<PAGE> 1
6,000,000 Shares
[SPARTECH LOGO]
Common Stock
($.75 par value)
------------------
Of the Shares offered hereby (the "Offering"), 3,000,000 shares are being sold
by Spartech Corporation ("Spartech" or the "Company") and 3,000,000 shares
are being sold by the Selling Stockholders named herein under "Principal
and Selling Stockholders" (the "Selling Stockholders"). The Company
will not receive any of the proceeds of shares sold by the Selling
Stockholders. The Common Stock is listed on the New York Stock
Exchange under the symbol "SEH." On September 24, 1996,
the reported last sale price of the Common Stock on
the New York Stock Exchange Composite Tape was
$9 3/4 per share.
------------------
FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED IN
CONNECTION WITH AN INVESTMENT IN THE COMMON STOCK, SEE "RISK FACTORS" BEGINNING
ON PAGE 9 HEREIN.
------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR AD-
EQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
Underwriting Proceeds to
Price to Discounts and Proceeds to Selling
Public Commissions Company(1) Stockholders
----------- ------------- ----------- ------------
<S> <C> <C> <C> <C>
Per Share................................. $9.25 $0.47 $8.78 $8.78
Total(2).................................. $55,500,000 $ 2,820,000 $26,340,000 $ 26,340,000
</TABLE>
(1) Before deduction of expenses payable by the Company estimated at $350,000.
(2) One of the Selling Stockholders has granted the Underwriters an option,
exercisable for 30 days from the date of this Prospectus, to purchase a
maximum of 900,000 additional shares to cover over-allotments of shares. If
the option is exercised in full, the total Price to Public will be
$63,825,000, Underwriting Discounts and Commissions will be $3,243,000,
Proceeds to the Company will be $26,340,000, and Proceeds to Selling
Stockholders will be $34,242,000.
------------------
The Shares are offered by the several Underwriters when, as and if
delivered to and accepted by the Underwriters and subject to their right to
reject orders in whole or in part. It is expected that the Shares will be ready
for delivery on or about September 27, 1996, against payment in immediately
available funds.
CS First Boston A.G. Edwards & Sons, Inc.
The date of this Prospectus is September 24, 1996.
<PAGE> 2
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK AT
A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK EXCHANGE OR OTHERWISE. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
DURING THIS OFFERING, CERTAIN PERSONS AFFILIATED WITH PERSONS PARTICIPATING
IN THE DISTRIBUTION MAY ENGAGE IN TRANSACTIONS FOR THEIR OWN ACCOUNTS OR FOR THE
ACCOUNTS OF OTHERS IN THE COMMON STOCK PURSUANT TO EXEMPTIONS FROM RULES 10B-6,
10B-7, AND 10B-8 UNDER THE SECURITIES EXCHANGE ACT OF 1934.
------------------------
The Company's principal executive offices are located at 7733 Forsyth
Boulevard, Suite 1450, Clayton, Missouri 63105-1817, telephone (314) 721-4242.
2
<PAGE> 3
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to the more
detailed information and the Consolidated Financial Statements, and related
notes, appearing elsewhere in this Prospectus. Unless otherwise indicated, all
information contained in this Prospectus assumes that the Underwriters' over-
allotment option is not exercised. Unless otherwise indicated, all references to
any "year" shall mean the fiscal year of the Company which ends on the Saturday
closest to October 31, and all references to the Company and Spartech shall mean
Spartech Corporation, a Delaware corporation, and its subsidiaries.
THE COMPANY
The Company is a leading producer of engineered thermoplastic materials and
polymeric compounds for a wide spectrum of manufacturing customers. The
Company's 15 nationwide facilities produce annually more than 400 million pounds
of extruded sheet & rollstock and specialty plastic alloys, compounds and color
concentrates. Spartech's business is conducted through two operating groups: the
Extruded Sheet & Rollstock Group and the Merchant Compounding Group.
Spartech's Extruded Sheet & Rollstock Group operates 11 plants nationwide
under the name Spartech Plastics and is the largest extruder of rigid plastic
sheet & rollstock in North America according to the Plastics News 1995 annual
ranking. Spartech Plastics' finished products are generally thermoformed by its
customers for use in a myriad of items including vehicle interiors, signs, spas
and showers, materials handling and packaging products, burial vault liners,
boats and refrigerators.
Spartech's Merchant Compounding Group operates four plants under the names
Spartech Compounding and Spartech Vy-Cal Plastics. This group's custom-designed
plastic alloys, compounds, color concentrates and calendared film are utilized
by a large number of manufacturing customers for specialized footwear, shutters,
loose leaf binders, cosmetic packaging products and numerous other plastic
applications.
In 1984, the Company began a restructuring program designed to expand its
plastics processing business and dispose of all non-plastics assets. Since that
time, the Company has completed eight acquisitions, including the May 1996
acquisition of Portage Industries Corporation ("Portage"). In the past three
years, the Company's total annual sales have grown at a compound annual growth
rate of approximately 28% from $168.8 million in 1992 to $352.3 million in 1995.
Since the beginning of 1992, the Company has recorded 19 consecutive quarters of
earnings improvement over the comparable prior year's quarter. Annual net
earnings and fully diluted earnings per share have grown from $4.2 million to
$14.5 million and from $0.21 to $0.60, respectively, during that same period,
representing compound annual growth rates in excess of 40%. The Company
estimates that internal sales (excluding growth from acquisitions) have grown at
a compound annual growth rate of approximately 15% during the three years from
1992 to 1995.
INDUSTRY OVERVIEW
The plastics industry consists of a broad group of companies, including
primary resin producers and compounders, intermediate processors and end-product
manufacturers. The overall industry in the United States is estimated to have
produced 78.7 billion pounds of plastic in 1995, according to the Society of
Plastics Industry, Inc., Facts & Figures of the U.S. Plastics Industry. The
Company operates principally in the extruded sheet & rollstock and thermoplastic
compound niches of the industry, converting resins to custom rigid plastic sheet
or specialized compound materials. Alternative processes in the industry include
profile extrusion, blow molding, injection molding, and blown & calendared film.
Since 1992, the United States plastics industry overall has grown by an
estimated compound annual growth rate of 5.8%, according to the Society of
Plastics Industry, Inc., Facts & Figures of the U.S. Plastics Industry.
A major trend within the industry, and the principal factor driving its
growth, is the ongoing transition from the use of other materials to recyclable
thermoplastics. Plastics are replacing wood, glass and metals as the raw
material of choice for many products, as manufacturers seek to reduce costs,
improve product performance and address environmental issues through the use of
recyclable materials. This trend has been evident for some time in the
thin-gauge segment of the plastics market but is only now beginning to impact
3
<PAGE> 4
heavy-gauge demand. Heavy-gauge plastics are replacing other materials in
products such as automobile parts, slides, lawn mower components, camper tops,
pallets, wheel covers and truck bumpers. Sales of heavy gauge thermoplastic
products represented a majority of the Company's annual revenues over the past
three years.
Another significant trend within the plastics industry is consolidation. A
large percentage of the plastics manufacturers in the United States are small,
regional operations that generate less than $50 million in annual sales. Many of
the small plastics businesses created during the 1960s are seeking buyers as
their founders approach retirement age. Due to the size and breadth of its
operations, the Company is well positioned to increase market share through
selective acquisitions which leverage its purchasing power, technical expertise
and operating efficiencies.
BUSINESS STRATEGY
The Company's business strategy focuses on balanced revenue growth through
both internal means -- new product development and product transformation
initiatives -- and strategic acquisitions. Additionally, the Company's operating
plan emphasizes ongoing cost containment and productivity improvement efforts to
increase operating earnings and further enhance stockholder returns. Key
elements of the Company's business strategy include:
- - LEADING MARKET POSITION -- Spartech is the largest extruder of rigid plastic
sheet & rollstock in North America according to the Plastics News 1995 annual
ranking. The Company utilizes its leading market position to drive new product
development and product transformation initiatives with both customers and
suppliers and to obtain economies of scale, particularly in the areas of
purchasing and production. As a result of its broad geographic presence, the
Company is also one of the few custom extruders of rigid plastic sheet &
rollstock able to provide service on a nationwide basis.
- - ONGOING PRODUCTIVITY IMPROVEMENTS -- The Company has made substantial
investments in new equipment both to expand capacity to support revenue growth
and to upgrade facilities to improve productivity. Capital expenditures for
1995 and 1994 were $10.0 million and $8.2 million, respectively, approximately
twice depreciation for those same periods. These expenditures have expanded
capacity and contributed to the reduction of conversion costs (manufacturing
labor and overhead costs). Conversion costs per pound have decreased by
approximately 5% from 1993 to 1995. Capital expenditures are projected to be
approximately $9.5 million in 1996.
- - EXPANDING LINE OF PRODUCTS AND CAPABILITIES -- The Company believes it is the
broadest line supplier of extruded sheet & rollstock, processing more types of
resin than any other North American supplier. The Company works closely with
its customers to provide products which meet their evolving needs and seeks to
differentiate itself from its competitors by emphasizing consistent product
quality and outstanding customer service. The Company's sales force consists
of approximately 50 individuals in direct sales and 40 individuals in customer
service support functions. Spartech's salespeople are knowledgeable about a
wide range of raw material resin types used for a variety of applications. The
Company capitalizes on the technical expertise of its sales force to provide
cost effective, innovative solutions for its customers. As the Company expands
its product line through strategic acquisitions, it is able to expand the
range of products it can offer to its existing customers, further
strengthening key supplier partnerships.
- - DIVERSIFIED CUSTOMER BASE AND GEOGRAPHIC PRESENCE -- The Company sells to
approximately 2,400 customers operating in a broad range of industries located
throughout North America. This customer and geographic diversity helps
minimize Spartech's exposure to economic downturns. Spartech's 15 plants
across the United States position the Company close to the marketplace,
enabling efficient delivery and promoting continuous customer contact.
