EXHIBIT 13
PAGES 8-23 OF THE 1994 ANNUAL REPORT TO SHAREHOLDERS
PAGE 8 (PAGES 1-7 NOT USED)
MANAGEMENT'S DISCUSSION
FISCAL YEAR ENDED OCTOBER 29, 1994
Sales in 1994 increased significantly from the prior year due to
record
volumes generated by the Company's rigid sheet & rollstock group.
Our February
2, 1994 acquisition of certain assets of Product Components, Inc.
("ProCom")
accounted for 45% of this increase (See "Investing Activities" for
a further
discussion of this acquisition). The remaining gain came from
improved sales
to the spa, food packaging, and transportation markets. In
addition, sales
volume increases were achieved by our merchant compounding group,
primarily
the result of stronger demand from the recreational vehicle and
home appliance
industries.
Cost of sales increased significantly from the prior year but
remained
consistent when stated as a percentage of net sales. This
consistency was
achieved, despite higher material costs caused by the increase in
worldwide
demand for plastic resins, through the sale of higher margin
products and
increased production efficiencies.
Selling and administrative expense increased by nearly 19%,
primarily the
result of the ProCom acquisition and an increase in legal fees
associated with
the defense of the lawsuit discussed in Note G, Commitments and
Contingencies,
of the Consolidated Financial Statements appearing on page 18 of
this report,
which is incorporated herein by reference.
The increase in depreciation and amortization is the result of the
ProCom
acquisition and the capital expenditures incurred during 1994.
Operating
earnings, as a result of the above items, increased significantly
in 1994,
reflecting the improved levels of volume, the sale of higher margin
products,
and increased production efficiencies. Interest expense was
slightly lower in
Fiscal 1994 as our cash flow from operations more than offset the
increase in
debt levels due to the ProCom acquisition and increases in interest
rates
during the year.
FISCAL YEAR ENDED OCTOBER 30, 1993
Sales in 1993 increased over levels experienced in 1992, also
primarily the
result of a sizable gain in pounds sold by the Company's rigid
sheet &
rollstock group. Over a third of the volume increase resulted from
additional
sales generated from our first quarter 1993 acquisition of a
portion of Penda
Corporation's custom extrusion division. Reference is made to Note
J,
Acquisition, of the Consolidated Financial Statements appearing on
page 19 of
this report, which is incorporated herein by reference, for a
discussion of
this acquisition. The majority of the remaining gains were obtained
from our
successful efforts to manufacture new rigid sheet & rollstock
products for
customers in the spa, marine, and transportation markets. The
merchant
compounding group's sales volume in 1993 was comparable with that
of the prior
year.
Cost of sales, which increased from the levels of 1992, remained
constant as a
percentage of net sales.
Selling and administrative expense increased by 10% due to an
increase in the
provision for bad debts, as well as additional costs incurred to
support the
increase in sales volume.
Depreciation and amortization increased as a result of the Penda
acquisition
and all other capital expenditures incurred during 1993.
Operating earnings increased in 1993, reflecting the improved sales
volume
levels discussed above.
Interest expense decreased from 1992, reflecting the benefits from
the
Company's debt-to-equity restructuring, which was completed April
30, 1992
(See "Financing Activities" for a further discussion on the
Company's debt-to-
equity restructuring), and the Company's ability to reduce senior
debt by
approximately $5.5 million during 1993 due to the positive cash
flow generated
from operations.
FISCAL YEAR ENDED OCTOBER 31, 1992
Sales in 1992 increased significantly from the prior year,
principally the
result of increased sales volume in the Company's rigid sheet &
rollstock
group. This group experienced sizable sales gains in the home
improvement,
transportation, recreation, and food & medical packaging markets
during the
year. The merchant compounding group's sales volume in 1992 was
comparable
with that of the prior year.
Cost of sales, which increased from the levels of 1991, remained
constant as a
percentage of net sales.
Selling and administrative expense decreased significantly from the
previous
year as a result of the positive impact of certain administrative
cost
reductions, principally within the Company's corporate office.
Depreciation and amortization increased approximately 4% due to
capital
expenditures incurred during 1992.
Operating earnings increased significantly in 1992, reflecting the
improved
level of sales and the positive impact of certain administrative
cost
reductions discussed above.
Interest expense decreased from 1991, reflecting the benefits of
the Company's
debt-to-equity restructuring which was completed on April 30, 1992
(see
"Financing Activities" for a further discussion on the Company's
debt-to-
equity restructuring).
PAGE 9
GENERAL
The plastic resins used by the Company in their production process
are crude
oil or natural gas derivatives and are available from a number of
domestic and
foreign suppliers. Accordingly, the Company's raw materials are
only somewhat
affected by supply, demand and price trends of the petroleum
industry; pricing
of the resins tends to follow its own supply and demand equation
except in
periods of anticipated or actual shortages of crude oil or natural
gas. The
Company is not aware of any trends in the petroleum industry which
will
significantly affect its sources of raw materials in 1995.
