SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-Q (Mark One) X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended April 30, 1994 or _____ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number 1-5911 SPARTECH CORPORATION (Exact name of registrant as specified in its charter) DELAWARE 43-0761773 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 7733 Forsyth Boulevard, Suite 1450, Clayton, Missouri, 63105 (address of principal executive offices) (314) 721-4242 (Registrant's telephone number, including area code) Indicate by checkmark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No _____ Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class Outstanding as of April 30, 1994 Common Stock, $.75 par value per share 8,263,547 SPARTECH CORPORATION AND SUBSIDIARIES INDEX April 30, 1994 PART I. FINANCIAL INFORMATION PAGE CONSOLIDATED CONDENSED BALANCE SHEET - April 30, 1994 and October 30, 1993 3 CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS - for the thirteen and twenty-six weeks ended April 30, 1994 and May 1, 1993 4 CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS - for the twenty-six weeks ended April 30, 1994 and May 1, 1993 5 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS 6 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 11 PART II. OTHER INFORMATION 13 SIGNATURES 14 SPARTECH CORPORATION AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEET (Dollars in thousands, except per share amounts) ASSETS April 30, Oct. 30, 1994 1993 (unaudited) Current Assets Cash $ 1,417 $ 1,449 Accounts and notes receivable, net 36,891 32,723 Inventories 23,462 20,677 Prepayments and other 2,664 1,369 Total Current Assets 64,434 56,218 Plant and Equipment, Net 44,769 37,637 Goodwill 21,365 18,506 Other Assets 990 1,833 $131,558 $114,194 LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities Current maturities of long-term debt $ 4,000 $ 3,000 Accounts payable 28,903 21,944 Accrued liabilities 7,483 6,242 Total Current Liabilities 40,386 31,186 Senior Long-Term Debt, Less Current Maturities 28,816 26,283 9% Convertible Subordinated Debentures 10,134 10,134 Other Liabilities 675 550 Total Long-Term Liabilities 39,625 36,967 Shareholders' Equity 6% Cumulative Convertible Preferred Stock, 776,700 shares issued and outstanding ($50 per share liquidation value) 777 777 Common stock, 8,326,296 shares issued 6,245 6,245 Contributed capital 73,053 73,258 Retained deficit (28,288) (32,151) Treasury stock, at cost, 62,749 shares in 1994 and 453,059 shares in 1993 (240) (2,088) Total Shareholders' Equity 51,547 46,041 $131,558 $114,194 The accompanying notes are an integral part of this financial statement. SPARTECH CORPORATION AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS (Unaudited and dollars in thousands, except per share amounts) THIRTEEN TWENTY-SIX WEEKS ENDED WEEKS ENDED April 30, May 1, April 30, May 1, 1994 1993 1994 1993 Revenues $64,350 $47,410 $113,508 $85,291 Costs and Expenses Cost of sales 54,437 39,498 95,659 70,665 Selling and administrative 4,815 4,198 8,824 7,715 Depreciation and amortization 1,107 1,007 2,090 1,981 60,359 44,703 106,573 80,361 Operating Earnings 3,991 2,707 6,935 4,930 Interest 795 825 1,466 1,642 Earnings Before Income Taxes 3,196 1,882 5,469 3,288 Provision for Income Taxes Federal 200 - 200 - State 200 100 370 230 Net Earnings 2,796 1,782 4,899 3,058 Preferred Stock Accretion 518 489 1,036 978 Net Earnings Applicable to Common Shares $ 2,278 $ 1,293 $ 3,863 $ 2,080 Net Earnings Per Common Share: Primary $ .25 $ .14 $ .42 $ .24 Fully diluted $ .12 $ .08 $ .21 $ .14 The accompanying notes are an integral part of this financial statement. SPARTECH CORPORATION AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS (Unaudited and dollars in thousands) TWENTY-SIX WEEKS ENDED April 30, May 1, 1994 1993 CASH FLOW FROM OPERATING ACTIVITIES Net earnings $ 4,899 $ 3,058 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 2,090 1,981 Change in current assets and liabilities (1,368) 1,279 Other, net 473 (342) Net cash provided by operating activities 6,094 5,976 CASH FLOW FROM INVESTING ACTIVITIES Capital expenditures (3,984) (1,377) Retirement of assets, net 63 27 Business acquisition: Plant equipment and intangibles (8,160) (2,330) Net working capital & debt assumed 1,320 - Proceeds from note receivable 495 - Net cash used for investing activities (10,266) (3,680) CASH FLOW FROM FINANCING ACTIVITIES