MANAGEMENT DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
Comparison Of Fiscal Years 1995 And 1994
Net sales in 1995 increased significantly from the prior year as a result of
sizable gains in pounds sold by both of the Company's operating groups. The
extruded sheet & rollstock group experienced sales volume increases of
approximately 35% over the prior year. The majority of this gain in sales
volume was obtained from our November 1, 1994, acquisition of Pawnee Industries,
Inc.'s ("Pawnee") Extrusion Division and our February 2, 1994, acquisition of
certain assets of Product Components, Inc. ("ProCom") (see "Investing
Activities" for a further discussion of these acquisitions) and from increased
product requests from the extruded sheet & rollstock group's sign/advertising,
home improvement, and material handling markets.
Net Sales
In millions of $'s
Bar Chart
1993-$189.4
1994-$256.6
1995-$352.3
In addition, the merchant compounding group's sales volume was up 48% due to
stronger demand from the specialty extrusion, office product, wallcovering, &
footwear industries and the group's newly acquired color concentrate facility.
Cost of sales increased from the levels of 1994, but remained consistent when
stated as a percentage of net sales. This consistency was achieved despite
higher material costs caused by the greater worldwide demand for plastic resins
and an increase in depreciation expense. Production efficiencies offset that
portion of the raw material increases not absorbed by customers. Depreciation
increased in 1995 as a direct result of the capital assets associated with the
Pawnee and ProCom acquisitions and the sizable capital expenditures incurred by
the Company during the past eighteen months (approximately $14.2 million).
Selling and administrative expense in 1995 increased by more than 22% from the
prior year, a direct result of the ProCom and Pawnee acquisitions. However,
through the Company's cost containment efforts, selling and administrative costs
as a percentage of net sales actually decreased during the year.
Operating earnings for fiscal year 1995 increased from 1994, both in dollars
and as a percentage of net sales. The increase was a result of the higher sales
volumes discussed above, production efficiencies, cost containment efforts, and
the benefits of the Pawnee and ProCom acquisitions.
Interest expense increased significantly in 1995, reflecting the additional
borrowings incurred by the Company for the acquisition of certain divisions of
Pawnee. In addition, prior to the refinancing in August of 1995, the Company's
borrowing rate was approximately two percentage points higher in 1995 compared
to 1994. The refinancing of a majority of the debt to a fixed interest rate
instrument is projected to reduce annual interest charges by approximately $1
million. Reference is made to Note B, Long-Term Debt, of the Consolidated
Financial Statements appearing on page 15 of this report.
As a result of the utilization of substantially all of the Company's net
operating loss carryforwards for financial statement purposes during 1994, the
income tax provision was substantially higher during 1995. The Company's
effective tax rate was 26% for 1995 and is projected to be approximately 38% in
1996. However, actual tax payments will be only 70-80% of the provision due to
the tax net operating loss carryforwards and depreciation timing differences.
Comparison Of Fiscal Years 1994 And 1993
Net sales in 1994 increased significantly from the prior year due to record
volumes generated by the Company's extruded sheet & rollstock group. The
acquisition of ProCom accounted for 45% of this increase. 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 through the sale of higher margin
products and the realization of production efficiencies. The increase in
depreciation is the result of the ProCom acquisition and the capital
expenditures incurred during 1994.
Selling and administrative expense in 1994 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 F, Commitments and
Contingencies, of the Consolidated Financial Statements appearing on page 18 of
this report, which is incorporated herein by reference.
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 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.
Operating Earnings
In millions of $'s
Bar Chart
1993-$10.6
1994-$16.4
1995-$24.6
Annual Report - Page 8
Environmental And Inflation
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.
The plastic resins used by the Company in its 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 1996.
The effects of inflation have not been significant on the overall operations of
the Company during the last few years. 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.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flow From Operations
The improvement in cash flow from operations reflects the Company's increase in
profitability. The Company's working capital increased in 1995 over 1994,
primarily as a result of the Pawnee acquisition ($8.3 million). The elimination
of current maturities on the Company's new financing arrangements, an increase
in inventories to support anticipated future shipments, and the increase in
accounts receivable resulting from the expanded sales levels also contributed to
the increase in working capital during the year. Finally, as a result of
limitations on the use of net operating loss carryforwards, the Company has
begun paying increased Federal income taxes in 1995. During 1995, the Company
paid approximately $3.5 million in income taxes.
