SPARTECH CORPORATION
1999 Annual Report
Management's Discussion & Analysis
Business Overview
Spartech is an intermediate processor of thermoplastics which converts base
polymers, or resins, from commodity suppliers into extruded plastic sheet and
rollstock, color concentrates and blended resin compounds, and injection molded
and profile extruded products for customers in a wide range of markets. We
operate 42 production facilities throughout North America and one in Europe, and
are organized into three business segments (1) Extruded Sheet & Rollstock (64%
of total sales), (2) Color & Specialty Compounds (27% of total sales), and (3)
Molded & Profile Products (9% of total sales). The results discussed below
include our 1997 acquisition of the Preferred Plastic Sheet Division of Echlin
Inc. (August 1997); the 1998 acquisitions of Polycom Huntsman, Inc. (March
1998), Prismaplast Canada Ltd, commonly known as Plasticolour (April 1998), and
Anjac-Doron Plastics, Inc. (October 1998); and our 1999 acquisitions of Lustro
Plastics Company (January 1999), Alltrista Plastic Packaging (May 1999), Accura
Molding Company, Ltd. (October 1999), OS Plastics (October 1999), and GeoPlast
(October 1999) from the date of acquisition.
Results of Operations
Comparison of Fiscal Years 1999 and 1998
Consolidated net sales increased 17%, from $653.9 million to $767.9 million,
including 8% from internal growth. Net sales of the Extruded Sheet & Rollstock
segment increased 9%, from $455.1 million to $494.1 million. This was due
primarily to a 7% increase in pounds sold and a 5% increase in sales related to
the Lustro and Alltrista acquisitions, offset in part by a negative 3% price and
product mix change. Sales to the growing packaging and recreation & leisure
markets were the primary factor in the increase in pounds sold for the sheet
group. Net sales of the Color & Specialty Compounds group increased 38%, from
$158.2 million to $217.6 million. This was primarily the result of our 1998
midyear acquisitions of Polycom and Prismaplast. Pounds sold increased by 9%
while price and product mix changes had a negative 5% effect on sales. The
negative price change reduced sales dollars, mostly reflecting an increase in
our tolling business, which is the value-added processing and conversion of
customer-owned material. Sales for the Molded & Profile Products group
increased 38%, from $40.6 million to $56.2 million, primarily as a result of our
1998 acquisition of Anjac-Doron.
Cost of sales increased from $542.6 million to $630.9 million, but as a
percentage of net sales decreased from 83.0% to 82.2%. The more favorable cost
of sales percentage in 1999 was primarily due to improved production
efficiencies and sales of Alloy Plastic and Product Transformation products,
partially offset by an increase in depreciation as a result of our capital
expenditures during the last 24 months.
Selling, general and administrative expenses increased from $38.3 million to
$45.1 million, but remained at 5.9% as a percentage of net sales.
Operating earnings increased 26%, from $69.7 million to $87.7 million.
Operating earnings as a percentage of net sales also increased from 10.7% to
11.4%. These gains in operating earnings were achieved through the increased
sales levels, improved production efficiencies and the sale of Alloy Plastics,
discussed above.
Interest expense and distributions on Preferred Securities increased 19%,
from $13.6 million to $16.2 million, as a result of borrowings related to the
1998 and 1999 acquisitions.
Our effective tax rate decreased from 39.9% to 39.8% as we begin to gain some
synergies in our multi-jurisdiction tax filings across our 43 operations.
Comparison of Fiscal Years 1998 and 1997
Net sales increased 30%, from $502.7 million to $653.9 million. This was
primarily due to an increase in pounds sold from 535 million to 902 million.
This growth in sales volume included a 10% increase in pounds sold excluding
acquisitions and the effect of our late 1997 acquisition of Preferred Plastics
and our 1998 acquisitions of Polycom and Plasticolour.
Our Extruded Sheet & Rollstock group's net sales increased 21%, from $375.8
million to $455.1 million. This increase resulted from a 10% increase in pounds
sold excluding the effect of acquisitions and a 15% increase in sales related to
the August 1997 acquisition of Preferred Plastics. Price and product mix changes
had a negative 4% impact on sales. The increase in Extruded Sheet & Rollstock
pounds sold reflected strong sales of sign and specialty packaging products.
The Color & Specialty Compounds group's sales increased 88%, from $84.0 million
to $158.2 million. This was primarily the result of the $75.0 million in
revenues generated and approximately 240 million pounds sold by our 1998
acquisitions. The nearly 14% growth in base volume for the Color & Specialty
Compounds group was offset in part by price and mix changes due to the increase
in our tolling business. Molded & Profile Products group sales decreased 5%,
from $42.9 million to $40.6 million, primarily due to the sale of our housewares
business early in 1998.
Cost of sales increased from $420.5 million to $542.6 million, but decreased
from 83.6% of net sales to 83.0% of net sales. The more favorable cost of sales
percentage in 1998 represents a mix of higher margin product sales generated by
our new alloy plastics and product transformations and improved production
efficiencies, partially offset by an increase in depreciation as a result of our
capital expenditures during the last 24 months.
Selling, general, and administrative expenses increased from $31.0 million to
$38.3 million. However, selling, general, and administrative expenses as a
percentage of net sales decreased from 6.2% to 5.9%, primarily as a result of
continued cost containment efforts in 1998, ongoing synergies from acquisitions,
and the effect of the overall increase in sales volume on the fixed portion of
the costs.
Operating earnings increased 40%, from $49.7 million to $69.7 million.
Operating earnings as a percentage of net sales also increased from 9.9% to
10.7%. These gains in operating earnings were achieved through increased sales
levels, improved production efficiencies, cost containment efforts, and the new
product sales discussed above.
Interest expense increased 62%, from $8.4 million to $13.6 million, as a
result of borrowings related to the Preferred Plastics and Polycom acquisitions.
Our effective tax rate increased from 38.3% to 39.9%, due primarily to the
impact of non-deductible goodwill resulting from the Polycom acquisition.
Other Matters
We operate under various laws and regulations governing employee safety and
the quantities of specified substances that may be emitted into the air,
discharged into waterways, or otherwise disposed of on and off our properties.
We do not anticipate that future expenditures for compliance with these laws and
regulations will have a material effect on our capital expenditures, earnings,
or competitive position.
The plastic resins we use in our production process are crude oil or natural
gas derivatives which are available from a number of domestic and foreign
suppliers. Accordingly, our raw materials are only somewhat affected by supply,
demand and price trends of the petroleum industry. The pricing of resins tends
to be independent of crude oil or natural gas prices except in periods of
anticipated or actual shortages. We are not aware of any trends in the petroleum
industry which will significantly affect our sources of raw materials in 2000.