The Company is subject to various laws governing employee safety
and Federal,
state and local laws and regulations governing the quantities of
certain
specified substances that may be emitted into the air, discharged
into
interstate and intrastate waters, and otherwise disposed of on and
off the
properties of the Company. The Company does not anticipate that
future
expenditures for compliance with such laws and regulations will
have a
material effect on its capital expenditures, earnings or
competitive position.
INFLATION
The effects of inflation have not been significant on the overall
operations
of the Company. None of the Company's sales are made pursuant to
fixed price,
long-term contracts. The Company has historically been successful
in
compensating for inflationary costs through increased selling
prices and/or
increased productivity and related efficiencies. The Company
anticipates this
trend to continue in the future.
CASH FLOW FROM OPERATIONS
The sizable improvement in cash flow from operations reflects the
Company's
increase in profitability during 1994 and 1993 and the better
management of
working capital. During 1994, the Company paid approximately
$1,043,000 in
income taxes, primarily state income taxes. As a result of net
operating loss
carryforwards, the Company anticipates paying only a minimal amount
of regular
Federal income tax during 1995.
INVESTING ACTIVITIES
Capital expenditures are primarily made to maintain and improve
productivity,
as well as to modernize and expand facilities. The Company
significantly
increased its level of capital expenditures in 1994 as compared to
the prior
year, with highlights including the installation of new production
lines at
our Spartech Plastics Mankato, Minnesota; McMinnville, Oregon; and
Arlington,
Texas plants along with numerous equipment upgrades at all of our
rigid sheet
& rollstock locations. In addition, the second phase of our upgrade
and
expansion plan at Spartech Compounding-Kearny was completed late in
1994 with
the installation of a new twin screw extruder and material handling
system.
During 1995, the Company anticipates capital expenditures of
approximately
$6,400,000. The primary component of these capital expenditures
will include
the upgrading of all facilities, in particular those operations
obtained
through our recent acquisitions of ProCom and Pawnee Industries,
Inc.
("Pawnee"), discussed below.
Reference is made to Note J, Acquisition, and Note K, Subsequent
Event, of the
Consolidated Financial Statements appearing on page 19 of this
report, which
is incorporated herein by reference, for a discussion on the
Company's
February 2, 1994 acquisition of certain assets of ProCom and the
November 1,
1994 acquisition of certain divisions of Pawnee.
The Company has not incurred any significant capital expenditures
in order to
comply with environmental laws and regulations, including the Clean
Air Act
Amendments of 1990. In addition, the Company does not anticipate
such capital
expenditures for continued compliance to be significant in the
future.
FINANCING ACTIVITIES
The Company's primary source of external capital is a Revolving
Credit
Agreement with Chemical Bank. Reference is made to Note B,
Long-Term Debt, of
the Consolidated Financial Statements appearing on page 15 and 16
of this
report, which is incorporated herein by reference, for a discussion
of the
recent modifications to the credit facility and for the detail of
future debt
payment requirements. Reference is made to Note C, Debt-To-Equity
Restructuring, of the Consolidated Financial Statements appearing
on page 16
of this report, which is incorporated herein by reference, for a
discussion of
the Company's 1992 debt-to-equity restructuring.
The Company anticipates that cash flow from operations and the
additional
borrowing capacity provided under the refinanced credit facility
will be
adequate to provide the necessary funds for the next several years.
PAGE 10
SPARTECH CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(Dollars in thousands, except per share amounts)
OCTOBER 29,
OCTOBER 30,
ASSETS 1994
1993
Current Assets
Cash $1,752
$1,449
Accounts and notes receivable, less
allowance for doubtful accounts of
$1,415 in 1994 and $1,044 in 1993 40,493
32,723
Inventories 22,936
20,677
Prepayments and other 1,112
1,369
Total Current Assets 66,293
56,218
Plant and Equipment, Net 46,656
37,637
Goodwill 21,044
18,506
Debt Issuance Costs and Other 1,727
1,833
$135,720
$114,194
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Current maturities of long-term debt $2,750
$3,000
Accounts payable 28,403
21,944
Accrued liabilities 8,789
6,242
Total Current Liabilities 39,942
31,186
Senior Long-Term Debt, Less Current Maturities 26,285
26,283
9% Convertible Subordinated Debentures 10,134
10,134
Other Liabilities 1,126
550
Total Long-Term Liabilities 37,545
36,967
Shareholders' Equity
6% Cumulative Convertible Preferred Stock,
776,700 shares issued and outstanding
($50 per share liquidation value) 777
777
Common stock, 8,629,947 and 8,326,296 shares
issued in 1994 and 1993, respectively 6,472
6,245
Contributed capital 74,438
73,258
Retained deficit (23,449)
(32,151)
Treasury stock, at cost, 1,324 shares
in 1994 and 453,059 shares in 1993 (5)
(2,088)
Total Shareholders' Equity 58,233
46,041
$135,720
$114,194
The accompanying notes are an integral part of this financial
statement.