- - PRODUCT TRANSFORMATIONS -- The Company drives internal sales growth by
actively working with its customers and suppliers in the transition of
products from traditional materials -- wood, metal and glass -- to high
performance and less expensive recyclable thermoplastics. This trend of
transforming products to thermoplastic materials is impacting many industries
and creating growth and diversification opportunities
4
<PAGE> 5
for Spartech. For example, materials handling products previously made of wood
and cardboard, such as pallets and specialty packaging, are being replaced
with lighter weight, more customized thermoplastic sheet. Shutters, siding,
gutters, bathtubs and spas for the housing industry, previously manufactured
from wood, fiberglass and metal, are also being made more durable with
thermoplastics.
- - STRATEGIC ACQUISITIONS -- The size and breadth of Spartech's operations
position the Company well for expansion through selective acquisitions in the
consolidating plastics industry. In evaluating acquisition opportunities,
Spartech looks for candidates that can complement its existing product lines
and extend its geographic coverage. Spartech considers acquisitions only
within the plastics industry, with a special emphasis on companies producing
specialty or value-added thermoplastic products. Spartech focuses on acquiring
profitable operations that can benefit from its operating efficiencies and
purchasing capabilities. The pending acquisition of the extrusion, color and
molding assets of Hamelin (as defined below) is expected to increase the
Company's production capacity by approximately 20% and annual sales by
approximately $80 million based on sales for Hamelin's fiscal year ended April
30, 1996.
THE HAMELIN ACQUISITION
On June 7, 1996, Spartech entered into an agreement (the "Purchase
Agreement") with Hamro Group Inc., a Quebec corporation, its subsidiary, Hamelin
Group Inc., a Quebec corporation, and Hamelin Group's subsidiary, Hamelin
Industries Inc., an Indiana corporation (Hamro, Hamelin Group and Hamelin
Industries are hereinafter referred to collectively as "Hamelin"), pursuant to
which, if all conditions to closing are satisfied or waived, Spartech will
acquire substantially all of the assets of Hamelin Group and Hamelin Industries
(the "Hamelin Acquisition"). Hamelin is a Canadian based manufacturer of
extruded plastic sheet, color concentrates and molded food packaging, industrial
and housewares products. Spartech believes that the Hamelin Acquisition will
strengthen its extruded sheet & rollstock and compounding groups by extending
their geographic presence, enhancing their technological capabilities and
expanding their product lines. In addition, Hamelin's molding operations will
complement the recently acquired Portage operations which participate in the
growing plastics packaging industry, as well as allow Spartech to enter new
markets. For the three years ended April 30, 1994, 1995 and 1996, Hamelin had
gross sales of $67.4 million, $78.8 million and $79.7 million, respectively.
Hamelin operates with the Canadian Dollar as its functional currency. For the
purposes of presenting the dollar amounts contained in this sub-section,
Canadian dollars have been converted into United States dollars at an exchange
rate of .7275 (the exchange rate reported as of August 3, 1996 in the Wall
Street Journal). See Financial Statements of Hamelin and "Pro Forma Financial
Data."
In addition to the assumption of certain liabilities of Hamelin (estimated
to be $8.2 million at July 27, 1996), Spartech will pay to Hamelin a base
purchase price of $57.1 million. The base purchase price will be adjusted based
on Hamelin's working capital, capital expenditures and related matters as of the
closing date. The Purchase Agreement provides that the closing will occur on a
date not later than September 30, 1996 (the "Closing Date"). The respective
obligations of Spartech and Hamelin to effect the closing are subject to the
satisfaction, at or prior to closing, of certain conditions to closing,
including the receipt of third party consents and other customary matters.
5
<PAGE> 6
THE FINANCING
In addition to the Offering, the Company expects to raise approximately $32
million of additional financing for the Hamelin Acquisition through additional
borrowings under its existing credit agreement and other private debt financings
(the "Debt Financing"). The Offering and the Debt Financing are together
referred to herein as the "Financing." The closing of the Financing and the
Hamelin Acquisition will occur simultaneously, and the closing of the Offering
is conditioned upon the closing of the Hamelin Acquisition.
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by:
The Company................................ 3,000,000 shares
Selling Stockholders....................... 3,000,000 shares
6,000,000 shares
Common Stock to be outstanding immediately
after the Offering......................... 26,460,002 shares (a)
Use of Proceeds.............................. The net proceeds to the Company of the
Offering, together with the net proceeds of
the Debt Financing, will be used to pay the
Hamelin Acquisition purchase price. See "Use
of Proceeds," "The Financing," and "Business
-- The Hamelin Acquisition."
NYSE Symbol.................................. SEH
</TABLE>
- -------------------------
(a) Does not include 2,207,062 shares as of August 3, 1996 issuable upon
exercise of stock options granted, or 1,664,000 additional shares available
for the grant of future options, under the Company's stock option plans.
6
<PAGE> 7
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA
The following summary historical and pro forma financial information should
be read in conjunction with the financial information in the historical
financial statements of Spartech and Hamelin included elsewhere herein. The
unaudited pro forma combined income statement data for the fiscal year ended
October 28, 1995, and for the nine months ended August 3, 1996, gives effect to
the acquisitions of Hamelin and Portage, the consummation of the Financing and
the application of the net proceeds therefrom as if such events had occurred at
October 30, 1994. The unaudited pro forma combined balance sheet data at August
3, 1996 gives effect to the acquisition of Hamelin, the consummation of the
Financing and the application of the net proceeds therefrom as if such events
had occurred at August 3, 1996. The pro forma combined information is based on
the historical financial statements of Spartech, the historical financial
statements of Portage, and the historical financial statements of Hamelin after
giving effect to the transactions and adjustments described in the notes to the
Pro Forma Financial Data appearing elsewhere herein. The pro forma information
may not be indicative of future financial position or financial position that
would have been reported had the transactions been completed as of the dates
assumed and do not project Spartech's financial position or results of
operations at any future date or for any period then ending.
<TABLE>
<CAPTION>
PRO FORMA
COMBINED
FISCAL YEAR ENDED OCTOBER FOR YEAR
-------------------------------------------------------- ENDED
1991 1992 1993 1994 1995 OCTOBER 28, 1995
-------- -------- -------- -------- -------- ----------------
(IN THOUSANDS, EXCEPT RATIOS AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net Sales................. $155,710 $168,800 $189,401 $256,593 $352,273 $464,983
Percent Change in Net
Sales from Prior
Year................... (6.2)% 8.4% 12.2% 35.5% 37.3% NM
Operating Earnings from
Continuing
Operations............. $ 774 $ 9,178 $ 10,569 $ 16,410 $ 24,604 $ 36,120
Operating Margin.......... 0.5% 5.4% 5.6% 6.4% 7.0% 7.8%
Net Earnings from
Continuing Operations
(a).................... $ (5,714) $ 4,220 $ 6,716 $ 10,835 $ 14,534 $ 19,400
Earnings Per Share (fully
diluted) (a)........... $ (1.85) $ .21 $ .30 $ .46 $ .60 $ .72
Dividends Per Share....... $ -- $ -- $ -- $ -- $ .09 NM
RATIO ANALYSIS:
Return on Equity (a)(b)... NM 11.4% 15.8% 20.8% 22.3%
Total Long-Term Debt as a
Percentage of Total
Capitalization......... 92.9% 51.1% 44.2% 38.5% 45.2%
</TABLE>
7
<PAGE> 8
<TABLE>
<CAPTION>
PRO FORMA
COMBINED
FOR NINE
NINE MONTHS ENDED (c) MONTHS
----------------------------- ENDED
JULY 29, AUGUST 3, AUGUST 3,
1995 1996 1996
----------- ------------ ------------
(IN THOUSANDS, EXCEPT RATIOS AND PER SHARE
DATA)
<S> <C> <C> <C>
INCOME STATEMENT DATA:
Net Sales........................................... $ 265,798 $287,019 $363,222
Percent Change in Net Sales from Prior Year......... 45.0% 8.0% N/A
Operating Earnings from Continuing Operations....... $ 18,424 $ 25,307 $ 33,791
Operating Margin.................................... 6.9% 8.8% 9.3%
Net Earnings from Continuing Operations (a)......... $ 10,895 $ 13,581 $ 17,361
Earnings Per Share (fully diluted) (a).............. $ .45 $ .55 $ .63
Dividends Per Share................................. $ .06 $ .11 N/A
</TABLE>
<TABLE>
<CAPTION>
PRO FORMA
COMBINED AT
AT JULY 29, AT AUGUST 3, AUGUST 3,
1995 1996(d) 1996
----------- ------------ ------------
(IN THOUSANDS, EXCEPT RATIOS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Working Capital..................................... $ 36,355 $ 53,053 $ 62,949
Total Assets........................................ $ 175,001 $214,403 $283,177
Total Long-Term Debt................................ $ 53,965 $ 75,250 $107,351
Total Stockholders' Equity.......................... $ 68,642 $ 82,007 $107,997
Total Long-Term Debt as a Percentage of Total
Capitalization................................... 44.0% 47.9% 49.9%
</TABLE>
- -------------------------
(a) Net earnings from continuing operations reflects an effective tax rate of
10% for 1992, 7% for 1993, 18% for 1994, 26% for 1995 and 38% for the first
nine months of 1996. The effective tax rate for 1991 is not meaningful.
(b) Represents net earnings divided by average equity. The 1992 return on equity
has been adjusted to reflect a debt-to-equity restructuring, which resulted
in the exchange of $30.2 million of the Company's subordinated debt for new
issues of preferred and common stock, as if such restructuring was completed
as of the beginning of 1992.
(c) The Company's fiscal year ends on the Saturday closest to October 31. Fiscal
year 1996 will include 53 weeks compared to 52 weeks in 1995. As a result,
the nine months ended August 3, 1996 consists of 40 weeks, compared to 39
weeks for the corresponding 1995 period.
(d) The Portage Acquisition was effective May 9, 1996 and is therefore included
in the Historical Spartech balance sheet as of August 3, 1996.
