SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 30, 1994
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-5911
SPARTECH CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 43-0761773
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7733 Forsyth Boulevard, Suite 1450, Clayton, Missouri, 63105
(address of principal executive offices)
(314) 721-4242
(Registrant's telephone number, including area code)
Indicate by checkmark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class Outstanding as of July 30, 1994
Common Stock, $.75 par value
per share 8,343,515
<PAGE>
SPARTECH CORPORATION AND SUBSIDIARIES
INDEX
July 30, 1994
PART I. FINANCIAL INFORMATION PAGE
CONSOLIDATED CONDENSED BALANCE SHEET -
July 30, 1994 and October 30, 1993 3
CONSOLIDATED CONDENSED STATEMENT OF
OPERATIONS - for the thirteen and
thirty-nine weeks ended July 30, 1994
and July 31, 1993 4
CONSOLIDATED CONDENSED STATEMENT OF
CASH FLOWS - for the thirty-nine weeks
ended July 30, 1994 and July 31, 1993 5
NOTES TO CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS 6
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 11
PART II. OTHER INFORMATION 13
SIGNATURES 14
<PAGE>
SPARTECH CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEET
(Dollars in thousands, except per share amounts)
ASSETS
July 30, October 30,
1994 1993
(unaudited)
Current Assets
Cash $ 2,006 $ 1,449
Accounts and notes receivable, net 38,062 32,723
Inventories 23,766 20,677
Prepayments and other 2,250 1,369
Total Current Assets 66,084 56,218
Plant and Equipment, Net 45,698 37,637
Goodwill 21,204 18,506
Other Assets 931 1,833
$133,917 $114,194
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Current maturities of long-term debt $ 4,000 $ 3,000
Accounts payable 28,012 21,944
Accrued liabilities 9,040 6,242
Total Current Liabilities 41,052 31,186
Senior Long-Term Debt, Less Current Maturities 27,016 26,283
9% Convertible Subordinated Debentures 10,134 10,134
Other Liabilities 995 550
Total Long-Term Liabilities 38,145 36,967
Shareholders' Equity
6% Cumulative Convertible Preferred Stock,
776,700 shares issued and outstanding
($50 per share liquidation value) 777 777
Common stock, 8,344,635 shares issued in
1994 and 8,326,296 shares issued in 1993 6,258 6,245
Contributed capital 73,451 73,258
Retained deficit (25,762) (32,151)
Treasury stock, at cost, 1,120 shares
in 1994 and 453,059 shares in 1993 (4) (2,088)
Total Shareholders' Equity 54,720 46,041
$133,917 $114,194
The accompanying notes are an integral part of this financial statement.<PAGE>
SPARTECH CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS
(Unaudited and dollars in thousands, except per share amounts)
THIRTEEN THIRTY-NINE
WEEKS ENDED WEEKS ENDED
July 30, July 31, July 30, July 31,
1994 1993 1994 1993
Net Sales $ 69,765 $ 50,234 $183,273 $135,525
Costs and Expenses
Cost of sales 58,959 42,276 154,618 112,941
Selling and administrative 4,748 4,190 13,572 11,905
Depreciation and amortization 1,159 975 3,249 2,956
64,866 47,441 171,439 127,802
Operating Earnings 4,899 2,793 11,834 7,723
Interest 824 889 2,290 2,531
Earnings Before Income Taxes 4,075 1,904 9,544 5,192
Provision for Income Taxes 1,000 100 1,570 330
Net Earnings 3,075 1,804 7,974 4,862
Preferred Stock Accretion 548 518 1,585 1,496
Net Earnings Applicable
to Common Shares $ 2,527 $ 1,286 $ 6,389 $ 3,366
Net Earnings Per Common Share:
Primary $ .28 $ .15 $ .70 $ .39
Fully diluted $ .13 $ .08 $ .34 $ .22
The accompanying notes are an integral part of this financial statement.