PAGE 11
SPARTECH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(Dollars in thousands, except per share amounts)
Fiscal Year
1994 1993
1992
Net Sales $256,593 $189,401
$168,800
Costs and Expenses
Cost of sales 216,417 158,561
141,221
Selling and administrative 19,344 16,271
14,779
Depreciation and amortization 4,422 4,000
3,622
240,183 178,832
159,622
Operating Earnings 16,410 10,569
9,178
Interest 3,125 3,350
4,495
Earnings Before Provision for Income Taxes 13,285 7,219
4,683
Provision for Income Taxes 2,450 503
463
Net Earnings 10,835 6,716
4,220
Preferred Stock Accretion/Requirements (2,133) (2,015)
(1,194)
Net Earnings Applicable to
Common Shares and Equivalents $8,702 $4,701
$3,026
Net Earnings Per Common Share
Primary $.97 $.54
$.42
Fully diluted $.46 $.30
$.21
The accompanying notes are an integral part of this financial
statement.
PAGE 12
SPARTECH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(Dollars in thousands)
Total
Preferred CommonContributed Retained
TreasurySharehldrs'
Stock Stock Capital Deficit Stock Equity
Balance
at 11/02/91 $ 415 $3,282 $44,065$(39,878)$(2,179)
$5,705
Debt-to-equity restructuring:
Issuance of 3,200,960 shares of
common stock - 2,401 7,185 - -
9,586
Exchange of 415,000 shares of
preferred stock (415) - (18,260) - -
(18,675)
Issuance of 776,700 shares of
preferred stock 777 - 36,224 - -
37,001
Redeemable preferred stock conversion
into 750,000 shares of
common stock - 562 938 - -
1,500
Preferred stock requirements/
accretion - - 978 (1,194) -
(216)
Net earnings - - - 4,220 -
4,220
Balance at 10/31/92 $ 777 $6,245 $71,130$(36,852)$(2,179)
$39,121
Stock options exercised - - 113 - 91
204
Preferred stock accretion - - 2,015 (2,015) -
-
Net earnings - - - 6,716 -
6,716
Balance at 10/30/93 $ 777 $6,245 $73,258$(32,151)$(2,088)
$46,041
Stock options exercised - 227 (953) - 2,083
1,357
Preferred stock accretion - - 2,133 (2,133) -
-
Net earnings - - - 10,835 -
10,835
Balance at 10/29/94 $ 777 $6,472 $74,438$(23,449) $(5)
$58,233
The accompanying notes are an integral part of this financial
statement.
PAGE 13
SPARTECH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollars in thousands)
Fiscal Year
1994 1993
1992
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings $10,835 $ 6,716
$ 4,220
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation and amortization 4,422 4,000
3,622
Change in current assets and liabilities,
net of effects of acquisitions
Accounts and notes receivable (4,594) (4,409)
(2,999)
Inventories (1,325) (1,154)
667
Prepayments and other 257 (418)
138
Accounts payable 2,726 5,642
(444)
Accrued liabilities 846 583
(1,782)
Other, net 191 (315)
(296)
Discontinued operations - -
(262)
Net cash provided by operating
activities 13,358 10,645
2,864
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (8,152) (2,610)
(2,327)
Retirement of assets, net 333 27
105
Business acquisitions (6,840) (2,487)
-
Proceeds from note receivable 495 -
-
Discontinued operations - -
1,174
Net cash used for investing activities (14,164) (5,070)
(1,048)
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings (payments) on revolving loan(6,248) (505)
(7,044)
Term loan additions 9,000 -
7,050
Principal payments on term loan (3,000) (5,000)
(500)
Issuance of mandatory redeemable
preferred stock - -
1,500
Financing issuance costs - -
(1,776)
Stock options exercised 1,357 204
-
Discontinued operations - -
(795)
Net cash provided by (used for) financing
activities 1,109 (5,301)
(1,565)
INCREASE IN CASH 303 274
251
CASH AT BEGINNING OF YEAR 1,449 1,175
924
CASH AT END OF YEAR $1,752 $ 1,449
$ 1,175
The accompanying notes are an integral part of this financial
statement.
PAGE 14
SPARTECH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
NOTE A - SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying consolidated financial statements include the
accounts of
SPARTECH Corporation and its wholly-owned subsidiaries (the
"Company"). The
Company's fiscal year ends on the Saturday closest to October 31.
Fiscal years
1994, 1993 and 1992 each include 52 weeks. All significant
intercompany
transactions have been eliminated. Inventories
Inventories are valued at the lower of cost (first-in,
first-out) or
market.
Costs of finished goods include materials, labor and overhead.
Inventories at
October 29, 1994 and October 30, 1993 are comprised of the
following
components:
1994 1993
Raw materials $16,171 $14,518
Finished goods 6,765 6,159
$22,936 $20,677
Plant and Equipment
Plant and equipment are carried at cost. Depreciation is
provided on a
straight-line basis over the estimated 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 being reflected in
operations.