Net borrowings under revolving credit loan 6,533 844 Principal payments on term loan (3,000) (3,000) Stock options exercised 607 47 Net cash provided by (used for) financing activities 4,140 (2,109) INCREASE (DECREASE) IN CASH (32) 187 CASH AT BEGINNING OF PERIOD 1,449 1,175 CASH AT END OF PERIOD $ 1,417 $ 1,362 The accompanying notes are an integral part of this financial statement. SPARTECH CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited and dollars in thousands, except per share amounts) NOTE A - Basis of Presentation The accompanying consolidated financial statements include the accounts of Spartech Corporation and its wholly-owned subsidiaries (the "Company"). These financial statements have been prepared on a condensed basis and, accordingly, certain information and note disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. In the opinion of management, the financial statements contain all adjustments (consisting solely of normal recurring adjustments) and disclosures necessary to make the information presented therein not misleading. These financial statements should be read in conjunction with the consolidated financial statements and accompanying footnotes thereto included in the Company's October 30, 1993 Annual Report on Form 10-K. 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. Operating results for the thirteen and twenty-six weeks ended April 30, 1994 and May 1, 1993 are seasonal in nature and are not necessarily indicative of the results expected for the full year. NOTE B - Inventories Inventories are valued at the lower of cost (first-in, first-out) or market. Inventories at April 30, 1994 and October 30, 1993 are comprised of the following components: 1994 1993 Raw materials $16,112 $14,518 Finished goods 7,350 6,159 $23,462 $20,677 NOTE C - Income Taxes Effective with the beginning of fiscal 1994, the Company adopted Statement of Financial Accounting Standards No. 109 ("SFAS No. 109"), "Accounting for Income Taxes", which requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the years in which the differences are expected to reverse. The adoption of SFAS No. 109 resulted in no cumulative effect on operations and, accordingly, prior year consolidated condensed financial statements were not restated. SPARTECH CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited and dollars in thousands, except per share amounts) Under the provisions of SFAS No. 109, the Company recorded, as of October 31, 1993, net deferred income tax assets aggregating approximately $4,000, which represented the tax benefits of the tax net operating loss and investment tax credit carryforwards offset by the net tax liabilities resulting from temporary differences (consisting principally of depreciation timing differences) in the tax bases of assets and liabilities versus their financial accounting bases. As of April 30, 1994, this net deferred income tax asset was approximately $2,300, reflecting the partial utilization of the tax net operating loss for the first six months of fiscal year 1994. Due to the uncertainty regarding the ability to utilize future tax benefits, the Company recorded a valuation allowance at October 31, 1993, of approximately $4,000 with approximately $2,300 remaining as of April 30, 1994. The partial utilization of existing operating loss carryforwards resulted in no regular tax provision for Federal income taxes being recognized for the thirteen and twenty-six weeks ended April 30, 1994, and May 1, 1993. However, due to the limitations on the use of net operating loss carryforwards in the computation of Federal alternative minimum tax, a $200 alternative minimum tax provision was recognized for the thirteen weeks and twenty-six weeks ended April 30, 1994. NOTE D - Earnings Per Share Primary net earnings per common share are computed based upon the weighted average number of common shares outstanding during each period after consideration of the dilutive effect of stock options and warrants. Such average shares were: Period Ended Thirteen Weeks Twenty-Six Weeks April 30, 1994 9,407,000 9,119,000 May 1, 1993 9,299,000 9,275,000 Fully diluted net earnings per common share assumes conversion of securities when the earnings per share result is dilutive. Assumed conversions increased the weighted average number of common shares outstanding by 14,275,000 for the thirteen and twenty-six weeks ended April 30, 1994 and May 1, 1993. For the