<PAGE>
SPARTECH CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS
(Unaudited and dollars in thousands)
THIRTY-NINE WEEKS ENDED
July 30, July 31,
1994 1993
CASH FLOW FROM OPERATING ACTIVITIES
Net earnings $ 7,974 $ 4,862
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization 3,249 2,956
Change in current assets and liabilities,
net of effects of acquisitions (1,763) 3,831
Other, net 852 (303)
Net cash provided by operating activities 10,312 11,346
CASH FLOW FROM INVESTING ACTIVITIES
Capital expenditures (5,921) (1,970)
Retirement of assets, net 73 27
Business acquisition:
Plant equipment and intangibles (8,160) (2,467)
Net working capital 1,320 -
Proceeds from note receivable 495 -
Net cash used for investing activities (12,193) (4,410)
CASH FLOW FROM FINANCING ACTIVITIES
Net borrowings (payments) on revolving loan 4,733 (2,978)
Principal payments on term loan (3,000) (4,000)
Stock options exercised 705 63
Net cash provided by (used for) financing
activities 2,438 (6,915)
INCREASE IN CASH 557 21
CASH AT BEGINNING OF PERIOD 1,449 1,175
CASH AT END OF PERIOD $ 2,006 $ 1,196
The accompanying notes are an integral part of this financial statement.<PAGE>
SPARTECH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited and dollars in thousands, except per share amounts)
NOTE A - Basis of Presentation
The accompanying consolidated financial statements include the accounts
of Spartech Corporation and its wholly-owned subsidiaries (the "Company").
These financial statements have been prepared on a condensed basis and,
accordingly, certain information and note disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to the rules
and regulations of the Securities and Exchange Commission. In the opinion
of management, the financial statements contain all adjustments (consisting
solely of normal recurring adjustments) and disclosures necessary to make
the information presented therein not misleading. These financial
statements should be read in conjunction with the consolidated financial
statements and accompanying footnotes thereto included in the Company's
October 30, 1993 Annual Report on Form 10-K.
The Company manufactures products for specific customer orders and for
standard stock inventory. Sales are recognized and billings are rendered as
the product is shipped to the customer.
Operating results for the thirteen and thirty-nine weeks ended July 30,
1994 and July 31, 1993 are seasonal in nature and are not necessarily
indicative of the results expected for the full year.
NOTE B - Inventories
Inventories are valued at the lower of cost (first-in, first-out) or
market. Inventories at July 30, 1994 and October 30, 1993 are comprised of
the following components:
1994 1993
Raw materials $16,364 $14,518
Finished goods 7,402 6,159
$23,766 $20,677
NOTE C - Income Taxes
Effective with the beginning of fiscal 1994, the Company adopted
Statement of Financial Accounting Standards No. 109 ("SFAS No. 109"),
"Accounting for Income Taxes", which requires recognition of deferred tax
assets and liabilities for the expected future tax consequences of events
that have been included in the financial statements or tax returns. Under
this method, deferred tax assets and liabilities are determined based on the
differences between the financial statement and tax bases of assets and
liabilities using enacted tax rates in effect for the years in which the
differences are expected to reverse.
The adoption of SFAS No. 109 resulted in no cumulative effect on
operations and, accordingly, prior year consolidated condensed financial
statements were not restated.<PAGE>
SPARTECH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited and dollars in thousands, except per share amounts)
Under the provisions of SFAS No. 109, the Company recorded, as of
October 31, 1993, net deferred income tax assets aggregating approximately
$4,000, which represented the tax benefits of the tax net operating loss and
investment tax credit carryforwards offset by the net tax liabilities
resulting from temporary differences (consisting principally of depreciation
timing differences) in the tax bases of assets and liabilities versus their
financial accounting bases. As of July 30, 1994, this net deferred income
tax asset was approximately $1,500, reflecting the partial utilization of
the tax net operating loss for the first nine months of fiscal year 1994.
Due to the uncertainty regarding the ability to utilize future tax benefits,
the Company recorded a valuation allowance at October 31, 1993, of
approximately $4,000 with approximately $1,500 remaining as of July 30,
1994.
The partial utilization of existing operating loss carryforwards
resulted in no regular tax provision for Federal income taxes being
recognized for the thirteen and thirty-nine weeks ended July 30, 1994, and
July 31, 1993. However, due to the limitations on the use of net operating
loss carryforwards in the computation of Federal alternative minimum tax, a
$200 alternative minimum tax provision was recognized for the thirty-nine
weeks ended July 30, 1994.