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Net Sales
In Millions of Pounds
1997 = 535
1998 = 902
1999 = 1,186
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Gross Margin
As a Percent of Sales
1997 = 16.4%
1998 = 17.0%
1999 = 17.8%
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SG&A Expenses
As a Percent of Sales
1997 = 6.2%
1998 = 5.9%
1999 = 5.9%
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Operating Earnings
In Millions of Dollars
1997 = $49.7
1998 = $69.7
1999 = $87.7
Liquidity and Capital Resources
Cash Flow
Our primary sources of liquidity have been cash flows from operating
activities and borrowings from third parties. Our principal uses of cash have
been to support our operating activities, invest in capital improvements, and
finance strategic acquisitions.
We continue to generate strong cash flows from operations, due in part to the
continuing increases in our net earnings. Operating cash flows provided by
changes in working capital were a positive $6.3 million in 1999 and $1.1 million
in 1998 as a result of improved inventory and accounts payable management.
Our primary investing activities are capital expenditures and acquisitions of
businesses in the plastics industry. Capital expenditures are primarily
incurred to maintain and improve productivity, as well as to modernize and
expand facilities. Capital expenditures were $17.9 million for 1998 and $24.7
million for 1999. We anticipate total capital expenditures of approximately $25
million for 2000. The net cash purchase price for Polycom, in March 1998, was
approximately $129 million, including estimated costs of the transaction and net
of cash acquired of $3 million. The acquisition was funded through our bank
credit facility and the issuance of $10 million of our common stock to Polycom
stockholders. In addition, we completed two other acquisitions in fiscal 1998
which, when combined with the Polycom purchase, totaled $132.6 million of cash
paid for acquired businesses. Our 1999 business acquisitions combined for a
total cash paid for these purchases of $64.8 million. We continue to evaluate
value-added acquisition opportunities that meet our stringent acquisition
criteria.
Our cash flows provided by financing activities were $82.9 million for 1998.
The primary activities were bank borrowings of $132.6 million for acquisitions,
repayment of debt of $33.5 million, purchases of treasury stock of $13.2
million, and proceeds from stock options exercised of $4.3 million. Our cash
flows provided by financing activities were $14.3 million for 1999. The primary
activities were bank borrowings of $64.8 million for acquisitions, repayment of
debt of $42.6 million, purchases of treasury stock of $16.6 million, and
proceeds from stock options exercised of $8.6 million. We paid common stock
dividends of $7.6 million or 28 cents per share in 1999, and at its December
1999 meeting our board of directors raised the dividend to an annual rate of 34
cents per share.
Financing Arrangements
In conjunction with the Polycom acquisition, on March 31, 1998 we increased
our $40 million bank credit facility to an aggregate availability of $150
million. The facility is unsecured and has a five-year term, with interest
payable at a rate chosen by us of either prime or LIBOR plus 0.5% to 1.0%. It
consists of a $50 million term loan, which has equal quarterly payments due of
$2.5 million that reduce our availability over the five year term, and a $100
million revolving facility. In conjunction with our two Canadian acquisitions
in October 1999, we entered into a credit facility for an additional $20 million
(in US dollars) of availability in Canada. At October 30, 1999, our total
borrowings under the bank credit facilities were $84.5 million at a weighted
average rate of 6.2% and we have $70.5 in remaining availability.
On March 5, 1999 we issued $50 million of 6.5% convertible subordinated
debentures to Spartech Capital Trust, a Delaware trust we control. We used the
proceeds to repay borrowings under our bank credit facility. The debentures are
(1) convertible into shares of our common stock at a conversion price equivalent
to $30.55 per share of common stock, for a total of 1,636,661 shares; (2)
redeemable on or after March 1, 2002; and (3) payable on March 1, 2014, if they
have not been previously redeemed or converted.
On June 8, 1999, we announced the completion of a secondary public offering
of 2,328,968 previously issued and outstanding shares of our common stock.
These shares represented all the common stock of the Company owned by two
selling shareholders. In addition to the shares offered by the selling
shareholders, we sold the underwriters an additional 345,000 shares to cover
over-allotments. The stock was sold to the public at $24.00 per share. The net
proceeds received by the Company from the sale of the over-allotment shares,
$7.6 million, was used to repay bank credit facility borrowings in support of
future strategic expansions.
We anticipate that cash flow from operations, together with the borrowings
under our bank credit facility and the proceeds from our debenture financing,
will satisfy our working capital needs, regular quarterly dividends, and planned
capital expenditures for the next year.
Year 2000
We have instituted a plan to help ensure that we have no material business
interruptions related to Year 2000 issues. The plan consists of evaluation,
prioritization, analysis, testing, correction, and contingency planning. We
have completed the testing and correction phases of our systems. Our current
state of readiness is:
* Major Business Systems. Our major business systems include all financial,
sales, purchasing, product manufacturing, inventory management, and logistics
modules. We have performed formal testing on all of these major business
systems with no transitional problems identified. We will continue to
monitor these systems for any new, unforeseen issues that may arise.
* Information Technology (IT) Systems Infrastructure. We have completed our
evaluation and upgrade of our existing IT systems infrastructure company-wide.
The areas evaluated included workstations, servers, network hardware, operating
software, and application software.
* Non - IT Systems. We have completed our evaluations and upgrades for Year
2000 compliance of our non - IT systems such as process control equipment,
analytical equipment, quality systems, HVAC systems, security systems and
material handling systems.
* Third Party Issues. We have surveyed our key supply chain business
partners including key raw material suppliers, process control equipment
providers, and key providers of utilities, telecommunications, waste management
and transportation. We completed this process, with no indications that the
supply of key materials or services will be interrupted by Year 2000-related
problems.
We have not incurred, nor do we expect to incur, any material costs related
to our Year 2000 compliance efforts. Amounts spent on information technology,
and non - IT equipment upgrades, have been planned in accordance with continual
efforts to upgrade our capabilities.
At this time, we believe that all major Year 2000 software, hardware, and
business-related issues have been identified. In addition, substantially all
internal Year 2000 necessary actions have occurred though normal maintenance and
upgrade plans. However, due to the general uncertainty inherent in the Year
2000 issue we are unable to determine with certainty whether the consequences of
Year 2000 failures will have a material impact on our financial position,
results of operations or cash flows. We believe the upgrades to systems and
software that have occurred should reduce the possibility of significant
interruptions of normal operations. However, we may experience problems due to
Year 2000 difficulties of others.
We have developed contingency plans for the critical aspects of our business.
These plans consist of manual back-up in case of internal IT or non - IT systems
failures, identification of alternative suppliers for our key supply chain
channels, providing IT disaster recovery resources, and ensuring extra staffing
is available near and over the Year 2000 transition.
Safe Harbor
This Report contains certain forward-looking statements, defined in Section
21E of the Securities Exchange Act of 1934. Forward-looking statements
represent our judgement relating to, among other things, future results of
operations, growth plans, sales, capital requirements, and general industry and
business conditions applicable to us. They are based largely on our current
expectations. Our actual results could differ materially from the information
contained in the forward-looking statements due to a number of factors,
including changes in the availability and cost of raw materials, the level of
financial leverage and restrictions from our indebtedness agreements,
unanticipated events that may prevent us from competing in existing or new
markets, and our ability to successfully complete acquisitions. Investors are
also directed to the discussion of risks and uncertainties associated with
forward-looking statements contained in our Annual Report on Form 10-K filed
with the Securities and Exchange Commission.