8
<PAGE> 9
RISK FACTORS
Prospective purchasers of the Common Stock offered hereby should carefully
consider the following risk factors, in addition to all of the other information
appearing or incorporated by reference in this Prospectus, in evaluating an
investment in the Common Stock. In particular, prospective investors should note
that this Prospectus contains forward-looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995, which involve known and
unknown risks, uncertainties and other factors which may cause the actual
results, performance or achievement of the Company, or industry results, to
differ materially from any future results, performance or achievements expressed
or implied by such forward-looking statements. The factors listed below
represent certain important factors the Company believes could cause such
results to differ. These factors are not intended to represent a complete list
of the general or specific risks that may affect the Company. It should be
recognized that other risks may be significant, presently or in the future, and
the risks set forth below may affect the Company to a greater extent than
indicated.
COST AND AVAILABILITY OF RAW MATERIALS
The Company uses large amounts of plastic resins in its manufacturing
processes. Such resins are crude oil or natural gas derivatives and are to some
extent affected by supply, demand and price trends in the petroleum industry.
While the Company seeks to match cost increases with corresponding price
increases, large increases in the costs of these raw materials could materially
and adversely affect the Company's operating margins. In addition, any major
disruptions in the availability of petroleum or natural gas to the Company's
suppliers could adversely impact the availability of the resins used in the
Company's manufacturing process and could have a material adverse effect on the
Company's business, financial condition or results of operations. See "Business
- -- Raw Materials."
COMPETITION
The industries in which the Company competes are highly competitive. Since
the Company manufactures a wide variety of products, it competes in different
areas with many other companies, some of which are much larger than the Company
and have more extensive production facilities, larger sales and marketing
staffs, and substantially greater financial resources than the Company. The
industries in which the Company competes are also periodically characterized by
oversupply and intense price competition. The Company competes generally on the
basis of price, product performance and customer service. There can be no
assurance that the Company will be able to continue to compete successfully in
such markets or to apply its strengths successfully to new markets. In addition,
the Company may experience competition from new entrants into the markets that
it serves and increased competition from companies offering products based on
alternative technologies and processes that may be competitive or superior in
price and performance to those of the Company.
Several of the Company's customers have, or upon expansion may acquire,
extrusion machinery. Moreover, some customers may be large enough to justify
building their own molds and shifting from thermoforming to an injection molding
process. Any material reduction in orders to the Company by its customers as a
result of a shift to in-house processing facilities could adversely affect the
Company's business, financial condition or results of operations. See "Business
- -- Competition."
LEVERAGE
The Company's consolidated long-term indebtedness was approximately $75
million at August 3, 1996, or approximately 48% of total consolidated
capitalization. On a pro forma basis, giving effect to the Financing and the
application of the net proceeds therefrom in connection with the Hamelin
Acquisition, the Company's consolidated long-term indebtedness would have been
approximately $107 million at August 3, 1996, or approximately 50% of total
consolidated capitalization.
The Company's leverage and the operating and financial restrictions imposed
by the instruments governing the Company's indebtedness may limit or prohibit,
among other things, the ability of the Company to incur additional indebtedness,
create liens, sell assets, engage in mergers, acquisitions or joint ventures,
pay
9
<PAGE> 10
cash dividends, make certain other payments or redeem stock. In addition, the
Company's leverage and such restrictions could limit its ability to respond to
changing business or economic conditions. See "Capitalization" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
ACQUISITIONS
Acquiring businesses that complement the Company's operations has been and
continues to be an important element of the Company's business strategy. Some of
the Company's major competitors have similar growth strategies, and the plastics
industry is consolidating rapidly. As a result, competition for suitable
acquisition candidates is increasing. There can be no assurance that the Company
will be able to acquire additional companies in its industry on terms favorable
to the Company. Furthermore, integrating acquired businesses requires a
significant amount of management time and skill and may place significant
demands on the Company's operations and financial resources. There can be no
assurance that the Company will be successful in integrating Hamelin, Portage or
any future acquired businesses into the Company's operations. Any failure to
effectively integrate such acquisitions into the Company's operations could have
a material adverse effect on the Company's business, financial condition or
results of operations.
In addition, the consideration used for any future acquisitions is expected
to be derived from issuances of capital stock or debt securities or from
increased borrowings under the Company's credit facility. No assurance can be
given that such financing will be available to the Company on satisfactory
terms, or at all. See "Management's Discussion and Analysis of Financial
Position and Results of Operations -- Liquidity and Capital Resources."
CONTROL BY PRINCIPAL STOCKHOLDERS
Immediately following the completion of the Offering, Vita International
Limited ("Vita") will hold approximately 33.0% of the outstanding shares of
Common Stock. It is currently anticipated that The TCW Group ("TCW") will sell
at least 2.1 million shares of its Spartech Common Stock in this Offering. At
such level, TCW's remaining shares of Common Stock will represent approximately
18.7% of the shares of Common Stock outstanding immediately following the
completion of the Offering. As a result, Vita and TCW would continue to own in
the aggregate a majority of the outstanding shares of Common Stock, and if they
chose to act in concert, such parties would be in a position to effectively
control the management and policies of the Company. The Company has been advised
by both Vita and TCW that neither is a party to any agreement with the other,
written or oral, with respect to their respective investments in the Company and
there is no understanding between them with respect to control of either the
management or policies of the Company. See "Management" and "Principal and
Selling Stockholders."
SEASONALITY
The Company's sales are seasonal in nature. Fewer orders are placed and
less manufacturing activity occurs during the November through January period.
The seasonal variation tends to track the manufacturing activities of the
Company's various customers in each region. See "Management's Discussion and
Analysis of Financial Position and Results of Operations."
POTENTIAL COSTS OF ENVIRONMENTAL COMPLIANCE
The Company's operations are subject to numerous federal, state, local and
provincial laws and regulations controlling the discharge of materials into the
environment or otherwise relating to the protection of the environment. Although
the Company does not presently anticipate that any material expenditures will be
required to enable it to comply with presently existing laws or regulations,
future costs for environmental compliance cannot be predicted with precision.
Modifications of existing environmental regulations, the adoption of new
environmental regulations in the future or unanticipated enforcement actions,
particularly with respect to environmental and safety standards, could require
material capital expenditures or otherwise have a material adverse effect on the
Company's business, financial condition or results of operations. See "Business
- -- Government Regulation."
10
<PAGE> 11
THE FINANCING
In addition to the Offering, the Company expects to raise approximately $32
million of additional financing for the Hamelin Acquisition through additional
borrowings under its existing credit agreement and other private debt financings
(the "Debt Financing"). The proceeds to the Company from the Offering and the
Debt Financing are together referred to herein as the "Financing." The closing
of the Financing and the Hamelin Acquisition will occur simultaneously, and the
closing of the Offering is conditioned upon the closing of the Hamelin
Acquisition.
USE OF PROCEEDS
The net proceeds to the Company from the Offering (after deducting
estimated underwriting discounts, commissions and offering expenses) are
estimated to be approximately $26.0 million. The Company intends to use such
proceeds, together with the net proceeds from the Debt Financing, to pay the
Hamelin Acquisition purchase price. The Company will not receive any proceeds
from the sale of Common Stock by the Selling Stockholders. In the event the
Underwriters exercise the over-allotment option granted them by one of the
Selling Stockholders, the Company will not receive any of the proceeds from the
sale of such shares.
11
<PAGE> 12
PRICE RANGE OF COMMON STOCK AND DIVIDENDS
The Common Stock commenced trading on the New York Stock Exchange ("NYSE")
on December 7, 1994. Prior to December 7, 1994, the Common Stock was traded on
the American Stock Exchange ("Amex"). The following table sets forth, for the
periods indicated, the high and low closing sales prices per share of the Common
Stock as reported on the composite tape of the NYSE and Amex, as applicable, and
dividends declared per share.
<TABLE>
<CAPTION>
DIVIDENDS
FISCAL YEARS HIGH LOW DECLARED
----------------------------------------------------- ------ ----- ---------
<S> <C> <C> <C>
1994
First Quarter...................................... $ 4 13/16 $3 9/16 --
Second Quarter..................................... $ 5 3/4 $4 1/8 --
Third Quarter...................................... $ 5 $4 1/8 --
Fourth Quarter..................................... $ 6 $4 1/8 --
1995
First Quarter...................................... $ 5 3/4 $4 7/8 --
Second Quarter..................................... $ 6 5/8 $5 1/8 .03(a)
Third Quarter...................................... $ 6 5/8 $5 5/8 .03
Fourth Quarter..................................... $ 7 3/4 $6 3/8 .03
1996
First Quarter...................................... $ 7 3/8 $6 .03
Second Quarter..................................... $10 1/8 $6 7/8 .04
Third Quarter...................................... $11 7/8 $9 1/4 .04
Fourth Quarter (through September 24, 1996)........ $10 5/8 $9 5/8 .04
</TABLE>
- -------------------------
(a) Represents special three cent per share dividend declared just following the
close of the Company's second quarter.
On September 24, 1996, the reported closing price of the Common Stock on
the NYSE was $9.75 per share. As of September 24, 1996, there were approximately
5,000 holders of record of the Common Stock.
The declaration and payment by the Company of dividends on the Common Stock
are at the discretion of the Board of Directors of the Company and depend upon
the Company's profitability, financial condition, capital needs, future
prospects and other factors deemed relevant by the Board of Directors. The
current policy of the Company is to pay dividends on a quarterly basis, subject
to those restrictions contained in the Company's bank credit facility and the
agreement governing the Company's outstanding senior notes due 2005. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
12
<PAGE> 13
CAPITALIZATION
The following table sets forth the unaudited consolidated short-term debt,
long-term debt and capitalization (i) of the Company at August 3, 1996, and (ii)
as adjusted to give effect to the acquisition of Hamelin, the Financing and the
application of the net proceeds therefrom, as if such transactions had occurred
on August 3, 1996. The table should be read in conjunction with the Consolidated
Financial Statements of the Company and Hamelin, and related notes thereto, and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AUGUST 3, 1996
---------------------------
AS ADJUSTED FOR
HAMELIN AND THE
ACTUAL FINANCING (A)
-------- ---------------
(IN THOUSANDS, EXCEPT
RATIOS)
<S> <C> <C>
Short-term debt:
Loans and current portion of long-term debt....................... $ 550 $ 903
======== ========
Long-term debt...................................................... 75,250 107,351
-------- --------
Stockholders' equity:
Common Stock, $.75 par value, 35,000,000 shares authorized,
23,609,090 shares issued (as adjusted, 26,609,090 shares
issued) (b).................................................... 17,706 19,956
Contributed capital............................................... 66,772 90,512
Retained deficit.................................................. (1,098) (1,098)
Treasury stock, at cost, 149,088 shares........................... (1,373) (1,373)
-------- --------
Total stockholders' equity..................................... 82,007 107,997
-------- --------
Total capitalization......................................... $157,257 $ 215,348
======== ========
Total Long-Term Debt as a percentage of Total Capitalization........ 48% 50%
======== ========
</TABLE>
- -------------------------
(a) Adjustments assume the estimated net proceeds to the Company of the Offering
will be $26.0 million and the estimated net proceeds from the Debt Financing
will be $32.0 million.
