-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, IQx7nPixaj+nA4E2HttVPQkZ5MVIgq8oDjVqKXUAqauitZVGrekpqPYe9GlkKmNr SzbWf8xsJPQFo+rEXcRUcA== 0000045370-98-000002.txt : 19980323 0000045370-98-000002.hdr.sgml : 19980323 ACCESSION NUMBER: 0000045370-98-000002 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980319 SROS: CSX SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: HANNA M A CO/DE CENTRAL INDEX KEY: 0000045370 STANDARD INDUSTRIAL CLASSIFICATION: MISCELLANEOUS PLASTIC PRODUCTS [3080] IRS NUMBER: 340232435 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-05222 FILM NUMBER: 98569053 BUSINESS ADDRESS: STREET 1: STE 36 5000 STREET 2: 200 PUBLIC SQUARE CITY: CLEVELAND STATE: OH ZIP: 44114-2304 BUSINESS PHONE: 2165894000 FORMER COMPANY: FORMER CONFORMED NAME: HANNA MINING CO DATE OF NAME CHANGE: 19850523 10-K405 1 SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Fiscal year ended December 31, 1997 Commission file number 1-5222 M. A. HANNA COMPANY (Exact name of Registrant as specified in its charter) STATE OF DELAWARE 34-0232435 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) SUITE 36-5000, 200 PUBLIC SQUARE, CLEVELAND, OHIO 44114-2304 (Address of principal executive offices) (Zip code) Registrant's telephone number, including area code 216-589-4000 Securities registered pursuant to Section 12(b) of the Act: Name of each exchange on Title of each class which registered Common Stock, $1 par value New York Stock Exchange Chicago Stock Exchange 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, and (2) has been subject to such filing requirements for the past 90 days. YES X NO___ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ X ] Aggregate market value of the voting stock held by nonaffiliates of the Registrant, computed by reference to the price at which the stock was sold as of February 13, 1998: $1,142,373,047. Common Shares outstanding as of February 13, 1998: 50,352,531. DOCUMENTS INCORPORATED BY REFERENCE Portions of the following documents are incorporated by reference into the designated parts of this Form 10-K: (1) Registrant's definitive proxy statement distributed to stockholders dated March 16, 1998, filed with the Commission pursuant to Regulation 14A and incorporated by reference into Parts I and III of this Form 10-K; and (2) Registrant's Annual Report distributed to stockholders for the fiscal year ended December 31, 1997, incorporated by reference into Parts I and II of this Form 10-K. With the exception of the information specifically incorporated by reference, neither the Registrant's proxy statement nor the 1997 Annual Report to stockholders is deemed to be filed as part of this Form 10-K. Except as otherwise stated, the information contained in this report is given as of December 31, 1997, the end of the Registrant's last fiscal year. PART I ITEM 1. BUSINESS (a) Acquisitions and Dispositions In February 1997, the Registrant announced the construction of a manufacturing plant to produce color and additive concentrates in the Pu Dong district of Shanghai, China. The new plant will operate as Hanna Wilson Polymer (Shanghai) Limited, a wholly-owned subsidiary of the Registrant. Previously the Registrant also had announced an agreement for the formation of Hanna Su Xing Plastics Compounding (Suzhou) Co., Ltd., a joint venture to produce plastics compounds in Suzhou, China, which is about 60 miles from the color facility in the Pu Dong district. In February 1997, the Registrant announced the sale of its 50 percent interest in IOC Ore Sales Company, a partnership that serves as sales agent for the Iron Ore Company of Canada ("IOC"). In the fourth quarter of 1997, the Registrant also sold its 50 percent interest in Hollinger-Hanna Limited, the holder of a royalty paid by IOC. In April 1997, the Registrant announced the acquisition of Enviro Care Compounds (ECC) of Norway, which produces halogen-free flame-retardant plastic compounds for the wire and cable market. It also announced it had acquired from Borealis A/S of Denmark the right to manufacture a line of plastic compounds for insulation and jacketing applications in telecommunications. In May 1997, the Registrant announced the acquisition of the former Sadolin Masterbatch plastic color and additive business from Akzo Nobel Inks A/S. Included in the acquisition was a Glostrup, Denmark manufacturing facility, which the Registrant continues to operate. In August 1997, the Registrant announced it would acquire the manufacturing business of Harwick Chemical Corporation. The company supplies specialty colorants and other specialty products for the rubber industry, and specialty color pigment dispersions and dry colorants for plastics, from plants in Akron, Ohio and Wynne, Arkansas. In November 1997, the Registrant announced the formation of a joint venture with Techmer PM to produce color and additive concentrates principally for the film and fiber markets. Doing business as Techmer PM, LLC, a limited liability company in which Registrant has a 51% interest, the company is headquartered in Clinton, Tennessee and has manufacturing plants in Clinton, Tennessee, Buford, Georgia and Rancho Dominguez, California. In February 1998, the Registrant announced the completion of its previously announced acquisition of Melos Carl Bosch GmbH & Co., a German rubber and plastic compounder. With a plant in Melle, Germany, the company produces rubber and thermoplastic elastomer compounds for the wire and cable, sport and recreation and automotive markets. In March 1998, the Registrant announced that it had acquired Exxon Chemical's business in halogen-free, flame retardant plastic compounds for the wire and cable industry. Exxon's sales of these flame retardant compounds totalled about $5 million in 1997. (b) See the financial information regarding the Registrant's business segments set forth at pages 30 through 31 of the Registrant's Annual Report distributed to stockholders for the fiscal year ended December 31, 1997, which information is incorporated herein by this reference. (c) (1) (i) Formulated Polymers (a) Processing The Registrant, through its custom plastic compounding businesses, Th. Bergmann, Compounding Technology, DH Compounding Company, Enviro Care Compounds, M.A. Hanna Engineered Materials, MACH-1 and Southwest Chemical Services business units, engages in the custom compounding of plastic materials to the specifications of manufacturers of molded plastic products for customers located throughout North America, Europe and Asia. Through its rubber compounding and additives businesses, M.A. Hanna Rubber Compounding, Melos Carl Bosch and Harwick Chemical Manufacturing, Registrant engages in the custom compounding of rubber materials to the specifications of manufacturers of rubber products throughout North America and Europe and the manufacture of additives for the rubber industry worldwide. Through its custom formulated color and additives businesses, M.A. Hanna Color, Hanna Polimeros, Victor International Plastics, Wilson Color, Hanna Wilson Polymer (Shanghai) Limited and Techmer PM, LLC, the Registrant manufactures custom formulated colorants in the form of color concentrates, liquid dispersions, dry colorants, and additives for customers in the plastics industry throughout North America, Europe, South America and Asia. M.A. Hanna Color also produces specialty colorants and additives for the automobile, vinyl building products and textile industries and M.A. Hanna Color, Wilson Color and Hanna Wilson Polymer (Shanghai) Limited also produce specialty colorants and additives for the wire and cable industry worldwide. (b) Distribution Through its M.A. Hanna Resin Distribution and Hanna de Mexico business units, the Registrant distributes thermoplastic and thermoset resins and fiberglass materials in North America for major resin producers. Through its Cadillac Plastic business unit, Registrant engages in the worldwide distribution of engineered plastic sheet, rod, tube, and film products to industrial and retail customers as well as cutting and machining plastic products to customers' specifications and thermoforming plastic into products such as skylights and signs. (c) Other Through its Diversified Polymer Products business unit, Registrant manufactures molded sponge automotive parts for customers located throughout the United States and Canada. (1) (iii) In Registrant's plastic and rubber compounding businesses, the primary raw materials required are natural and synthetic rubbers, resins, and chemicals, all of which are available in adequate supply. The primary raw materials required by Registrant's color businesses are resins, chemicals, and organic and inorganic pigments, all of which are available in adequate supply. (1) (iv) Registrant's business units own numerous patents and trademarks, which are important in that they protect the Registrant's corresponding inventions and product names against infringement by others and thereby enhance Registrant's position in the marketplace. The patents vary in duration from 1 year to 20 years, and the trademarks have an indefinite life which is based upon continued use. (1) (x) The custom compounding of plastic and rubber materials and the manufacture of rubber additives are highly competitive, with product quality, price and service to customers being principal factors affecting competition. Registrant believes it is the largest independent custom compounder of rubber and a leading independent compounder of plastics in North America and Europe. The manufacture of custom-formulated color and additive concentrates for the plastics industry is highly competitive, with product quality, price and service to customers being principal factors affecting competition. Registrant believes it is one of the leading producers of custom formulated color and additive concentrates in the United States and Europe. The manufacture of molded sponge automotive parts is highly competitive, with quality, price and service to customers being principal factors affecting competition. Information generally available indicates that Registrant is among the leading suppliers of such parts in the United States. The distribution and fabrication of engineered plastic sheet, rod, tube, film products, and polymer resins is highly competitive, with product quality, price and service to customers being principal factors affecting competition. Registrant believes it is one of the leading distributors of engineered shapes in the world and one of the leading distributors of plastic resins in North America. (1) (xii) At each of its operations the Registrant, its subsidiaries, and associated companies are governed by laws and regulations designed to protect the environment, and in this connection Registrant has adopted a corporate policy which directs compliance with the various requirements of these laws and regulations. The Registrant believes that it, its subsidiaries and associated companies are in substantial compliance with all such laws and regulations, although it recognizes that these laws and regulations are constantly changing. There are presently no material estimated capital expenditures for further environmental control facilities projected by the Registrant, its subsidiaries and associated companies for any of its operations. (1) (xiii) Registrant employs 7,016 persons at its consolidated operations (6,068 in 1996). (d) (1) See information regarding Registrant's international operations at page 31 of Registrant's Annual Report distributed to stockholders for the fiscal year ended December 31, 1997, which page is incorporated herein by this reference. (2) The international operations owned directly by Registrant and in which the Registrant and its subsidiaries have equity interests, may be affected from time to time by foreign political and economic developments, laws and regulations, increases or decreases in costs in such countries and changes in the relative values of the various currencies involved. ITEM 2. PROPERTIES The table below sets forth the principal plants and properties owned or leased by the Registrant's business units. For properties which are leased, the date of expiration of the current term of the lease is indicated. Properties which are shown as owned are owned in fee simple. Some properties may be subject to minor encumbrances of a nature which do not materially affect the Registrant's operations. In addition, Registrant's Cadillac Plastic, M.A. Hanna Resin Distribution and Hanna de Mexico business units lease floor space at various locations within North America. They are used for sales offices, for the distribution of Registrant's products, for fabrication, and for warehousing. These are short-term leases. Registrant's Cadillac Plastic business unit also leases space in various locations outside the United States, including Australia, Belgium, Canada, France, Germany, Hong Kong, Korea, Malaysia, Mexico, Netherlands, New Zealand, Singapore, Spain, Sweden, Taiwan and Vietnam. Location Facility Owned/Leased Approximate Size (sq. ft.) Burton, M.A. Hanna Rubber Owned 160,000 Ohio Compounding Macedonia, MACH-1 Compounding Owned 87,000 Ohio Tillsonburg, M.A. Hanna Rubber Owned 60,000 Ontario Compounding Jonesboro, M.A. Hanna Rubber Owned 69,000 Tennessee Compounding DeForest, M.A. Hanna Rubber Owned 130,000 Wisconsin Compounding Santa Fe Springs, M.A. Hanna Rubber Leased 13,231 California Compounding 1998 Chicago, M.A. Hanna Rubber Leased 31,000 Illinois 2001 Kennedale, M.A. Hanna Rubber Owned 80,000 Texas Broadview Heights, M.A. Hanna Color Owned 61,000 Ohio Phoenix, M.A. Hanna Color Owned 20,500 Arizona Vonore, M.A. Hanna Color Owned 47,000 Tennessee North Kansas City, M.A. Hanna Color Leased 44,000 Missouri 1998 San Fernando, M.A. Hanna Color Leased 45,000 California 1998 Vancouver, M.A. Hanna Color Leased 35,000 Washington 2002 Troy, Cadillac Plastic Leased 34,655 Michigan (headquarters and 2007 call center) Coppell, Cadillac Plastic Leased 101,016 Texas (area distribution 2006 and call center) Naperville, Cadillac Plastic Leased 88,910 Illinois (area distribution 2007 center) Austell, Cadillac Plastic Leased 88,500 Georgia (area distribution 2008 center) Fresno, Cadillac Plastic Leased 50,960 California (area distribution 2007 center) Middletown, Cadillac Plastic Leased 61,620 Pennsylvania (area distribution 2008 center) Lemont, M.A. Hanna Resin Leased 103,000 Illinois Distribution 2008 (headquarters) Seattle, M.A. Hanna Resin Leased 44,520 Washington Distribution 2005 Kingstree, M.A. Hanna Rubber Owned 156,174 South Carolina Compounding and Southwest Chemical Services Dyersburg, M.A. Hanna Owned 862,399 Tennessee Engineered Materials, M.A. Hanna Rubber Compounding and Diversified Polymer Products Bethlehem, M.A. Hanna Leased Pennsylvania Engineered 2004 82,000 Materials 1999 25,400 Norcross M.A. Hanna Leased 27,814 Georgia Engineered 2002 Materials (headquarters and technical center) Suwanee, M.A. Hanna Color Owned 20,000 Georgia (headquarters) Suwanee, M.A. Hanna Color Owned 44,022 Georgia (technical center) Somerset, M.A. Hanna Color Owned 44,300 New Jersey Florence, M.A. Hanna Color Owned 30,000 Kentucky Eagan, M.A. Hanna Color Leased 51,600 Minnesota and Resin 2002 Distribution Gastonia, M.A. Hanna Color Owned 43,992 North Carolina Elk Grove Village, M.A. Hanna color Owned 51,870 Illinois St. Peters, M.A. Hanna Color Owned 32,480 Missouri Fort Worth, M.A. Hanna Color Owned 75,080 Texas Norwalk, M.A. Hanna Color Owned 94,000 Ohio Carolina, M.A. Hanna Color Leased 12,600 Puerto Rico 1999 Bethlehem, M.A. Hanna Color Owned 58,672 Pennsylvania Milford, M.A. Hanna Color Leased 20,600 New Hampshire 2001 LaPorte, Southwest Chemical Owned 200,000 Texas Services Ayer, M.A. Hanna Resin Leased 53,250 Massachusetts Distribution 2002 Houston, M.A. Hanna Leased Texas Engineered 2002 88,000 Materials 2002 44,120 Statesville, M.A. Hanna Resin Leased 48,240 North Carolina Distribution 2002 Corona, Compounding Leased 32,000 California Technology, Inc. 2001 Clinton, Techmer PM, LLC Owned 151,000 Tennessee Rancho Dominguez, Techmer PM, LLC Leased 119,000 California 1999 Gainesville, Techmer PM, LLC Leased 36,374 Georgia 2005 Wynne, Harwick Chemical Owned 119,000 Arkansas Manufacturing Corporation Toluca, Hanna Polimeros Owned 22,000 Mexico Assesse, Wilson Color Owned 120,976 Belgium Tossiat, Wilson Color Owned 87,188 France Bendorf, Wilson Color Owned 72,086 Germany Angered, Wilson Color Owned 22,259 Sweden Saint Ouen,(Paris) Wilson Color Owned 46,285 France Coventry, Victor Leased 52,750 England International 2000 Manchester, Victor Owned 58,890 England International Gaggenau, Th. Bergmann Owned 241,114 Germany Barbastro, Polibasa Owned 71,042 Spain (Bergmann) Jurong, Compounding Leased 43,000 Singapore Technology, 1999 Pte. Ltd. Saint Etienne, Compounding Owned 35,000 France Technology Euro, S.A. Pu Dong Hanna Wilson Owned 30,400 (Shanghai), Polymer China Glostrup, Wilson Color Owned 7,545 Denmark Melle, Melos Carl Bosch Owned 69,225 Germany Registrant's combined annual plastic and rubber compounding capacity and colorant manufacturing capacity, based on the estimated design capacities of Registrant's plants, amounts to approximately 766 million pounds of compounded rubber products, 962 million pounds of compounded plastic products and approximately 311 million pounds of colorants. A variation in the mix of products produced at a given plant results in a corresponding increase or decrease in the quantity of products that can be produced at full capacity. Beyond these estimated capacities for Registrant's rubber and plastic compounding and colorant manufacturing properties, there are no comparative measurement units of production capacity that reasonably can be ascribed to Registrant's other properties in the processing segment. Registrant's 50 percent-owned partnership, DH Compounding Company, owns and operates an engineering plastics compounding plant in Clinton, Tennessee. The 150,000 square foot plant has an annual design capacity of 110 million pounds. ITEM 3. LEGAL PROCEEDINGS Registrant, directly and indirectly through a wholly-owned subsidiary, is obligated for costs of environmental remediation measures taken and to be taken in connection with certain operations that have been sold or discontinued. These include the clean-up of a Superfund site and participation with other companies in the clean-up of hazardous waste disposal sites, several of which have been closed. Registrant has established reserves for these anticipated liabilities for environmental remediation, which do not reflect potential insurance recoveries and which management believes are adequate to cover Registrant's ultimate exposure. Registrant believes that these liabilities will not have a material adverse effect on the Registrant's results of operations, financial position or cash flows. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. _______ EXECUTIVE OFFICERS OF THE REGISTRANT The following table lists information as of March 1, 1998, as to each executive officer of the Registrant, including his position with the Registrant as of that date and other positions held by him during at least the past five years: D. J. McGregor Chairman and Chief Executive Age - 57 Officer, July 1, 1997 to date. President and Chief Operating Officer, May 1989 to December 31, 1996. President and Chief Executive Officer January 1, 1997 to June 30, 1997. L. L. Beach Vice President, Human Resources, Age - 53 April 1995 to date. Vice President, Human Resources of Kraft Foods International (manufacturer and distributor of consumer products) 1991 to April 1995. K. J. Darragh Senior Vice President, Operations, Age - 49 May 1997 to date. President - Cadillac Plastic, February 1995 to May 1997. Vice President Operations - Cadillac Plastic, February 1991 to January 1995. M. S. Duffey Vice President and Chief Financial Age - 43 Officer, August 1996 to date. Vice President and Treasurer, Outboard Marine Corporation (manufacturer of recreational boats and marine engines), 1986-1992; Vice President and Treasurer, Foote, Cone & Belding Communications, Inc. (advertising agency) 1992 - July 1994. Treasurer of the Registrant, July 1994 - April 1995; Vice President, Chief Financial Officer and Treasurer of Registrant, April 1995 to August 1996. J. R. Gwinnell Vice President Strategy and Age 42 Development, February 4, 1998 to date. Senior Engagement Manager, McKinsey & Company, Inc., 1989 to 1996. Vice President, Strategy, Westinghouse Electric Corporation, 1996 to February 1998. G. W. Henry Senior Vice President, International Age - 52 Operations, May 1997 to date. Vice President - Operations, 1992 - 1994; Vice President, International Operations, 1994 - May 1997. J. S. Pyke, Jr. Vice President, General Counsel and Age - 59 Secretary, 1979 to date. D. R. Schrank Senior Vice President, Operations, Age - 49 May 1997 to date. Senior Vice President and Chief Financial Officer, Sealy, Inc. (bedding manufacturer) 1989 to September 1993. Vice President and Chief Financial Officer of the Registrant, September 1993 - April 1995; Vice President, North American Plastics Operations, April 1995 to May 1997. C. R. Sachs Treasurer, August 1996 to date. Age - 45 Treasurer Outboard Marine Corporation (manufacturer of recreational boats and marine engines) 1992-1996. T. E. Lindsey Controller, July 1990 to date. Age - 47 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS See the tables regarding Registrant's stock price data at page 36 and Shareholder Information at the bottom of page 37 of Registrant's Annual Report distributed to stockholders for the fiscal year ended December 31, 1997, which tables and information are incorporated herein by this reference. ITEM 6. SELECTED FINANCIAL DATA See Selected Financial Data at page 37 of Registrant's Annual Report distributed to stockholders for the fiscal year ended December 31, 1997, which Selected Financial Data is incorporated herein by this reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS See pages 38 through 39 of Registrant's Annual Report distributed to stockholders for the fiscal year ended December 31, 1997, which pages are incorporated herein by this reference. ITEM 7.A QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK. Not applicable. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA See pages 23 through 36 and page 40 of Registrant's Annual Report distributed to stockholders for the fiscal year ended December 31, 1997, which pages are incorporated herein by this reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Directors See the table listing nominees for directors on page 2 of Registrant's definitive proxy statement distributed to stockholders dated March 16, 1998, filed with the Commission pursuant to Regulation 14A, which table is incorporated herein by this reference. Executive Officers See the item captioned "Executive Officers of the Registrant" in Part I of this Form 10-K, which item is incorporated herein by this reference. Section 16(a) Beneficial Ownership Reporting Compliance See the paragraph bearing the foregoing caption on page 5 of Registrant's definitive proxy statement distributed to stockholders dated March 16, 1998, filed with the Commission pursuant to Regulation 14A, which paragraph is incorporated herein by this reference. ITEM 11. EXECUTIVE COMPENSATION See the section captioned "Executive Compensation" at pages 5 through 13 of Registrant's definitive proxy statement distributed to stockholders dated March 16, 1998, filed with the Commission pursuant to Regulation 14A, which section is incorporated herein by this reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT (a) Security Ownership of Certain Beneficial Owners: See the section captioned "Holdings of Shares of the Company's Common Stock" at page 5 of Registrant's definitive proxy statement distributed to stockholders dated March 16, 1998 filed with the Commission pursuant to Regulation 14A, which section is incorporated herein by this reference. (b) Security Ownership by Management: See the table, and footnotes thereto, regarding beneficial ownership of the Registrant's Common Stock by management, at page 3 of Registrant's definitive proxy statement distributed to stockholders dated March 16, 1998 filed with the Commission pursuant to Regulation 14A, which table and footnotes are incorporated herein by this reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS None. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) 1. and 2. The response to this portion of Item 14 is submitted as a separate section commencing on page F-1 of this Form 10-K. 3. List of Exhibits. [Those documents listed below that are incorporated herein by reference to Registrant's earlier periodic reports were filed with the Commission under Registrant's File No. 1-5222.] (i) Exhibits filed pursuant to Regulation S-K (Item 601): (3) Articles of Incorporation and By-laws. (a) Registrant's Articles of Incorporation (as amended and restated as of May 1, 1996, and currently in effect), filed as Exhibit 3(a) to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1996 and incorporated herein by this reference. (b) Registrant's by-laws (as adopted as of November 5, 1997 and currently in effect), filed as Exhibit 3(ii) to Registrant's Current Report on Form 8-K dated November 10, 1997, and incorporated herein by this reference. (4) Instruments Defining the Rights of Security Holders: (a) Indenture dated November 9, 1996, between the Registrant and NBD Bank, as trustee, governing Registrant's Medium Term Notes, a form of which was filed as Exhibit 4.1 to Registrant's Form S-3 filed on June 12, 1996 and incorporated herein by this reference. (b) Credit and Guarantee Agreement, dated January 31, 1997 between the Registrant, Bank of America, N.T. & N.A. and the other banks signatory thereto, a copy of which will be provided to the Commission upon request. (c) Indenture dated September 15, 1991 between the Registrant and Ameritrust Company, National Association, Trustee relating to Registrant's $100,000,000 aggregate principal amount of 9% Senior Notes due 1998 and $150,000,000 aggregate principal amount of 9 3/8% Senior notes due 2003, filed as Exhibit 4 to the Registrant's Form S-3 filed on September 18, 1991, and incorporated herein by this reference. (d) Indenture dated September 26, 1991 between the Registrant and Ameritrust Texas, National Association, Trustee, relating to Registrant's $50,000,000 aggregate principal amount of 9% Senior Notes due 1998, filed as Exhibit 4 to the Registrant's Form S-3 filed on October 24, 1991, and incorporated herein by this reference. (e) Associates Ownership Trust Agreement dated September 12, 1991, between Registrant and Wachovia Bank of North Carolina, filed as Exhibit 28.3 to Registrant's Current Report on Form 8-K dated September 12, 1991, and incorporated herein by this reference. (10) Material Contracts: *(a) 1988 Long-Term Incentive Plan, and forms of Grants of Stock Options, Grants of Appreciation Rights and Grants of Long-Term Incentive Units thereunder, filed as Exhibit 10(e) to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1988, and incorporated herein by this reference. Also forms of 1989 Stock Option Agreement, 1989 Grant of Appreciation Rights and 1989 Grant of Long- Term Incentive Units, filed as Exhibit 10(e) to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1989 and incorporated herein by this reference. Also 1990 Amendment to the Plan, filed as Exhibit 10(e) to Registrant's Form 10-K for the fiscal year ended December 31, 1990 and incorporated herein by this reference and forms of 1990 Stock Option Agreement, 1990 Grant of Appreciation Rights and 1990 Grant of Long-Term Incentive Units, filed as Exhibit 10(e) to Registrant's Form 10-K for the fiscal year ended December 31, 1990 and incorporated herein by this reference. Also 1991 Amendment to the Plan, filed as Exhibit 10(f) to Registrant's Form 10-K for the fiscal year ended December 31, 1991, and incorporated herein by this reference. Also 1994 Amendment to the Plan, filed as Exhibit A to Registrant's definitive proxy statement distributed to stockholders dated March 17, 1994 and incorporated herein by this reference. Also forms of Stock Option Agreement, Performance Share Award Agreement and Restricted Stock Agreement entered into by all participants in the Plan, filed herewith. *(b) Form of Supplemental Deferred Compensation agreement in which any of the five most highly compensated executive officers of the Registrant participates, filed as Exhibit 10(e) to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1993, and incorporated herein by this reference. *(c) Form of Supplemental Death Benefits agreement in which any of the five most highly compensated executive officers of the Registrant participates, filed as Exhibit 10(f) to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1993, and incorporated herein by this reference. *(d) Form of Employment Agreement dated as of February 17, 1989 between Registrant and certain of Registrant's executive officers filed as Exhibit 10(h) to Registrant's Annual Report on form 10-K for the fiscal year ended December 31, 1988 and incorporated herein by this reference. *(e) Description of Directors' compensation and retirement benefit, set forth in the section captioned "Directors' Compensation" on page 14 of Registrant's definitive proxy statement dated March 16, 1998, as distributed to stockholders and filed with the Commission pursuant to Regulation 14A, which section is incorporated herein by this reference. *(f) Excess Benefit Plan in which any of the five most highly compensated executive officers of the Registrant participates, filed as Exhibit 10(j) to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1992 and incorporated herein by this reference. *(g) Supplemental Retirement Benefit Plan in which any of the five most highly compensated executive officers of the Registrant participates, filed as Exhibit 10(k) to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1992 and incorporated herein by this reference. *(h) Voluntary Non-Qualified Deferred Compensation Plan in which any of the five most highly compensated executive officers of the Registrant participates, filed as Exhibit A to the Registrant's definitive proxy statement distributed to stockholders dated March 20, 1995 filed with the Commission pursuant to Regulation 14A, which Exhibit A is incorporated herein by this reference. [*- Identifies management contract or compensation plans or arrangements filed pursuant to Item 601(b) (10) (iii) (A) ] (11) Computation of per share earnings, filed herewith. (13) Registrant's Annual Report as distributed to stockholders for the fiscal year ended December 31, 1997, filed herewith. (21) Subsidiaries of the Registrant, filed herewith. (23) Consent of Independent Accountants, filed herewith. (24) Powers of Attorney of certain Directors of Registrant, filed herewith. (27) Financial Data Schedule, filed herewith. (ii) Other exhibits: Financial statements (and consent of independent accountants) pursuant to Form 11-K and Rule 15D-21 for the year ended December 31, 1997, for the Capital Accumulation Plan for Salaried Employees of M. A. Hanna Company and Associated Companies, and for stock purchase/savings plans of Registrant's subsidiaries and divisions will be filed as exhibits to the Form 10-K under a Form 10-K/A amendment not later than June 29, 1998. (b) Since September 30, 1997, Registrant has filed two reports on Form 8-K, one filed on November 10, 1997 filing the Registrant's by-laws as adopted as of November 5, 1997 and one filed on February 19, 1998 filing a revised Exhibit 12.1 (Computation of Ratio of Earnings to Fixed Charges) to Registration Statement #333-5763. (c) The response to this portion of Item 14 is submitted as a separate Section commencing on page X-1 of this Form 10-K. (d) The response to this portion of Item 14 is submitted as a separate section commencing on page F-1 of this Form 10-K. 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. M. A. HANNA COMPANY (Registrant) Date: March 19, 1998 By /s/J. S. Pyke, Jr. J. S. Pyke, Jr. Vice President, General Counsel and Secretary Pursuant to the requirements of the Securities and 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 dates indicated. Date: March 19, 1998 By /s/D. J. McGregor D. J. McGregor Chairman and Chief Executive Officer (Principal Executive Officer) and Director Date: March 19, 1998 By /s/M. S. Duffey M. S. Duffey Vice President and Chief Financial Officer (Principal Financial Officer) Date: March 19, 1998 By /s/T. E. Lindsey T. E. Lindsey Controller (Principal Accounting Officer) B. C. Ames, Director C. A. Cartwright, Director W. R. Embry, Director J. T. Eyton, Director By /s/T. E. Lindsey G. D. Harnett, Director T. E. Lindsey Attorney-In Fact G. D. Kirkham, Director Date: March 19, 1998 D. B. Lewis, Director M. L. Mann, Director R. W. Pogue, Director M. D. Walker, Director FORM 10-K ITEM 14(a)(1) and (2) FINANCIAL STATEMENTS AND SCHEDULES M.A. HANNA COMPANY The following consolidated financial statements of the Registrant and its consolidated subsidiaries, included in the annual report of the Registrant to its stockholders for the year ended December 31, 1997, are incorporated herein by reference in Item 8: Summary of accounting policies Consolidated balance sheets - December 31, 1997 and 1996 Consolidated statements of income, stockholders' equity and cash flows - years ended December 31, 1997, 1996 and 1995 Notes to financial statements The following consolidated financial information, together with the report of the independent accountants, are included in Item 14(d): Schedule II - Valuation and qualifying accounts All other 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. Financial statements of unconsolidated subsidiaries or 50% or less owned persons accounted for by the equity method have been omitted because they do not, considered individually or in the aggregate, constitute a significant subsidiary. F-1 Report of Independent Accountants on Financial Statement Schedule To the Board of Directors of M.A. Hanna Company Our audits of the consolidated financial statements referred to in our report dated January 28, 1998 appearing in the 1997 Annual Report to Stockholders of M.A. Hanna Company (which report and consolidated financial statements are incorporated by reference in this Annual Report on Form 10- K) also included an audit of the Financial Statement Schedule listed in Item 14(a) of this Form 10-K. In our opinion, this Financial Statement Schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. /s/ Price Waterhouse LLP Cleveland, Ohio January 28, 1998 F-2 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS M. A. HANNA COMPANY AND CONSOLIDATED SUBSIDIARIES
COL. A COL. B COL. C ADDITIONS (1) (2) Balance at Beginning Charged to Costs Charged to Other DESCRIPTION of Period and Expenses Accounts - Describe Year ended December 31, 1997: Deducted from asset accounts: Allowance for doubtful accounts $ 7,572,000 $4,073,000 $ 84,000 (a) Year ended December 31, 1996: Deducted from asset accounts: Allowance for doubtful accounts $11,034,000 $3,362,000 $934,000 (a) Year ended December 31, 1995: Deducted from asset accounts: Allowance for doubtful accounts $11,346,000 $2,480,000 COL. A COL. D COL. E Balance at End DESCRIPTION Deductions - Describe of Period Year ended December 31, 1997: Deducted from asset accounts: Allowance for doubtful accounts $3,080,000 (b) $ 8,649,000 Year ended December 31, 1996: Deducted from asset accounts: Allowance for doubtful accounts $7,758,000 (b) $ 7,572,000 Year ended December 31, 1995: Deducted from asset accounts: Allowance for doubtful accounts $2,792,000 (b) $11,034,000 (a) Reserves of companies acquired. (b) Uncollectible amounts written off.