Cash Flow from Operations
In millions of $'s
Bar Chart
1993-$10.6
1994-$13.4
1995-$16.5
Investing Activities
Capital expenditures are primarily incurred to maintain and improve
productivity, as well as to modernize and expand facilities. Highlights of the
Company's sizable $10.0 million in capital expenditures for 1995 include the
installation of new production lines at our Spartech Plastics-Atlanta, Georgia;
Paulding, Ohio; McMinnville, Oregon; and Arlington, Texas plants and a new
compounding line at Spartech Compounding-Cape Girardeau, Missouri. In addition,
the 22% increase over the prior year in capital expenditures related to the
purchase of four new rollstands and the upgrading of all facilities, in
particular those operations obtained through our recent acquisitions of Pawnee
and ProCom.
Capital Expenditures
In millions of $'s
Bar Chart
1993-$2.6
1994-$8.2
1995-$10.0
During 1996, the Company anticipates making capital expenditures of
approximately $7.1 million. New extrusion lines, scheduled for our Spartech
Compounding-Cape Girardeau, Missouri, and Spartech Plastics-Richmond, Indiana
facilities, represent the major items included in this figure.
Reference is made to Note H, Acquisitions, of the Consolidated Financial
Statements appearing on page 18 of this report, which is incorporated herein by
reference, for a discussion on the Company's November 1, 1994 acquisition of
certain divisions of Pawnee and February 2, 1994 acquisition of certain assets
of ProCom.
Financing Activities
On August 15, 1995, the Company completed a $50 million Private Placement of
Senior Unsecured Notes at a fixed rate of 7.21% and shortly thereafter,
finalized a new $40 million Unsecured Bank Credit Facility. Reference is made to
Note B, Long-Term Debt, of the Consolidated Financial Statements appearing on
page 15 of this report, which is incorporated herein by reference, for a further
discussion of the Company's new financing arrangements.
Effective May 1, 1995, all of the Company's Preferred Stockholders converted
their shares into the Company's common stock increasing its outstanding common
shares by 14.3 million. On May 2, 1995, the Company's Board of Directors
declared a special dividend of three cents per share that was paid on May 31,
1995. In addition, the Board also declared its first and second regular
quarterly cash dividends on June 2, 1995 and September 6, 1995, each in the
amount of three cents per share.
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 1996 and well into the future.
Annual Report - Page 9
SPARTECH CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(Dollars in thousands, except share amounts)
OCTOBER 28, OCTOBER 29,
1995 1994
ASSETS
Current Assets
Cash $3,505 $1,752
Receivables, net of allowances of
$1,592 in 1995 and $1,415 in 1994 51,762 40,493
Inventories 33,002 22,936
Prepayments and other 1,274 1,112
Total Current Assets 89,543 66,293
Plant and Equipment, Net 63,150 46,656
Goodwill 24,014 21,044
Debt Issuance Costs and Other 1,622 1,727
$178,329 $135,720
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Current maturities of long-term debt $- $2,750
Accounts payable 31,966 28,403
Accrued liabilities 12,469 8,789
Total Current Liabilities 44,435 39,942
Long-Term Debt, Less Current Maturities 59,510 36,419
Other Liabilities 2,256 1,126
Total Long-Term Liabilities 61,766 37,545
Shareholders' Equity
6% Cumulative Convertible Preferred Stock,
776,700 shares issued and outstanding in 1994
($50 per share liquidation value) - 777
Common stock, 23,364,407 and 8,629,947 shares
issued in 1995 and 1994, respectively 17,523 6,472
Contributed capital 66,771 74,438
Retained deficit (12,099) (23,449)
Treasury stock, at cost, 11,291 shares
in 1995 and 1,324 shares in 1994 (67) (5)
Total Shareholders' Equity 72,128 58,233
$178,329 $135,720
The accompanying notes are an integral part of this financial statement.