NOTE D - Senior Long-Term Debt
The Company renegotiated its senior credit facility with Chemical Bank
during the third quarter of this year. The new senior credit facility
increases the amount of available borrowings from $42,000 to $50,000 through
the issuance of a three year revolving credit loan commitment of $35,000
based on specified levels of receivables and inventories, and a three year
term loan of $15,000. The term loan is due in eight consecutive quarterly
payments of $500 each, followed by consecutive quarterly payments of $750
each, 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 substantially all of the plant and equipment of
the Company. Interest on these loans is payable at a rate chosen by the
Company of either of the following:
Chemical Bank's prime rate
Adjusted LIBO Rate plus 1.50%
NOTE E - Earnings Per Share
Primary net earnings per common share are computed based upon the
weighted average number of common shares outstanding during each period
after consideration of the dilutive effect of stock options and warrants.
Such average shares were:
Period Ended Thirteen Weeks Thirty-Nine Weeks
July 30, 1994 9,389,000 9,188,000
July 31, 1993 9,282,000 9,263,000<PAGE>
SPARTECH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited and dollars in thousands, except per share amounts)
Fully diluted net earnings per common share assumes conversion of
securities when the earnings per share result is dilutive. Assumed
conversions increased the weighted average number of common shares
outstanding by 14,275,000 for the thirteen and thirty-nine weeks ended
July 30, 1994 and July 31, 1993.
For the computation of primary net earnings per common share, net
earnings have been increased for an after-tax interest expense reduction as
computed under the modified treasury stock method. For the computation of
fully diluted net earnings per common share, net earnings have been further
increased for the elimination of preferred stock accretion resulting from
the assumed conversion of preferred stock. Net earnings increases for the
thirteen and thirty-nine weeks ended July 30, 1994 and July 31, 1993 were as
follows:
Thirteen Weeks Thirty-Nine Weeks
1994 1993 1994 1993
Primary $ 43 $ 87 $ 124 $ 253
Fully Diluted $ 548 $ 518 $1,585 $1,496
NOTE F - Interest and Income Tax Payments
Cash paid for interest, net of amounts capitalized, and income taxes
during the thirty-nine weeks ended July 30, 1994 and July 31, 1993 were as
follows:
1994 1993
Interest $1,980 $2,252
Income taxes $ 778 $ 373
NOTE G - 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 July 30, 1994 and October 30, 1993
consisted of the following series of 6% Cumulative Convertible Preferred
Stock, which are convertible into the shares of common stock indicated and
which carry the equivalent common share voting rights indicated prior to
conversion:
Preferred Number of Common Stock Equivalent Common
Stock Preferred Shares Issuable Upon Share Voting
Series Outstanding Conversion Rights
Series L 373,500 6,884,987 1,721,247
Series M 343,200 6,289,998 1,572,500
Series N 60,000 1,099,650 274,913
These series of preferred stock were issued at an equivalent price of $50
per share as part of a debt-to-equity restructuring completed April 30,
1992. In total, the restructuring resulted in the exchange of $30,163 of
the Company's subordinated debt for these issues of preferred and common
stock. <PAGE>
SPARTECH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited and dollars in thousands, except per share amounts)
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.
The dividend terms of each series of preferred stock provide that
dividends will not begin accruing until April 30, 1995. Due to the absence
of a dividend requirement on these series of preferred stock, a noncash
charge for the accretion of the preferred stock has been recognized. Such
charges were:
Period Ended Thirteen Weeks Thirty-Nine Weeks
July 30, 1994 $ 548 $1,585
July 31, 1993 $ 518 $1,496
The charge results in no net change in shareholders' equity, as the same
amount charged to retained earnings each quarter is added back to
contributed capital.
NOTE H - Commitments and Contingencies
On June 2, 1992, Mr. Lawrence M. Powers, former Chairman of the Board
and Chief Executive Officer of the Company, filed a lawsuit in the United
States District Court for the Southern District of New York against the
Company and certain of its Directors and major shareholders. In the suit,
Mr. Powers claims that, by reason of the Company's April 30, 1992 debt-to-
equity restructuring (which he had previously, on April 13, 1992 voted in
favor of as a Director) the Company should adjust his existing stock
options, provide for the issuance of 167,744 additional shares of common
stock to him and award to him attorney's fees and interest. Mr. Powers
seeks judgment against the Company and the other defendants: (1) in excess
of $13,000 plus punitive damages, (2) requiring the Company to issue him an
additional 167,744 shares of common stock, (3) requiring an adjustment
increasing his then outstanding options to purchase the Company's common
stock from 1,871,201 shares to 4,080,000 shares, and (4) for attorney's fees
and interest. In June, 1993, in responding to the Company's request for
summary judgment, the Court ruled the Board of Director's decision to not
adjust Mr. Powers' options was "final, binding and conclusive" unless Mr.
