forth expressly hereinabove, all terms of the Credit Agreement
and the other Loan Documents remain in full force and effect, and
constitute the legal, valid, binding and enforceable obligations
of the Borrower. The amendments contained herein are deemed to
have prospective application only, unless otherwise specifically
stated herein.
13. Ratification. The Borrower hereby restates, ratifies
and reaffirms each and every term, covenant and condition set
forth in the Credit Agreement and the other Loan Documents
effective as of the date hereof.
14. Counterparts. This Waiver and First Amendment may be
executed in any number of counterparts and by different parties
hereto in separate counterparts, each of which when so executed
and delivered will be deemed to be an original and all of which
counterparts, taken together, will constitute but one and the
same instrument.
15. Section References. Section titles and references used
in this Waiver and First Amendment have no substantive meaning or
content of any kind whatsoever and are not a part of the
agreements among the parties hereto evidenced hereby.
16. No Default. To induce the Agent and the Banks to enter
into this Waiver and First Amendment and to continue to make
<PAGE>
advances pursuant to the Credit Agreement, the Borrower hereby
acknowledges and agrees that, as of the date hereof, and after
giving effect to the terms hereof, there exists (i) no Default or
Event of Default and (ii) no right of offset, defense,
counterclaim, claim or objection in favor of the Borrower arising
out of or with respect to any of the Loans or other obligations
of the Borrower owed to the Banks under the Credit Agreement.
17. Further Assurances. The Borrower agrees to take such
further actions as the Agent reasonably requests in connection
herewith to evidence the amendments herein contained to the
Borrower.
18. Governing Law. This Waiver and First Amendment are
governed by and construed and interpreted in accordance with, the
laws of the State of Georgia.
19. Conditions Precedent. This Waiver and First Amendment
will become effective only upon (i) receipt by the Agent from
each of the parties hereto of a duly executed counterpart of this
Waiver and First Amendment, (ii) true and correct photocopies of
each of all documents (in such detail as may be reasonably
requested by the Agent) executed, delivered and/or furnished by
or to the Borrower in connection with the MTL/MTOy Acquisition on
or before the date of the consummation of the MTL/MTOy
Acquisition, and (iii) payment to the Agent of that certain fee
referenced in that certain letter from the Agent to Borrower
dated as of October 28, 1997. Notwithstanding anything contained
in this Waiver and First Amendment to the contrary, in the event
that the MTL/MTOy Acquisition is not fully consummated by
February 1, 1998, then the Agent's and the Banks' agreements with
respect to the following will be null and void: (y) the words
"and (vi) loans or advances, in no event greater than 11.7
million Swedish kroner in the aggregate, made by McWhorter
Technologies AB to Newco (as described in the memorandum
referenced in the definition of MTL/MTOy Acquisition) in
connection with the MTL/MTOy Acquisition;" appearing in the
proposed amendment to Section 5.07 set forth in paragraph 4
herein; and (z) paragraph 5 herein.
<PAGE>
IN WITNESS WHEREOF, the Borrower, the Agent and each of the
Banks has caused this Waiver and First Amendment to be duly
executed, under seal, by its duly authorized officer as of the
day and year first above written.
MCWHORTER TECHNOLOGIES, INC., WACHOVIA BANK, N.A., as Agent and
as Borrower (SEAL) as a Bank (SEAL)
By: /s/Louise M. Tonozzi-Frederick By:/s/John F. Carlin
Title: Vice President & CFO Title: Vice President
BANK OF AMERICA, BANK OF TOKYO-MITSUBISHI, LTD.,
as a Bank (SEAL) CHICAGO BRANCH, as a Bank (SEAL)
By:/s/Thomas E. Hall By:/s/Hajime Watanabe
Title: Vice President Title: Deputy General Manager
THE SAKURA BANK, LIMITED, HARRIS BANK,
as a Bank (SEAL) as a Bank (SEAL)
By:/s/Yukiharu Sakumoto By:/s/Richard H. Michalik
Title: Joint General Manager Title: Assistant Vice President
THE FIRST NATIONAL BANK OF THE NORTHERN TRUST COMPANY,
CHICAGO, as a Bank (SEAL) as a Bank (SEAL)
By:/s/Julia Bristow By:/s/Ron Mallicoat
Title: Managing Director Title: Vice President
MELLON BANK, N.A. MERITA BANK, LTD, NEW YORK
as a Bank (SEAL) BRANCH, as a Bank (SEAL)
By:/s/George B. Davis By:/s/Anu Seppala, John Kehnle
Title: Vice President Title: Vice President, Vice President
<PAGE>
CONSENT AND REAFFIRMATION OF GUARANTOR
The undersigned (i) acknowledges receipt of the foregoing Waiver
and First Amendment to Credit Agreement (the "Amendment"), (ii)
consents to the execution and delivery of the Amendment by the parties
thereto and (iii) reaffirms all of its obligations and covenants under
the respective Limited Guaranty Agreement executed by it in favor of
the Agent for the ratable benefit of the Banks, and agrees that none
of such obligations and covenants shall be affected by the execution
and delivery of the Amendment.
MCWHORTER INTERNATIONAL SALES CORPORATION
By:/s/Louise M. Tonozzi-Frederick
Title: Vice President and CFO