(b) Does not include 2,207,062 shares as of August 3, 1996 issuable upon
exercise of stock options granted or 1,664,000 additional shares available
for the grant of future options under the Company's stock option plans.
13
<PAGE> 14
PRO FORMA FINANCIAL DATA
The following unaudited pro forma combined condensed balance sheet at
August 3, 1996 gives effect to the acquisition of Hamelin, the consummation of
the Financing and the application of the net proceeds therefrom as if such
events had occurred at August 3, 1996, and the unaudited pro forma combined
condensed statement of operations for the fiscal year ended October 28, 1995,
and for the nine months ended August 3, 1996, give effect to the acquisitions of
Hamelin and Portage, the consummation of the Financing and the application of
the net proceeds therefrom as if such events had occurred at October 30, 1994.
The pro forma financial information should be read in conjunction with the
historical financial statements of the Company and the historical financial
statements of Hamelin included elsewhere herein. The pro forma information may
not be indicative of future financial position or financial position that would
have been reported had the transactions been completed as of August 3, 1996, and
is not necessarily indicative of future earnings or earnings that would have
been reported for the periods indicated had the transactions been completed at
October 30, 1994. Further, the pro forma combined condensed statement of
operations for the nine months ended August 3, 1996, should not necessarily be
taken as indicative of the results to be expected for a full year.
UNAUDITED PRO FORMA
COMBINED CONDENSED BALANCE SHEET
AT AUGUST 3, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
HISTORICAL HISTORICAL PRO FORMA PRO FORMA
SPARTECH(a) HAMELIN(b) ADJUSTMENTS COMBINED
----------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
ASSETS:
Cash......................................... $ 3,131 $ -- $ -- $ 3,131
Receivables, Net............................. 55,329 11,320 (48)(c) 66,601
Inventories.................................. 44,768 7,817 -- 52,585
Prepayments and Other........................ 1,752 452 1,038 (d) 3,242
-------- ------- ------- --------
Total Current Assets.................... 104,980 19,589 990 125,559
Property, Plant and Equipment, Net........... 74,675 18,859 16,479 (e) 110,013
Goodwill..................................... 32,920 73 12,774 (f) 45,767
Other Assets................................. 1,828 341 (331)(g) 1,838
-------- ------- ------- --------
Total Assets............................ $ 214,403 $ 38,862 $29,912 $ 283,177
======== ======= ======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Loans and Current Portion of Long-Term
Debt...................................... 550 2,381 (2,028)(h) 903
Accounts Payable and Accrued Liabilities..... 51,377 8,015 2,315 (i) 61,707
-------- ------- ------- --------
Total Current Liabilities............... 51,927 10,396 287 62,610
Long-Term Debt............................... 75,250 14,017 18,084 (j) 107,351
Other Liabilities............................ 5,219 1,671 (1,671)(k) 5,219
Total Stockholders' Equity................... 82,007 12,778 13,212 (l) 107,997
-------- ------- ------- --------
Total Liabilities and Stockholders'
Equity............................... $ 214,403 $ 38,862 $29,912 $ 283,177
======== ======= ======= ========
</TABLE>
(footnotes on following page)
14
<PAGE> 15
(footnotes from previous page)
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
(IN THOUSANDS EXCEPT SHARE DATA)
(a) The Portage Acquisition was effective May 9, 1996 and is therefore included
in the Historical Spartech balance sheet as of August 3, 1996.
(b) Hamelin operates with the Canadian Dollar (C$) as its functional currency.
For the purposes of the Pro Forma balance sheet, Hamelin's historical
balances have been translated using a "C$ into US$" exchange rate of .7275
(the currency exchange rate reported as of August 3, 1996 in the Wall
Street Journal).
(c) To eliminate the Hamelin tax receivable not acquired.
(d) Represents the deferred tax effects on the adjustments to accrued
liabilities net of the elimination of the tax credit not acquired:
<TABLE>
<S> <C>
Record deferred taxes....................................................... $ 1,140
Eliminate income tax credit................................................. (102)
--------
$ 1,038
========
</TABLE>
(e) Represents the write up of Hamelin net property, plant and equipment to its
estimated fair value.
(f) Represents the net effect of writing off the goodwill which existed prior
to the acquisition and recording the excess of the purchase price over the
estimated value of the assets acquired from Hamelin.
(g) To eliminate Hamelin other assets not acquired.
(h) To eliminate the current maturities of Hamelin's debt not assumed.
(i) Represents the net effect of the elimination of the Hamelin liabilities not
assumed and the accrued liabilities recorded in connection with the
acquisition:
<TABLE>
<S> <C>
Hamelin liabilities not assumed............................................. $ (686)
Severance, vacation pay, and other accrued liabilities...................... $ 3,001
--------
$ 2,315
========
</TABLE>
(j) Represents the net effect of the borrowings under financing arrangements
for the acquisition and the elimination of the Hamelin debt not assumed:
<TABLE>
<S> <C>
Hamelin Debt Financing...................................................... $ 32,101
Hamelin debt not assumed.................................................... (14,017)
--------
$ 18,084
========
</TABLE>
(k) Represents the net effect of the elimination of Hamelin liabilities not
assumed.
(l) Reflects the elimination of the Hamelin stockholders' equity and the net
proceeds to the Company from the Offering:
<TABLE>
<S> <C> <C>
Eliminate Hamelin equity............................................ $(12,778)
Record Offering:
Gross proceeds to the Company..................................... 27,750
Underwriter's discount and commissions............................ (1,410)
Direct costs of Offering.......................................... (350)
-------
25,990
--------
$ 13,212
========
</TABLE>
15
<PAGE> 16
UNAUDITED PRO FORMA
COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR THE FISCAL YEAR ENDED OCTOBER 28, 1995, AND
THE NINE MONTHS ENDED AUGUST 3, 1996
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 28, 1995
------------------------------------------------------------------
HISTORICAL HISTORICAL HISTORICAL PRO FORMA PRO FORMA
SPARTECH PORTAGE HAMELIN(a) ADJUSTMENTS COMBINED
---------- ---------- ---------- ----------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS:
Net Sales................................... $352,273 $ 35,318 $ 77,392 $ -- $464,983
Costs and Expenses
Cost of Sales............................. 302,394 31,059 66,055 (4,968)(c) 394,540
Selling and Administrative................ 24,545 2,829 7,101 (1,441)(d) 33,034
Goodwill Amortization..................... 730 105 4 450 (e) 1,289
-------- ------- ------- ------- --------
Operating Earnings from Continuing
Operations................................ 24,604 1,325 4,232 5,959 36,120
Interest Expense............................ 4,960 259 2,255 1,381 (f) 8,855
Other Expense (Income)...................... -- -- (227) -- (227)
-------- ------- ------- ------- --------
Earnings Before Provision for Income
Taxes..................................... 19,644 1,066 2,204 4,578 27,492
Provision for Income Taxes................ 5,110 437 680 1,865 (g) 8,092
-------- ------- ------- ------- --------
Net Earnings from Continuing Operations..... 14,534 629 1,524 2,713 19,400
Preferred Stock Accretion................. (1,098) -- -- -- (1,098)
-------- ------- ------- ------- --------
Net Earnings Applicable to Common Stock and
Equivalents............................... $ 13,436 $ 629 $ 1,524 $ 2,713 $ 18,302
======== ======= ======= ======= ========
Weighted Average Shares:
Primary................................... 16,858 3,000 19,858
======== ======= ========
Fully Diluted............................. 24,111 3,000 27,111
======== ======= ========
PER SHARE INFORMATION:
Net Earnings per Share
Primary................................... $ 0.80 $ 0.92
======== ========
Fully Diluted............................. $ 0.60 $ 0.72
======== ========
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED AUGUST 3, 1996
---------------------------------------------------------------------
HISTORICAL PRE-ACQUISITION HISTORICAL PRO FORMA PRO FORMA
SPARTECH PORTAGE(b) HAMELIN(a) ADJUSTMENTS COMBINED
---------- --------------- ---------- ----------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS:
Net Sales................................... $287,019 $18,120 $ 58,083 $ -- $363,222
Costs and Expenses
Cost of Sales............................. 242,954 15,948 48,633 (3,176)(c) 304,359
Selling and Administrative................ 18,139 1,516 5,482 (1,045)(d) 24,092
Goodwill Amortization..................... 619 52 4 305 (e) 980
-------- ------- ------- ------- --------
Operating Earnings from Continuing
Operations................................ 25,307 604 3,964 3,916 33,791
Interest Expense............................ 3,577 108 1,331 1,120 (f) 6,136
Other Expense (Income)...................... -- -- (716) 545 (h) (171)
-------- ------- ------- ------- --------
Earnings Before Provision for Income
Taxes..................................... 21,730 496 3,349 2,251 27,826
Provision for Income Taxes................ 8,149 203 852 1,261 (g) 10,465
Non-Controlling Interest.................. -- -- 9 (9) --
-------- ------- ------- ------- --------
Net Earnings from Continuing Operations..... $ 13,581 $ 293 $ 2,488 $ 999 $ 17,361
======== ======= ======= ======= ========
Weighted Average Shares:
Primary................................... 24,536 3,000 27,536
======== ======= ========
Fully Diluted............................. 24,777 3,000 27,777
======== ======= ========
PER SHARE INFORMATION:
Net Earnings per Share
Primary................................... $ 0.55 $ 0.63
======== ========
Fully Diluted............................. $ 0.55 $ 0.63
======== ========
</TABLE>
(Footnotes on following page)
16
<PAGE> 17
(footnotes from previous page)
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
(IN THOUSANDS EXCEPT SHARE DATA)
(a) Hamelin operates with the Canadian Dollar (C$) as its functional currency.