F-3 EX-10 2 1995 STOCK OPTION AGREEMENT Pursuant to the M. A. Hanna Company (the "Company") 1988 Long-Term Incentive Plan as amended (the "Plan"), stock options may be granted to you (hereinafter called "Associate") from time to time under the terms and conditions described below and in the Plan. 1. The Associate may be granted an option under this Agreement in the form of an incentive stock option within the meaning of Section 422 of the Code or a non-qualified stock option, or both, as determined at the time of grant by the Compensation Committee of the Board of Directors of the Corporation (the "Compensation Committee". (Both such options shall be referred to collectively herein as "options" and individually as an "option", unless the context requires a different interpretation.) 2. Except as provided in Section 3 hereof, the options granted under this Agreement (until terminated as hereinafter provided) shall be exercisable only to the extent of one-third of the shares specified in the grant after the Associate shall have been in the continuous employ of the Company or any Subsidiary for one full year from the date of such grant and to the extent of an additional one-third of such shares on each of the next two successive anniversary dates of this grant thereafter during which the Associate shall have been in the continuous employ of the Company or any Subsidiary. In the case of an option intended to be an incentive stock option, the aggregate fair market value, determined as of the date of grant, of the shares as to which such option is exercisable for the first time by the Associate shall be limited to $100,000 per calendar year. Non-qualified stock options are exercisable by the Associate without regard to the foregoing limitation. The number of shares of Common Stock as to which an option may be exercised shall be determined on the last date on which the Associate shall have been in the continuous employ of the Company or any Subsidiary except that options may be exercised as to all the shares subject to such options under the circumstances set forth in Section 3 hereof. Any portion of an incentive stock option in excess of the fair market value limitation on exercisability set forth above which becomes fully exercisable as provided in Section 3, shall be converted into a non-qualified stock option and exercisable in accordance with its terms. For the purposes of this Section, leaves of absence approved by the Chief Executive Officer of the Company or approved by the Compensation Committee in the case of a leave of absence involving the Chief Executive Officer of the Company, for illness, military or governmental service, or other cause, shall be considered as employment. To the extent exercisable, the options granted under this Agreement may be exercised in whole or in part from time to time only by written notice delivered to and received by the Company, which notice shall be signed by the Associate and shall state the election to exercise an incentive stock option or a non-qualified stock option and the number of whole shares of Common Stock with respect to which the option is being exercised. Such notice may be accompanied by (i) cash, (ii) a check payable to the Company, or (iii) a certificate or certificates for shares of Common Stock of the Company (that have been owned by the Associate for at least 6 months) in a form for transfer acceptable to the Company, or a combination thereof, in payment of the full option price for the number of shares purchased. The Associate may exercise an option and sell the shares acquired upon the exercise of such option, pursuant to a brokerage arrangement consistent with practices approved by the Company, and use the proceeds from such sale as payment of all or a portion of the option price or any taxes which the Company is required by law to withhold or is requested by the Associate to withhold by reason of such exercise. The Associate may elect to pay any such taxes by directing the Company to withhold shares of Common Stock otherwise deliverable as a result of an option exercise in an amount up to his or her estimated marginal tax rate. As soon as practicable after it receives such notice and payment, and following receipt from the Associate of payment for any such taxes, the Company will deliver to the Associate or designee a certificate or certificates for the shares of Common Stock so purchased. 3. Notwithstanding any provision in this Agreement to the contrary, the options granted under this Agreement (until terminated as hereinafter provided) shall become exercisable to the full extent of the shares specified in such grant if there is a Change in Control of the Company, as hereinafter defined. For purposes of this Agreement, a "Change in Control" shall have occurred if any of the following events shall have occurred: (a) The Company enters into an agreement to merge, consolidate or reorganize into or with another corporation or other legal person, and as a result of such merger, consolidation or reorganization less than 75% of the combined voting power of the then-outstanding securities of such corporation or person immediately after such transaction will be held in the aggregate by the holders of Voting Stock (as that term is defined in Subsection (c)) of the Company immediately prior to such transaction; (b) The Company enters into an agreement to sell or otherwise transfer all or substantially all of its assets to any other corporation or other legal person, and as a result of such sale or transfer less than 75% of the combined voting power of the then-outstanding securities of such corporation or person immediately after such sale or transfer will be held in the aggregate by the holders of Voting Stock of the Company immediately prior to such sale or transfer; (c) The filing on Schedule 13D or Schedule 14D-1 (or any successor schedule, form or report), each as promulgated pursuant to the Securities Exchange Act of 1934, as amended (the "Exchange Act"), disclosing that any person (as the term "person" is used in Section 13(d)(3) or Section 14(d)(2) of the Exchange Act) has become the beneficial owner (as the term "beneficial owner" is defined under Rule 13d-3 or any successor rule or regulation promulgated under the Exchange Act) of securities representing 15% or more of the combined voting power of the then-outstanding securities entitled to vote generally in the election of directors of the Company ("Voting Stock"); (d) The Company files a report or proxy statement with the Securities and Exchange Commission pursuant to the Exchange Act disclosing in response to Form 8-K or Schedule 14A (or any successor schedule, form or report or item therein) that a change in control of the Company has or may have occurred or will or may occur in the future pursuant to the any then-existing contract or transaction; (e) During any period of two consecutive years, individuals who constituted the Directors of the Company at the beginning of any such period cease for any reason to constitute at least a majority thereof, unless the election, or the nomination for election by the Company's stockholders, of each new Director was approved by a vote of at least two-thirds of the Directors of the Company then still in office who were directors of the Company at the beginning of such period; or (f) Three or more new directors, separately or together, are elected to the Board of Directors in spite of publicly-stated opposition to such election by at least a majority of the Board of Directors of the Company. Notwithstanding the foregoing provisions of Sections 3(c) or (d) hereof, a Change in Control shall not be deemed to have occurred for purposes of this Agreement solely because (i) the Company, (ii) an entity in which the Company directly or indirectly beneficially owns 50% or more of the voting securities, or (iii) the Company's Associates Ownership Trust, any Company-sponsored employee stock ownership plan or any other employee benefit plan of the Company, either files or becomes obligated to file a report or proxy statement under or in response to Schedule 13D, Schedule 14D-1, Form 8-K or Schedule 14A (or any successor schedule, form or report or item therein) under the Exchange Act, disclosing beneficial ownership by it of shares of Voting Stock, whether in excess of 15% or otherwise, or because the Company reports that a Change in Control of the Company has or may have occurred or will or may occur in the future by reason of such beneficial ownership. In the event that any such agreement to merge, consolidate, reorganize or sell or otherwise transfer assets referred to in Sections 3(a) or (b) is terminated without such merger, consolidation, reorganization or sale or transfer having been consummated, or the person filing the Schedule 13D or Schedule 14D-1 referred to in Section 3(c) files an amendment to any such Schedule disclosing that it no longer is the beneficial owner of securities representing 15% or more of the Voting Stock of the Company, or the Company reports that the Change in Control which it reported in the filing referred to in Section 3(d) will not in fact occur, the operation of this Section 3 may be nullified by notice from the Board of Directors or the Compensation Committee to the Associate and the provisions of Section 2 hereof may be reinstated for accrual of exercise rights in installments, but without prejudice to any exercise of the options granted under this Agreement that may have occurred prior to such nullification. 4. The options granted under this Agreement shall terminate and cease to be exercisable on the earliest of the following dates: (a) On the date Associate ceases to be an employee of the Company or a Subsidiary by reason of termination for Cause, as defined below; (b) Thirty days after the Associate ceases to be an employee of the Company or a Subsidiary, unless Associate ceases to be an employee by reason of termination for Cause, as defined below, or by reason of death, permanent disability or retirement as described in (c) or (d) below; (c) Sixty months after the Associate ceases to be an employee of the Company or a Subsidiary by reason of total and permanent disability or retirement with consent of the Company; (d) Twelve months after the death of the Associate; (e) On the date Associate becomes an employee of a competitor of the Company or a Subsidiary without the consent of the Board of Directors or Compensation Committee of the Company; or (f) Ten years from the date the option was granted hereunder. As used herein, termination for "Cause" shall mean the determination by the Board of Directors or Compensation Committee that Associate (i) engaged in improper conduct or acts involving moral turpitude, (ii) failed to perform or negligently performed his or her duties, or (iii) acted so as to substantially prejudice the business or reputation of the Company or any of its Subsidiaries. In the event the Associate shall intentionally commit an act materially inimical to the interests of the Company or a Subsidiary (including, without limitation, engaging in any conduct that is competitive with the Company or a Subsidiary), and the Board of Directors or Compensation Committee shall so find, the options granted under this Agreement shall terminate at the time of such act, notwithstanding any other provision of this Agreement to the contrary. Nothing contained in this Agreement shall limit whatever right the Company or a Subsidiary might otherwise have to terminate the employment of the Associate. 5. Except as otherwise set forth herein, the options granted under this Agreement are not transferable by the Associate otherwise than by will or the laws of descent and distribution, and are exercisable, during the lifetime of the Associate, only by him or by his guardian or legal representative. The Compensation Committee may approve transfers of non-qualified options granted under this Agreement to members of the Associate's family or to a trust to benefit the Associate or members of the Associate's family. 6. The options granted under this Agreement shall not be exercisable if such exercise would violate any applicable securities laws. The Company agrees to make reasonable efforts to effect and maintain all necessary registrations under such laws so as to permit exercise of the options granted under this Agreement unless the Compensation Committee shall determine that such registrations would impose undue hardship on the Company. 7. The Compensation Committee shall make such adjustments in the option price and in the number or kind of shares of Common Stock or other securities covered by options granted under this Agreement as the Compensation Committee in its sole discretion, exercised in good faith, may determine is equitably required to prevent dilution or enlargement of the rights of the Associate that otherwise would result from (a) any stock dividend, stock split, combination of shares, issuance of stock purchase rights, recapitalization or other change in the capital structure of the Company, or (b) any merger, consolidation, spin-off, reorganization or partial or complete liquidation, or (c) any other corporate transaction or event having an effect similar to any of the foregoing. No adjustment provided for in this Section 6 shall require the Company to sell any fractional share. 8. For purposes of this Agreement, the continuous employ of the Associate with the Company or a Subsidiary shall not be deemed interrupted, and the Associate shall not be deemed to have ceased to be an employee of the Company or any Subsidiary, by reason of the transfer of such employee among the Company and its Subsidiaries. 9. Terms not otherwise defined herein shall have the same meaning as set forth in the Plan. 10. If Associate, either during employment by the Company or a Subsidiary or within six (6) months after termination of such employment for any reason, shall become an employee of a competitor of the Company or a Subsidiary or shall engage in any other conduct that is competitive with the Company or a Subsidiary, unless the Board of Directors or Compensation Committee of the Company shall determine otherwise, Associate shall (a) return to the Company, in exchange for payment by the Company of the option price paid therefor, all shares of Common Stock that Associate has not disposed of that were purchased pursuant to this Agreement within a period of one (1) year prior to the date of the commencement of such employment by a competitor or other competitive conduct, and (b) with respect to any shares so purchased that the Associate has disposed of, pay to the Company in cash the difference between (i) the option price paid therefor by Associate pursuant to this Agreement, and (ii) the closing price of the Common Stock on the New York Stock Exchange on the date of such purchase (or on the last trading day prior to such purchase, if there was no trading on the purchase date). To the extent that such amounts are not paid to the Company, the Company may set off the amounts so payable to it against any amounts that may be owing from time to time by the Company or a Subsidiary to Associate, whether as wages, deferred compensation or vacation pay or in the form of any other benefit or for any other reason. EXECUTED in two original counterparts at Cleveland, Ohio on Date Signed. M. A. HANNA COMPANY By________________________________ Company Officer Title The undersigned Associate hereby acknowledges receipt of an executed original of this 1995 Stock Option Agreement. _________________________________ Associate EX-10 3 M.A. HANNA COMPANY 1988 LONG-TERM INCENTIVE PLAN PERFORMANCE SHARE AGREEMENT Dated as of December 6, 1995 AGREEMENT between M. A. Hanna Company (the "Company") and the executive named at the end of this Agreement ("Executive") pursuant to the Company's 1988 Long-Term Incentive Plan, as amended (the "Plan"), providing for one or more awards which may be granted to the Executive under the terms and conditions described below and in the Plan. 1. Definitions. The following terms shall have the meanings as defined herein. Terms not otherwise defined herein shall have the meaning as set forth in the Plan: (a) "Performance Share Award" means an amount equal to the number of Performance Shares granted to the Executive multiplied by the Market Value of one share of M.A. Hanna Company Common Stock on the date of grant. (b) "Determination Date" has the meaning provided in Section 4 of this Agreement. (c) "EPS" means earnings per share of Common Stock on a fully diluted basis. (d) "Grant of Performance Shares" means the document evidencing each grant made under the Plan which is subject to the terms and conditions of this Agreement. (e) "Management Objectives" means the targets as set forth in Section 2 of this Agreement. (f) "Market Value" means the closing sale price of M.A. Hanna Company Common Stock on the New York Stock Exchange. (g) "Payment Value" means the value of the Performance Shares at the Determination Date calculated as provided in Section 3 of this Agreement. (h) "Performance Period" means the three consecutive calendar years identified in the Grant of the Performance Shares. (i) "Performance Share" means one LTIP Unit granted to the Executive pursuant to the Grant of Performance Shares, this Agreement and the Plan and expressed by reference to one share of Common Stock of the Company. (j) "Profit Growth" means the compound annual percentage growth in profit of the Company or a business unit of the Company, as the case may be, for the Performance Period. (k) "ROE" means the average annual return on stockholders' equity for the Performance Period expressed as a percentage. (l) "ROIC" means the average annual return on invested capital of a business unit of the Company for the Performance Period expressed as a percentage. 