Plant and equipment consist of the following at October 29,
1994 and
October 30,
1993:
1994 1993
Land $ 4,326 $ 4,307
Buildings and leasehold
improvements 13,766 12,423
Machinery and equipment 50,023 39,175
Furniture and fixtures 2,314 2,068
70,429 57,973
Less accumulated depreciation 23,773 20,336
Plant and equipment, net $46,656 $37,637
Goodwill
Goodwill, representing the excess of the purchase price over
the fair
value of
net assets acquired, is being charged against operations on a
straight-line
basis over 40 years. Amortization amounted to $622, $563 and $537
in 1994,
1993
and 1992, respectively.
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
In 1994, the Company adopted SFAS No. 109, "Accounting for
Income Taxes."
Under SFAS No. 109, 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. 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. SFAS No.
109 requires an assessment, which includes anticipating future
income, in
determining the likelihood of realizing deferred tax assets. The
adoption of
SFAS No. 109 resulted in no cumulative effect on operations and,
accordingly,
prior year consolidated financial statements were not restated.
The Company previously followed SFAS No. 96 in accounting for
income
taxes, under which only reversing temporary differences were
considered when
recording the deferred tax assets and liabilities.
PAGE 15
Earnings Per Share
Primary Net Earnings Per Share is 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
8,985,000, 9,163,000 and 8,309,000 for 1994, 1993 and 1992,
respectively.
Fully Diluted Net Earnings Per 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 14,449,000,
14,275,000
and 10,677,000 for 1994, 1993 and 1992, respectively.
For the computations of Primary Net Earnings Per Share, net
earnings
applicable to common shares and equivalents 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
Share, net
earnings applicable to common shares and equivalents have been
increased for
the elimination of preferred stock accretion from the assumed
conversion of
preferred stock and for the after-tax interest expense reduction as
computed
under the modified treasury stock method, when applicable. The
primary and
fully diluted increases to net earnings applicable to common shares
and
equivalents for the fiscal years 1994, 1993 and 1992 are as
follows:
1994 1993 1992
Primary $74 $300 $462
Fully diluted $2,133 $2,315 $978
Reclassifications
Certain prior year amounts have been reclassified to conform
to the
current year presentation.
NOTE B - LONG-TERM DEBT
Long-term debt is comprised of the following:
1994 1993
Revolving Credit Loan due
April 30, 1998 $16,035 $22,283
Term Loan due in quarterly install-
ments through April 30, 1998 13,000 7,000
9% Convertible Subordinated
Debentures due 1999 10,134 10,134
Total 39,169 39,417
Less current maturities 2,750 3,000
Total long-term debt $36,419 $36,417
On September 28, 1994, the Company entered into an Amended and
Restated
Loan Agreement (the "Credit Facility") with Chemical Bank
("Chemical"). Under
this Credit Facility, the Revolving Credit Loan commitment provides
for
borrowings of up to $37,000 based on specified levels of
receivables and
inventories, and a Term Loan commitment of $13,000.
On November 1, 1994, the Company acquired certain divisions of
Pawnee
Industries, Inc. (see Note K, Subsequent Event, for a discussion on
this
acquisition). To facilitate the funding of this purchase, the
Company amended
its Credit Facility effective November 1, 1994 by increasing the
commitment on
its Revolving Credit Loan to $47,000 and increasing its Term Loan
commitment by
$5,000.
The Term Loan is due in quarterly payments of $500 to $1,000,
commencing
on November 1, 1994, with the remaining principal balance to be
paid in full on
April 30, 1998. Both the Revolving Credit Loan and Term Loan are
secured by
receivables, inventories and all of the property of the Company.
Interest on
these loans is payable at a rate chosen by the Company of either
Chemical's
prime rate plus 0.25% or the Adjusted LIBO rate plus 1.75%. As of
October 29,
1994, Chemical's Prime rate was 7.75% and the six month Adjusted
LIBO rate was
6.0%.
The 9% Convertible Subordinated Debentures ("Debentures")
issued in April
1987, may be converted into common stock at a price of $8.28 per
share at any
time prior to maturity. Annual sinking fund payments, sufficient
to annually
retire 15% of the aggregate principal amount of the Debentures
issued, adjusted
for conversions of the Debentures, will commence April 15, 1997 and
continue
through April 15, 1998, until 75% of the aggregate principal amount
of the
Debentures has been paid. The Debentures may be redeemed early, at
the
Company's option, upon the payment of a premium.
PAGE 16
Scheduled maturities of long-term debt, by fiscal year, are as
follows:
Senior Subordinated
Bank Debt Debt
1995 $2,750 $--
1996 3,000 --
1997 4,000 134
1998 19,285 3,750
1999 -- 6,250
$29,035 $10,134
Under certain borrowing agreements, the Company is required to
maintain
specified earnings levels, ratios of working capital, interest
coverage,
tangible net worth, and indebtedness, as therein defined, and is
limited with
respect to payment of cash dividends, asset disposal, investments,
and capital
expenditures.