Annual Report - page 10
SPARTECH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(Dollars in thousands, except per share amounts)
Fiscal Year
1995 1994 1993
Net Sales $352,273 $256,593 $189,401
Costs and Expenses
Cost of sales 302,394 219,595 161,393
Selling and administrative 24,545 19,966 16,876
Amortization of intangibles 730 622 563
327,669 240,183 178,832
Operating Earnings 24,604 16,410 10,569
Interest 4,960 3,125 3,350
Earnings Before Provision for Income Taxes 19,644 13,285 7,219
Provision for income taxes 5,110 2,450 503
Net Earnings 14,534 10,835 6,716
Preferred stock accretion (1,098) (2,133) (2,015)
Net Earnings Applicable to
Common Shares and Equivalents $ 13,436 $ 8,702 $ 4,701
Net Earnings Per Common Share
Primary $ .80 $ .97 $ .54
Fully diluted $ .60 $ .46 $ .30
The accompanying notes are an integral part of this financial statement.
Annual Report - page 11
SPARTECH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(Dollars in thousands)
Total
Preferred Common Contributed Retained Treasury Shareholders'
Stock Stock Capital Deficit Stock Equity
Balance,
October 31, 1992 $ 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,
October 30, 1993 $ 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,
October 29, 1994 $ 777 $ 6,472 $74,438 $(23,449) $ (5) $58,233
Preferred stock
conversion (777) 10,706 (9,929) - - -
Stock options
exercised - 345 1,164 - - 1,509
Cash dividends - - - (2,086) - (2,086)
Preferred stock
accretion - - 1,098 (1,098) - -
Treasury stock
purchases - - - - (62) (62)
Net earnings - - - 14,534 - 14,534
Balance,
October 28, 1995 $ - $17,523 $66,771 $(12,099) $(67) $72,128
The accompanying notes are an integral part of this financial statement.
Annual Report - page 12
SPARTECH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollars in thousands)
Fiscal Year
1995 1994 1993
Cash Flows From Operating Activities
Net earnings $ 14,534 $ 10,835 $ 6,716
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation and amortization 5,798 4,422 4,000
Change in current assets and liabilities,
net of effects of acquisitions
Receivables (4,447) (4,594) (4,409)
Inventories (6,504) (1,325) (1,154)
Prepayments and other (17) 257 (418)
Accounts payable 3,563 2,726 5,642
Accrued liabilities 1,410 846 583
Other, net 2,150 191 (315)
Net cash provided by operating
activities 16,487 13,358 10,645
Cash Flows From Investing Activities
Capital expenditures (10,015) (8,152) (2,610)
Retirement of assets 538 333 27
Business acquisitions (24,060) (6,840) (2,487)
Proceeds from note receivable _ 495 _
Net cash used for investing activities (33,537) (14,164) (5,070)
Cash Flows From Financing Activities
Net borrowings (payments) on revolving
credit facilities (6,525) (6,248) (505)
Issuance of 7.21% Senior Unsecured Notes 50,000 _ _
Term loan additions (payments) (13,000) 6,000 (5,000)
Redemption of 9% Convertible
Subordinated Debentures (10,134) _ _
Debt issuance costs (899) _ _
Cash dividends on common stock (2,086) _ _
Stock options exercised 1,509 1,357 204
Treasury stock acquired (62) _ _
Net cash provided by (used for)
financing activities 18,803 1,109 (5,301)
Increase In Cash 1,753 303 274
Cash At Beginning Of Year 1,752 1,449 1,175
Cash At End Of Year $3,505 $1,752 $1,449
The accompanying notes are an integral part of this financial statement.
Annual Report - page 13
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
1995, 1994, and 1993 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.
Finished goods include the costs of material, labor, and overhead. Inventories
at October 28, 1995 and October 29, 1994 are comprised of the following
components:
1995 1994
Raw materials $23,368 $16,171
Finished goods 9,634 6,765
$33,002 $22,936
Plant and Equipment
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.
Plant and equipment consisted of the following at October 28, 1995 and October
29, 1994:
1995 1994
Land $ 3,999 $ 4,326
Buildings and leasehold improvements 18,243 13,766
Machinery and equipment 67,308 50,434
Furniture and fixtures 2,152 1,903
91,702 70,429
Less accumulated depreciation 28,552 23,773
Plant and equipment, net $63,150 $46,656
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
40 years. Goodwill amortization totaled $730, $622, and $563 in 1995, 1994, and
1993, respectively. Accumulated amortization at October 28, 1995 totaled $4,851.
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.