2. Management Objectives. Management Objectives are set forth on Annex A to each Grant of Performance Shares. 3. Payment Value. Payment Value shall be calculated by multiplying the number of Performance Shares by the level of achievement of Management Objectives expressed as a percentage, as determined by the intersect of the applicable coordinates for Management Objectives as set forth on Annex A to the respective Grant of Performance Shares, and further multiplied by the average Market Value of the Company's Common Stock for the last ten (10) trading days of the Performance Period. An example of this calculation would be as follows: The grant was 100 Performance Shares. The Market Value of the Company's Common Stock on the date of grant was $25.00. Therefore, the Performance Share Value for the Grant of Performance Shares was 100 x $25.00 = $2,500. The level of achievement of the Management Objectives for the Performance Period was 150% of the performance targets as determined from the intersect of the applicable coordinates for performance measures as set forth on the applicable Annex A. The number of Performance Shares is multiplied by 150% = 150 Performance Shares. The average Market Value of the Company's Common Stock for the last ten(10) trading days of the Performance Period was $35.00. The Payment Value to the Executive would be 150 Performance Shares x $35.00 = $5,250. If the level of achievement of the Management Objectives does not reach the minimum performance threshold, as set forth on such Annex A, the percentage of Performance Shares achieved will be 0%. If the level of achievement of the Management Objectives equals or exceeds the minimum performance threshold, the percentage of the Performance Shares achieved will range from 0% to 200% as set forth on such Annex A. However, in no event will the amount of Performance Shares exceed 200% of the Performance Share Award. 4. Timing of Payment. The Compensation Committee of the Board of Directors of the Company (the "Compensation Committee") shall, on a date (the "Determination Date") within a reasonable time after necessary financial and other information for the Performance Period becomes available, determine the extent to which the Payment Value has been earned by the Executive through achievement of the Management Objectives. Not later than fifteen days after the Determination Date, the Compensation Committee shall notify the Executive in writing of the determination and shall cause the Payment Value to be paid to the Executive in cash, shares of Common Stock or any combination thereof, as determined by the Compensation Committee. For the purposes of the immediately preceding sentence, shares of Common Stock shall be valued at the Market Value on the Determination Date. 5. Termination of Employment. If the Executive's employment should terminate because of death, total and permanent disability or retirement with the consent of the Company prior to the end of the Performance Period, the extent to which the Payment Value shall be deemed to have been earned, as calculated at the end of the Performance Period, shall be determined as if the Executive's employment had not terminated and the Payment Value shall be multiplied by a fraction, the numerator of which is the number of days the Executive was employed during the Performance Period and the denominator of which is the total number of days in the Performance Period. If the Executive's employment terminates for any reason other than as described in the preceding sentence, the Executive shall be deemed not to have earned any portion of the Payment Value, which shall be forfeited, unless the Compensation Committee, in its sole discretion, determines otherwise. 6. Transfers. For purposes of this Agreement and any grant hereunder, the Executive's continuous employment with the Company or a Subsidiary shall not be deemed interrupted, and the Executive shall not be deemed to have ceased to be an employee of the Company or a Subsidiary, by reason of a transfer among the Company and its Subsidiaries. 7. No Shareholder Rights. A Grant of Performance Shares shall not entitle the Executive to any dividend or voting rights or any other rights as a stockholder with respect to such award. 8. Tax Withholding. The Company has the right to deduct from the portion of the Payment Value made in cash or Common Stock an amount equal to any taxes required by law to be withheld, including, any taxes required to be withheld with respect to the portion of the Payment Value paid in Common Stock. 9. Applicability of Plan. This Agreement and any Grant of Performance Shares hereunder is subject to all terms and conditions of the Plan. In the event of any inconsistencies between this Agreement and the Plan, the plan shall govern. EXECUTED in two original counterparts at Cleveland, Ohio effective as of the ____ of _______________________. M. A. HANNA COMPANY EXECUTIVE By:________________________________ _________________________ [Company Officer] GRANT OF PERFORMANCE SHARES Name: 1 Date: December 6, 1995 Award: 2 Performance Shares Business Unit: Performance Period: January 1, 1996 through December 31, 1998 Performance Target: See attached Performance Grid M.A. HANNA COMPANY ___________________________________ By: Vice President, Human Resources The undersigned accepts the foregoing Grant of Performance Shares under the terms and conditions contained in the M.A. Hanna Company 1988 Long-Term Incentive Plan and the Performance Share Agreement dated as of December 6, 1995. _____________________________________ _____________________ 1 Date EX-10 4 RESTRICTED STOCK AGREEMENT THIS RESTRICTED STOCK AGREEMENT, made and entered into as of the PayoutDate, by and between M. A. Hanna Company (the "Company") and Name ("Recipient"). W I T N E S S E T H WHEREAS, the Compensation Committee of the Board of Directors of M. A. Hanna Company ("Compensation Committee") has authorized the payment of the LTIP Units granted on Award Date ("LTIP Units") to be made in a combination of cash and shares of Common Stock; and WHEREAS, the Compensation Committee has authorized an additional payment of shares of Common Stock subject to certain restrictions, as an incentive to Recipient to hold the Common Stock issued as partial payment of the LTIP Units. NOW THEREFORE, in consideration of the premises and the covenants contained herein, the sufficiency of which is hereby acknowledged, the Company and the Recipient agree to amend the Grant of LTIP Units dated Award Date as follows: 1. The Company shall issue to Recipient Common shares of Common Stock in partial payment of the LTIP Units ("Award Stock") and Restricted shares of Common Stock which shall be subject to the following restrictions ("Restricted Stock"): (a) During a period ending on the earlier of four (4) years from the date of issuance of the Award Stock and the Restricted Stock or the death of the Recipient (the "Restricted Period"), the Recipient (executor) shall not sell or otherwise dispose of the Restricted Stock; (b) The Recipient may sell or otherwise dispose of the Award Stock at any time; provided however, that if the Award Stock is sold or otherwise disposed of during the Restricted Period, all of the Restricted Stock shall be forfeited and canceled upon such sale or disposition; (c) The Restricted Stock shall be forfeited and canceled in the event that the Recipient ceases to be an employee of the Company or any subsidiary of the Company, except by reason of permanent disability or retirement under a retirement plan of the Company or a subsidiary; and (d) All taxes which the Company is required to collect from the Recipient as a result of the lapse of restrictions on transfer of the Restricted Stock must be paid before the stock certificate evidencing on the Restricted Stock is issued without restrictions and released to the Recipient or before the shares of Restricted Stock are transferred by the Company or its transfer agent. 2. During the Restricted Period the certificate evidencing Restricted Stock shall be held in escrow by the Company. 3. The certificate evidencing the Restricted Stock shall bear a notation or legend to the effect that such shares are subject to the restrictions contained in this Agreement and that they may not be sold or otherwise disposed of and that no transfer thereof will be made by the Company or the transfer agent except in accordance with this Agreement. 4. Other than as restricted herein, the Recipient shall be entitled to all rights as a stockholder in respect of the Award Stock and the Restricted Stock including, but not limited to, all dividends declared and paid on such stock, so long as the Recipient remains a stockholder of record. After the Restricted Period, the Recipient or the Recipient's executor, as the case may be, may sell or otherwise dispose of the Award Stock and the Restricted Stock without restrictions. 5. Recipient (executor) may pay for taxes imposed at the time of the lapse of the restrictions on the Restricted Stock by cash or check. The Company reserves the right to withhold monies otherwise due Recipient and apply such monies to the payment of taxes. If Recipient does not pay the taxes due within 90 days of the lapse of the restriction, the Company may have the certificate evidencing the Restricted Stock canceled and withhold from the Restricted Stock such number of shares equal in value to the taxes required to be paid. The Recipient shall receive a replacement certificate evidencing the remaining shares without any restriction. IN WITNESS WHEREOF, the parties have executed duplicate originals of this Agreement as of the day and year first above written. M. A. HANNA COMPANY ________________________ ____________________________ Company Officer Name Title EX-11 5 M.A. HANNA COMPANY AND CONSOLIDATED SUBSIDIARIES COMPUTATION OF EARNINGS PER SHARE
Year Ended December 31 1997 1996 1995 (Dollars in thousands except per share data) Basic Income from continuing operations before extraordinary charge $ 64,601 $ 59,162 $ 56,702 Income(loss) from discontinued operations - - 45,337 Extraordinary charge - (5,352) - Net income $ 64,601 $ 53,810 $ 102,039 Average common shares outstanding 45,167,937 45,789,136 46,511,966 Income(loss) per share Continuing operations $ 1.43 $ 1.29 $ 1.22 Discontinued operations - - .97 Extraordinary charge - (.11) - Net income $ 1.43 $ 1.18 $ 2.19 Diluted Income from continuing operations before extraordinary charge $ 64,601 $ 59,162 $ 56,702 Income(loss) from discontinued operations - - 45,337 Extraordinary charge - (5,352) - Net income $ 64,601 $ 53,810 $ 102,039 Average common shares outstanding 45,167,937 45,789,136 46,511,966 Effect of dilutive stock options 1,103,920 1,034,365 900,331 Total 46,271,857 46,823,501 47,412,297 Income(loss) per share Continuing operations $ 1.40 $ 1.26 $ 1.19 Discontinued operations - - .95 Extraordinary charge - (.11) - $ 1.40 $ 1.15 $ 2.14
EX-13 6 CONSOLIDATED STATEMENTS OF INCOME M.A. Hanna Company and Consolidated Subsidiaries
Year Ended December 31 Dollars in thousands except per share data 1997 1996 1995 Net Sales $2,200,345 $2,066,248 $1,901,954 Costs and Expenses Cost of goods sold 1,781,736 1,685,167 1,552,643 Selling, general and administrative 271,894 243,505 218,823 Interest on debt 23,751 20,033 26,278 Amortization of intangibles 14,204 14,313 13,969 Other - net (1,669) 339 (8,580) 2,089,916 1,963,357 1,803,133 Income from Continuing Operations Before Income Taxes and Extraordinary Charge 110,429 102,891 98,821 Income taxes 45,828 43,729 42,119 Income from Continuing Operations Before Extraordinary Charge 64,601 59,162 56,702 Income from discontinued operations - - 45,337 Extraordinary charge - (5,352) - Net Income $ 64,601 $ 53,810 $ 102,039 Net Income Per Share Basic Continuing operations $ 1.43 $ 1.29 $ 1.22 Discontinued operations - - .97 Extraordinary charge - (.11) - Net income $ 1.43 $ 1.18 $ 2.19 Diluted Continuing operations $ 1.40 $ 1.26 $ 1.19 Discontinued operations - - .95 Extraordinary charge - (.11) - Net income $ 1.40 $ 1.15 $ 2.14 See summary of accounting policies and notes to consolidated financial statements
CONSOLIDATED STATEMENTS OF CASH FLOWS M. A. Hanna Company and Consolidated Subsidiaries
Year Ended December 31 Dollars in thousands 1997 1996 1995 Cash Provided from (Used for) Operating Activities Net income $ 64,601 $ 53,810 $102,039 Discontinued operations - - 4,797 Depreciation and amortization 52,639 50,116 47,241 Companies carried at equity: Income (4,546) (6,058) (6,459) Dividends received 5,420 7,104 8,213 Changes in operating assets and liabilities: Receivables (37,153) 3,743 (23,212) Inventories (30,746) 3,197 (10,934) Prepaid expenses (3,193) (2,450) (2,031) Trade payables and accrued expenses 43,380 (1,978) 4,066 Gain from sales of assets (6,340) - (84,427) Restructuring payments (8,239) (13,157) (17,289) Restructuring charges 6,140 - - Other 7,487 8,248 11,911 Extraordinary charge - 8,774 - Net operating activities 89,450 111,349 33,915 Cash Provided from (Used for) Investing Activities Capital expenditures (52,604) (49,532) (55,885) Acquisitions of businesses, less cash acquired (96,512) (58,439) - Acquisition payments (14,965) (1,805) (2,969) Sales of assets 13,048 11,928 223,500 Investments in associated and other companies (22,071) (2,862) (4,775) Return of cash from associated and other companies 851 8,170 1,367 Purchase of short-term securities - - (69,703) Sale of short-term securities - - 69,703 Other 2,468 7 (7,211) Net investing activities (169,785) (92,533) 154,027 Cash Provided from (Used for) Financing Activities Cash dividends paid (19,176) (18,291) (16,962) Proceeds from the sale of common stock 4,333 8,027 1,996 Purchase of shares for treasury (17,972) (28,830) (24,969) Increase in debt 227,523 110,872 57,458 Reduction in debt (99,161) (172,218) (118,622) Net financing activities 95,547 (100,440) (101,099) Effect of exchange rate changes on cash (3,810) 417 1,287 Cash and Cash Equivalents Increase(decrease) 11,402 (81,207) 88,130 Beginning of year 30,028 111,235 23,105 End of year $ 41,430 $ 30,028 $111,235 Cash Paid During Year Interest $ 22,836 $ 22,938 $ 26,724 Income taxes 36,992 31,731 85,830 See summary of accounting policies and notes to consolidated financial statements