NOTE C - DEBT-TO-EQUITY RESTRUCTURING
On April 30, 1992, the Company completed a debt-to-equity
restructuring
which resulted in the exchange of $30,163 of the Company's
subordinated debt
for new issues of preferred and common stock. The holders of an
aggregate of
$10,003 of the Company's 9% Convertible Subordinated Debentures
exchanged their
debentures, plus accrued but unpaid interest, for 320 shares of
common stock
for every one thousand dollar face value debenture. In addition,
the holders
of the Company's 11.78% Subordinated Convertible Note and 11%
Subordinated
Notes exchanged such notes for 343,200 shares of Series M 6%
Cumulative
Convertible Preferred Stock and 60,000 shares of Series N 6%
Cumulative
Convertible Preferred Stock. These series of preferred stock were
issued at an
equivalent issue price of $50 per share.
As part of the restructuring, the holder of all the shares of
the
Company's Series K 7% Cumulative Convertible Preferred Stock
exchanged such
preferred stock for 373,500 shares of Series L 6% Cumulative
Convertible
Preferred Stock at an equivalent issue price of $50 per share. In
addition,
the holder purchased 30,000 shares of Series O 6.5% Cumulative
Convertible
Preferred Stock for $1,500, which was subsequently converted into
750,000
shares of common stock on October 14,1992.
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. The
aggregate
accretion to be recognized on each issuance of preferred stock,
along with the
accretion charges incurred during fiscal years 1994, 1993 and 1992
are as
follows:
Preferred
Stock Aggregate
Series Accretion 1994 1993 1992
Series L $2,995 $1,025 $968 $470
Series M 2,752 943 891 432
Series N 481 165 156 76
Total $6,228 $2,133 $2,015 $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.
See Note D, Shareholders' Equity, for a description of the
dividend
provisions, convertible features, voting rights, and liquidation
rights
associated with the preferred stock issued as part of the
debt-to-equity
restructuring.
NOTE D - 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 October 29, 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 shown below 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
PAGE 17
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. As discussed in Note C, Debt-To-Equity Restructuring,
these
series of preferred stock were issued as part of a debt-to-equity
restructuring
completed April 30, 1992.
NOTE E - INCOME TAXES
As discussed in Note A, Significant Accounting Policies, the
company
adopted SFAS No. 109, "Accounting for Income Taxes", effective
October 31,
1993. The provision for income taxes for fiscal years 1994, 1993
and 1992 is
comprised of the following:
1994 1993
1992
Federal:
Current $-- $--
$--
Deferred 4,488 2,466
1,618
State 1,000 503
463
5,488 2,969
2,081
Utilization of operating loss carryfowards (3,038) (2,466)
(1,618)
Provision for income taxes $2,450 $503
$463
The income tax provision on total earnings of the Company
differs from the
amounts computed by applying the U.S. Federal tax rate of 35% in
1994 and 34%
in 1993 and 1992 as follows:
1994 1993
1992
Federal income taxes at statutory rate $4,650 $2,454
$1,592
State income taxes, net of applicable
Federal income tax benefits 650 332
306
Goodwill amortization 188 183
183
Operating loss carryforwards (3,038) (2,466)
(1,618)
$2,450 $503
$463
At October 29, 1994, the Company had deferred tax assets of
approximately
$7,800 and deferred tax liabilities of approximately $7,800. The
principal
components of the deferred tax assets and liabilities consisted of
the
following:
Deferred tax assets:
Net operating loss carryforwards $5,700
Bad debt reserves 485
Inventory 395
Tax credit carryforwards 600
Accrued liabilities, not deductible until paid 620
$7,800
Deferred tax liabilities:
Depreciation $7,800
At October 29, 1994, the Company had net operating loss
carryforwards for
Federal income tax purposes of approximately $16,000 which are
available to
offset future Federal taxable income expiring in the years 2001
through 2007.
The Company also has alternative minimum tax credits of $380 and
investment tax
credit carryfowards of approximately $220 expiring through 2001.
All of the
foregoing are subject to the interaction of any alternative minimum
tax
calculations and review by the Internal Revenue Service.
NOTE F - STOCK OPTION PLANS AND COMMON STOCK WARRANTS
The Company has an Incentive Stock Option Plan ("Incentive
Plan") and
Restricted
Stock Option Plan ("Restricted Plan") for executive officers and
key employees.
The maximum number of shares which may be issued under the
Incentive Plan is
1,000,000. The minimum option price is the fair market value per
share at the
date of grant, which may be paid on exercise in Company shares.
PAGE 18
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. 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 an administrative
committee of
the Board of Directors.
Additional options, which have been issued outside the plans
discussed
above, totaled 390,000 at October 29, 1994. These additional
options, issued
outside the plans, are exercisable at prices ranging from $1.625 to
$5.00 per
share and expire at various dates through 2000.