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Operating Cash Flow
In Millions of Dollars
1997 = $48.4
1998 = $64.5
1999 = $76.5
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Capital Expenditures
In Millions of Dollars
1997 = $12.2
1998 = $17.9
1999 = $24.7
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Cash Paid for Acquisitions
In Millions of Dollars
1997 = $71.9
1998 = $132.6
1999 = $64.8
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Debt Repayments
In Millions of Dollars
1997 = $27.7
1998 = $33.5
1999 = $42.6
CONSOLIDATED BALANCE SHEET
(Dollars in thousands, except share amounts)
October 30, October 31,
1999 1998
ASSETS
Current Assets
Cash and equivalents $ 8,890 $ 7,247
Receivables, net of allowances
of $3,016 in 1999 and $2,430 in 1998 117,345 91,631
Inventories 72,108 64,859
Prepayments and other 8,634 9,459
---------- ----------
Total Current Assets 206,977 173,196
Property, Plant and Equipment, Net 242,699 206,887
Goodwill 168,497 148,668
Other Assets 7,228 4,558
---------- ----------
$625,401 $533,309
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Current maturities of long-term debt $ 13,215 $ 8,948
Accounts payable 78,644 59,578
Accrued liabilities 37,420 32,466
---------- ----------
Total Current Liabilities 129,279 100,992
---------- ----------
Long-Term Debt, Less Current Maturities 217,094 245,272
Other Liabilities 38,986 33,449
---------- ----------
Total Long-Term Liabilities 256,080 278,721
Company-obligated, mandatorily redeemable
convertible preferred securities of
Spartech Capital Trust holding solely 6.5%
convertible subordinated debentures 50,000 --
Shareholders' Equity
Common stock, 27,915,873 and 27,550,107
Shares issued in 1999 and 1998,
respectively 20,925 20,663
Contributed capital 101,709 99,407
Retained earnings 85,651 50,185
Treasury stock, at cost, 675,937 shares in
1999 and 688,917 shares in 1998 (14,835) (11,875)
Cumulative translation adjustments (3,408) (4,784)
---------- ----------
Total Shareholders' Equity 190,042 153,596
---------- ----------
$625,401 $533,309
========== ==========
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENT OF OPERATIONS
(Dollars in thousands, except per share amounts)
Fiscal Year
1999 1998 1997
Net Sales $767,873 $653,855 $502,715
-------- -------- --------
Costs and Expenses
Cost of sales 630,911 542,640 420,500
Selling, general and administrative 45,067 38,257 31,019
Amortization of intangibles 4,188 3,230 1,495
-------- -------- --------
680,166 584,127 453,014
-------- -------- --------
Operating Earnings 87,707 69,728 49,701
Interest 14,063 13,602 8,393
Distributions on preferred securities
of Spartech Capital Trust 2,135 -- --
-------- -------- --------
Earnings Before Income Taxes 71,509 56,126 41,308
Income taxes 28,438 22,406 15,815
-------- -------- --------
Net Earnings $ 43,071 $33,720 $25,493
========= ======== ========
Net Earnings Per Common Share
Basic $ 1.59 $ 1.26 $ .96
========= ======== ========
Diluted $ 1.48 $ 1.18 $ .92
========= ======== ========
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(Dollars in thousands)
Cumulative Total
CommonContributedRetainedTreasuryTranslationShareholders'
Stock Capital Earnings Stock Adjustments Equity
Balance, November 2,
1996 $19,957 $90,708 $2,703 $(2,061) $1,088 $112,395
--------------- ------- ------- ------- --------
Stock options exercised 14 (1,407) -- 4,335 -- 2,942
Cash dividends -- -- (5,284) -- -- (5,284)
Treasury stock purchases -- -- -- (4,401) -- (4,401)
Net earnings -- -- 25,493 -- -- 25,493
Translation adjustments -- -- -- -- (2,756) (2,756)
Balance, November 1, --------------- ------- ------- ------- --------
1997 $19,971 $89,301 $22,912 $(2,127)$(1,668) $128,389
--------------- ------- ------- ------- --------
Common stock issuance 476 9,524 -- -- -- 10,000
Stock options exercised 216 582 -- 3,459 -- 4,257
Cash dividends -- -- (6,447) -- -- (6,447)
Treasury stock purchases -- -- -- (13,207) -- (13,207)
Net earnings -- -- 33,720 -- -- 33,720
Translation adjustments -- -- -- -- (3,116) (3,116)
--------------- ------- ------- ------- --------
Balance, October 31,
1998 $20,663 $99,407 $50,185 $(11,875) $(4,784)$153,596
--------------- ------- ------- ------- --------
Common stock issuance -- 1,344 -- 6,269 -- 7,613
Stock options exercised 262 958 -- 7,394 -- 8,614
Cash dividends -- -- (7,605) -- -- (7,605)
Treasury stock purchases -- -- -- (16,623) -- (16,623)
Net earnings -- -- 43,071 -- -- 43,071
Translation adjustments -- -- -- -- 1,376 1,376
--------------- ------- ------- ------- --------
Balance, October 30,
1999 $20,925 $101,709 $85,651 $(14,835) $(3,408) $190,042
======================= ================ ========
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollars in thousands)
Fiscal Year
1999 1998 1997
-------- -------- --------
Cash Flows From Operating Activities
Net earnings $43,071 $33,720 $25,493
Adjustments to reconcile net
earnings to net cash provided by
operating activities:
Depreciation and amortization 23,222 18,530 11,548
Change in current assets
and liabilities, net of
effects of acquisitions:
Receivables (12,944) (2,383) 1,072
Inventories 685 (2,268) 1,296
Prepayments and other 1,411 1,314 538
Accounts payable 12,337 4,257 2,902
Accrued liabilities 4,784 151 (311)
Other, net 3,981 11,225 5,852
Net cash provided by operating -------- -------- --------
activities 76,547 64,546 48,390
-------- -------- --------
Cash Flows From Investing Activities
Capital expenditures (24,692) (17,859) (12,172)
Business acquisitions (64,826) (132,590) (71,920)
Dispositions of assets 283 4,264 215
Net cash used for investing -------- -------- --------
activities (89,235) (146,185) (83,877)
-------- -------- --------
Cash Flows From Financing Activities
Bank borrowings for business
acquisitions 64,826 132,590 11,920
Net borrowings (payments) on bank
credit facilities (41,847) (32,190) (27,320)
Payments on bonds and leases (718) (1,272) (409)
Issuance of 7.0% Senior Notes -- -- 60,000
Issuance of common stock 7,613 -- --
Debt issuance costs -- (801) (451)
Cash dividends on common stock (7,605) (6,447) (5,284)
Stock options exercised 8,614 4,257 2,942
Treasury stock acquired (16,623) (13,207) (4,401)
Net cash provided by financing -------- -------- --------
activities 14,260 82,930 36,997
-------- -------- --------
Effect of exchange rate changes on
cash and equivalents 71 (102) (137)
Increase In Cash And Equivalents 1,643 1,189 1,373
Cash And Equivalents At
Beginning Of Year 7,247 6,058 4,685
-------- -------- --------
Cash And Equivalents At End Of Year $8,890 $7,247 $6,058
======== ======== ========
See accompanying notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
1) SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect reported amounts and related disclosures.