CONSOLIDATED BALANCE SHEETS M. A. Hanna Company and Consolidated Subsidiaries
December 31 Dollars in thousands 1997 1996 Assets Current Assets Cash and cash equivalents $ 41,430 $ 30,028 Receivables Trade (less allowance of $8,649 in 1997 and $7,572 in 1996) 322,975 284,132 Other 9,372 9,493 332,347 293,625 Inventories Finished products 161,731 134,655 Raw materials and supplies 65,430 44,509 227,161 179,164 Prepaid expenses 10,976 7,679 Deferred income taxes 31,005 23,043 Total current assets 642,919 533,539 Property, Plant and Equipment Land 19,285 18,040 Buildings 118,413 108,322 Machinery and equipment 385,571 326,306 523,269 452,668 Less accumulated depreciation 234,956 198,261 288,313 254,407 Other Assets Goodwill and other intangibles 420,696 355,538 Investments and other assets 87,608 70,678 Deferred income taxes 29,469 36,617 537,773 462,833 Total assets $1,469,005 $1,250,779 Liabilities and Stockholders' Equity Current Liabilities Notes payable to banks $ 2,919 $ 2,304 Trade payables and accrued expenses 393,925 348,608 Current portion of long-term debt 2,149 1,027 Total current liabilities 398,993 351,939 Other Liabilities 205,480 182,852 Long-Term Debt Senior notes 124,960 124,960 Medium-term notes 120,000 20,000 Other 80,267 62,745 325,227 207,705 Stockholders' Equity Preferred stock, without par value: authorized 5,000,000 shares: issued and outstanding 0 shares in 1997 and 1996 - - Common stock, par value $1.00 per share: authorized 100,000,000 shares; issued 65,749,570 shares in 1997 and 65,261,907 shares in 1996 65,750 65,262 Capital surplus 358,145 329,543 Retained earnings 462,653 417,228 Associates ownership trust (5,545,273 shares in 1997 and 5,997,347 shares in 1996) (144,213) (134,704) Cost of treasury stock (15,272,602 shares in 1997 and 14,272,092 shares in 1996) (191,066) (165,675) Minimum pension liability adjustment - (5,018) Accumulated translation adjustment (11,964) 1,647 Total stockholders' equity 539,305 508,283 Total liabilities and stockholders' equity $1,469,005 $1,250,779 See summary of accounting policies and notes to consolidated financial statements
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY M. A. Hanna Company and Consolidated Subsidiaries Dollars in thousands except per share data
Minimum Associates Pension Preferred Common Capital Retained Ownership Treasury Liability Stock Stock Surplus Earnings Trust Stock Adjustment Balance January 1, 1995 $ - $43,015 $299,725 $296,632 $(111,471) $(103,731) $(7,262) Net income 102,039 Cash dividends - $.367 per share (16,962) Exercise of stock options 228 4,678 (1,483) Purchase of shares for treasury (24,969) Sale of common stock (30,502 shares) 31 755 Transfer of shares (241,520) 8,039 (8,039) Payment of incentive compensation awards and associate benefits 595 589 1,041 Adjustment to market value 18,520 (18,520) Minimum pension adjustment (260) Translation adjustment Balance December 31, 1995 - 43,274 324,273 381,709 (121,363) (137,181) (7,522) Net income 53,810 Cash dividends - $.402 per share (18,291) Exercise of stock options 309 4,532 (817) Purchase of shares for treasury (28,830) Sale of common stock (193,058 shares) 42 2,005 4,041 Payment of incentive compensation awards and associate benefits 866 2,122 1,153 Three-for-two common stock split 21,637 (21,637) Adjustment to market value 19,504 (19,504) Minimum pension adjustment 2,504 Translation adjustment Balance December 31, 1996 - 65,262 329,543 417,228 (134,704) (165,675) (5,018) Net income 64,601 Cash dividends - $.4275 per share (19,176) Exercise of stock options 449 7,047 (3,069) Purchase of shares for treasury (17,972) Sale of common stock (49,356 shares) 39 976 220 Transfer of shares (300,000 shares) 6,166 (6,166) Payment of incentive compensation awards and associate benefits 1,779 2,905 1,816 Adjustment to market value 18,800 (18,800) Minimum pension adjustment 5,018 Translation adjustment Balance December 31, 1997 $ - $65,750 $358,145 $462,653 $(144,213) $(191,066) $ - Accumulated Total Translation Stockholders' Adjustment Equity Balance January 1, 1995 $(1,996) $414,912 Net income 102,039 Cash dividends - $.367 per share (16,962) Exercise of stock options 3,423 Purchase of shares for treasury (24,969) Sale of common stock (30,502 shares) 786 Transfer of shares (241,520) - Payment of incentive compensation awards and associate benefits 2,225 Adjustment to market value - Minimum pension adjustment (260) Translation adjustment 3,584 3,584 Balance December 31, 1995 1,588 484,778 Net income 53,810 Cash dividends - $.402 per share (18,291) Exercise of stock options 4,024 Purchase of shares for treasury (28,830) Sale of common stock (193,058 shares) 6,088 Payment of incentive compensation awards and associate benefits 4,141 Three-for-two common stock split - Adjustment to market value - Minimum pension adjustment 2,504 Translation adjustment 59 59 Balance December 31, 1996 1,647 508,283 Net income 64,601 Cash dividends - $.4275 per share (19,176) Exercise of stock options 4,427 Purchase of shares for treasury (17,972) Sale of common stock (49,356 shares) 1,235 Transfer of shares (300,000 shares) - Payment of incentive compensation awards and associate benefits 6,500 Adjustment to market value - Minimum pension adjustment 5,018 Translation adjustment (13,611) (13,611) Balance December 31, 1997 $(11,964) $539,305 See summary of accounting policies and notes to consolidated financial statements
SUMMARY OF ACCOUNTING POLICIES M.A. Hanna Company and Consolidated Subsidiaries Dollars in thousands except per share data PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of M.A. Hanna Company and all majority-owned subsidiaries. Investments in less than majority-owned companies are carried at cost adjusted for undistributed earnings and losses since acquisition, or at cost. All significant intercompany accounts and transactions have been eliminated. REVENUE RECOGNITION Revenues are recognized when a product is shipped or a service is performed. NET INCOME PER SHARE In February 1997, the Financial Accounting Standards Board issued Statement No. 128 "Earnings Per Share." The Company adopted this standard in 1997. All per share amounts have been restated in accordance with the standard resulting in no changes to previously reported earnings per share. Basic earnings per share is computed by dividing net income by the weighted average number of shares of common stock outstanding during the year. Shares of common stock held by the Associates Ownership Trust (AOT) enter into the determination of the average number of shares outstanding when the shares are released from the AOT to fund obligations under certain associate compensation and benefit plans. Basic weighted average shares outstanding for the years ended December 31, 1997, 1996 and 1995 were 45,167,937, 45,789,136 and 46,511,966, respectively. For diluted earnings per share, the number of shares used for basic earnings per share are increased by the common stock equivalents which would arise from the exercise of stock options. Weighted average shares outstanding (diluted) for the years ended December 31, 1997, 1996 and 1995, were 46,271,857, 46,823,501, and 47,412,297, respectively. CASH EQUIVALENTS Cash equivalents are highly liquid investments with an original purchased maturity of three months or less. Cash equivalents are stated at cost, which approximates fair value. CONCENTRATIONS OF CREDIT RISK Financial instruments which potentially subject the Company to credit risk are trade accounts receivable and foreign exchange contracts. Concentration of credit risk with respect to trade accounts receivable is limited due to the large number of customers comprising the Company's customer base and their distribution among many different industries and geographic locations. The Company is exposed to credit risk with respect to foreign exchange contracts in the event of nonperformance by the counterparties to these financial instruments, which are major financial institutions. Management believes the risk of incurring material losses related to this credit risk is remote. INVENTORIES Inventories are stated at the lower of cost or market. Domestic inventories of $164,848 are valued principally by the last-in, first-out (LIFO) cost method. Inventories of international subsidiaries are valued by the first-in, first- out (FIFO) method. The excess of current cost over LIFO cost was $8,794 and $11,690 at December 31, 1997 and 1996, respectively. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are stated at cost. Depreciation is computed principally by the straight-line method. Estimated asset lives are: Building and improvements 20 - 40 years Machinery and equipment 5 - 10 years Computer software and hardware 5 years Property items retired or otherwise disposed of are removed from the property and related accumulated for depreciation accounts, and any gain or loss is included in operations. GOODWILL AND OTHER INTANGIBLES Goodwill is amortized over 40 years on a straight-line basis. Other intangibles, net, of $10,675 and $16,007 at December 31, 1997 and 1996, respectively, are amortized on a straight-line basis over 4 to 40 years. Accumulated amortization at December 31, 1997 and 1996 was $111,747 and $99,505, respectively. The carrying value of goodwill and other intangibles is evaluated if circumstances indicate a possible impairment in value. If undiscounted cash flows over the remaining amortization period indicate that goodwill and other intangibles may not be recoverable, the carrying value will be reduced by the estimated shortfall of cash flows on a discounted basis. INCOME TAXES Deferred tax liabilities and assets are determined based on the differences between the financial reporting and tax basis of assets and liabilities and are measured using the enacted tax rate and laws that are currently in effect. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the reported financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. FOREIGN CURRENCY TRANSLATION Assets and liabilities of international affiliates are translated at the exchange rates as of the balance sheet date. Related translation adjustments are reported as a component of stockholders' equity. Revenues and expenses are translated at the average rates in effect during the period. DERIVATIVE FINANCIAL INSTRUMENTS The Company limits its use of derivative financial instruments to forward exchange contracts to hedge foreign currency receivables, payables and intercompany lending transactions. Gains and losses on foreign currency transaction hedges are recognized in other income or expense and offset the foreign exchange gains and losses on the underlying transactions. PENDING ACCOUNTING CHANGES In June 1997, the Financial Accounting Standards Board issued Statement No. 130 "Reporting Comprehensive Income" and Statement No. 131 "Disclosures about Segments of an Enterprise and Related Information." The Company is analyzing the impact of Statements No. 130 and No. 131 and will adopt these standards in 1998. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS M. A. Hanna Company and Consolidated Subsidiaries Dollars in thousands except per share data ACQUISITIONS In February 1997, the Company purchased Enviro Care Compounds, a producer of halogen-free flame retardant plastic compounds based in Norway; in May 1997, the Company purchased the former Sadolin Masterbatch, a plastic color and additive concentrate business based in Denmark; and in September 1997, the Company acquired the manufacturing business of Harwick Chemical Manufacturing Corporation, a supplier of chemical dispersions, specialty colorants and other specialty products for the rubber industry, and specialty color pigment dispersions and dry colorants for plastics. These acquisitions were accounted for using the purchase method of accounting. In November 1997, the Company formed a joint venture alliance with Techmer PM to produce color and additive concentrates for the film and fiber markets. The Company contributed cash and the assets of its fiber colorant business for a 51% interest in the joint venture. Had the acquisitions and the formation of the joint venture been made at the beginning of 1996, reported pro forma results of operations for 1997 and 1996 would not be materially different. On January 8, 1998 the Company announced that it had entered into an agreement to acquire Melos Carl Bosch GmbH & Co. The acquisition is subject to governmental approval and is anticipated to close at the end of February 1998. Melos, which is based in Germany, produces rubber, thermoplastic elastomer and plastic compounds. In January 1996, the Company acquired the outstanding stock of CIMCO, Inc., a producer of thermoplastic compounds and plastic components. Consistent with its strategy as an intermediary between the polymer producer and the end product manufacturer, the Company announced that it would sell CIMCO's plastic components business. Accordingly, the assets of the plastic components business were recorded at net realizable value and future operating losses were recorded as part of the purchase price accounting. The sale of the plastic components business was consummated in June 1996. In March 1996, the Company acquired Victor International Plastics Limited, a leading producer of color masterbatch in the United Kingdom. In addition, the Company acquired the United States based custom rubber mixing operations of Chase Elastomer in November 1996. These acquisitions were accounted for using the purchase method of accounting. Had the acquisitions been made at the beginning of 1996, reported pro forma results of operations for 1997 and 1996 would not be materially different. DISCONTINUED OPERATIONS In December 1994, the Company adopted a plan to sell its Day International printing and textile business. The business consists of the manufacturing of printing blankets and other consumable supplies for the printing industry and the manufacturing of engineered consumable supplies for the textile industry. In April 1995, the Company announced it had entered into an agreement to sell the business to American Industrial Partners Capital Fund. The sale consummated on June 6, 1995 with the Company realizing an after-tax gain of $40,254. Income from discontinued operations in 1995 included income from operations of $5,083 (net of tax of $3,992) and a gain on the sale of $40,254. INCOME TAXES Income taxes from continuing operations consist of the following: 1997 1996 1995 Current: Federal $26,693 $24,613 $26,311 State 5,663 4,022 4,541 Foreign 8,675 8,505 6,311 41,031 37,140 37,163 Deferred: Federal 2,297 4,055 3,704 State 8 759 497 Foreign 2,492 1,775 755 4,797 6,589 4,956 $45,828 $43,729 $42,119 The provision for income taxes differs from the amount computed by applying the U.S. statutory federal income tax rate as follows:
1997 1996 1995 Amount Percent Amount Percent Amount Percent Provision at statutory tax rate $38,650 35.0% $36,012 35.0% $34,587 35.0% State income taxes 3,686 3.3 3,108 3.0 3,274 3.3 Goodwill amortization 2,869 2.6 2,811 2.7 2,613 2.6 Other - net 623 .6 1,798 1.8 1,645 1.7 $45,828 41.5% $43,729 42.5% $42,119 42.6%