For the purposes of the Pro Forma income statements, Hamelin's historical
balances have been translated using a "C$ into US$" exchange rate of .7275
(the currency exchange rate reported as of August 3, 1996 in the Wall Street
Journal).
(b) Portage was acquired by the Company on May 9, 1996. Therefore, the
pre-acquisition statement of operations of Portage represents approximately
six months of operations from November 1, 1995 through May 8, 1996. Pro
forma adjustments related to Portage represent adjustments to this six month
period prior to the acquisition.
Results of operations of Portage subsequent to the acquisition date (May 9,
1996 through August 3, 1996) are included in the Historical Spartech
statement of operations. Total sales for Portage during this period were
approximately $8.5 million.
(c) Represents the reduction in costs of materials and conversion costs related
to the effect of Spartech's contractual arrangements and the change in
depreciation expense for the estimated fair value of plant assets, and the
elimination of non-recurring severance and salary:
<TABLE>
<CAPTION>
YEAR NINE MONTHS
ENDED ENDED
OCTOBER 28, 1995 AUGUST 3, 1996
---------------- --------------
<S> <C> <C>
Reduction in costs of sales............................. $ (2,874) $ (1,855)
Change in depreciation expense.......................... (1,706) (1,168)
Nonrecurring severance and salary....................... (388) (153)
------- -------
$ (4,968) $ (3,176)
======= =======
</TABLE>
(d) Represents the elimination of the management fee and related expenses of
previous owner, the change in depreciation expense on office assets,
reductions for duplicate administrative expenses and the elimination of the
amortization on other assets not acquired from Hamelin:
<TABLE>
<CAPTION>
YEAR NINE MONTHS
ENDED ENDED
OCTOBER 28, 1995 AUGUST 3, 1996
---------------- --------------
<S> <C> <C>
Elimination of Hamelin management fee................... $ (509) $ (382)
Change in depreciation expense.......................... (122) (85)
Reduction of duplicate administrative expenses.......... (500) (346)
Elimination of amortization on assets not acquired from
Hamelin............................................... (310) (232)
------- -------
$ (1,441) $ (1,045)
======= =======
</TABLE>
(e) Represents the amortization of new goodwill from the acquisition, net of the
elimination of amortization on goodwill which existed prior to the
acquisition:
<TABLE>
<CAPTION>
YEAR NINE MONTHS
ENDED ENDED
OCTOBER 28, 1995 AUGUST 3, 1996
---------------- --------------
<S> <C> <C>
Portage goodwill ($9,525 over 40 years less historical
amortization)......................................... $ 133 $ 67
Hamelin goodwill ($12,847 over 40 years less historical
amortization)......................................... 317 238
------- -------
$ 450 $ 305
======= =======
</TABLE>
(f) Represents interest expense at Portage on the amount of the purchase price
and the increase in interest at Hamelin for the amount borrowed under the
Debt Financing:
<TABLE>
<CAPTION>
YEAR NINE MONTHS
ENDED ENDED
OCTOBER 28, 1995 AUGUST 3, 1996
---------------- --------------
<S> <C> <C>
Portage acquisition ($17,686 at average 6.25% LIBOR).... $ 1,105 $ 553
Spartech bank borrowings ($2,101 at average 6.25%
LIBOR)................................................ 131 98
Debt financing for Hamelin ($30,000 at 8%, net of
previously recorded interest expense)................. 145 469
------- -------
$ 1,381 $ 1,120
======= =======
</TABLE>
(g) To adjust the tax rate for Portage and Hamelin to 38%.
(h) To eliminate the non-recurring income from research and development
investment tax credits related to Hamelin's fiscal years 1987 through 1995,
received and recorded in the nine-month period ended August 3, 1996.
17
<PAGE> 18
SELECTED HISTORICAL FINANCIAL DATA
The following table sets forth, for the periods and dates indicated,
selected financial data derived from the Consolidated Financial Statements of
the Company for the five-year period ended October 28, 1995. The selected
historical financial data for the nine months ended August 3, 1996 and July 29,
1995 are unaudited and, in the opinion of management, include all adjustments
which are of a normal recurring nature necessary for a fair presentation. The
information for interim periods may not be indicative of a full year's results.
The Consolidated Financial Statements of the Company for the five year period
ended October 28, 1995 were audited by Arthur Andersen LLP. The report of Arthur
Andersen LLP appears elsewhere in this Prospectus. This table should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Financial Statements and related notes.
<TABLE>
<CAPTION>
NINE MONTHS ENDED(A)
FISCAL YEAR ENDED OCTOBER ---------------------
-------------------------------------------------------- JULY 29, AUGUST 3,
1991 1992 1993 1994 1995 1995 1996
-------- -------- -------- -------- -------- -------- ---------
(IN THOUSANDS, EXCEPT RATIOS AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS:
Net Sales.................................... $155,710 $168,800 $189,401 $256,593 $352,273 $265,798 $ 287,019
Cost of Sales and Other Expenses............. 150,904 159,085 178,269 239,561 326,939 246,826 261,093
Amortization of Intangibles.................. 532 537 563 622 730 548 619
Nonrecurring Transactions.................... (3,500) -- -- -- -- -- --
-------- -------- -------- -------- -------- -------- --------
Operating Earnings -- Continuing
Operations................................. 774 9,178 10,569 16,410 24,604 18,424 25,307
Interest Expense............................. 6,201 4,495 3,350 3,125 4,960 3,779 3,577
-------- -------- -------- -------- -------- -------- --------
Earnings Before Provision for Income Taxes... (5,427) 4,683 7,219 13,285 19,644 14,645 21,730
Provision for Income Taxes................. 287 463 503 2,450 5,110 3,750 8,149
-------- -------- -------- -------- -------- -------- --------
Net Earnings (Loss)(b)
Continuing Operations...................... (5,714) 4,220 6,716 10,835 14,534 10,895 13,581
Discontinued Operations.................... (12,000) -- -- -- -- -- --
-------- -------- -------- -------- -------- -------- --------
$(17,714) $ 4,220 $ 6,716 $ 10,835 $ 14,534 $ 10,895 $ 13,581
======== ======== ======== ======== ======== ======== ========
PER SHARE INFORMATION(B):
Fully Diluted Earnings
Continuing Operations...................... $ (1.85) $ .21 $ .30 $ .46 $ .60 $ .45 $ .55
Discontinued Operations.................... (3.17) -- -- -- -- -- --
-------- -------- -------- -------- -------- -------- --------
$ (5.02) $ .21 $ .30 $ .46 $ .60 $ .45 $ .55
======== ======== ======== ======== ======== ======== ========
Dividends Declared per Share................. $ -- $ -- $ -- $ -- $ .09 $ .06 $ .11
======== ======== ======== ======== ======== ======== ========
RATIO ANALYSIS:
Operating Margin............................. 0.5% 5.4% 5.6% 6.4% 7.0% 6.9% 8.8%
Return on Equity (Annualized)(b)(c).......... NM 11.4% 15.8% 20.8% 22.3% 22.9% 23.5%
Total Long-Term Debt as a Percentage of Total
Capitalization............................. 92.9% 51.1% 44.2% 38.5% 45.2% 44.0% 47.9%
BALANCE SHEET DATA:
Working Capital.............................. $ 22,299 $ 23,997 $ 25,032 $ 26,351 $ 45,108 $ 36,355 $ 53,053
======== ======== ======== ======== ======== ======== ========
Total Assets................................. $108,752 $106,546 $114,194 $135,720 $178,329 $175,001 $ 214,403
======== ======== ======== ======== ======== ======== ========
Long Term Debt, Less Current Maturities
Senior..................................... $ 34,250 $ 30,783 $ 26,283 $ 26,285 $ 59,510 $ 43,831 $ 75,250
Subordinated............................... 40,297 10,134 10,134 10,134 -- 10,134 --
-------- -------- -------- -------- -------- -------- --------
$ 74,547 $ 40,917 $ 36,417 $ 36,419 $ 59,510 $ 53,965 $ 75,250
======== ======== ======== ======== ======== ======== ========
Stockholders' Equity......................... $ 5,705 $ 39,121 $ 46,041 $ 58,233 $ 72,128 $ 68,642 $ 82,007
======== ======== ======== ======== ======== ======== ========
</TABLE>
- -------------------------
(a) The Company's fiscal year ends on the Saturday closest to October 31. Fiscal
year 1996 will include 53 weeks compared to 52 weeks in 1995. As a result,
the nine months ended August 3, 1996 consists of 40 weeks, compared to 39
weeks for the corresponding 1995 period.
(b) Net earnings from continuing operations reflects an effective tax rate of
10% for 1992, 7% for 1993, 18% for 1994, 26% for 1995 and 38% for the nine
months of 1996. The effective tax rate for 1991 is not meaningful.
(c) Represents net earnings divided by average equity. The 1992 return on equity
has been adjusted to reflect a debt-to-equity restructuring, which resulted
in the exchange of $30.2 million of the Company's subordinated debt for new
issues of preferred and common stock, as if such restructuring was completed
as of the beginning of 1992.
18
<PAGE> 19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the "Selected
Financial Data" and the Consolidated Financial Statements and notes thereto
appearing elsewhere in this Prospectus.
RESULTS OF OPERATIONS
Comparison Of The Nine Months Ended August 3, 1996 And The Nine Months Ended
July 29, 1995
The Company's fiscal year ends on the Saturday closest to October 31.