Annual Report - page 14
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
16,858,000, 8,985,000, and 9,163,000 for 1995, 1994, and 1993, respectively. The
weighted average shares total for 1995 was effected by the actual conversion of
the Company's Preferred Stock discussed below.
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 used in the computation to 24,111,000,
23,434,000, and 23,438,000 for 1995, 1994, and 1993, respectively.
Effective May 1, 1995, all of the Company's Preferred Stockholders converted
their shares into the Company's common stock. The conversion increased the
Company's outstanding common shares by 14,274,635. If the Preferred Stockholders
had converted their shares at the beginning of 1993, the Primary Net Earnings
Per Share reported for 1995, 1994, and 1993 would have been $.60, $.46, and
$.30, 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
factor as computed under the modified treasury stock method. Due to the 1995
conversion of the Company's Preferred Stockholders, the Primary Net Earnings Per
Share for 1995 was computed using the treasury stock method, which requires no
such adjustment to net earnings. For the computation of Fully Diluted Net
Earnings Per Share, net earnings applicable to common shares and equivalents
have been further increased for the elimination of preferred stock accretion
(recorded up to the 1995 conversion date) 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 1995, 1994, and 1993 are as follows:
1995 1994 1993
Primary $_ $ 74 $ 300
Fully diluted $1,098 $2,133 $2,315
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:
1995 1994
7.21% Senior Unsecured Notes $50,000 $_
Unsecured Bank Credit Facility 9,510 _
Revolving Credit Loan _ 16,035
Term Loan _ 13,000
9% Convertible Subordinated Debentures _ 10,134
59,510 39,169
Less current maturities _ 2,750
Total long-term debt $59,510 $36,419
On August 15, 1995, the Company completed a $50,000 Private Placement of 7.21%
Senior Unsecured Notes (the "Notes") over a ten-year term. The Notes require
equal annual principal payments of approximately $7,143 commencing on August 15,
1999. Interest on the Notes is payable semiannually on February 15 and August 15
of each year. In addition, the Company concurrently finalized a new revolving
$40,000 Unsecured Bank Credit Facility (the "Credit Facility"). The Credit
Facility has a five-year term, with interest payable at a rate chosen by the
Company of either prime rate or an adjusted LIBOR plus .75%. As of September 1,
1995, the Company entered into a six-month fixed LIBOR loan under the Credit
Facility of $5,000 at 6.91%. The remaining Credit Facility is at the current
prime rate, which at October 28, 1995, was 8.75%.
The proceeds from these new financing arrangements were used to replace the
Company's previously existing Senior Credit Facility (consisting of the
Revolving Credit Loan and Term Loan) and to redeem the Company's 9% Convertible
Subordinated Debentures. Interest on the Revolving Credit Loan and Term Loan was
payable at a rate chosen by the Company of either prime rate plus .25% or
Adjusted LIBOR plus 1.75%.
Annual Report - page 15
Scheduled maturities of long-term debt, by fiscal year, are as follows:
7.21% Senior Unsecured
Unsecured Notes Bank Credit Facility
1996 $ _ $ _
1997 _ _
1998 _ _
1999 7,143 _
2000 7,143 9,510
Thereafter 35,714 _
$50,000 $9,510
The Notes and Credit Facility both contain certain covenants which, among other
matters, require the Company to restrict the incurrence of additional
indebtedness, to satisfy certain ratios and net worth levels, and to limit both
the sale of assets and merger transactions.
NOTE C - 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. The Company declared a special three cent per share dividend on its
common stock in May of 1995 and two regular quarterly dividends of three cents
per share beginning in June of 1995.