Deferred income taxes reflect the net effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The Company has not provided deferred taxes on undistributed earnings of international subsidiaries and joint ventures as these earnings are considered indefinitely reinvested. The Company may consider repatriating these earnings, if at some future time the distribution results in no incremental tax cost. Significant components of the Company's deferred tax assets (liabilities) are as follows: 1997 1996 Basis differences from purchase accounting $(7,471) $(5,481) Property, plant and equipment (12,490) (13,769) Other postretirement benefits 32,948 32,956 Associate benefits 18,012 17,121 Restructuring and plant closedown costs 4,926 4,611 Environmental costs 6,869 7,079 Inventory and receivable allowances 4,082 3,830 Other 7,816 8,937 $54,692 $55,284 Income from continuing operations before income taxes includes $35,343, $26,980, and $17,577 in 1997, 1996 and 1995, respectively, from international operations. LONG-TERM DEBT Long-term debt at December 31 consists of the following: 1997 1996 9% Senior notes due 1998 $ 37,185 $ 37,185 9.375% Senior notes due 2003 87,775 87,775 Medium-term notes 120,000 20,000 Bank borrowings 77,197 55,148 Other 5,219 8,624 327,376 208,732 Less current portion 2,149 1,027 $325,227 $207,705 Annual maturities of long-term debt for the next five years are: 1998--$39,334; 1999--$521; 2000--$462; 2001--$476 and 2002--$491. In June 1996, the Company filed a shelf registration statement with the Securities and Exchange Commission to issue up to $300 million of debt securities. During 1997 and 1996, the Company issued $100 million and $20 million, respectively, of medium-term notes. These medium-term notes are due between 2004 and 2009 and bear interest at rates ranging from 6.74% to 7.16%. Interest on the notes is paid semi-annually. The weighted average interest rate of these notes is 6.93%. In 1997, the Company entered into a new revolving credit agreement with a group of financial institutions replacing an existing facility. The agreement provides for borrowings up to $200 million through January 2003 with interest rates determined at the time of the borrowing based on a choice of formulas specified in the agreement. There were no borrowings under either agreement at December 31, 1997 or 1996. At December 31, 1997, the Company had $77,197 of borrowings from uncommitted bank lines at interest rates ranging from 5.98% to 7.10% and a weighted average interest rate of 6.39%. Other debt at December 31, 1997 and 1996 consists primarily of mortgages, industrial revenue bonds and notes. These obligations mature in various installments through 2012 and are at interest rates ranging from 3.50% to 7.00%. The Company also had $2,919 and $2,304 of outstanding notes payable to banks at December 31, 1997 and 1996 at weighted average interest rates of 8.62% and 9.75%, respectively. In 1996 and 1995, the Company repurchased $102,310 and $8,500, respectively, principal amount of Senior Notes in the open market, resulting in an extraordinary charge of $8,774 in 1996 ($5,352 after tax). The Senior Note agreements contain certain restrictions and conditions among which are limitations on cash dividends and other payments. Under the most restrictive of these agreements, approximately $239,020 of retained earnings was free of such limitations at December 31, 1997. STOCKHOLDERS' EQUITY The Associates Ownership Trust (AOT) acquired shares of common stock from the Company in 1991 for a promissory note in the amount of $100,049. The shares acquired are released from the AOT on an annual basis to fund a portion of the Company's obligations under certain of its associate compensation and associate benefit plans for the 15-year term of the AOT and to meet annual principal payments on the promissory note. Shares remaining in the AOT are adjusted at each balance sheet date to their respective market value with an offsetting adjustment to capital surplus. Under the Company's Stock Purchase Rights Plan each Right entitles the holder of common stock to buy from the Company one one-hundredth of a share of Cumulative Series A Preferred Stock, without par value for $95, subject to adjustment. The Rights become exercisable if certain triggering events occur, including the acquisition of 15% or more of the Company's common stock. The Company is entitled to redeem the Rights at $.01 per Right at any time until ten days after any person or group has acquired 20% of the Company's common stock and in certain circumstances thereafter. If a party owning 20% or more of the Company's common stock merges with the Company or engages in certain other transactions with the Company, each Right, other than the Rights held by the acquiring party, entitles the holder to purchase that number of additional common shares having a market value of two times the exercise price of the Right. The Rights expire on December 16, 2001. The Company's 1988 Long-Term Incentive Plan provides for the granting of options, including options to nonassociate directors, up to 6,426,038 shares. The exercise price of each option equals the market price of the Company's stock on the date of grant; options have a life of ten years. Options vest according to a graded vesting schedule of one-third one year from the date of grant, one-third two years from the date of grant and one-third three years from the date of grant. The Company applies the intrinsic value-based method of accounting prescribed by APB Opinion No. 25 for this plan. Accordingly, no compensation expense has been recognized for its fixed stock option plan as options are granted at fair market value. Had compensation expense for the Company's stock-based compensation plan been determined based on the fair value at the grant dates for awards under that plan consistent with the method of FAS No. 123, the Company's net income, basic earnings per share and diluted earnings per share amounts would have been restated as follows for 1997 and 1996. The effect on 1995 net income and earnings per share amounts was not material. Proforma 1997 1996 Net income $62,392 $53,065 Basic earnings per share 1.38 1.16 Diluted earnings per share 1.35 1.13 The imputed fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions used for grants in 1997, 1996 and 1995, respectively: dividend yield of 2.00%, 2.08% and 2.56%; expected volatility of 25.0%, 22.6% and 27.4%; risk-free interest rate of 5.75% for 1997 and 6.25% for 1996 and 1995 and expected life of eight years for 1997 and ten years for 1996 and 1995. The following table summarizes the changes in the outstanding options for the three years ended December 31, 1997:
1997 1996 1995 Weighted Weighted Weighted Average Average Average Shares Exercise Price Shares Exercise Price Shares Exercise Price Outstanding at beginning of year 2,951,234 $14.14 2,821,484 $12.39 2,762,360 $11.05 Granted 470,026 23.92 456,521 21.15 422,198 17.33 Exercised (446,958) 10.31 (309,131) 8.39 (342,416) 7.60 Canceled or expired (68,778) 18.01 (17,640) 15.49 (20,658) 14.23 Outstanding at end of year 2,905,524 16.21 2,951,234 14.14 2,821,484 12.39 Options exercisable at end of year 2,177,233 1,862,317 1,713,188 Weighted-average fair value of options granted during the year $7.96 $7.54 $6.82
The following table summarizes information about options outstanding at December 31, 1997:
Options Outstanding Options Exercisable Weighted Average Weighted Weighted Range of Options Remaining Average Options Average Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price $ 7.40 to 12.99 759,125 2.7 years $10.46 759,125 $10.46 13.00 to 17.99 1,264,976 6.2 years 15.14 1,114,793 14.99 18.00 to 26.81 881,423 9.2 years 22.70 303,315 21.35 2,905,524 2,177,233
At December 31, 1997, 1,562,401 shares were available for grants. BUSINESS SEGMENTS The Company operates principally in the formulated polymers industry which consists of two major segments - processing and distribution. Processing includes production of custom plastic compounds, rubber compounds and additives, and custom formulated colorants and additives for the plastics industry. Distribution includes distributors of thermoplastic and thermoset resins and fiberglass materials and distributors of engineered plastic shapes. Sales are made through the Company's organization, distributors and representatives. Other operations include the Company's diversified polymer products business, its marine and insurance operations and management fees. The Company was the Managing Agent for Iron Ore Company of Canada (IOC) through December 1996. Through May 1995, the Company owned approximately 8% of IOC's common stock. The sale of the Company's investment in IOC resulted in a pre-tax gain of $9,334 in 1995. In February 1997, the Company sold its remaining interest in the Iron Ore Company of Canada sales agency resulting in pre-tax gain of $3,250. IOC incurred management expense of $3,061 and $3,162 in 1996 and 1995, respectively payable to the Company and commission expense of $6,035 and $5,169 in 1996 and 1995, respectively, payable to companies in which M.A. Hanna had a 50% equity interest. In the fourth quarter of 1997, the Company sold its equity interest in Hollinger Hanna, a management service company, resulting in a pre-tax gain of $3,090. Net sales, operating profit and identifiable assets by geographic area are as follows: 1997 1996 1995 Net sales Domestic $1,722,373 $1,637,252 $1,579,424 International Europe 251,720 234,263 187,790 Asia/Pacific 154,897 137,407 83,104 Other 71,355 57,326 51,636 $2,200,345 $2,066,248 $1,901,954 Operating profit Domestic $ 121,606(1) $ 116,091 $ 112,919 International Europe 21,203 16,154 13,982 Asia/Pacific 11,510 10,056 5,100 Other 6,841 5,394 5,174 Corporate (26,980) (24,771) (12,076)(2) $ 134,180 $ 122,924 $ 125,099 Identifiable assets Domestic $1,149,431 $ 950,441 $ 991,667 International Europe 201,290 201,364 175,767 Asia/Pacific 84,527 73,199 40,407 Other 33,757 25,775 23,755 $1,469,005 $1,250,779 $1,231,596 (1) Includes $6,340 gain from sale of assets and $6,140 restructuring charges (2) Includes $9,334 gain from sale of assets
Depreciation Operating and Capital Identifiable Net Sales Profit Amortization Expenditures Assets 1997 Processing $1,242,688 $107,841 (3) $44,731 $45,955 $ 942,204 Distribution 968,340 42,767 (4) 6,167 6,022 376,681 Other 21,952 10,552 (5) 825 420 16,471 Intersegment activity (32,635) - - - - Corporate - (26,980) 916 207 133,649 $2,200,345 $134,180 $52,639 $52,604 $1,469,005 1996 Processing $1,129,962 $ 96,691 $42,660 $42,778 $ 758,314 Distribution 926,230 40,497 5,909 6,140 360,564 Other 32,473 10,507 746 157 7,926 Intersegment activity (22,417) - - - - Corporate - (24,771) 801 457 123,975 $2,066,248 $122,924 $50,116 $49,532 $1,250,779 1995 Processing $1,023,672 $ 92,404 $39,745 $49,542 $ 656,655 Distribution 862,077 35,509 5,991 3,804 354,599 Other 33,421 9,262 890 250 16,323 Intersegment activity (17,216) - - - - Corporate - (12,076) (6) 615 760 204,019 Discontinued operations - - - 1,529 - $1,901,954 $125,099 $47,241 $55,885 $1,231,596 (3) Includes $5,140 of restructuring charges (4) Includes $1,000 of restructuring charges (5) Includes $6,340 gain from sale of assets (6) Includes $9,334 gain from sale of assets
PENSION AND OTHER POSTRETIREMENT BENEFITS The Company has noncontributory defined benefit plans covering certain of its associates which comply with federal funding requirements. Benefits for these plans are based primarily on years of service and qualifying compensation during the final years of employment. Plan assets include marketable equity securities (including stock of the Company), money market funds and fixed income securities. The Company also sponsors defined contribution plans for certain of its associates, which provide for Company contributions of a specified percentage of each associate's total compensation. A summary of the components of net pension cost for the defined benefit plans and the total contributions charged to expense for the defined contribution plans follows: 1997 1996 1995 Defined benefit plans Service cost $ 411 $ 430 $ 306 Interest cost on projected benefit obligation 5,979 5,911 6,161 Return on plan assets (8,941) (6,933) (6,215) Net amortization and deferral 2,673 1,735 1,869 Net pension cost 122 1,143 2,121 Defined contribution plans 5,464 5,213 5,006 $5,586 $6,356 $7,127 Prior to 1997, the Company had recorded a minimum pension liability representing the excess of the accumulated benefit obligation over the fair value of plan assets and accrued pension liabilities. The liability had been offset by intangible assets to the extent possible. Because the intangible assets recognized may not exceed the amount of unrecognized prior service cost plus unrecognized obligations at transition that remain at December 31 each year, the balance of the liability at the end of 1996 was reported as a separate reduction of stockholders' equity, net of applicable deferred income taxes. The following table sets forth the funded status of the Company's defined benefit plans:
Accumulated Benefits Assets Exceed Exceed Assets Accumulated Benefits 1997 1996 1997 1996 Actuarial present value of benefit obligations Accumulated benefit obligations including vested benefits of $77,217 in 1997 and $75,799 in 1996 $1,223 $46,155 $78,174 $31,540 Projected benefit obligation $1,223 $47,494 $79,786 $31,873 Plan assets at fair value 1,148 44,455 99,563 42,251 Projected benefits in excess of (less than) plan assets 75 3,039 (19,777) (10,378) Consisting of Unrecognized net transition obligation - 797 758 150 Unrecognized net actuarial (gains) losses (19) 10,244 (7,795) (5,861) Adjustment to recognize minimum liability - 9,870 - - Accrued (prepaid) pension cost recognized in balance sheet $ 94 $ 1,868 $(12,740) $(4,667)
The projected benefit obligation was determined using an assumed discount rate of 7.50% and 7.75% in 1997 and 1996, respectively, and an assumed long-term rate of increase in compensation of 5% for both years. The assumed long-term rate of return on plan assets is 8.5%. The 1997 change in the discount rate caused the accumulated benefit obligation to increase by approximately $1,835. In addition to providing pension benefits, the Company provides certain contributory and noncontributory health care and life insurance benefits for certain retired associates. Certain associates of the Company may become eligible for these postretirement benefits if they reach retirement age while working for the Company. The status of the Company's plans, which are unfunded, at December 31, 1997 and 1996 is as follows: 1997 1996 Accumulated postretirement benefit obligation Retirees $51,579 $49,128 Fully eligible active plan participants 4,564 4,931 Other active plan participants 9,630 9,425 65,773 63,484 Unrecognized actuarial gain 18,677 21,019 Accrued postretirement benefit obligation $84,450 $84,503 Net periodic postretirement benefit cost includes the following components: 1997 1996 1995 Service cost $ 834 $1,060 $ 915 Interest cost 4,807 4,863 5,196 Amortization of unrecognized actuarial gain (781) (425) (799) Net periodic postretirement benefit cost $4,860 $5,498 $5,312 The weighted-average assumed rate of increase in the per capita cost of covered benefits (i.e., health care cost trend rate) is assumed to be 8.5% and 9.0% at December 31, 1997 and 1996, respectively, and decreasing gradually to 5.25% in 2005 and remaining at that level thereafter. A one percentage point increase in the assumed health care cost trend rate would have increased the accumulated benefit obligation by $7,792 at December 31, 1997 and the aggregate service and interest costs components of net periodic postretirement benefit costs for 1997 by $1,236. A discount rate of 7.50% and 7.75% in 1997 and 1996, respectively, was used in determining the accumulated benefit obligation. The change in the actuarial assumptions caused the accumulated benefit obligation to increase approximately $1,558 in 1997. FINANCIAL INSTRUMENTS The Company transacts business in various foreign currencies and is subject to financial exposure from foreign exchange rate movement between the date a foreign currency transaction is recorded and the date it is consummated. To mitigate this risk, the Company enters into foreign exchange contracts. Gains and losses on these contracts generally offset gains or losses on the assets and liabilities being hedged and are recorded as other income or expense. Additionally, the Company enters into intercompany