Information with respect to options granted, all presently
exercisable,
under the Incentive and Restricted Plans for fiscal years 1994,
1993 and 1992
follows (in thousands, except exercise price range per share):
Options Options
Exercise Price
Beginning Exercised/ End ofRange Per Share
of Year Granted Canceled Year At
End of Year
Fiscal 1994
Incentive Plan 77 95 23 149
$3.00-$4.38
Restricted Plan 1,956 170 158 1,968
$1.25-$5.00
Fiscal 1993
Incentive Plan 62 66 51 77
$3.00-$4.00
Restricted Plan 2,056 - 100 1,956
$1.25-$5.00
Fiscal 1992
Incentive Plan 104 10 52 62
$1.63-$4.00
Restricted Plan 1,696 360 - 2,056
$1.25-$5.00
NOTE G - COMMITMENTS AND CONTINGENCIES
The Company conducts certain of its operations in facilities
under
operating leases and has no material capital lease commitments.
Rental expense
for 1994, 1993 and 1992 was $2,273, $1,670, and $1,549,
respectively, which
includes $328 in 1992 of rental expense paid to the former owners
(one of whom
was an employee during 1992) of the Company's Spartech Plastics'
Western Region
facility.
Future minimum lease payments under all non-cancelable
operating leases
are as follows:
1995 $1,600
1996 1,178
1997 754
1998 598
1999 462
2000 and thereafter 552
$5,144
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 the litigation, however the Company
believes that
Mr. Powers' litigation is without merit and is defending against it
vigorously.
PAGE 19
NOTE H - CASH FLOW INFORMATION
Supplemental information on cash flows and noncash
transactions is as
follows:
Fiscal Year
1994 1993
1992
Cash paid during the year for:
Interest (net of amounts capitalized) $2,974 $3,220
$4,378
Income taxes $1,043 $394
$380
Schedule of noncash transactions:
Business acquisitions -
Fair value of assets acquired $12,274 $2,487
$--
Liabilities assumed (5,434) --
--
Total cash paid for the net assets acquired $6,840 $2,487
$--
NOTE I - DISCONTINUED OPERATIONS
In Fiscal 1992, the Company completed its disposition of the
polyethylene
film segment. On March 11, 1992, the stock of the Brooklyn, New
York facility
was sold. Under the terms of the sale, the buyer assumed the
operation's bank
debt and trade credit obligations and signed a long-term lease with
a purchase
option on the real estate and building. No gain or loss resulted
from this
sale as provisions were made in prior years to reduce this segment
to its net
realizable value. The net book value of the real estate and
building has been
reclassified into Plant and Equipment in the accompanying
Consolidated Balance
Sheet.
The Monroe, Louisiana facility was shutdown during September
of 1991. All
of the equipment has been sold, and the real estate and building,
which are
owned by the Company, have been leased to an independent third
party. The net
book value of the real estate and building has been reclassified
into Plant and
Equipment in the accompanying Consolidated Balance Sheet.
NOTE J - ACQUISITION
On February 2, 1994, the Company acquired certain assets of
Product
Components, Inc. ("ProCom"). The purchase included two rigid
plastic sheet &
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 totaled $8,160, subject to post-closing
adjustments.
Approximately $6,800 of this purchase price was paid in cash, while
the
remaining balance represented the net liabilities assumed by the
Company. The
acquisition has been accounted for by the purchase method, and
accordingly, the
results of operations of ProCom are included in the Company's
Consolidated
Statement of Operations from the date of acquisition. 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. Pro forma information with respect
to this
acquisition is presented below under Note K, Subsequent Event.
On January 8, 1993, the Company purchased a portion of Penda
Corporation's
Custom Extrusion Division. The acquisition price and installation
costs for
both the equipment and business purchased was less than $2,500 in
cash and was
funded out of operating cash flow, paid in installments, as the
equipment was
delivered. Installation of the four extrusion lines into two of the
Company's
existing rigid sheet & rollstock facilities was completed in early
May of 1993.
NOTE K - SUBSEQUENT EVENT
On November 1, 1994, the Company acquired Pawnee Industries,
Inc.'s
("Pawnee") Extrusion and Color Divisions. The purchase included two
rigid
plastic sheet & rollstock manufacturing plants (Extrusion
Division), located in
Wichita, Kansas and Paulding, Ohio, along with a color concentrate
manufacturing plant (Color Division) located in Goddard, Kansas.
The purchase
price for Pawnee's net assets, exclusive of working capital
purchased, totaled
$15,000, subject to post-closing adjustments. In addition, the
Company paid
approximately $10,000 for working capital assets (inventory and
receivables).
The following summarizes unaudited pro forma consolidated
results of
operations for the fiscal years ended October 29, 1994 and October
30, 1993,
assuming the ProCom (discussed in Note J, Acquisition) and Pawnee
acquisitions
had occured at the beginning of each fiscal year presented. The
results are not
necessarily indicative of what would have occured had these
transactions been
consummated as of the beginning of each fiscal year presented, or
of future
operations of the consolidated companies.