Fiscal year 1996 will include 53 weeks compared to 52 weeks in 1995. As a
result, the nine months ended August 3, 1996 consists of 40 weeks, compared to
39 weeks for the same 1995 period. The operating results presented below include
discussions as a percentage of sales for additional comparison.
Net sales of $287.0 million for the nine months ended August 3, 1996
increased 8.0% from $265.8 million for the same period in 1995. The Extruded
Sheet & Rollstock Group's sales increased approximately 10% in 1996 representing
a 4% increase in pounds shipped and a 4% increase in sales related to the
acquisition of Portage on May 9, 1996, with the remaining increase coming from a
change in the mix of products sold in the period. Sales by the Merchant
Compounding Group for the nine months ended August 3, 1996 were up 3% when
compared to the same nine month period in 1995, despite a decline in volume for
the third quarter related to the start-up transition at a recently installed
production line.
Cost of sales increased 6.4% to $243.0 for the nine months ended August 3,
1996, compared with $228.2 million for the same period of 1995, but decreased to
84.6% of net sales for 1996 from 85.9% for 1995. The stabilization of raw
material prices and improved production efficiencies, partially offset by an
increase in depreciation as a result of capital expenditures incurred by the
Company during the last 12 months, contributed to a more favorable cost of sales
percentage.
Selling and administrative expenses of $18.1 million for the first nine
months of 1996 decreased slightly when compared to $18.6 million for the
comparable period in 1995. On a percentage of net sales basis, selling and
administrative expenses decreased to 6.3% in 1996 from 7.0% in 1995. The
decrease in 1996 was primarily a result of the absence of significant legal
expenses incurred in 1995 and continued cost containment efforts in 1996.
Operating earnings for the nine months ended August 3, 1996 were $25.3
million (8.8% of net sales) compared to $18.4 million (6.9% of net sales) for
the corresponding period in 1995. The gain in operating earnings was achieved
through the increased sales discussed above, improved production efficiencies,
and cost containment efforts.
Interest expense of $3.6 million for the nine months ended August 3, 1996
decreased from $3.8 million for the same period in 1995, reflecting both the
refinancing of the Company's Bank Credit Facility and completion of a $50
million Private Placement in the last quarter of fiscal 1995 at more favorable
rates than the previous financing arrangements.
As a result of the utilization of substantially all of the Company's book
loss carryforwards in 1995, the income tax provision was substantially higher
for the nine months ended August 3, 1996 compared to the same period in 1995.
The Company's effective tax rate increased to approximately 38% for the first
nine months of 1996 from approximately 26% for the same period in 1995. However,
actual tax payments for 1996 will only be 70-80% of the provision due to
continuing tax net operating loss carryforwards and depreciation timing
differences.
Comparison Of Fiscal Years 1995 And 1994
Net sales of $352.3 million in 1995 increased significantly (37.3%) from
the prior year's net sales of $256.6 million principally due to volume gains 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 the Company's November
1, 1994, acquisition of
19
<PAGE> 20
Pawnee Industries, Inc.'s ("Pawnee") Extrusion Division and the Company's
February 2, 1994, acquisition of certain assets of Product Components, Inc.
("ProCom") and from increased sales of the extruded sheet and rollstock products
into the sign/advertising, home improvement, and materials handling markets. In
addition, the merchant compounding group's sales volume was up 48% due to
stronger demand from the specialty extrusion, office product, wallcovering and
footwear industries and the group's newly acquired color concentrate facility.
(See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Cash Flow" for a further discussion of these acquisitions).
Fiscal year 1995 cost of sales of $302.4 million increased from the 1994
amount of $219.6 million, but remained consistent as a percentage of net sales.
This consistency was achieved despite higher material costs caused by greater
worldwide demand for plastic resins and an increase in depreciation expense.
Improved 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
preceding eighteen months (approximately $14.2 million).
Selling and administrative expense of $24.5 million in 1995 increased by
more than 22% from the 1994 amount of $20.0 million, 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 from 7.8% in 1994 to 7.0% for 1995.
Operating earnings of $24.6 million for 1995 were 7.0% of net sales and
increased from 1994 operating earnings of $16.4 million which were 6.4% of net
sales. The increase was a result of the higher sales volumes discussed above,
improved production efficiencies, cost containment efforts and the benefits of
the Pawnee and ProCom acquisitions.
Interest expense was $5.0 million, a significant increase compared to the
$3.1 million incurred in 1994, 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 as compared to 1994.
The income tax provision was substantially higher in 1995 as a result of
increased profitability and the utilization of substantially all of the
Company's book net operating loss carryforwards during 1994. The Company's
effective tax rate was 26% for 1995 and 18% for 1994.
Comparison Of Fiscal Years 1994 And 1993
Net sales of $256.6 million in 1994 increased significantly from $189.4
million in the prior year, principally due to record volumes generated by the
Company's extruded sheet & rollstock group. In addition, sales volume increases
were achieved by the merchant compounding group, primarily the result of
stronger demand from the recreational vehicle and home appliance industries. The
acquisition of ProCom accounted for 45% of the total volume increase. The
remaining gain came from improved sales to the spa, food packaging, and
transportation markets.
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 decreased as a percentage of net sales
(7.8% for 1994 compared to 8.9% for 1993) but increased to $20.0 million in 1994
from $16.9 million incurred in 1993, primarily as a result of the ProCom
acquisition and an increase in legal fees associated with the defense of the
Powers lawsuit.
As a result of the preceding items, operating earnings increased
significantly to $16.4 million or 6.4% of net sales in 1994 versus $10.6 million
or 5.6% of net sales in 1993, reflecting the improved levels of volume, the sale
of higher margin products, and increased production efficiencies.
20
<PAGE> 21
Interest expense of $3.1 million was slightly lower in 1994 compared to
1993's $3.4 million as the Company's cash flow from operations used to reduce
outstanding indebtedness more than offset the increase in debt levels due to the
ProCom acquisition and increases in interest rates during the year.
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 will continue in the future.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flow
The Company's primary sources of liquidity have been cash flows from
operating activities and borrowings from third parties. The Company's principal
uses of cash have been to support its operating activities, invest in capital
improvements, and finance strategic acquisitions. The Company's cash flows for
the periods indicated are summarized as follows:
<TABLE>
<CAPTION>
FISCAL YEAR NINE MONTHS
1994 1995 1995 1996
------ ------ ------ ------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Net cash provided by operating activities..... $ 13.4 $ 16.5 $ 13.6 $ 13.7
Net cash used for investing activities........ (14.2) (33.5) (31.0) (23.8)
Net cash provided by financing activities..... 1.1 18.8 17.3 9.7
</TABLE>
The Company continues to generate strong cash flows from operations,
resulting from the 34% and 25% increases in net earnings in fiscal year 1995 and
nine months 1996 compared to the corresponding periods of the prior year,
respectively, net of the impact of changes in working capital. Operating cash
flows used for changes in working capital increased $6.0 million (net of the
Pawnee acquisition) in fiscal year 1995 and $6.6 million (net of the Portage
Acquisition) in the nine months ended August 3, 1996, primarily as a result of
the increase in inventories to support future shipments and the increase in
accounts receivable arising from the expanded sales levels. In addition, as a
result of increased profitability and the limitation on the use of the remaining
tax net operating loss carryforwards, the Company has begun paying increased
Federal income taxes. The Company paid approximately $6.2 million for the first
nine months of 1996 versus $3.5 million and $1.0 million for the full fiscal
years of 1995 and 1994 respectively.
The Company's primary investing activities are capital expenditures and
acquisitions of businesses in the plastics industry. Capital expenditures are
primarily incurred to maintain and improve productivity, as well as to modernize
and expand facilities. Capital expenditures for the nine months ended August 3,
1996, nine months ended July 29, 1995 and fiscal years ended 1995 and 1994 were
$6.3 million, $7.4 million, $10.0 million and $8.2 million, respectively.
Highlights of the Company's sizable $10.0 million in capital
21
<PAGE> 22
expenditures for 1995 include the installation of new production lines at the
Spartech Plastics-Atlanta, Georgia, Paulding, Ohio, McMinnville, Oregon, and
Arlington, Texas plants. In addition, the 22% increase in capital expenditures
over the prior fiscal year related to the purchase of four new rollstands and
the upgrading of all facilities, in particular those operations obtained through
the recent acquisitions of Pawnee and ProCom.
The Company anticipates total capital expenditures of approximately $9.5
million for fiscal 1996. New extrusion lines, scheduled for the Spartech
Compounding-Cape Girardeau, Missouri, and Spartech Plastics-Cape Girardeau,
Missouri facilities, represent the major items included in this figure.
Effective May 9, 1996, the Company completed the purchase of all of the
outstanding stock of Portage for a cash purchase price of approximately $17.6
million including estimated costs of the transaction. This acquisition of stock
was funded by the Company's existing unsecured credit facility. On November 1,
1994, the Company acquired certain divisions of Pawnee for approximately $24
million in cash and the assumption of certain liabilities. On February 2, 1994,
the Company acquired certain assets of ProCom for approximately $6.8 million in
cash and the assumption of certain liabilities.
Financing Arrangements
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.
Effective May 1, 1995, all of the Company's Preferred Stockholders
converted their shares into common stock increasing the Company's 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 has declared a regular quarterly cash dividend for
each quarter since the third quarter of 1995.
The Company anticipates that cash flow from operations, together with the
Financing and borrowings under the Company's credit facility, will satisfy its
working capital needs and planned capital expenditures for the next year.
22
<PAGE> 23
BUSINESS
THE COMPANY
The Company is a leading producer of engineered thermoplastic materials and
polymeric compounds for a wide spectrum of manufacturing customers. The
Company's 15 nationwide facilities produce annually more than 400 million pounds
of extruded sheet & rollstock and specialty plastic alloys, compounds and color
concentrates. Spartech's business is conducted through two operating groups: the
Extruded Sheet & Rollstock Group and the Merchant Compounding Group. The Company
was incorporated in the State of Delaware in 1968, succeeding a business which
had commenced operations in 1960.