Powers can establish the Board was not acting independently and that it
could not have acted appropriately. Discovery was allowed to continue in
this litigation. The Company believes Mr. Powers' litigation is without
merit and is defending against it vigorously.<PAGE>
SPARTECH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited and dollars in thousands, except per share amounts)
NOTE I - Acquisition
On February 2, 1994, the Company completed the acquisition of certain
assets of Product Components, Inc. ("ProCom"). The purchase included two
rigid plastic sheet and rollstock manufacturing plants, located in Richmond,
Indiana and Clare, Michigan, along with various other assets of ProCom. The
purchase price for ProCom's net assets, exclusive of working capital
purchased, totaled $8,000 of which $7,000 was paid in cash, subject to post-
closing adjustments. To facilitate the funding of the purchase, the Company
amended its credit arrangement with Chemical Bank by increasing the limit on
its revolving credit loan from $30,000 to $38,000.
The following summarizes unaudited pro forma consolidated results of
operations for the thirty-nine weeks ended July 30, 1994 and July 31, 1993,
respectively, assuming this acquisition had been consummated as of the
beginning of each period. The results are not necessarily indicative of
what would have occurred had this acquisition been consummated as of the
beginning of each period presented or of the future operations of the
consolidated companies.
PRO FORMA
Thirty-Nine Weeks Ended
July 30, July 31,
1994 1993
Revenues $189,773 $155,750
Earnings Before Income Taxes $ 9,827 $ 5,965
Net Earnings $ 8,237 $ 5,585
Net Earnings Per Common Share:
Primary $ .74 $ .47
Fully diluted $ .36 $ .25<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Results of Operations
Net Sales for the thirteen and thirty-nine weeks ended July 30, 1994
increased from the similar periods in 1993, primarily the result of sizable
gains in pounds sold by the Company's rigid sheet & rollstock group. This
group experienced sales volume increases in excess of 50% for the thirteen
and thirty-nine weeks ended July 30, 1994, over the similar periods of 1993.
The majority of the gains in sales volume during these periods were obtained
from our February 2, 1994 acquisition of certain assets of Product
Components, Inc. (see "Financial Condition - Investing Activities" below for
a further discussion of this acquisition) and from the sign/advertising,
home improvement, food packaging, and transportation markets. The gains
obtained in food packaging were the direct result of our 1993 first quarter
acquisition of a portion of Penda Corporation's custom extrusion division.
In addition, sales volume increases were achieved by our Merchant
Compounding Group during the thirteen and thirty-nine weeks ended July 30,
1994 from the similar periods in 1993. These increases were primarily the
result of stronger demand from the building, recreational vehicle and
footwear industries.
Operating earnings for the thirteen and thirty-nine weeks ended July
30, 1994 also increased from the similar periods in 1993. The gains in
operating earnings were achieved through the increased sales volumes
discussed above, containment of selling, general, and administrative
expenses, and production efficiencies.
Interest expense for the thirteen and thirty-nine weeks ended July 30,
1994 decreased from the similar periods in 1993, reflecting the lower
interest rates obtained by the Company during the first nine months of
fiscal year 1994 compared to the first nine months of fiscal 1993. This
decrease in interest was partially offset by the additional borrowings
incurred by the Company for the acquisition of certain assets of Product
Components, Inc. ("ProCom"). During the second quarter of 1994, the Company
fixed its interest rate on all of its senior bank debt at less than 6.25%
through September of 1994, which is approximately 3/4% better than the rate
incurred during the same period of fiscal 1993.<PAGE>
Financial Condition
Operations
Effective October 31, 1993 (Fiscal Year 1994), the Company adopted
Statement of Financial Accounting Standards No. 109 ("SFAS No. 109"),
"Accounting for Income Taxes." Reference is made to Note C, Income Taxes,
in Item 1 of this report, which is incorporated herein by reference, for a
further discussion on the adoption of SFAS No. 109.