Actual results could differ from those estimates. Certain prior year amounts
have been reclassified to conform to the current year presentation. The
Company's fiscal year ends on the Saturday closest to October 31. Fiscal years
1999, 1998 and 1997 each consisted of 52 weeks.
Principles of Consolidation -- The accompanying consolidated financial
statements include the accounts of SPARTECH Corporation and its wholly-owned
subsidiaries. All significant intercompany transactions and balances have been
eliminated.
Foreign Currency Translation -- Assets and liabilities of the Company's Non-U.S.
operations are translated from their functional currency to U.S. dollars using
exchange rates in effect at the balance sheet date. Results of operations are
translated using average rates during the period. Adjustments resulting from the
translation process are included as a separate component of shareholders'
equity. The Company may periodically enter into foreign currency contracts to
manage exposures to market risks from prospective changes in exchange rates. No
such contracts were outstanding as of October 30, 1999.
Cash Equivalents -- Cash equivalents consist of highly liquid investments with
original maturities of three months or less.
Inventories -- Inventories are valued at the lower of cost (first-in, first-out)
or market. Finished goods include the costs of material, labor, and overhead.
Property, Plant and Equipment -- Property, plant and equipment are carried at
cost. Depreciation is provided on a straight-line basis over the estimated
useful lives of the related assets as follows:
Years
Buildings and leasehold improvements 25
Machinery and equipment 12-16
Furniture and fixtures 5-10
Major renewals and betterments are capitalized. Maintenance and repairs are
expensed as incurred. Upon disposition, the net book value is eliminated from
the accounts, with the resultant gain or loss reflected in operations.
Goodwill -- Goodwill, representing the excess of the purchase price over the
fair value of net assets acquired, is charged against operations on a straight-
line basis over the periods estimated to be benefited, not exceeding 40 years.
Goodwill amortization totaled $4,188, $3,230, and $1,495 in 1999, 1998, and
1997, respectively. Accumulated amortization at October 30, 1999 totaled
$14,660.
The Company reviews goodwill and other long-lived assets for impairment whenever
events and changes in business circumstances indicate the carrying value of the
assets may not be recoverable. It recognizes impairment losses if expected
undiscounted future cash flows of the related assets are less than their
carrying value. An impairment loss represents the amount by which the carrying
value of an asset exceeds the fair value of the asset. The Company did not
recognize any impairment losses for the periods presented.
Financial Instruments -- The Company uses the following methods and assumptions
in estimating the fair value of financial instruments:
Cash, accounts receivable, accounts payable, and accrued liabilities -- the
carrying value of these instruments approximates fair value due to their short-
term nature; and
Long-term debt (including bank credit facilities) and mandatorily redeemable
convertible preferred securities -- based on borrowing rates currently
available for these security instruments with similar terms and maturities,
the carrying value of these instruments approximates fair value.
Revenue Recognition -- The Company manufactures products for specific customer
orders and for standard stock inventory. Revenues are recognized and billings
are rendered as the product is shipped to the customer.
Income Taxes -- Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to temporary differences between the
financial statement carrying amounts of assets and liabilities and their
respective tax bases. Deferred tax assets are also recognized for credit
carryforwards based on an assessment (which includes anticipating future income)
in determining the likelihood of realization. Deferred tax assets and
liabilities are measured using the rates expected to apply to taxable income in
the years in which the temporary differences are expected to reverse and the
credits are expected to be used. The effect of a change in tax rates on deferred
tax assets and liabilities is recognized in income in the period that includes
the enactment date.
2) ACQUISITIONS
On January 7, 1999, the Company completed its acquisition of the net assets of
Lustro Plastics Company, a custom sheet and rollstock extruder located in
Evanston, Illinois with annual sales of approximately $28,000. The cash
purchase price of approximately $10,400 was funded through our existing bank
credit facility.
On May 24, 1999, the Company completed its acquisition of the net assets of the
Plastic Packaging Division of Alltrista Corporation, a well-established
manufacturer of extruded sheet & rollstock packaging materials based in Muncie,
Indiana with sales approaching $30,000. The cash purchase price of
approximately $34,000 was funded through our existing bank credit facility.
In October 1999 the Company completed the acquisitions of the net assets of
Accura Molding Company, Ltd., OS Plastics, and GeoPlast Profile Extrusion.
Sales for the group of companies was approximately $24,000 and the cash purchase
price of approximately $21,000 was funded primarily through our revolving bank
credit facility in Canada. These acquisitions added custom injection molding,
extruded corrugated sheet, and profile extrusion product capabilities to the
Company.
On March 31, 1998, the Company completed its acquisition of all the stock of
Polycom Huntsman, Inc., a manufacturer of color & specialty compounds. The net
cash purchase price was approximately $129,000 (including estimated costs of the
transaction and net of cash acquired of $3,000). The acquisition was funded
through our bank credit facility and the issuance of $10,000 in Spartech common
stock to Polycom shareholders. The fair value of the assets acquired (including
approximately $65,000 in goodwill) and liabilities assumed (consisting of
accounts payable, accrued liabilities, lease liabilities, and industrial revenue
bonds) were $171,000 and $39,000, respectively. For its fiscal year ended March
31, 1998, Polycom's color, specialty, and toll compounding businesses generated
annual sales of approximately $115,000.
On April 26, 1998, the Company completed the purchase of the net assets of
Prismaplast Canada Ltd. of Montreal. Prismaplast, commonly known as
Plasticolour, produces color concentrates and specialty compounds with net sales
for 1997 of approximately $10,000. The acquisition price for Plasticolour
approximated $5,000, which was financed through operating cash flow and our bank
credit facility.
On October 30, 1998, the Company completed its purchase of all the stock of
Anjac-Doron Plastics, Inc., a custom profile extruder with annual sales of
approximately $9,000. The acquisition price of approximately $6,700 was financed
through our bank credit facility.
On August 22, 1997, the Company completed the acquisition of the net assets of
the Preferred Plastic Sheet Division of Echlin Inc. The purchase of the extruded
plastic sheet and profile extruded product operations included four
manufacturing facilities with annual sales of approximately $75,000. The
purchase price for the net assets acquired from Preferred was $65,074 in cash,
including costs of the transaction. The fair value of assets acquired (including
$39,199 of goodwill) and liabilities assumed (including accounts payable and
accrued liabilities) was $73,517 and $8,443, respectively. The purchase price
and related costs of the acquisition were funded by a $60,000 private placement
of debt with a fixed interest rate of 7.0% and borrowings on the Company's
existing bank credit facility.