Preferred stock outstanding as of October 29, 1994 consisted of 6% Cumulative
Convertible Preferred Stock, which was convertible into shares of common stock
and carried equivalent common share voting rights as follows:
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
NOTE D - INCOME TAXES
The provision for income taxes for fiscal years 1995, 1994, and 1993 is
comprised of the following:
1995 1994 1993
Federal:
Current $2,715 $_ $_
Deferred 3,680 4,488 2,466
State 1,348 1,000 503
7,743 5,488 2,969
Utilization of operating loss carryforwards (2,633) (3,038) (2,466)
Provision for income taxes $5,110 $2,450 $503
The income tax provision on earnings of the Company differs from the amounts
computed by applying the U.S. Federal tax rate of 35% in 1995 and 1994, and 34%
in 1993 as follows:
1995 1994 1993
Federal income taxes at statutory rate $6,875 $4,650 $2,454
State income taxes, net of applicable
Federal income tax benefits 876 650 332
Operating loss carryforwards (2,633) (3,038) (2,466)
Other (8) 188 183
$5,110 $2,450 $ 503
Annual Report - page 16
At October 28, 1995 and October 29, 1994, the Company's principal components of
deferred tax assets and liabilities consisted of the following:
1995 1994
Deferred tax assets:
Net operating loss and other tax carryforwards $4,701 $5,700
Bad debt reserves 412 485
Inventories 222 395
Tax credit carryforwards 952 600
Accrued liabilities 1,275 620
$7,562 $7,800
Deferred tax liabilities:
Depreciation $8,208 $7,800
Other 471 _
$8,679 $7,800
At October 28, 1995, the Company had net operating loss carryforwards for
Federal income tax purposes of approximately $11,000 which are available to
offset future Federal taxable income expiring in the years 2001 through 2007.
NOTE E - 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.
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 the compensation committee of the Board of
Directors.
Information with respect to options granted, all presently exercisable, under
the Incentive and Restricted Plans for fiscal years 1995, 1994, and 1993 follows
(in thousands, except exercise price range per share):
Options Options Exercise Price
Beginning Exercised/ End of Range Per Share
of Year Granted Canceled Year At End of Year
Fiscal 1995
Incentive Plan 149 165 6 308 $3.00-$7.00
Restricted Plan 1,968 95 434 1,629 $1.25-$5.38
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
Additional options, which have been issued outside the plans discussed above,
totaled 330,000 at October 28, 1995. These additional options are exercisable
at prices ranging from $3.875 to $5.00 per share and expire at various dates
through 2000. A total of 60,000 options at prices ranging from $1.625 to $2.15
were exercised in 1995.
Annual Report - page 17
NOTE F - 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 1995,
1994, and 1993 was $2,872, $2,273, and $1,670, respectively.
Future minimum lease payments under non-cancelable operating leases, by fiscal
year, are as follows:
1996 $1,490
1997 1,073
1998 870
1999 642
2000 414
2001 and thereafter 308
$4,797
On June 2, 1992, Mr. Lawrence M. Powers, former Director, 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 additional shares of common stock, and award to him attorney's fees and
interest. Mr. Powers seeks the following judgment against the Company and the
other defendants: (1) in excess of $13,000 plus punitive damages, (2) an
additional 167,744 shares of common stock, (3) 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) 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 that the Board was not
acting independently and that it could not have acted appropriately. Discovery
in the litigation has concluded, and the Company, together with the other
defendants, has moved for summary judgment dismissing the complaint. The Company
believes Mr. Powers' litigation is without merit and will continue to defend
against it vigorously.
At October 28, 1995, there were no other known contingent liabilities (including
guarantees, pending litigation, and environmental claims) that, in the opinion
of management, are expected to be material in relation to the Company's
financial position, nor were there any material commitments outside the normal
course of business.
NOTE G - CASH FLOW INFORMATION
Supplemental information on cash flows is as follows:
Fiscal Year
1995 1994 1993
Cash paid during the year for:
Interest $4,099 $ 2,974 $ 3,220
Income taxes $3,517 $ 1,043 $ 394
Schedule of business acquisitions:
Fair value of assets acquired $26,330 $12,274 $ 2,487
Liabilities assumed (2,270) (5,434) _
Total cash paid for the
net assets acquired $24,060 $ 6,840 $ 2,487
NOTE H - ACQUISITIONS
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 $15,785. In addition,
the Company paid approximately $8,275 for net working capital assets (inventory
and receivables net of assumed accrued liabilities).
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. Approximately $6,800 of this purchase price was paid in cash,
while the remaining balance represented the net liabilities assumed by the
Company.
Annual Report - page 18
Both acquisitions have been accounted for by the purchase method, and
accordingly, the results of operations of Pawnee and ProCom are included in the
Company's Consolidated Statement of Operations from their respective 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.
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
extruded sheet & rollstock facilities was completed in early May of 1993.