Pro Forma (Unaudited)
Fiscal Year Ended
1994 1993
Net Sales $324,658 $277,165
Earnings Before Income Taxes $15,478 $10,449
Net Earnings $12,639 $9,720
Net Earnings Per Common Share:
Primary $1.17 $.87
Fully diluted $.53 $.43
PAGE 20
MANAGEMENT AND AUDITORS' REPORTS
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 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 & Co., 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 the preparation of 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.
PRESIDENT, CHIEF EXECUTIVE
VICE PRESIDENT OF FINANCE AND CORPORATE CONTROLLER
AND CHIEF OPERATING OFFICER
CHIEF FINANCIAL OFFICER
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO SPARTECH CORPORATION
We have audited the accompanying consolidated balance sheet of
SPARTECH
Corporation (a Delaware Corporation) and subsidiaries as of October
29, 1994
and October 30, 1993, and the related consolidated statements of
operations,
shareholders' equity and cash flows for each of the three fiscal
years in the
period ended October 29, 1994. 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 29, 1994 and October 30, 1993, and the
results of
their operations and their cash flows for each of the three fiscal
years in the
period ended October 29, 1994 in conformity with generally accepted
accounting
principles.
St. Louis, Missouri
December 6, 1994
PAGE 21
INVESTOR INFORMATION
COMMON STOCK
SPARTECH Corporation's common stock is traded on the New York
Stock
Exchange under the symbol "SEH." The table below sets forth the
high and low
closing prices for the Company's common stock during each fiscal
quarter during
1993 and 1994.
Year 1993 1994
High Low High Low
Price Price Price Price
Quarter
1st 3 9/16 2 1/2 4 13/16 3 9/16
2nd 5 3 1/8 5 3/4 4 1/8
3rd 3 3/4 2 7/8 5 4 1/8
4th 4 1/16 3 1/8 6 4 1/8
There are approximately 6,000 shareholders of the Company's
common stock
as of January 1, 1995. For the previous five years, the Company
has not paid
cash dividends on its common stock, however, in December of 1994,
the Company's
Board of Directors announced their intent to declare a cash
dividend during
Fiscal 1995.
TRANSFER AGENT & REGISTRAR
The Company's transfer agent and registrar is Boatmen's Trust
Company, 510
Locust Street, St. Louis, Missouri 63101.
ANNUAL SHAREHOLDERS' MEETING
SPARTECH Corporation's Annual Shareholders' Meeting will be
held on
Wednesday, March 8, 1995 at the Pierre Laclede Conference Center,
7733 Forsyth
Boulevard, Clayton, Missouri 63105 at 10:00 a.m. A formal notice
of the
meeting, together with a Proxy, will be mailed before the meeting
to
shareholders entitled to vote.
QUARTERLY FINANCIAL INFORMATION
Certain unaudited quarterly financial information for the
years ended
October 29, 1994 and October 30, 1993 is as follows:
Quarter Ended
Fiscal
Jan April July October
Year
1994
Net Sales $49,158 $64,350 $69,765 $73,320
$256,593
Gross Profit 7,246 9,123 9,962 10,667
36,998
Net Earnings 2,103 2,796 3,075 2,861
10,835
Earnings Per Share
Primary .17 .25 .28 .27
.97
Fully diluted .09 .12 .13 .12
.46
1993
Net Sales $37,881 $47,410 $50,234 $53,876
$189,401
Gross Profit 5,994 7,129 7,161 7,414
27,698
Net Earnings 1,276 1,782 1,804 1,854
6,716
Earnings Per Share
Primary .10 .14 .15 .15
.54
Fully diluted .06 .08 .08 .08
.30
REPORT ON FORM 10-K
The Company will provide, without charge to any shareholder,
a copy of its
1994 Report on Form 10-K, as filed with the Securities and Exchange
Commission.
Written requests should be directed to: Investor Relations,
SPARTECH
Corporation, 7733 Forsyth Boulevard, Suite 1450, Clayton, Missouri
63105.
PAGE 22
SPARTECH CORPORATION AND SUBSIDIARIES
FIVE YEAR FINANCIAL SUMMARY
(Dollars in thousands, except per share amounts)
The following table sets forth selected financial data for each
of the most
recent five fiscal years. All data presented have been
retroactively restated,
giving effect to the discontinuance of the polyethylene film
segment.