All these acquisitions have been accounted for by the purchase method, and
accordingly, the results of operations were included in the Company's
Consolidated Statement of Operations from their respective date of acquisition.
The purchase price has been allocated to the assets and liabilities, and the
excess of cost over the fair value of net assets acquired is being amortized
over a forty-year period on a straight-line basis.
The following summarizes unaudited pro forma consolidated results of operations
for fiscal year 1999 assuming the OS Plastics, Accura, Alltrista, Lustro, and
GeoPlast acquisitions had occurred at the beginning of the fiscal year. The
results are not necessarily indicative of what would have occurred had these
transactions been consummated as of the beginning of the fiscal year presented,
or of future operations of the consolidated companies.
Pro Forma (Unaudited)
1999 1998
Net Sales $810,928 $783,264
====== ======
Earnings Before Income Taxes $ 73,907 $ 64,326
====== ======
Net Earnings $ 44,511 $ 38,694
====== ======
Net Earnings Per
Common Share -- Diluted $ 1.53 $ 1.35
====== ======
3) INVENTORIES
Inventories at October 30, 1999 and October 31, 1998 are comprised of the
following components:
1999 1998
Raw materials $41,781 $42,016
Finished goods 30,327 22,843
-------- -------
$72,108 $64,859
======== =======
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following at October 30, 1999 and
October 31, 1998:
1999 1998
Land $ 6,936 $ 6,369
Buildings and leasehold improvements 51,559 45,312
Machinery and equipment 251,755 205,124
Furniture and fixtures 8,278 6,821
--------- ---------
318,528 263,626
Less accumulated depreciation 75,829 56,739
--------- ---------
Property, plant and equipment, net $242,699 $206,887
========= =========
5) LONG-TERM DEBT
Long-term debt is comprised of the following at October 30, 1999 and October 31,
1998:
1999 1998
7.0% Senior Unsecured Notes $ 60,000 $ 60,000
7.62% Guaranteed Unsecured Notes 30,000 30,000
7.21% Senior Unsecured Notes 42,857 50,000
Bank Credit Facilities 84,500 100,700
Other 12,952 13,520
--------- ---------
230,309 254,220
Less current maturities 13,215 8,948
--------- ---------
Total long-term debt $217,094 $245,272
========= =========
On March 31, 1998, the Company amended its unsecured bank credit facility to an
aggregate availability of $150,000 for a new five-year term. This facility
consists of a $50,000 term loan, which has equal quarterly payments due of
$2,500 that reduce this availability over the five-year term, and a $100,000
revolving facility. On September 24, 1999, the Company's Canadian entity
entered into an additional $20,000 revolving facility in Canada. The total
availability under these bank credit facilities was $155,000 at October 30,
1999. Of the $84,500 outstanding, $35,000 was under term loans and $49,500 under
revolving facilities, all of which is classified as long term as no paydowns of
the aggregate facility are required within the next year. Interest on our bank
credit facilities is payable at a rate chosen by the Company of either prime or
LIBOR plus .5% to 1.0%. At October 30, 1999, the Company had fixed LIBOR loans
outstanding under the bank credit facilities of $64,000 at 6.2% for a one-month
period (LIBOR loans totaled $88,500 at 6.19% on October 31, 1998). The remaining
bank credit facility borrowings were at the current prime rate (October 30, 1999
of $3,400 at 8.25% in the U.S. and $17,100 at 5.69% in Canada and October 31,
1998 of $12,200 at 8.0%).
On August 22, 1997, the Company completed a Private Placement of 7.0% Senior
Unsecured Notes consisting of $45,000 designated as Series A and $15,000
designated as Series B. The Series A 1997 Notes require equal annual principal
payments of approximately $6,429 commencing on August 22, 2001 and the Series B
1997 Notes do not require principal payments before becoming due on August 22,
2004. Interest on the 1997 Notes is payable semiannually on February 22 and
August 22 of each year.
On September 27, 1996, the Company completed a $30,000 Private Placement of
7.62% Guaranteed Unsecured Notes over a ten-year term. The 1996 Notes require
equal annual principal payments of approximately $4,286 commencing on September
27, 2000. Interest on the 1996 Notes is payable semiannually on March 27 and
September 27 of each year.
On August 15, 1995, the Company completed a $50,000 Private Placement of 7.21%
Senior Unsecured Notes over a ten-year term. The 1995 Notes require equal annual
principal payments of approximately $7,143 that commenced on August 15, 1999.
Interest on the 1995 Notes is payable semiannually on February 15 and August 15
of each year.
The other debt consists of industrial revenue bonds, capital leases, and other
term notes utilized to finance capital expenditures. These financings mature
between 1999 and 2015 and have interest rates ranging from 2.00% to 9.38%.
Scheduled maturities of long-term debt for the next five fiscal years are: 2000-
- -$13,215; 2001--$18,772; 2002--$18,553; 2003--$102,754; and 2004--$28,748. The
long-term debt contains certain covenants which, among other matters, require
the Company to restrict the incurrence of additional indebtedness, satisfy
certain ratios and net worth levels, and limit both the sale of assets and
merger transactions.
6) CONVERTIBLE PREFERRED SECURITIES
On March 5, 1999, the Company issued $50 million of 6.5% convertible
subordinated debentures to Spartech Capital Trust, a Delaware trust under the
Company's control. The Company used the proceeds to repay borrowings under our
bank credit facilities. The debentures are the sole asset of the Trust and
eliminate in consolidation. The Trust purchased the debentures with the proceeds
of a $50 million private placement of 6.5% convertible preferred securities of
the Trust having an aggregate liquidation preference of $50 million and
guaranteed by Spartech. The debentures:
Are convertible along with the Trust preferred securities, at the option of
the preferred security holders, into shares of our common stock at a conversion
price equivalent to $30.55 per share of common stock, for a total of 1,636,661
shares;
Are redeemable along with the Trust preferred securities, at Spartech's
option on or after March 1, 2002, at a price equal to 104.56% at October 30,
1999 of the principal amount plus accrued interest, declining annually to a
price equal to the principal amount plus accrued interest by March 1, 2009; and
Mature and are payable, along with the Trust preferred securities, on March
1, 2014, if they have not been previously redeemed or converted.
7) SHAREHOLDERS' EQUITY & STOCK OPTIONS
The authorized capital stock of the Company consists of 45 million shares of
$.75 par value common stock and 4 million shares of $1 par value preferred
stock.