The following summarizes unaudited pro forma consolidated results of operations
for fiscal year 1994 assuming the Pawnee and ProCom 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)
Fiscal Year
1994
Net Sales $324,658
Earnings Before Income Taxes $ 15,478
Net Earnings $ 12,639
Net Earnings Per Common Share
Primary $ 1.17
Fully diluted $ .53
NOTE I - QUARTERLY FINANCIAL INFORMATION
Certain unaudited quarterly financial information for the years ended October
28, 1995 and October 29, 1994 is as follows:
Quarter Ended Fiscal
Jan April July Oct Year
1995
Net Sales $79,258 $95,649 $90,891 $86,475 $352,273
Gross Profit 10,847 13,733 12,988 12,311 49,879
Net Earnings 3,125 3,950 3,820 3,639 14,534
Net Earnings Per Share
Primary .27 .36 .16 .15 .80
Fully diluted .13 .16 .16 .15 .60
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
Net Earnings Per Share
Primary .17 .25 .28 .27 .97
Fully diluted .09 .12 .13 .12 .46
The aggregate Primary Net Earnings Per Share for the four quarters of 1995 is
greater than the full year results, due to the conversion by the Preferred
Stockholders to common stock at the beginning of the third quarter. If the
Preferred Stockholders had converted their shares at the beginning of 1994, all
Primary Net Earnings Per Share amounts reported above would have been equal to
Fully Diluted Net Earnings Per Share.
Annual Report - page 19
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 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 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.
/s/Bradley B. Buechler /s/David B. Mueller /s/Randy C. Martin
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 28, 1995 and
October 29, 1994, and the related consolidated statements of operations,
shareholders' equity, and cash flows for each of the three fiscal years in the
period ended October 28, 1995. 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 28, 1995 and October 29, 1994, and the results of
their operations and their cash flows for each of the three fiscal years in the
period ended October 28, 1995 in conformity with generally accepted accounting
principles.
St. Louis, Missouri /s/ Arthur Andersen LLP
December 6, 1995
Annual Report - page 20
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 has been retroactively restated,
giving effect to the discontinuance of the polyethylene film segment.
FISCAL YEAR
1995 1994 1993 1992 1991
SUMMARY OF OPERATIONS
Net Sales $352,273 $256,593 $189,401 $168,800 $155,710
Cost of Sales and
Other Expenses 326,939 239,561 178,269 159,085 150,904
Amortization of
Intangibles 730 622 563 537 532
Nonrecurring Transactions - - - - (3,500)
Operating Earnings-
Continuing Operations $ 24,604 $16,410 $10,569 $9,178 $774
Interest Expense $4,960 $3,125 $3,350 $4,495 $6,201
Net Earnings (Loss)
Continuing operations $14,534 $10,835 $6,716 $4,220 $(5,714)
Discontinued operations - - - - (12,000)
$14,534 $10,835 $6,716 $4,220 $(17,714)
PER SHARE INFORMATION
Fully Diluted Earnings
Continuing operations $.60 $.46 $.30 $ .21 $(1.85)
Discontinued operations - - - - (3.17)
$.60 $.46 $.30 $ .21 $(5.02)
Dividends Declared $.09 $- $- $- $-
BALANCE SHEET INFORMATION
Working Capital $45,108 $26,351 $25,032 $23,997 $22,299
Long-Term Debt, Less Current Maturities
Senior $59,510 $26,285 $26,283 $30,783 $34,250
Subordinated - 10,134 10,134 10,134 40,297
$59,510 $36,419 $36,417 $40,917 $74,547
Shareholders' Equity $72,128 $58,233 $46,041 $39,121 $5,705
Total Assets $178,329 $135,720 $114,194 $106,546 $108,752
Annual Report - page 21
CORPORATE AND DIVISION MANAGEMENT
CORPORATE MANAGEMENT
- -picture-
Daniel J. Yoder
Vice President
Engineering & Technology
Terry F. Tisza
Director of Sales &
Marketing Compound Division
David G. Pocost
Director of Quality & Environmental Affairs
Randy C. Martin
Corporate Controller
Bradley B. Buechler
President, Chief Executive and Chief Operating Officer
David B. Mueller
Vice President Finance, Chief Financial Officer and Corporate Secretary
DIVISION GENERAL MANAGERS
EXTRUDED SHEET & ROLLSTOCK
- -picture-
Left to right: W. Harrison Hiatt, Patrick B. Fleming, Johnnie W. Sepulvado,
Greg S. Nagel, and William F. Phillips
MERCHANT COMPOUNDING
- -picture-
Left to right: John D. Edwards, Howard K. Pomerantz, and Stephen J. Byron
MANAGEMENT CHANGES - 1995
In August, Greg S. Nagel, formerly Spartech Plastics-Central and East
Controller, was appointed General Manager of Spartech Plastics-East.