lending transactions. The Company also hedges this foreign exchange exposure. Realized and unrealized gains and losses on these contracts are recorded as other income or expense. The Company does not hold or issue financial instruments for trading purposes. The table below summarizes by currency the contractual amounts of the Company's foreign exchange contracts at December 31, 1997. Foreign currency amounts are translated at exchange rates as of December 31, 1997. The "Buy" amounts represent the U.S. dollar equivalent of commitments to purchase foreign currencies, and the "Sell" amounts represent the U.S. dollar equivalent of commitments to sell foreign currencies. Buy Sell Currency U.S. dollar $62,209 $ - German deutschmark 824 23,876 French franc - 46,615 Australian dollar 2,067 3,363 Belgian franc 2,367 - British pound sterling 13,047 10,388 Other 5,294 1,006 $85,808 $85,248 The following methods and assumptions were used by the Company in estimating fair value disclosures for financial instruments: Cash, Cash Equivalents and Short-Term Securities: The carrying amounts reported in the balance sheet approximate fair value. Long and Short-Term Debt: The carrying amount of the Company's short-term borrowings approximates fair value. The fair value of the Company's Senior and Medium-term Notes is based on quoted market prices. The carrying amount of the Company's borrowings under its variable interest rate long- term revolving credit agreements and other long-term borrowings approximates fair value. Foreign Exchange Contracts: The fair value of short-term foreign exchange contracts is based on exchange rates at December 31, 1997. The fair value of long-term foreign exchange contracts is based on quoted market prices for contracts with similar maturities. The carrying amounts and fair values of the Company's financial instruments at December 31, 1997 and 1996 are as follows: 1997 1996 Carrying Fair Carrying Fair Amount Value Amount Value Cash and cash equivalents $41,430 $41,430 $30,028 $30,028 Notes payable to banks 2,919 2,919 2,304 2,304 Long-term debt 9% Senior notes 37,185 37,910 37,185 38,784 9.375% Senior notes 87,775 100,055 87,775 98,958 Medium-term notes 120,000 122,545 20,000 19,762 Bank borrowings 77,197 77,197 55,148 55,148 Other 5,219 5,219 8,624 8,624 Foreign exchange contracts 663 663 1,025 1,025 LEASE COMMITMENTS Rental expense under operating leases for certain manufacturing facilities, warehouses, transportation equipment and data processing and office equipment was $21,009, $18,646 and $17,843 for the years ending December 31, 1997, 1996 and 1995, respectively. Certain of the Company's leases have options to renew, and there are no significant contingent rentals. At December 31, 1997, future minimum lease commitments for noncancelable operating leases are $15,010 in 1998, $11,838 in 1999, $8,682 in 2000, $7,365 in 2001, $6,478 in 2002 and $14,711 thereafter. CONTINGENCIES Claims have been made against a subsidiary of the Company for the costs of environmental remediation measures taken or to be taken in connection with operations that have been sold or closed. These include the clean-up of Superfund sites and participation with other companies in the clean-up of hazardous waste disposal sites, several of which have been designated as Superfund sites. Reserves for such liabilities have been established and no insurance recoveries have been anticipated in the determination of the reserves. In management's opinion, the aforementioned claims will be resolved without material adverse effect on the financial position, results of operations or cash flows of the Company. LITIGATION The Company is engaged in legal proceedings arising in the ordinary course of business. The Company believes that the ultimate outcome of these proceedings will not have material adverse impact on the Company's financial position, results of operations or cash flows. OTHER - NET Other - net includes the following: 1997 1996 1995 Interest and dividends $ (589) $(1,578) $(4,809) Gain on sale of assets (6,340) - (9,334) Expenses of closed facilities 3,166 4,160 4,854 Restructuring costs 6,140 - - Foreign exchange gain (2,800) (2,558) (598) Other (1,246) 315 1,307 $(1,669) $ 339 $(8,580) DETAIL OF CURRENT AND OTHER LIABILITIES Trade payables and accrued expenses and other liabilities at December 31 are principally comprised of the following items. Associate benefit accruals include employee health, life and disability insurance, profit sharing and incentive compensation, pension expense, workers' compensation costs and vacation pay. 1997 1996 Trade payables and accrued expenses Trade payables $247,778 $217,142 Salaries and wages 12,466 14,760 Associate benefits 42,847 37,510 Restructuring and acquisition costs 10,164 11,803 Other postretirement benefits 4,763 4,970 Other liabilities Plant closedown costs 11,420 12,933 Environmental costs 14,641 16,097 Associate benefits 27,544 37,178 Other postretirement benefits 79,687 79,533 Minority interest 25,708 2,457 SUPPLEMENTAL CASH FLOW DATA The following is a summary of noncash investing and financing activities. 1997 1996 1995 Acquisition of businesses Assets acquired $103,369 $130,712 Liabilities assumed 6,520 68,574 Cash paid 96,849 62,138 Less cash acquired 337 3,699 $ 96,512 $ 58,439 Debt of companies acquired $ 19,106 Payment of incentive compensation awards with treasury stock $ 3,293 $ 2,019 $ 1,636 Payment of stock options exercised with shares of common stock $ 3,069 $ 817 $ 1,483 Release of common stock held by Associates Ownership Trust $ 8,134 $ 2,122 $ 8,628 Transfer of common stock released from Associates Ownership Trust to treasury stock $ (6,166) - $(8,039) Quarterly Financial and Stock Price Data M.A. Hanna Company and Consolidated Subsidiaries Dollars in thousands except per share data Summarized unaudited quarterly financial and stock price data for 1997 and 1996 are as follows:
First Second Third Fourth Quarter Quarter Quarter Quarter 1997 Net sales $527,629 $555,382 $561,418 $555,916 Gross margin 101,477 106,020 103,907 107,205 Net income 15,228 17,104 16,631 15,638 Net income per common share (diluted) .33 .37 .36 .34 Price range High 24.63 30.00 28.75 27.25 Low 19.75 20.38 24.63 23.63 Cash dividends paid .105 .105 .105 .1125 1996 Net sales $497,451 $537,348 $531,928 $499,521 Gross margin 91,456 98,595 95,777 95,253 Income Continuing operations 13,353 15,658 15,442 14,709 Extraordinary charge (1,575) (3,777) - - Net income 11,778 11,881 15,442 14,709 Income per common share (diluted) Continuing operations .28 .33 .33 .32 Extraordinary charge (.03) (.08) - - Net income .25 .25 .33 .32 Price range High 23.58 24.08 22.88 23.13 Low 17.75 20.13 18.38 20.75 Cash dividends paid .097 .10 .10 .105 Income per share calculations for each of the quarters are based on the weighted average number of shares outstanding for each quarter, and the sum of the quarters may not necessarily be equal to the full year income per share amount.
SELECTED FINANCIAL DATA M. A. Hanna Company and Consolidated Subsidiaries Dollars in thousands except per share data
1997 1996 1995 1994 1993 1992 Summary of Operations Net sales $2,200,345 $2,066,248 $1,901,954 $1,719,356 $1,412,071 $1,188,541 Cost of goods sold 1,781,736 1,685,167 1,552,643 1,393,036 1,146,191 961,925 Selling, general and administrative 271,894 243,505 218,823 213,318 179,228 152,366 Amortization of intangibles 14,204 14,313 13,969 12,458 12,006 11,069 Interest on debt 23,751 20,033 26,278 28,549 32,258 32,509 Income(loss) from continuing operations before income taxes, extraordinary charge and cumulative effect of changes in accounting principles 110,429 102,891 98,821 66,222 37,654 27,005 Income taxes 45,828 43,729 42,119 29,218 16,357 8,819 Income(loss) from continuing operations before extraordinary charge and cumulative effect of changes in accounting principles 64,601 59,162 56,702 37,004 21,297 18,186 Net income 64,601 53,810 102,039 43,294 2,018 19,025 Per share of common stock (basic) Income(loss) from continuing operations 1.43 1.29 1.22 .80 .46 .42 Net income 1.43 1.18 2.19 .93 .05 .44 Dividends paid .43 .40 .37 .34 .32 .29 Cash dividends paid on Common stock 19,175 18,291 16,962 15,688 14,003 12,630 Preferred stock - - - - - - Balance Sheet Current assets $ 642,919 $ 533,539 $ 574,612 $ 565,615 $ 405,782 $ 416,739 Current liabilities 398,993 351,939 335,251 337,491 259,680 229,327 Working capital 243,926 181,600 239,361 228,124 146,102 187,412 Property, plant and equipment - net 288,313 254,407 227,021 204,135 184,296 195,117 Other assets 537,773 462,833 429,963 445,410 438,628 440,873 Net long-term assets of discontinued operations - - - - 94,904 99,836 Other liabilities (205,480) (182,852) (179,580) (173,888) (176,422) (174,558) Long-term debt (325,227) (207,705) (231,987) (288,869) (322,052) (350,737) Total stockholders' equity $ 539,305 $ 508,283 $ 484,778 $ 414,912 $ 365,456 $ 397,943 Shares of common stock outstanding 50,476,968 50,989,815 51,964,377 53,541,141 53,417,283 52,650,162 Average diluted shares outstanding 46,271,857 46,823,501 47,412,297 47,203,412 46,283,262 44,332,720 Book value per share of common stock $ 10.68 $ 9.97 $ 9.33 $ 7.75 $ 6.84 $ 7.56 1991 1990 1989 1988 Summary of Operations Net sales $1,006,638 $ 960,228 $ 918,276 $ 797,563 Cost of goods sold 797,892 749,071 718,636 614,465 Selling, general and administrative 147,998 137,674 135,741 128,573 Amortization of intangibles 10,146 9,704 8,886 6,456 Interest on debt 23,221 18,301 21,128 23,622 Income(loss) from continuing operations before income taxes, extraordinary charge and cumulati effect of changes in accounting principles (16,195) 44,023 44,797 28,554 Income taxes 8,225 12,830 7,608 4,107 Income(loss) from continuing operations before extraordinary charge and cumulative effect of changes in accounting principles (24,420) 31,193 37,189 24,447 Net income 1,875 55,871 86,920 83,223 Per share of common stock (basic) Income(loss) from continuing operations (.48) .50 .61 .33 Net income .01 .90 1.49 1.55 Dividends paid .28 .25 .20 .15 Cash dividends paid on Common stock 15,267 15,175 11,812 7,169 Preferred stock 1,031 - 2,125 8,501 Balance Sheet Current assets $ 275,060 $ 276,711 $ 264,772 $ 240,029 Current liabilities 195,610 181,471 167,272 166,185 Working capital 79,450 95,240 97,500 73,844 Property, plant and equipment - net 184,877 183,536 173,477 154,477 Other assets 443,702 458,394 444,479 406,426 Net long-term assets of discontinued operations 121,374 129,869 137,304 141,552 Other liabilities (118,082) (161,674) (175,310) (169,470) Long-term debt (330,863) (137,691) (134,834) (137,725) Total stockholders' equity $ 380,458 $ 567,674 $ 542,616 $ 469,104 Shares of common stock outstanding 51,367,613 59,906,358 62,524,211 48,496,907 Average diluted shares outstanding 54,472,086 63,136,015 63,399,335 62,614,373 Book value per share of common stock $ 7.41 $ 9.47 $ 8.68 $ 7.61 Shareholder Information M.A. Hanna Company common stock is listed on the New York and Chicago stock exchanges under the symbol MAH. At December 31, 1997, the number of shareholders of record of the Company's common stock was 4,658.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS Revenues exceeded $2.2 billion in 1997 and established a new record for the Company. Total revenues increased 6.5% in 1997 and international revenues now comprise 21.7% of total revenues. Earnings per share grew 11.1% over the prior year level and net income of $64.6 million also established a new record for the Company. Within our processing segment, we had good growth in our domestic rubber and plastic compounding businesses and international operations. 1997 was a difficult year for our domestic colorants business as the marketplace migrated to less robust colors which resulted in lower average selling prices. Within our distribution segment, resin distribution also had good growth in 1997. Shapes distribution implemented a hub and spoke distribution system and opened two call centers which will reduce costs and improve service levels for customers. During 1997, significant strategic objectives were advanced. Three acquisitions were consummated which expanded our product portfolio and increased our international presence. We also formed a joint venture, Techmer PM LLC, which strengthened our market position in domestic colorants. We opened two facilities during 1997 - a domestic wire and cable colorants plant in Lehigh Valley, Pennsylvania and a colorants plant in China. Two additional international facilities are under construction - a plastic compounding plant in China and a colorants plant in Hungary that will come on stream in early 1998. In addition, we recently announced the pending acquisition of Melos Carl Bosch GmbH & Co., our first international acquisition in rubber compounding. 1997 Compared with 1996 Revenues from processing businesses increased 10% over 1996 levels to $1,242.7 million due in part to higher volumes and acquisitions, partially offset by lower pricing and the impact of foreign exchange. Distribution revenues increased from $926.2 million in 1996 to $968.3 million in 1997. Increases in unit volume and product mix were partially offset by lower pricing and the stronger U.S. dollar. Sales from other operations were down $10.5 million from 1996 levels. 1996 revenue included revenues from: the management of Iron Ore Company of Canada, management of a bulk unloading facility in Cleveland and our ownership interest in the IOC sales agency. No revenues were generated during 1997 from the aforementioned operations due to the expiration of our management contracts and the sale of our ownership interest in the sales agency. Gross margins were 19% in 1997 compared with 18.4% in 1996. The improvement in gross margin is due in part to the mix of sales between our processing and distribution businesses. Our processing businesses, which had a higher overall growth rate in sales than our distribution businesses, carry higher gross margins. Margin improvement was also driven by acquisitions and reductions in LIFO reserves. Acquisitions generated .2% points improvement in margins while the reductions in LIFO reserves generated a .1% point improvement. Selling, general and administrative expenses increased from $243.5 million in 1996 to $271.9 million in 1997. The increase is due to higher levels of sales, acquisitions and higher costs associated with the development of HannaLinkTM, the Company's enterprise-wide information system. Acquisitions accounted for $10.2 million while the incremental cost of HannaLinkTM was $8.2 million. As a percent of sales, selling, general and administrative expenses were 12.4% in 1997 and 11.8% in 1996. Other - net includes gains of $6.3 million from the sale of the Company's remaining interest in the Iron Ore Company of Canada sales agency and its interest in Hollinger Hanna, a management services company. Additionally, the Company recorded a $5.1 million charge for plant closings, facilities rationalization and start up costs for a new plant within the processing segment and a $1.0 million charge for the reengineering of its resin distribution business. Interest on debt increased $3.7 million in 1997 to $23.8 million. The increase in interest expense resulted from increased borrowings to fund acquisitions, the formation of a joint venture and increased working capital levels. The Company's effective tax rate was 41.5% in 1997 compared with 42.5% in 1996. We continue to explore tax planning strategies that will enable us to sustain or lower the current tax rate in the future. 