The Company has an Incentive Stock Option Plan and Restricted Stock Option Plan
for executive officers and key employees. The minimum option price is the fair
market value per share at the date of grant. The Incentive Plan has 598,625
shares outstanding at October 30, 1999. The maximum number of shares issuable
annually under the Restricted Plan is limited to 10% of the Company's
outstanding common shares (excluding treasury shares) at each year end through
2001. Notwithstanding the foregoing, the Board of Directors has resolved that at
no time will the total unexercised options issued to employees be in excess of
10% of the then outstanding common shares. The options granted and common shares
purchased under the Restricted Plan may not be sold or disposed of for a period
of three years from the date of option grant. Subject to the limitations
discussed above, the number of shares issued, or options granted, pursuant to
these plans is at the discretion of the Compensation Committee of the Board of
Directors. The Restricted Plan has 2,159,850 shares outstanding at October 30,
1999. Additional options, which have been issued outside the Incentive and
Restricted plans discussed above, totaled 80,000 at October 30, 1999.
A summary of the combined activity for the Company's stock options for fiscal
years 1999, 1998, and 1997 follows (shares in thousands):
1999 1998 1997
Shares Weighted Shares Weighted Shares Weighted
Under Average Under Average Under Average
Option Exercise Option Exercise Option Exercise
Price Price Price
Outstanding, beginning
of year 3,293 $9.36 3,015 $6.88 2,074 $4.37
Granted 302 $18.74 793 $16.11 1,414* $9.84
Exercised (757) $7.27 (515) $5.29 (473) $4.74
--------- ---------- ----------
Outstanding, end of
Year 2,838 $10.91 3,293 $9.36 3,015 $6.88
======== ======== ========
Exercisable, end
of year 2,531 3,287 3,015
======== ======== ========
Weighted average fair
value of options granted $6.89 $5.00 $3.95
====== ====== ======
*Amount includes an option for 900 shares issued in conjunction with the
settlement
of litigation, 560 of which remain outstanding at October 30,1999.
Information with respect to options outstanding at October 30, 1999 follows
(shares
in thousands):
Weighted Average Weighted
Shares Under Remaining Average
Range of Exercise
Prices Option Contractual Life Exercise Price
$ 1.25 -- 7.00 843 3.2 years $4.49
$ 9.00 -- 10.88 866 4.9 years $9.66
$11.00 -- 15.88 758 7.1 years $15.65
$16.00 -- 28.94 371 6.6 years $18.71
------
2,838
======
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The range from $16.00 - $28.94 includes 64 shares under option that were
exercisable at October 30, 1999 at an average exercise price of $18.58. All
other shares under option were exercisable at October 30, 1999.
The Company follows Accounting Principles Board Opinion No. 25 "Accounting for
Stock Issued to Employees" ("APB 25"), in accounting for its employee stock
options. Under APB 25, if the exercise price of the stock option equals the
market price of the underlying stock on the issuance date, no compensation
expense is recognized. The Company is required by Statement of Financial
Accounting Standards No. 123 "Accounting for Stock-Based Compensation" to
provide pro forma disclosures under an alternative fair value method of
accounting. The weighted average fair values of options granted were estimated
using the Black-Scholes option-pricing model with the following assumptions:
1999 1998 1997
Expected Dividend Yield 1.10% 1.30% 1.25%
Expected Volatility 33% 31% 35%
Risk-Free Interest Rates 5.70-5.80% 4.52-4.83% 5.77-5.81%
Expected Lives 5 Years 5 Years 5 Years
Had compensation expense been recognized based on these hypothetical values the
Company's net income for 1999, 1998, and 1997 would have been $41,818, $31,330,
and $23,020, respectively, and diluted earnings per share for 1999, 1998, and
1997 would have been $1.39, $1.10, and $.83, respectively. As a result of
changing assumptions, these hypothetical calculations are not necessarily
representative of future results.
8) INCOME TAXES
The provision for income taxes for fiscal years 1999, 1998, and 1997 is
comprised of the following:
1999 1998 1997
Federal:
Current $19,823 $14,844 $8,698
Deferred 3,138 3,483 3,631
State 3,441 2,697 1,819
Foreign 2,036 1,382 1,667
------- ------- -------
Provision for income taxes$28,438 $22,406 $15,815
======= ======== ========
Earnings before income taxes for 1999, 1998, and 1997 include $5,634, $4,383,
and $4,924, respectively from Non-U.S. operations. The income tax provision on
earnings of the Company differs from the amounts computed by applying the U.S.
Federal tax rate of 35% as follows:
1999 1998 1997
Federal income taxes at
statutory rate $25,028 $19,644 $14,458
State income taxes, net of applicable
Federal income tax benefits 2,237 1,753 1,182
Other 1,173 1,009 175
-------- ------- -------
$28,438 $22,406 $15,815
======== ======= =======
At October 30, 1999 and October 31, 1998, the Company's principal components of
deferred tax assets and liabilities consisted of the following:
1999 1998
Deferred tax assets:
Tax carryforwards $ 387 $ 486
Bad debt reserves 657 675
Inventories 250 780
Accrued liabilities 7,236 6,571
-------- --------
$ 8,530 $ 8,512
======== ========
Deferred tax liabilities:
Depreciation $38,064 $34,531
Other 3,570 1,295
-------- -------
$41,634 $35,826
======== =======
At October 30, 1999 and October 31, 1998, the net current deferred tax asset was
$5,446 and $5,969, respectively, and the net noncurrent deferred tax liability
was $38,550 and $33,283, respectively.
9) EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128 "Earnings Per Share" ("SFAS 128") which
specifies the computation, presentation and disclosure requirements for earnings
per share. Basic earnings per share excludes any dilution and is computed by
dividing net income available to common stockholders by the weighted average
number of common shares outstanding for the period. Diluted earnings per share
reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common stock or
resulted in the issuance of common stock that then shared in the earnings of the
entity. All earnings per share data has been calculated in accordance with SFAS
128.
The weighted average number of common shares used in the computations of basic
and diluted earnings per share for 1999, 1998, and 1997 follows:
1999 1998 1997
Basic earnings per share 27,038 26,807 26,418
Effect of stock options 1,869 1,802 1,420
Effect of convertible
preferred securities 1,075 -- --
------- ------- ------
Diluted earnings per share 29,982 28,609 27,838
======= ======= =======
The effect of stock options represents the shares resulting from the assumed
exercise of outstanding stock options calculated using the treasury stock method
and the effect of convertible preferred securities represents the shares
resulting from the assumed conversion using the if converted method. Earnings
used in the computations of basic earnings per share represents net earnings as
reported. Earnings used in the computation of diluted earnings per share is
adjusted to add back the effect of the distributions on preferred securities for
the assumed conversion at the beginning of 1999.
10) EMPLOYEE BENEFITS
The Company sponsors or contributes to various retirement benefit and savings
plans covering substantially all employees. The total cost of such plans for
fiscal years 1999, 1998, and 1997 was $2,639, $1,856, and $1,057, respectively.