In September, Randy C. Martin, formerly with KPMG Peat Marwick LLP, was
appointed Corporate Controller of the Company.
In October, Patrick B. Fleming and John D. Edwards were appointed to the
additional posts of General Managers of Spartech Plastics-Mideast (Paulding)
and Spartech Compounding (Goddard), respectively.
Annual Report - page 22
DIRECTORS
- -pictures of-
John F. Arning Bradley B. Buechler Thomas L. Cassidy W.R. Clerihue
Francis J. Eaton David B. Mueller Jackson W. Robinson Rodney H. Sellers
John F. Arning, age 70, 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 1998 annual meeting.
Bradley B. Buechler, age 47, 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 immediate past Chairman of the Sheet Producers
Division of the Society of Plastics Industry. His term as Director expires at
the 1998 annual meeting.
Thomas L. Cassidy, age 67, has been a member of the Board since February 1986.
He has been a Managing Director of 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 72, 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 56, 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 1998 annual meeting.
David B. Mueller, age 42, 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 53, has been a member of the Board since March 1993. He
is President of Winslow Management Company, having held that position since
1983. He is also a Director of Merlin International Green Investment Trust,
Jupiter European Investment Trust, National Gardening Association, and Suffield
Academy. His term as Director expires at the 1996 annual meeting.
Rodney H. Sellers, age 49, 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
Compensation Committee Audit Committee
John F. Arning John F. Arning
Thomas L. Cassidy W.R. Clerihue
W.R. Clerihue Jackson W. Robinson
Francis J. Eaton
Jackson W. Robinson
Annual Report - page 23
INVESTOR INFORMATION
COMMON STOCK AND DIVIDEND INFORMATION
SPARTECH Corporation's common stock is traded on the New York Stock Exchange
under the symbol "SEH." As of January 1, 1996, there were approximately 5,000
shareholders of the Company's common stock. The table below sets forth the high
and low closing prices for SPARTECH's common stock, along with dividends
declared, during each quarter of fiscal 1994 and 1995.
Fiscal 1994 Fiscal 1995
Stock Price Dividends Stock Price Dividends
High Low Declared High Low Declared
First Quarter $4 13/16 $3 9/16 $- $5 3/4 $4 7/8 $-
Second Quarter 5 3/4 4 1/8 - 6 5/8 5 1/8 .03*
Third Quarter 5 4 1/8 - 6 5/8 5 5/8 .03
Fourth Quarter 6 4 1/8 - 7 3/4 6 3/8 .03
* Represents special three cent per share dividend declared just following the
close of the Company's second quarter.
Prior to 1995, the Company had not paid a cash dividend on its common stock
since it was founded in 1968. Effective with the third quarter of fiscal 1995,
the Board of Directors established a policy of declaring a regular quarterly
cash dividend on the Company's common stock.
RESEARCH AND INFORMATIONAL REPORTS
Research and informational reports on SPARTECH Corporation are available from
the following companies/individuals by calling SPARTECH Investor Relations at
(314) 721-4242 or the listed companies direct at the numbers shown below:
A. G. Edwards Mike Braig (314) 289-5894
Cruttenden Roth Pete Castellanos (805) 966-5205
Stifel, Nicolaus & Co. Richard Hilgert (314) 342-2258
Wealth Monitors Michael Lamb (913) 345-2822
TRANSFER AGENT & REGISTRAR
The Company's transfer agent & 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 13, 1996 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 Statement, will be mailed before the meeting to shareholders
entitled to vote.
REPORT ON FORM 10-K
The Company will provide, without charge to any shareholder, a copy of its 1995
Report on Form 10-K as filed with the Securities and Exchange Commission.
Written requests should be directed to:
Investor Relations
Attention: Randy Martin
SPARTECH Corporation
7733 Forsyth Boulevard, Suite 1450
Clayton, Missouri 63105
(314) 721-4242
FAX (314) 721-1447
Annual Report - page 24