FISCAL YEAR ENDED
1994 1993 1992 1991
1990
SUMMARY OF OPERATIONS
Net Sales $256,593 $189,401 $168,800 $155,710
$166,062
Cost of Sales and
Other Expenses 235,761 174,832 156,000 147,960
153,263
Depreciation and
Amortization 4,422 4,000 3,622 3,476
3,462
Nonrecurring Transactions - - - (3,500)
1,533
Operating Earnings-
Continuing Operations $16,410 $10,569 $9,178 $774
$10,870
Interest Expense $ 3,125 $3,350 $4,495 $6,201
$6,137
Net Earnings (Loss)
Continuing operations $ 10,835 $6,716 $4,220 $(5,714)
$4,233
Discontinued operations - - - (12,000)
(6,500)
Extraordinary gain - - - -
1,158
$ 10,835 $6,716 $4,220 $(17,714)
$(1,109)
PER SHARE INFORMATION
Primary
Continuing operations $.97 $.54 $.42 $(1.85)
$.80
Discontinued operations - - - (3.17)
(1.71)
Extraordinary gain - - - -
.30
$.97 $.54 $.42 $(5.02)
$(.61)
Fully Diluted
Continuing operations $.46 $.30 $.21 $(1.85)
$.80
Discontinued operations - - - (3.17)
(1.71)
Extraordinary gain - - - -
.30
$.46 $.30 $.21 $(5.02)
$(.61)
BALANCE SHEET INFORMATION
Working Capital $ 26,351 $ 25,032 $ 23,997 $ 22,299
$29,623
Long-Term Debt,
Less Current Maturities
Senior $ 26,285 $ 26,283 $ 30,783 $ 34,250
$40,835
Subordinated 10,134 10,134 10,134 40,297
40,297
$ 36,419 $ 36,417 $ 40,917 $ 74,547
$81,132
Shareholders' Equity $ 58,233 $ 46,041 $ 39,121 $5,705
$24,787
Total Assets $135,720 $114,194 $106,546 $108,752
$130,819
PAGE 23
John F. Arning, age 69, has been a member of the Board since
January 1992. He
is a retired partner of the law firm of Sullivan & Cromwell, having
held that
position from January 1957 through his retirement on January 1,
1992. Mr.
Arning also serves as a Director of Box Energy Corporation. His
term as
Director expires at the 1995 annual meeting.
Bradley B. Buechler, age 46, President, Chief Executive and Chief
Operating
Officer of the Company, has been a member of the Board since
February 1984. He
is a CPA and was with Arthur Andersen & Co. prior to joining the
Company in
1981. Mr. Buechler was the Corporate Controller and Vice President,
Finance of
the Company from 1981 to 1984. He became Chief Operating Officer of
the Company
in 1985, the Company's President in 1987 and Chief Executive
Officer effective
October 1, 1991. He is also the current Chairman of the Sheet
Producers
Division of the Society of Plastics Industry. His term as Director
expires at
the 1995 annual meeting.
Thomas L. Cassidy, age 66, has been a member of the Board since
February 1986.
He has been a Managing Director of The Trust Company of the West
and a senior
partner of TCW Capital since 1984. Prior to 1984, he was a
Managing Director
of The First Boston Corporation. Mr. Cassidy serves on the Board of
Directors
of Federal Paper Board Company, Inc., DeVlieg-Bullard, Inc., and
Holnam, Inc.
His term as Director expires at the 1997 annual meeting.
W.R. Clerihue, age 71, Chairman of the Board of the Company, has
been a member
of the Board since February 1990. He became Chairman of the Board
effective
October 1, 1991. Mr. Clerihue is currently a consultant and also a
Director of
Federal Paper Board Company, Inc., New York. He is retired from
Celanese
Corporation, with his last position at Celanese being Executive
Vice President
and Chief of Staff. His term as Director expires at the 1996 annual
meeting.
Francis J. Eaton, age 55, has been a member of the Board since
December 1989.
He is a polymer technologist and, after joining British Vita PLC in
1958,
became General Manager of the Industrial Polymer Division in 1971.
He was
appointed to British Vita's Board of Directors in 1975 and became
their Deputy
Chief Executive effective October 1, 1991. Mr. Eaton is a council
member of
the British Rubber Manufacturer's Association in the United
Kingdom. His term
as Director expires at the 1995 annual meeting.
David B. Mueller, age 41, Vice President, Chief Financial Officer,
and
Secretary of the Company, has been a member of the Board since
March 1994. He
is a CPA and was with Arthur Andersen & Co. from 1974 through 1981.
Mr. Mueller
was Corporate Controller of Apex Oil Company from 1981 through
1988. He became
Vice President and Chief Financial Officer of the Company in 1988
and was named
Secretary in 1991. His term as Director expires at the 1997 annual
meeting.
Jackson W. Robinson, age 52, has been a member of the Board since
March 1993.
He is President of Winslow Management Company, a separate operating
division of
Eaton Vance Management in Boston. He is also a Director of Jupiter
international Green Investment Trust, Jupiter European Investment
Trust, The
National Gardening Association, and a Trustee of Suffield Academy.
His term as
Director expires at the 1996 annual meeting.
Rodney H. Sellers, age 48, has been a member of the Board since
December 1989.
He is a Chartered Accountant in the United Kingdom. He joined
British Vita PLC
in 1971, was appointed to British Vita's Board of Directors in
1974, and on
July 1, 1990, he became their Chief Executive. His term as Director
expires at
the 1997 annual meeting.
Committees of the Board of Directors
Audit Committee Compensation Committee
John F. Arning John F. Arning
W.R. Clerihue Thomas L. Cassidy
Jackson W. Robinson W.R. Clerihue
Francis J. Eaton
Jackson W. Robinson