11) CASH FLOW INFORMATION
Supplemental information on cash flows for fiscal years 1999, 1998, and 1997 was
as follows:
1999 1998 1997
Cash paid during the year for:
Interest $17,422 $14,535 $7,470
======== ======== ========
Income taxes $18,431 $15,642 $11,245
======== ======== ========
Schedule of business acquisitions:
Fair value of assets acquired $75,528 $183,073 $73,517
Liabilities assumed (10,146) (43,434) (8,443)
Non-cash consideration/
holdback payments (556) (7,049) 6,846
--------- -------- --------
Total cash paid for the net
assets acquired $64,826 $132,590 $71,920
======== ======== ========
12) COMMITMENTS AND CONTINGENCIES
The Company conducts certain of its operations in facilities under operating
leases. Rental expense for 1999, 1998, and 1997 was $6,767, $5,408, and $3,780,
respectively.
Future minimum lease payments under non-cancelable operating leases, by fiscal
year, are: 2000--$4,795; 2001--$3,894; 2002--$2,668; 2003--$2,443; 2004--$1,669;
and $4,189 thereafter.
The Company is also subject to various other claims, lawsuits, and
administrative proceedings arising in the ordinary course of business with
respect to commercial, product liability, employment, and other matters, several
which claim substantial amounts of damages. While it is not possible to
estimate with certainty the ultimate legal and financial liability with respect
to these claims, lawsuits, and administrative proceedings, the Company believes
that the outcome of these other matters will not have a material adverse effect
on the Company's financial position or results of operations. The Company
currently has no litigation with respect to any environmental matters.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13) SEGMENT INFORMATION
The Company's forty-three facilities are organized into three reportable
segments based on the nature of the products manufactured. The Company utilizes
operating earnings to evaluate business segment performance and determine the
allocation of resources. Segment accounting policies are the same as policies
described in note (1). A description of reportable segments for Spartech
Corporation follows:
Extruded Sheet & Rollstock -- This segment has twenty-one manufacturing
facilities and is the largest extruder of custom rigid plastic sheet and
rollstock in North America. The segment's finished products are generally
thermoformed by its customers for use in a wide variety of markets.
Color & Specialty Compounds -- This segment operates fourteen plants
throughout North America and Europe. The Color & Specialty Compounds
segment manufactures custom designed plastic alloys, compounds, color
concentrates and calendered film for utilization in numerous applications.
Molded & Profile Products -- This segment has eight North American
facilities which manufacture a number of proprietary items. These include
injection molded and printed food packaging, complete thermoplastic wheels
and tires, profile extruded products, and injection molded parts for water
filtration systems.
Corporate & Other includes unallocated corporate office expenses, goodwill
amortization, and other non-allocated expenses. Assets included in Corporate &
Other are made up primarily of goodwill, cash and cash equivalents, and
deferrals.
1999 1998 1997
Net Sales
Extruded Sheet & Rollstock $ 494,088 $ 455,096 $ 375,822
Color & Specialty Compounds 217,640 158,191 84,005
Molded & Profile Products 56,145 40,568 42,888
--------- --------- ---------
Net Sales $ 767,873 $ 653,855 $ 502,715
========= ========= =========
Operating Earnings
Extruded Sheet & Rollstock $ 57,648 $ 50,531 $ 39,625
Color & Specialty Compounds 28,622 18,078 7,139
Molded & Profile Products 7,784 5,664 5,896
Corporate & Other (6,347) (4,545) (2,959)
--------- --------- ---------
Total Operating Earnings $ 87,707 $ 69,728 $ 49,701
========= ========= =========
Assets
Extruded Sheet & Rollstock $ 252,661 $ 185,505 $ 182,870
Color & Specialty Compounds 152,279 149,810 42,000
Molded & Profile Products 49,574 29,467 32,102
Corporate & Other 170,887 168,527 101,831
--------- --------- ---------
Total Assets $ 625,401 $ 533,309 $ 358,803
========= ========= =========
Depreciation and Amortization
Extruded Sheet & Rollstock $ 8,821 $ 7,495 $ 5,898
Color & Specialty Compounds 7,467 5,118 1,626
Molded & Profile Products 2,512 2,117 2,110
Corporate & Other 4,422 3,800 1,914
--------- --------- ---------
Total Depreciation
and Amortization $ 23,222 $ 18,530 $ 11,548
========= ========= =========
Capital Expenditures
Extruded Sheet & Rollstock $ 12,927 $ 9,908 $ 6,570
Color & Specialty Compounds 6,670 5,018 1,467
Molded & Profile Products 4,595 2,881 4,060
Corporate & Other 500 52 75
--------- --------- ---------
Total Capital Expenditures $ 24,692 $ 17,859 $ 12,172
========= ========= =========
In addition to the external sales disclosed in the table above, intersegment
sales were $20,457, $14,756, and $11,702 for the fiscal years ended 1999, 1998,
and 1997 respectively. Nearly all intersegment sales were generated from our
Color & Specialty Compounds segment.
The Company operates in three reportable geographic areas--the United States,
Canada, and Europe. Geographic financial information for fiscal years 1999,
1998, and 1997 was as follows:
Total
Net Sales Assets
1999 1998 1997 1999 1998 1997
United States $675,988 $572,676 $427,530 $526,502 $460,897 $295,511
Canada 82,464 75,970 75,185 91,868 63,898 63,292
Europe 9,421 5,209 -- 7,031 8,514 --
-------- ----------------- -------- -------- --------
$767,873 $653,855 $502,715 $625,401 $533,309 $358,803
========= ======== ======== ======== ======== ========
14) QUARTERLY FINANCIAL INFORMATION
Certain unaudited quarterly financial information for the fiscal years ended
October 30, 1999 and October 31, 1998 was as follows:
[CAPTION]
Quarter Ended Fiscal
Jan April July Oct Year
1999
Net Sales $167,801 $196,937 $201,802 $201,333 $767,873
Gross Profit 30,197 35,066 35,351 36,348 136,962
Net Earnings 9,157 11,105 11,415 11,394 43,071
Net Earnings Per Share:
Basic .34 .41 .42 .42 1.59
Diluted .32 .38 .39 .39 1.48
1998
Net Sales $133,081 $165,707 $177,702 $177,365 $653,855
Gross Profit 22,480 27,918 30,190 30,627 111,215
Net Earnings 7,021 8,863 9,020 8,816 33,720
Net Earnings Per Share:
Basic .27 .33 .33 .33 1.26
Diluted .25 .31 .31 .31 1.18
15) COMPREHENSIVE INCOME
On November 1, 1998 we adopted Statement of Financial Accounting Standards
(SFAS) No. 130---"Reporting Comprehensive Income". Comprehensive Income is an
entity's change in equity during the period from transactions, events, and
circumstances from non-owner sources. The only component of Other Comprehensive
Income is foreign currency translation adjustments which represented a $1,376
increase and a $3,116 decrease to reported net earnings in 1999 and 1998,
respectively. Accumulated other comprehensive income is represented on the
balance sheet as cumulative translation adjustments as of October 30, 1999 and
October 31, 1998.
SPARTECH CORPORATION
MANAGEMENT REPORT
To Our Shareholders
The financial statements of SPARTECH Corporation and subsidiaries were prepared
under the direction of management, which is responsible for their integrity and
objectivity. The statements have been prepared in conformity with generally
accepted accounting principles and, as such, include amounts based on informed
estimates and judgment of management.