computation of primary net earnings per common share, net earnings have been increased for an after-tax interest expense reduction as computed under the modified treasury stock method. For the computation of fully diluted net earnings per common share, net earnings have been further increased for the elimination of preferred stock accretion resulting from the assumed conversion of preferred stock. Net earnings increases for the thirteen and twenty-six weeks ended April 30, 1994 and May 1, 1993 were as follows: Thirteen Weeks Twenty-Six Weeks 1994 1993 1994 1993 Primary $ 35 $ 71 $ 91 $ 168 Fully Diluted $ 518 $ 489 $1,036 $ 978 SPARTECH CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited and dollars in thousands, except per share amounts) NOTE E - Interest and Income Tax Payments Cash paid for interest, net of amounts capitalized, and income taxes during the twenty-six weeks ended April 30, 1994 and May 1, 1993 were as follows: 1994 1993 Interest $1,434 $1,625 Income taxes $ 456 $ 308 NOTE F - Shareholders' Equity The authorized capital stock of the Company consists of 35 million shares of $.75 par value common stock and 4 million shares of $1 par value preferred stock. Preferred stock outstanding as of April 30, 1994 and October 30, 1993 consisted of the following series of 6% Cumulative Convertible Preferred Stock, which are convertible into the shares of common stock indicated and which carry the equivalent common share voting rights indicated prior to conversion: Preferred Number of Common Stock Equivalent Common Stock Preferred Shares Issuable Upon Share Voting Series Outstanding Conversion Rights Series L 373,500 6,884,987 1,721,247 Series M 343,200 6,289,998 1,572,500 Series N 60,000 1,099,650 274,913 These series of preferred stock were issued at an equivalent price of $50 per share as part of a debt-to-equity restructuring completed April 30, 1992. In total, the restructuring resulted in the exchange of $30,163 of the Company's subordinated debt for these issues of preferred stock and common stock. Dividends are payable on each series of preferred stock commencing April 30, 1995 at an annual rate of $3.00 per share; provided however, that in the event a cash dividend is not declared by the Company's Board of Directors, dividends shall be payable in shares of common stock based on a price of $5.00 per share of common stock. These series of preferred stock are not subject to mandatory redemption; however, they may be redeemed at the option of the Company for $50 per share from and after December 1, 1994 if certain conditions with respect to the market price of the Company's common stock have been met and, in any event, from and after December 1, 1999. The holders of these series of preferred stock are entitled to receive $50 per share, plus accrued but unpaid dividends, in the event of liquidation, dissolution or winding up of the Company. SPARTECH CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited and dollars in thousands, except per share amounts) The dividend terms of each series of preferred stock provide that dividends will not begin accruing until April 30, 1995. Due to the absence of a dividend requirement on these series of preferred stock, a noncash charge for the accretion of the preferred stock has been recognized. Such charges were: Period Ended Thirteen Weeks Twenty-Six Weeks April 30, 1994 $ 518 $1,036 May 1, 1993 $ 489 $ 978 The charge results in no net change in shareholders' equity, as the same amount charged to retained earnings each quarter is added back to contributed capital. NOTE G - Commitments and Contingencies On June 2, 1992, Mr. Lawrence M. Powers, former Chairman of the Board and Chief Executive Officer of the Company, filed a lawsuit in the United States District Court for the Southern District of New York against the Company and certain of its Directors and major shareholders. In the suit, Mr. Powers claims that, by reason of the Company's April 30, 1992 debt-to- equity restructuring (which he had previously, on April 13, 1992 voted in favor of as a Director) the Company should adjust his existing stock options, provide for the issuance of 167,744 additional shares of common stock to him and award to him attorney's fees and interest. Mr. Powers seeks judgment against the Company and the other defendants: (1) in excess of $13,000 plus punitive damages, (2) requiring the Company to issue him an additional 167,744 shares of