1996 Compared with 1995 Net sales were $2,066.2 million, an increase of 8.6% over 1995. Sales from processing businesses increased from $1,023.7 million in 1995 to $1,130.0 million in 1996 or an increase of 10.4%. Excluding acquisitions, sales from processing businesses were $1,015.0 million, down .8% from 1995 due to lower volumes, particularly in rubber compounding which experienced a decline in spot tire and toll compounding. Distribution revenues increased 7.4% to $926.2 million in 1996 compared with $862.1 million in 1995 based on higher volumes, partially offset by lower pricing. Sales from other operations were comparable with 1995 levels. Cost of goods sold increased $132.5 million to $1,685.2 million in 1996 corresponding with the increase in sales. Gross margins in both years were 18.4%. Impacting gross margins was a reduction in LIFO reserves of $1.8 million in 1996 compared with a LIFO charge of $3.3 million in 1995. In addition, acquisitions in 1996 had a negative impact on gross margins of .5% points. Selling, general and administrative expenses increased $24.7 million in 1996 to $243.5 million. The increase was attributable to the higher level of sales, acquisitions made in 1996, increased costs associated with the development of HannaLinkTM, the Company's information system, and higher costs associated with the Company's incentive compensation programs. Selling, general and administrative expenses as a percent of sales were 11.8% in 1996 compared with 11.5% in 1995. Interest on debt decreased from $26.3 million in 1995 to $20.0 million in 1996 due to lower average borrowings outstanding. During 1996, the Company repurchased $102.3 million of its Senior Notes in the open market, resulting in an extraordinary charge of $8.8 million ($5.4 million after- tax). Funds to repurchase the Senior Notes were obtained from existing cash flows as well as borrowings under uncommitted bank lines, which carried a lower rate of interest. Other - net in 1995 included a gain of $9.3 million from the sale of the Company's remaining interest in IOC and higher levels of interest income. LIQUIDITY AND SOURCES OF CAPITAL Cash flows from operating activities were $89.5 million in 1997. Working capital used $27.7 million reflecting lower inventory turns due in part to the roll out of our area distribution centers in our shapes distribution business. Payments related to prior restructurings used $8.2 million. Excluding the restructuring payments, operating activities generated cash flow of $97.7 million. Investment activities used $169.8 million including $111.5 million for acquisitions and acquisition related obligations. Capital spending was $52.6 million, or approximately 1.4 times depreciation. Additional investments in associated companies of $22.1 million primarily relates to the formation of a joint venture with Techmer PM. Proceeds from the sale of assets were $13.0 million and included the sale of our interest in the Iron Ore Sales Partnership and Hollinger Hanna, a management services company. Financing activities generated $95.5 million. Dividends used $19.2 million and the repurchase of .8 million shares for treasury utilized $18.0 million. The Company also issued $100.0 million of medium-term notes during 1997. At December 31, 1997, $180.0 million of additional debt securities could be issued under a shelf registration statement filed with the Securities and Exchange Commission during 1996. The Company has a revolving credit facility which provides for borrowings up to $200 million and expires in January 2003. The agreement provides for interest rates to be determined at the time of borrowing based on a choice of formulas specified in the agreement. The current ratio was 1.6:1 at December 31, 1997 compared with 1.5:1 at December 31, 1996. Debt to total capital was 37.6% and 29.0% at December 31, 1997 and 1996, respectively. ENVIRONMENTAL MATTERS The Company is subject to various laws and regulations concerning environmental matters. The Company is committed to a long-term environmental protection program that reduces releases of hazardous materials into the environment as well as the remediation of identified existing environmental concerns. Claims have been made against a subsidiary of the Company for costs of environmental remediation measures taken or to be taken in connection with operations that have been sold or closed. These include the clean-up of Superfund sites and participation with other companies in the clean-up of hazardous waste disposal sites, several of which have been designated as Superfund sites. Reserves for such liabilities have been established and no insurance recoveries have been anticipated in the determination of reserves. While it is not possible to predict with certainty, management believes that the aforementioned claims will be resolved without material adverse effect on the financial position, results of operations or cash flows of the Company. Year 2000 The Company is in the process of implementing new enterprise- wide information technology systems and applications across our processing and distribution businesses to achieve a Year 2000 date conversion with no impact on our customer base or disruption to our operations. Management believes that this process should be substantially completed during 1998. A significant portion of the implementation costs have already been incurred and are being amortized or charged to expense in current operations. The Company does not believe that future costs will be material to its financial condition, results of operations or cash flows. OUTLOOK Any forward-looking statements included in this annual report are based on current expectations. Any statements in this annual report that are not historical in nature are forward-looking statements. Actual results may differ materially depending on the business conditions and growth in the plastics and rubber industries and general economy, foreign, political and economic developments, availability and pricing of raw materials, changes in product mix, shifts in market demand and changes in prevailing interest rates. We continue to follow the financial crisis in Asia. We do not believe we have a significant exposure because in many instances, our business activities are transacted in U.S. dollars. Our operations are not concentrated in any one country and we sell to a diverse customer base. On behalf of M.A. Hanna Management, /s/ Michael S. Duffey Michael S. Duffey Vice President and Chief Financial Officer EX-21 7 Item 14(c) - Exhibit (i) (21) SUBSIDIARIES OF THE REGISTRANT: Where Incorporated Name (or formed) Burton Rubber Compounding, L.P. Delaware (a limited partnership) Burton Rubber Processing, Ltd. Ontario Cadillac Plastic Group, Inc. Michigan CI Holding Company Delaware Compounding Technology, Euro S.A. France Compounding Technology, Inc. California Compounding Technology Pte. Ltd. Singapore DH Compounding Company Delaware (a general partnership) Enviro Care Compounds AS Norway Hanna France SARL France Hanna Hamilton Holdings Company Delaware Hanna International Corporation Delaware Hanna Polimeros, S.A. de C.V. Mexico Hanna Su Xing Plastics Compounding (Suzhou) Company Limited China Hanna-Wilson Polimer Feldolgozo Kft Hungary Hanna Wilson Polymer (Shanghai) Limited China Harwick Chemical Manufacturing Company Delaware M. A. Hanna Export Services Company Barbados M. A. Hanna International Financial Services Company Ireland M. A. Hanna de Mexico, S.A. de C.V. Mexico M. A. Hanna Resin Distribution Company Delaware MAH Plastics Company Delaware Melos Carl Bosch GmbH & Co. Germany Monmouth Plastics Company Delaware Poliamidas Barbastro, S.A. Spain Techmer PM, LLC Delaware The Ohio & Western Pennsylvania Dock Company Ohio The Pennsylvania Tidewater Dock Company Delaware Theodor Bergmann GmbH & Co. Kunststoffwerk KG Germany Victor International Plastics, Ltd. England Wilson Color S.A. Belgium Wilson Color GmbH Germany Wilson Color S.A. France Wilson Color AB Sweden The Registrant has other unconsolidated subsidiaries and 50 percent or less owned persons accounted for by the equity method, which in the aggregate do not constitute a significant subsidiary. EX-23 8 Consent of Independent Accountants We hereby consent to the incorporation by reference in the Prospectus constituting part of the Registration Statement on Form S-3 and the Registration Statements on Form S-8 (appearing on Exhibit 1) of M.A. Hanna Company of our report dated January 28, 1998 appearing on page 40 of the Annual Report to Stockholders which is incorporated in this Annual Report on Form 10-K. We also consent to the incorporation by reference of our report on the Financial Statement Schedule, which appears on page F-2 of this Form 10-K. /s/ Price Waterhouse LLP Cleveland, Ohio March 19, 1998 EX-24 9 POWER OF ATTORNEY The undersigned, Director of the corporation named herein opposite his signature, hereby appoints T. E. Lindsey, J. S. Pyke, Jr., and M. S. Duffey, or any of them, his attorney or attorneys in fact, with full power of substitution, to sign the Annual Report on Form 10-K for the fiscal year ended December 31, 1997, being filed with the Securities and Exchange Commission by M.A. Hanna Company, and any and all amendments to such Annual Report, with full power and authority to take any and all such action as may be necessary or advisable in the premises. Capacity in which Annual Report on Form 10-K is to be signed Signature Date /s/ B. C. Ames Director of M.A. Hanna March 4, 1998 B. C. Ames Company POWER OF ATTORNEY The undersigned, Director of the corporation named herein opposite her signature, hereby appoints T. E. Lindsey, J. S. Pyke, Jr., and M. S. Duffey, or any of them, her attorney or attorneys in fact, with full power of substitution, to sign the Annual Report on Form 10-K for the fiscal year ended December 31, 1997, being filed with the Securities and Exchange Commission by M.A. Hanna Company, and any and all amendments to such Annual Report, with full power and authority to take any and all such action as may be necessary or advisable in the premises. Capacity in which Annual Report on Form 10-K is to be signed Signature Date /s/ C. A. Cartwright Director of M.A. Hanna March 4, 1998 C. A. Cartwright Company POWER OF ATTORNEY The undersigned, Director of the corporation named herein opposite his signature, hereby appoints T. E. Lindsey, J. S. Pyke, Jr., and M. S. Duffey, or any of them, his attorney or attorneys in fact, with full power of substitution, to sign the Annual Report on Form 10-K for the fiscal year ended December 31, 1997, being filed with the Securities and Exchange Commission by M.A. Hanna Company, and any and all amendments to such Annual Report, with full power and authority to take any and all such action as may be necessary or advisable in the premises. Capacity in which Annual Report on Form 10-K is to be signed Signature Date /s/ W. R. Embry Director of M.A. Hanna March 4, 1998 W. R. Embry Company POWER OF ATTORNEY The undersigned, Director of the corporation named herein opposite his signature, hereby appoints T. E. Lindsey, J. S. Pyke, Jr., and M. S. Duffey, or any of them, his attorney or attorneys in fact, with full power of substitution, to sign the Annual Report on Form 10-K for the fiscal year ended December 31, 1997, being filed with the Securities and Exchange Commission by M.A. Hanna Company, and any and all amendments to such Annual Report, with full power and authority to take any and all such action as may be necessary or advisable in the premises. Capacity in which Annual Report on Form 10-K is to be signed Signature Date /s/ J. T. Eyton Director of M.A. Hanna March 4, 1998 J. T. Eyton Company POWER OF ATTORNEY The undersigned, Director of the corporation named herein opposite his signature, hereby appoints T. E. Lindsey, J. S. Pyke, Jr., and M. S. Duffey, or any of them, his attorney or attorneys in fact, with full power of substitution, to sign the Annual Report on Form 10-K for the fiscal year ended December 31, 1997, being filed with the Securities and Exchange Commission by M.A. Hanna Company, and any and all amendments to such Annual Report, with full power and authority to take any and all such action as may be necessary or advisable in the premises. Capacity in which Annual Report on Form 10-K is to be signed Signature Date /s/ G. D. Harnett Director of M.A. Hanna March 4, 1998 G. D. Harnett Company POWER OF ATTORNEY The undersigned, Director of the corporation named herein opposite his signature, hereby appoints T. E. Lindsey, J. S. Pyke, Jr., and M. S. Duffey, or any of them, his attorney or attorneys in fact, with full power of substitution, to sign the Annual Report on Form 10-K for the fiscal year ended December 31, 1997, being filed with the Securities and Exchange Commission by M.A. Hanna Company, and any and all amendments to such Annual Report, with full power and authority to take any and all such action as may be necessary or advisable in the premises. Capacity in which Annual Report on Form 10-K is to be signed Signature Date /s/ G. D. Kirkham Director of M.A. Hanna March 4, 1998 G. D. Kirkham Company POWER OF ATTORNEY The undersigned, Director of the corporation named herein opposite his signature, hereby appoints T. E. Lindsey, J. S. Pyke, Jr., and M. S. Duffey, or any of them, his attorney or attorneys in fact, with full power of substitution, to sign the Annual Report on Form 10-K for the fiscal year ended December 31, 1997, being filed with the Securities and Exchange Commission by M.A. Hanna Company, and any and all amendments to such Annual Report, with full power and authority to take any and all such action as may be necessary or advisable in the premises. Capacity in which Annual Report on Form 10-K is to be signed Signature Date /s/ D. B. Lewis Director of M.A. Hanna March 4, 1998 D. B. Lewis Company POWER OF ATTORNEY The undersigned, Director of the corporation named herein opposite his signature, hereby appoints T. E. Lindsey, J. S. Pyke, Jr., and M. S. Duffey, or any of them, his attorney or attorneys in fact, with full power of substitution, to sign the Annual Report on Form 10-K for the fiscal year ended December 31, 1997, being filed with the Securities and Exchange Commission by M.A. Hanna Company, and any and all amendments to such Annual Report, with full power and authority to take any and all such action as may be necessary or advisable in the premises. Capacity in which Annual Report on Form 10-K is to be signed Signature Date /s/ M. L. Mann Director of M.A. Hanna March 4, 1998 M. L. Mann Company POWER OF ATTORNEY The undersigned, Director of the corporation named herein opposite his signature, hereby appoints T. E. Lindsey, J. S. Pyke, Jr., and M. S. Duffey, or any of them, his attorney or attorneys in fact, with full power of substitution, to sign the Annual Report on Form 10-K for the fiscal year ended December 31, 1997, being filed with the Securities and Exchange Commission by M.A. Hanna Company, and any and all amendments to such Annual Report, with full power and authority to take any and all such action as may be necessary or advisable in the premises. Capacity in which Annual Report on Form 10-K is to be signed Signature Date /s/ R. W. Pogue Director of M.A. Hanna March 4, 1998 R. W. Pogue Company POWER OF ATTORNEY The undersigned, Director of the corporation named herein opposite his signature, hereby appoints T. E. Lindsey, J. S. Pyke, Jr., and M. S. Duffey, or any of them, his attorney or attorneys in fact, with full power of substitution, to sign the Annual Report on Form 10-K for the fiscal year ended December 31, 1997, being filed with the Securities and Exchange Commission by M.A. Hanna Company, and any and all amendments to such Annual Report, with full power and authority to take any and all such action as may be necessary or advisable in the premises. Capacity in which Annual Report on Form 10-K is to be signed Signature Date /s/ M. D. Walker Director of M.A. Hanna March 4, 1998 M. D. Walker Company EX-27 10
5 1,000 12-MOS DEC-31-1997 DEC-31-1997 41,430 0 340,996 8,649 227,161 642,919 523,269 234,956 1,469,005 398,993 325,227 0 0 65,750 473,555 1,469,005 2,200,345 2,200,345 1,781,736 1,781,736 0 4,073 23,751 110,429 45,828 64,601 0 0 0 64,601 1.43 1.40
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