Investing Activities
Capital expenditures for the thirty-nine weeks ended July 30, 1994
increased significantly as compared to the same period of 1993. This
increase was the direct result of the installation of a new PET line at the
Company's Mankato, Minnesota plant during late January 1994 and significant
equipment upgrades at all of our rigid sheet and rollstock locations. The
new Mankato line was necessary to keep up with the growing demand for the
PET packaging market.
In addition, the Second Phase of our strategic plan at Spartech
Compounding's Kearny, New Jersey location began during 1994. This Phase,
which includes the addition of a new compounding line, is anticipated to be
completed by September of 1994. Once completed, the production capabilities
at this operation will increase by more than 25%.
Reference is made to Note I, Acquisition, in Item 1 of this report,
which is incorporated herein by reference, for a discussion of the Company's
February 2, 1994 acquisition of certain assets of Product Components, Inc.
The Company has not incurred any significant capital expenditures in
order to comply with the Clean Air Act Amendments of 1990. In addition, the
Company does not anticipate such capital expenditures to be material in the
future.
Financing Activities
The Company renegotiated its senior credit facility with Chemical Bank
during the third quarter of 1994. This new facility will increase the
Company's borrowing capacity from $42,000 to $50,000 and lower its interest
rate by nearly a full percentage point.
Reference is made to Note D, Senior Long-Term Debt, in Item 1 of this
report, which is incorporated herein by reference, for a further discussion
of the Company's Senior Long-Term Debt refinancing.
The Company anticipates that cash flow from operations and the
additional borrowing capacity provided under the Company's refinanced senior
credit facility will be adequate to provide necessary funds for the balance
of fiscal year 1994.<PAGE>
PART II - OTHER INFORMATION
Responses to Part II, Items 1, 2, 3, 4, and 5, are omitted because the
requested information has been previously reported, the items are
inapplicable or the answer is negative.
Item 6 (a). Exhibits
11 Statement re Computation of Per Share Earnings
Item 6 (b). Reports on Form 8-K
None.<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SPARTECH CORPORATION
(Registrant)
Date: August 23, 1994 /s/ Bradley B. Buechler
Bradley B. Buechler
President and Chief
Executive Officer
(Principal Executive Officer)
/s/ David B. Mueller
David B. Mueller
Vice President of Finance
and Chief Financial Officer
(Principal Financial and
Accounting Officer)
<PAGE>
EXHIBIT 11
SPARTECH CORPORATION AND SUBSIDIARIES
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
(In thousands, except per share amounts)
THIRTEEN WEEKS ENDED THIRTY-NINE WEEKS ENDED
July 30, July 31, July 30, July 31,
1994 1993 1994 1993
NET EARNINGS
Net Earnings $ 3,075 $ 1,804 $ 7,974 $ 4,862
Preferred stock
dividend accretion (548) (518) (1,585) (1,496)
Add: Interest savings,
net of tax effect,
on retirement of
debt from the
proceeds received
from the exercise
of options and
warrants in excess
of 20% limitation 43 87 124 253
Primary net earnings
applicable to
common shares 2,570 1,373 6,513 3,619
Add: Preferred stock
dividend elimination
resulting from the
assumed conversion
of preferred stock 548 518 1,585 1,496
Fully diluted net
earnings applicable
to common shares $ 3,118 $ 1,891 $ 8,098 $ 5,115
WEIGHTED AVERAGE SHARES
OUTSTANDING
Weighted average common
shares outstanding 8,296 7,760 8,140 7,751
Add: Shares issuable
from assumed exercise
of options and
warrants in excess
of 20% limitation 1,093 1,522 1,048 1,512
Primary weighted average
shares outstanding 9,389 9,282 9,188 9,263
Add: Shares issuable
from assumed
conversion of
preferred stock 14,275 14,275 14,275 14,275
Fully diluted
weighted average
shares outstanding 23,664 23,557 23,463 23,538
NET EARNINGS PER SHARE
Primary $ .28 $ .15 $ .70 $ .39
Fully Diluted $ .13 $ .08 $ .34 $ .22