common stock, (3) requiring an adjustment increasing his then outstanding options to purchase the Company's common stock from 1,871,201 shares to 4,080,000 shares, and (4) for attorney's fees and interest. In June, 1993, in responding to the Company's request for summary judgment, the Court ruled the Board of Director's decision to not adjust Mr. Powers' options was "final, binding and conclusive" unless Mr. Powers can establish the Board was not acting independently and that it could not have acted appropriately. Discovery was allowed to continue in this litigation. The Company believes Mr. Powers' litigation is without merit and is defending against it vigorously. NOTE H - Acquisition On February 2, 1994, the Company completed the acquisition of certain assets of Product Components, Inc. ("ProCom"). The purchase included two rigid plastic sheet and rollstock manufacturing plants, located in Richmond, Indiana and Clare, Michigan, along with various other assets of ProCom. The purchase price for ProCom's net assets, exclusive of working capital purchased, totaled $8,000 of which $7,000 was paid in cash, subject to post-closing adjustments. To facilitate the funding of the purchase, the Company amended its credit arrangement with Chemical Bank by increasing the limit on its revolving credit loan from $30,000 to $38,000. SPARTECH CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited and dollars in thousands, except per share amounts) The following summarizes unaudited pro forma consolidated results of operations for the twenty-six weeks ended April 30, 1994 and May 1, 1993, respectively, assuming this acquisition had been consummated as of the beginning of each period. The results are not necessarily indicative of what would have occurred had this acquisition been consummated as of the beginning of each period presented or of the future operations of the consolidated companies. PRO FORMA Twenty-Six Weeks Ended April 30, May 1, 1994 1993 Revenues $120,008 $ 98,291 Earnings Before Income Taxes $ 5,752 $ 3,848 Net Earnings $ 5,162 $ 3,583 Net Earnings Per Common Share: Primary $ .45 $ .30 Fully diluted $ .22 $ .16 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations Revenues for the thirteen and twenty-six weeks ended April 30, 1994 increased from the similar periods in 1993, primarily the result of sizable gains in pounds sold by the Company's rigid sheet & rollstock group. This group experienced sales volume increases in excess of 50% for the thirteen and twenty-six weeks ended April 30, 1994, over the similar periods of 1993. The majority of the gains in sales volume during these periods were obtained from our February 2, 1994 acquisition of certain assets of Product Components, Inc. (see "Financial Condition - Investing Activities" below for a further discussion of this acquisition) and from the sign/advertising, home improvement, food packaging, and transportation markets. The gains obtained in food packaging were the direct result of our late 1993 first quarter acquisition of a portion of Penda Corporation's custom extrusion division. Operating earnings for the thirteen and twenty-six weeks ended April 30, 1994 also increased from the similar periods in 1993. The gains in operating earnings were achieved through the increased sales volumes discussed above, containment of selling, general, and administrative expenses, and production efficiencies. These gains were partially offset as strong construction industry demands for PVC resulted in higher raw material costs at two of our units within the merchant compounding group. Interest expense for the thirteen and twenty-six weeks ended April 30, 1994 decreased from the similar periods in 1993, reflecting the lower interest rates obtained by the Company during the first six months of fiscal year 1994 compared to the first six months of fiscal 1993. This decrease in borrowing costs was partially offset by the additional borrowings incurred by the Company for the acquisition of certain assets of Product Components, Inc. ("ProCom"). In addition, during the second quarter of 1994, the Company fixed its interest rate on all of its senior bank debt at less than 6.25% through September of 1994, which is approximately 3/4% better than the rate incurred during the same period of fiscal 1993. This favorable rate will help offset the additional interest costs resulting from the ProCom acquisition. Financial Condition Operations