Spartech's Extruded Sheet & Rollstock Group operates 11 plants nationwide
under the name Spartech Plastics and is the largest extruder of rigid plastic
sheet & rollstock in North America according to the Plastics News 1995 annual
ranking. Spartech Plastics' finished products are generally thermoformed by its
customers for use in a myriad of items including vehicle interiors, signs, spas
and showers, materials handling and packaging products, burial vault liners,
boats and refrigerators.
Spartech's Merchant Compounding Group operates four plants under the names
Spartech Compounding and Spartech Vy-Cal Plastics. This group's custom-designed
plastic alloys, compounds, color concentrates and calendared film are utilized
by a large number of manufacturing customers for specialized footwear, shutters,
loose leaf binders, cosmetic packaging products and numerous other plastic
applications.
In 1984, the Company began a restructuring program designed to expand its
plastics processing business and dispose of all non-plastics assets. Since that
time, the Company has completed eight acquisitions, including the May 1996
acquisition of Portage. In the past three years, the Company's total annual
sales have grown at a compound annual growth rate of approximately 28% from
$168.8 million in 1992 to $352.3 million in 1995. Since the beginning of 1992,
the Company has recorded 19 consecutive quarters of earnings improvement over
the comparable prior year's quarter. Annual net earnings and fully diluted
earnings per share have grown from $4.2 million to $14.5 million and from $0.21
to $0.60, respectively, during that same period, representing compound annual
growth rates in excess of 40%. The Company estimates that internal sales
(excluding growth from acquisitions) have grown at a compound annual growth rate
of approximately 15% during the three years from 1992 to 1995.
In 1989, the Company instituted its "Total Transaction Quality Program"
which emphasizes quality in all aspects of its business from production and
suppliers to sales and customer service personnel. Seven of Spartech's
production facilities are ISO 9002 certified, and the Company expects to have
its remaining eight plants certified by the end of 1997.
INDUSTRY OVERVIEW
The plastics industry consists of a broad group of companies, including
primary resin producers and compounders, intermediate processors and end-product
manufacturers. The overall industry in the United States is estimated to have
produced 78.7 billion pounds of plastic in 1995, according to the Society of
Plastics Industry, Inc., Facts & Figures of the U.S. Plastics Industry. The
Company operates principally in the extruded sheet & rollstock and thermoplastic
compound niches of the industry, converting resins to custom rigid plastic sheet
or specialized compound materials. Alternative processes in the industry include
profile extrusion, blow molding, injection molding, and blown & calendared film.
Since 1992, the United States plastics industry overall has grown by an
estimated compound annual growth rate of 5.8%, according to the Society of
Plastics Industry, Inc., Facts & Figures of the U.S. Plastics Industry.
A major trend within the industry, and the principal factor driving its
growth, is the ongoing transition from the use of other materials to recyclable
thermoplastics. Plastics are replacing wood, glass and metals as the raw
material of choice for many products, as manufacturers seek to reduce costs,
improve product performance and address environmental issues through the use of
recyclable materials. This trend has been evident for some time in the
thin-gauge segment of the plastics market but is only now beginning to impact
heavy-gauge demand. Heavy-gauge plastics are replacing other materials in
products such as automobile parts, slides, lawn mower components, camper tops,
pallets, wheel covers and truck bumpers. Sales of heavy gauge thermoplastic
products represented a majority of the Company's annual revenues over the past
three years.
23
<PAGE> 24
Another significant trend within the plastics industry is consolidation. A
large percentage of the plastics manufacturers in the United States are small,
regional operations that generate less than $50 million in annual sales. Many of
the small plastics businesses created during the 1960s are seeking buyers as
their founders approach retirement age. Due to the size and breadth of its
operations, the Company is well positioned to increase market share through
selective acquisitions which leverage its purchasing power, technical expertise
and operating efficiencies.
BUSINESS STRATEGY
The Company's business strategy focuses on balanced revenue growth through
both internal means -- new product development and product transformation
initiatives -- and strategic acquisitions. Additionally, the Company's operating
plan emphasizes ongoing cost containment and productivity improvement efforts to
improve operating earnings and further enhance stockholder returns. Key elements
of the Company's business strategy include:
- - LEADING MARKET POSITION -- Spartech is the largest extruder of rigid plastic
sheet & rollstock in North America according to the Plastics News 1995 annual
ranking. The Company utilizes its leading market position to drive new product
development and product transformation initiatives with both customers and
suppliers and to obtain economies of scale, particularly in the areas of
purchasing and production. As a result of its broad geographic presence, the
Company is also one of the few custom extruders of rigid plastic sheet &
rollstock able to provide service on a nationwide basis.
- - ONGOING PRODUCTIVITY IMPROVEMENTS -- The Company has made substantial
investments in new equipment both to expand capacity to support revenue growth
and to upgrade facilities to improve productivity. Capital expenditures for
1995 and 1994 were $10.0 million and $8.2 million, respectively, approximately
twice depreciation for those same periods. These expenditures have expanded
capacity and contributed to the reduction of conversion costs (manufacturing
labor and overhead costs). Conversion costs per pound have decreased by
approximately 5% from 1993 to 1995. Capital expenditures are projected to be
approximately $9 million in 1996.
- - EXPANDING LINE OF PRODUCTS AND CAPABILITIES -- The Company believes it is the
broadest line supplier of extruded sheet & rollstock, processing more types of
resin than any other North American supplier. The Company works closely with
its customers to provide products which meet their evolving needs and seeks to
differentiate itself from its competitors by emphasizing consistent product
quality and outstanding customer service. The Company's sales force consists
of approximately 50 individuals in direct sales and 40 individuals in customer
service support functions. Spartech's salespeople are knowledgeable about a
wide range of raw material resin types used for a variety of applications. The
Company capitalizes on the technical expertise of its sales force to provide
cost effective, innovative solutions for its customers. As the Company expands
its product line through strategic acquisitions, it is able to expand the
range of products it can offer to its existing customers, further
strengthening key supplier partnerships.
- - DIVERSIFIED CUSTOMER BASE AND GEOGRAPHIC PRESENCE -- The Company sells to
approximately 2,400 customers operating in a broad range of industries located
throughout North America. This customer and geographic diversity helps
minimize Spartech's exposure to economic downturns. Spartech's 15 plants
across the United States position the Company close to the marketplace,
enabling efficient delivery and promoting continuous customer contact.
- - PRODUCT TRANSFORMATIONS -- The Company drives internal sales growth by
actively working with its customers and suppliers in the transition of
products from traditional materials -- wood, metal and glass -- to high
performance and less expensive recyclable thermoplastics. This trend of
transforming products to thermoplastic materials is impacting many industries
and creating growth and diversification opportunities for Spartech. For
example, materials handling products previously made of wood and cardboard,
such as pallets and specialty packaging, are being replaced with lighter
weight, more customized thermoplastic sheet. Shutters, siding, gutters,
bathtubs and spas for the housing industry, previously manufactured from wood,
fiberglass and metal, are also being made more durable with thermoplastics.
24
<PAGE> 25
- - STRATEGIC ACQUISITIONS -- The size and breadth of Spartech's operations
position the Company well for expansion through selective acquisitions in the
consolidating plastics industry. In evaluating acquisition opportunities,
Spartech looks for candidates that can complement its existing product lines
and extend its geographic coverage. Spartech considers acquisitions only
within the plastics industry, with a special emphasis on companies producing
specialty or value-added thermoplastic products. Spartech focuses on acquiring
profitable operations that can benefit from its operating efficiencies and
purchasing capabilities. The pending acquisition of the extrusion, color and
molding assets of Hamelin (as defined below) is expected to increase the
Company's production capacity by approximately 20% and annual sales by
approximately $80 million based on sales for Hamelin's fiscal year ended April
30, 1996.
THE HAMELIN ACQUISITION
On June 7, 1996, Spartech entered into an agreement with Hamro Group Inc.,
a Quebec corporation, and its subsidiary, Hamelin Group Inc., a Quebec
corporation, and Hamelin Group's subsidiary, Hamelin Industries Inc., an Indiana
corporation, pursuant to which, if all conditions to closing are satisfied or
waived, Spartech will acquire substantially all of the assets of Hamelin Group
and Hamelin Industries. Hamelin is a Canadian based manufacturer of extruded
plastic sheet, color concentrates and molded food packaging, industrial and
housewares products. Spartech believes that the Hamelin Acquisition will
strengthen its extruded sheet & rollstock and compounding groups by extending
their geographic presence, enhancing their technological capabilities and
expanding their product lines. In addition, Hamelin's molding operations will
complement the recently acquired Portage operations which participate in the
growing plastics packaging industry, as well as allow Spartech to enter new
markets. For the three years ended April 30, 1994, 1995 and 1996, Hamelin had
gross sales of $67.4 million, $78.8 million and $79.7 million, respectively.
Hamelin operates with the Canadian Dollar as its functional currency. For the
purposes of presenting the dollar amounts contained in this sub-section,
Canadian dollars have been converted into United States dollars at an exchange
rate of .7275 (the exchange rate reported as of August 3, 1996 in the Wall
Street Journal). See Financial Statements of Hamelin and "Pro Forma Financial
Data."
In addition to the assumption of certain liabilities of Hamelin (estimated
to be $8.2 million at July 27, 1996), Spartech will pay to Hamelin a base
purchase price of $57.1 million. The base purchase price will be adjusted based
on Hamelin's working capital, capital expenditures and related matters as of the
closing date. The Purchase Agreement provides that the closing will occur on a
date not later than September 30, 1996. The respective obligations of Spartech
and Hamelin to effect the closing are subject to the satisfaction, at or prior
to closing, of certain conditions to closing, including the receipt of third
party consents and other customary matters.
Hamelin's seven facilities (two extruded sheet plants located in Cornwall,
Ontario and Granby, Quebec; one color concentrate house situated in Stratford,
Ontario; and four molding facilities, three located in Canada and one in
Indiana) will provide both product line expansion and improved geographic
coverage in Canada and the Northeastern United States.