Management has developed a system of internal controls, which is designed to
assure that the books and records accurately reflect the transactions of the
Company, and that its established policies and procedures are followed properly.
This system is augmented by written policies and procedures, and the selection
and training of qualified personnel.
Arthur Andersen LLP, independent public accountants, are engaged to provide an
objective audit of the financial statements of SPARTECH Corporation and issue
reports thereon. Their audit is conducted in accordance with generally accepted
auditing standards.
The Board of Directors, acting upon the advice and recommendations of the Audit
Committee, is responsible for assuring that management fulfills its
responsibilities in preparing the financial statements and for engaging the
independent public accountants with whom the Committee reviews the scope of the
audits and the accounting principles to be applied in financial reporting. The
Committee meets regularly with the independent public accountants and
representatives of management to review their activities and ensure that each is
properly discharging its responsibilities.
/s/Bradley B. Buechler /s/David B. Mueller /s/Randy C. Martin
Chairman, President Executive Vice President Vice President-Finance
and Chief Executive and Chief Operating and Chief Financial
Officer Officer Officer
REPORT OF INDEPENDENT ACCOUNTANTS
To SPARTECH Corporation
We have audited the accompanying consolidated balance sheet of SPARTECH
Corporation (a Delaware Corporation) and subsidiaries as of October 30, 1999 and
October 31, 1998, and the related consolidated statements of operations,
shareholders' equity, and cash flows for each of the three fiscal years in the
period ended October 30, 1999. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of SPARTECH Corporation and
subsidiaries as of October 30, 1999 and October 31, 1998, and the results of
their operations and their cash flows for each of the three fiscal years in the
period ended October 30, 1999 in conformity with generally accepted accounting
principles.
Arthur Andersen LLP
St. Louis, Missouri
December 7, 1999
FIVE YEAR SUMMARY
The following table sets forth selected financial data for each of the most
recent five fiscal years
1999 1998 1997 1996 1995
(Dollars in Thousands, except per share amounts)
SUMMARY OF OPERATIONS
Net Sales $767,873 $653,855 $502,715 $391,348 $352,273
Gross Profit $136,962 $111,215 $82,215 $60,572 $49,879
Depreciation and $23,222 $18,530 $11,548 $7,211 $5,798
Amortization
Operating Earnings $87,707 $69,728 $49,701 $34,492 $24,604
Interest and Preferred $16,198 $13,602 $8,393 $5,062 $4,960
Distributions
Net Earnings $43,071 $33,720 $25,493 $18,317 $14,534
PER SHARE INFORMATION
Earnings Per Share - $ 1.48 $ 1.18 $ .92 $ .74 $ .60
Diluted
Dividends Declared Per Share $ .28 $ .24 $ .20 $.15 $ .09
Book Value Per Share $ 6.98 $ 5.72 $ 4.85 $4.26 $ 3.09
BALANCE SHEET INFORMATION
Working Capital $77,698 $72,204 $63,429 $54,261 $45,108
Total Debt $230,309 $254,220 $ $98,466 $59,510
142,614
Total Assets $625,401 $533,309 $358,803 $288,960 $178,329
Cash Flow from Operations $76,547 $64,546 $ 48,390 $23,160 $16,487
Capital Expenditures $24,692 $17,859 $ 12,172 $9,566 $10,015
Shareholders' Equity $190,042 $153,596 $128,389 $112,395 $72,128
Market Value of Equity $779,743 $483,501 $420,377 $290,405 $148,876
Ratios / Other Data
Gross Margin 17.8% 17.0% 16.4% 15.5% 14.2%
Operating Margin 11.4% 10.7% 9.9% 8.8% 7.0%
Effective Tax Rate 39.8% 39.9% 38.3% 37.8% 26.0%
Total Debt to Capitalization 49.0% 62.3% 52.6% 46.7% 45.2%
Return on Average Equity 25.1% 23.9% 21.2% 20.0% 22.3%
Number of Employees 3,350 2,700 2,125 1,800 1,200
Weighted Average Shares 29,982 28,609 27,838 24,874 24,111
Outstanding - Diluted
INVESTOR INFORMATION
Annual Shareholders' Meeting
SPARTECH's Annual Shareholders' Meeting will be held on Wednesday, March 8, 2000
at Pierre Laclede Center, 7701 Forsyth Blvd., Clayton, MO at 10:00 a.m. A
formal notice of the Meeting, together with a Proxy Statement, will be mailed
before the meeting to shareholders entitled to vote.
Common Stock and Transfer Agent
As of January 1, 2000, there were approximately 6,000 shareholders of the
Company's common stock. The Company's Registrar and Transfer Agent is
ChaseMellon Shareholder Services LLC, 85 Challenger Overpeck Center, Ridgefield
Park, New Jersey 07660. SPARTECH Corporation's common stock is traded on the
New York Stock Exchange under the symbol "SEH." Quarterly stock prices for
fiscal years 1999 and 1998 and year-ends 1996 to 1999 are shown to the left.
Dividend Reinvestment Plan and Report on Form 10-K
A Dividend Reinvestment Plan is available to shareholders of the Company,
allowing for the automatic investment of cash dividends and direct cash
purchases of SPARTECH common stock. For details on the Plan, please contact the
Company's Registrar and Transfer Agent, ChaseMellon Shareholder Services at
(888) 213-0965. In addition, the Company will provide, without charge to any
shareholder, a copy of its 1999 Report on Form 10-K as filed with the Securities
and Exchange Commission. Requests should be directed to SPARTECH Investor
Relations at (314) 721-4242 or via the internet at http://www.spartech.com
Research and Informational Reports
Research and informational reports on SPARTECH Corporation are available from
the following companies and individuals by calling SPARTECH Investor Relations
at (314) 721-4242 or the listed companies direct at the numbers shown below:
First Analysis - Allan Cohen (312) 258-1400
Janney Montgomery Scott Inc. - Chris Crooks (215) 665-4446
Tucker Anthony Cleary Gull - Gary Prestopino (312) 466-4869
Sidebar Bar Chart
1999 Quarterly Common Stock Prices
1st Quarter = $17 5/8 to $24 3/8
2nd Quarter = $20 to $25 3/8
3rd Quarter = $21 1/4 to $32 1/2
4th Quarter = $26 7/8 to $30 5/16
Sidebar Bar Chart
1998 Quarterly Common Stock Prices
1st Quarter = $14 3/4 to $17 9/16
2nd Quarter = $16 3/8 to $23 1/8
3rd Quarter = $19 1/16 to $22 7/8
4th Quarter = $14 3/4 to $19
Sidebar Bar Chart
1996-1999 Year-End Common Stock Price
1996 = $11
1997 = $15 7/8
1998 = $18
1999 = $28 5/8
Sidebar Bar Chart
1996-1999 Common Stock Dividends
1996 = 15 cents
1997 = 20 cents
1998 = 24 cents
1999 = 28 cents