Effective October 31, 1993 (Fiscal Year 1994), the Company adopted Statement of Financial Accounting Standards No. 109 ("SFAS No. 109"), "Accounting for Income Taxes." The adoption of SFAS No. 109 resulted in no cumulative effect on operations and, accordingly, prior year consolidated condensed financial statements were not restated. Reference is made to Note C, Income Taxes, in Item 1 of this report, which is incorporated herein by reference, for a further discussion on the adoption of SFAS No. 109. Investing Activities Capital expenditures for the twenty-six weeks ended April 30, 1994 increased significantly as compared to the same period of 1993. This increase was the direct result of the installation of a new PET line at the Company's Mankato, Minnesota plant during late January of 1994. The new line was necessary to keep up with the growing demand for the PET packaging market. In addition, the Second Phase of our strategic plan at Spartech Compounding's Kearny, New Jersey location began during 1994. This Phase, which includes the addition of a new compounding line, is anticipated to be completed by August of 1994. Once completed, the production capabilities at this operation will increase by more than 25%. Reference is made to Note H, Acquisition, in Item 1 of this report, which is incorporated herein by reference, for a discussion of the Company's February 2, 1994 acquisition of certain assets of Product Components, Inc. The Company has not incurred any significant capital expenditures in order to comply with the Clean Air Act Amendments of 1990. In addition, the Company does not anticipate such capital expenditures to be material in the future. Financing Activities The Company amended its credit arrangement with Chemical Bank by increasing the limit on its revolving credit loan from $30,000 to $38,000 to facilitate the funding of the acquisition of certain assets of ProCom (discussed in the referenced note above). The Company anticipates that cash flow from operations and the additional borrowing capacity provided under the Company's amended senior credit facility will be adequate to provide necessary funds for the balance of fiscal year 1994. PART II - OTHER INFORMATION Responses to Part II, Items 1, 2, 3, 4, and 5, are omitted because the requested information has been previously reported, the items are inapplicable or the answer is negative. Item 6 (a). Exhibits 11 Statement re Computation of Per Share Earnings Item 6 (b). Reports on Form 8-K A report on Form 8-K, dated February 2, 1994, relating to the acquisition of certain assets of Product Components, Inc., was filed with the Securities and Exchange Commission on February 15, 1994. SIGNATURES Pursuant to the requirements 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. SPARTECH CORPORATION (Registrant) Date: May 31, 1994 /s/ Bradley B. Buechler Bradley B. Buechler President and Chief Executive Officer (Principal Executive Officer) /s/ David B. Mueller David B. Mueller Vice President of Finance and Chief Financial Officer (Principal Financial and Accounting Officer) EXHIBIT 11 SPARTECH CORPORATION AND SUBSIDIARIES STATEMENT RE COMPUTATION OF PER SHARE EARNINGS (In thousands, except per share amounts) THIRTEEN WEEKS ENDED TWENTY-SIX WEEKS ENDED April 30, May 1, April 30, May 1, 1994 1993 1994 1993 NET EARNINGS Net Earnings $ 2,796 $ 1,782 $ 4,899 $ 3,058 Preferred stock dividend requirements (518) (489) (1,036) (978) Add: Interest savings, net of tax effect, on retirement of debt from the proceeds received from the exercise of options and warrants in excess of 20% limitation 35 71 91 168 Primary net earnings applicable to common shares 2,313 1,364 3,954 2,248 Add: Preferred stock dividend elimination resulting from the assumed conversion of preferred stock 518 489 1,036 978 Fully diluted net earnings applicable to common shares $ 2,831 $ 1,853 $ 4,990 $ 3,226 WEIGHTED AVERAGE SHARES OUTSTANDING Weighted average common shares outstanding 8,217 7,756 7,978 7,747 Add: Shares issuable from assumed exercise of options and warrants in excess of 20% limitation 1,190 1,543 1,141 1,528 Primary weighted average shares outstanding 9,407 9,299 9,119 9,275 Add: Shares issuable from assumed conversion of preferred stock 14,275 14,275 14,275 14,275 Fully diluted weighted average shares outstanding 23,682 23,574 23,394 23,550 NET EARNINGS PER SHARE Primary $ .25 $ .14 $ .42 $ .24 Fully Diluted $ .12 $ .08 $ .21 $ .14