COMPLETED ACQUISITIONS
An important component of Spartech's growth strategy has been the Company's
ability to successfully identify and complete strategic acquisitions within the
plastics industry and efficiently integrate acquired operations into its
extruded sheet & rollstock or compounding groups. The integration process
typically includes the exchange of product development efforts, the expansion of
product offerings available to customers through the Company's nationwide sales
force and the consolidation of resin purchasing to gain economies of scale.
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<PAGE> 26
The following table provides certain information regarding various
acquisitions consummated by Spartech over the past 12 years:
<TABLE>
<CAPTION>
SALES
DATE COMPANY LOCATIONS PRODUCTS (IN MILLIONS) (A)
- ------ ------------------------ --------- ------------------------ -----------------
<C> <S> <C> <C> <C>
05/84 Southwest Converting TX Sheet & Rollstock $ 8
01/86 Franklin/Vy-Cal Plastics NJ/PA Alloys & Compounds $30
12/86 Atlas Plastics Corp. (b) MO/TX/MN Sheet & Rollstock $32
12/86 The Resin Exchange (b) MO Alloys & Compounds $ 8
07/87 Eagle Plastics OR Sheet & Rollstock $ 4
01/93 Penda Corp. (Extrusion) WI Sheet & Rollstock $12
02/94 Product Components IN/MI Sheet & Rollstock $30
11/94 Pawnee Extrusion (c) KS/OH Sheet & Rollstock $46
11/94 Pawnee Color (c) KS Color Concentrates $10
05/96 Portage Industries WI Sheet & Rollstock $35
</TABLE>
- -------------------------
(a) The Company's estimate of approximate annual sales for the 12 month period
prior to the date of acquisition.
(b) Atlas Plastics Corp. and The Resin Exchange were acquired in the same
transaction.
(c) Pawnee Extrusion and Pawnee Color were acquired in the same transaction.
Acquisition of Portage
Effective May 9, 1996, the Company completed its acquisition of Portage by
means of a cash merger. The total purchase price for Portage's net assets
totaled approximately $17.6 million including estimated costs of the
transaction. The acquisition of Portage has been accounted for as a purchase.
The purchase price was funded by the Company's existing unsecured credit
facility. See "Pro Forma Financial Data."
Portage is a manufacturer of extruded plastic sheet & rollstock and light
gauge packaging products located in Portage, Wisconsin. Portage manufactures and
markets extruded and coextruded plastic sheet & rollstock which is sold to
customers for use in the manufacture of a wide range of products, including
parts for automotive and recreational vehicles, farm equipment components,
environmental products, lawn and garden items, agricultural products, home
improvement products and packaging for items such as meat and dairy, medical
devices and pharmaceuticals. For the year ended December 31, 1995, Portage's
sales were $35.6 million.
EXTRUDED SHEET & ROLLSTOCK
The Company's extruded sheet & rollstock group operates under the name
Spartech Plastics and is the nation's largest extruder of custom rigid sheet &
rollstock, manufacturing and marketing both single and multilayer co-extruded
plastic sheet for many applications. The group, operating 64 extrusion lines,
annually produces over 300 million pounds of extruded sheet & rollstock from
several types of resins, including acrylonitrile butadiene styrene ("ABS"),
polycarbonate, polypropylene, acrylic, polyethylene, polystyrene and
polyethylene terephthalate ("PET"), on a custom basis for end product
manufacturers.
Net sales and operating earnings (consisting of earnings before interest,
taxes and corporate operations/allocations) of the extruded sheet & rollstock
group for 1993, 1994 and 1995 are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR
------------------------------
1993 1994 1995
------ ------ ------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Net Sales........................................ $150.1 $210.0 $283.2
Operating Earnings............................... $ 11.7 $ 18.8 $ 25.7
</TABLE>
Products -- Customers of the extruded sheet & rollstock group use the
Company's plastic sheet & rollstock principally in the manufacture of vehicle
interiors, signs, spas and showers, food packaging products, burial vault
liners, boats and private watercraft and refrigerators. Most of the Company's
customers thermoform, cut and trim their plastic sheet for various end uses.
26
<PAGE> 27
Manufacturing -- The principal raw materials used in manufacturing extruded
sheet & rollstock are plastic resins in pellet form, which are crude oil or
natural gas derivatives. The Company extrudes a wide variety of plastic resins,
including ABS, polycarbonate, polypropylene, acrylic, PET, polystyrene and
polyethylene.
The Company produces plastic sheet of up to three layers using a
multi-extrusion process, combining the materials in distinct layers as it is
extruded through the die into a sheet form. More than half of the Company's
plastic sheet is produced using a multi-extrusion process. The remainder is
produced in a single layer using conventional extrusion processes. In some
cases, the Company will coat the plastic sheet or laminate sheets together in
order to achieve performance characteristics desired by customers for particular
applications.
Marketing, Sales and Distribution -- The custom sheet extrusion business
has generally been a regional business supplying manufacturers within an
estimated 500 mile radius of each of the group's 11 plants because of shipping
costs for rigid plastic material and the need for prompt response to customer
requirements and specifications. The outdoor sign and spa businesses, however,
are more national in scope.
The Company markets its extruded sheet & rollstock products principally
through its own sales force, but also uses a limited number of independent sales
representatives. The Company generally does not sell products of the extruded
sheet & rollstock group under long-term contracts. During 1995, the extruded
sheet & rollstock group sold its products to approximately 1,600 customers.
MERCHANT COMPOUNDING
The Company's merchant compounding group is comprised of Spartech
Compounding and Spartech Vy-Cal Plastics. The merchant compounding group
primarily manufactures plastic alloys, compounds and color concentrates for end
product manufacturers. In addition, the Spartech Compounding-Cape Girardeau
facility distributes thermoplastic resins purchased from other resin suppliers.
Spartech Vy-Cal Plastics operates a vinyl calendar, supplying finished PVC film
to manufacturers of loose-leaf binders, decorator grade wallcoverings and
packaging products for the medical industry. The group annually produces and/or
distributes over 90 million pounds of thermoplastic compounds, color
concentrates and PVC film, selling to a number of large and small manufacturers
of precision plastic products.
Net sales and operating earnings (consisting of earnings before interest,
taxes and corporate operations/allocations) of the merchant compounding group
for 1993, 1994 and 1995 are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR
---------------------------
1993 1994 1995
----- ----- -----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Net Sales........................................... $39.3 $46.6 $69.1
Operating Earnings.................................. $ 2.2 $ 2.8 $ 4.6
</TABLE>
Products -- Customers of the merchant compounding group include both
extrusion and injection molding businesses. The group's compounds are
principally used in the manufacture of specialized footwear, shutters,
loose-leaf binders, cosmetic packaging products and numerous other custom
plastic applications.
Spartech Compounding produces a highly diversified range of compounds,
including: clear compounds for food, beverage and medical applications;
phosphorescent and fluorescent compounds; PVC combinations incorporating nitrile
and polyurethane for chemical and abrasion resistance for footwear, color
compounds and other specialty applications.
Spartech Vy-Cal Plastics operates as a custom specialty house with its own
laboratory facility for quality testing of color, thickness, texture, tensile
strength and dimensional stability of its specialized film output.
Manufacturing -- The principal raw materials used in manufacturing
specialty plastic alloys, compounds and color concentrates are plastic resins in
powder and pellet form, primarily PVC and ABS, with colorants, stabilizers and
several other additives used to obtain particular qualities in the plastic resin
once it is heated and extruded or molded into end products.
The group has well-equipped laboratory facilities, with experimental
extruders and various types of chemical analysis and testing equipment. In
addition to compounding technology, the group has developed enhanced
capabilities to produce color concentrates and additives.
27
<PAGE> 28
Marketing, Sales and Distribution -- The merchant compounding group markets
most of its products to East Coast and Midwest customers. The group markets its
products principally through its own sales force, but also uses independent
sales representatives. During 1995, the merchant compounding group sold its
products to approximately 800 customers.
RAW MATERIALS
The Company uses large amounts of plastic resins in its manufacturing
processes. Such resins are crude oil or natural gas derivatives and their price
and availability are, to some extent, affected by supply, demand and price
trends in the petroleum industry. The Company does business with most of the
major resin manufacturers and has enjoyed good relationships with such suppliers
over the past several years. The Company has been able to adequately obtain all
of its required raw materials to date and expects to be able to continue to
satisfy its requirements in 1996 and beyond.
SEASONALITY
The Company's sales are seasonal in nature. Fewer orders are placed and
less manufacturing activity occurs during the November through January period.
The seasonal variation tends to track the manufacturing activities of the
Company's various customers in each region. See "Management's Discussion and
Analysis of Financial Position and Results of Operations."
COMPETITION
The industries in which the Company competes are highly competitive. Since
the Company manufactures a wide variety of products, it competes in different
areas with many other companies, some of which are much larger than the Company
and have more extensive production facilities, larger sales and marketing
staffs, and substantially greater financial resources than the Company. The
industries in which the Company competes are also periodically characterized by
oversupply and intense price competition.
Important competitive factors in each of the Company's businesses include
the ability to: (1) manufacture consistently to required quality levels, (2)
provide excellent customer service, including timely deliveries, (3) exercise
skill in raw materials purchasing and (4) achieve production line efficiencies
to process the products profitably.
The Company is an intermediate processor of extruded sheet & rollstock
which is sold to customers who shape it for their end use with thermoforming
equipment. Several of these customers have, or upon expansion may acquire,
extrusion machinery. Moreover, some customers may be large enough to justify
building their own molds and shifting from thermoforming to an injection molding
process. Injection molding techniques become competitive whenever large
quantities are produced or fine detailing or contouring is required on the end
product. However, thermoforming techniques have been improved in recent years
and are generally less expensive than other manufacturing methods due to lower
equipment costs and other associated start-up expenses. In addition, the Company
expects to benefit from a growing trend of outsourcing of specialized
semifinished materials by many manufacturers.
BACKLOG
The Company estimates that the total dollar volume of its backlog as of
August 3, 1996, was approximately $33.8 million, which represents approximately
four weeks of production for both the extruded sheet & rollstock and merchant
compounding groups. The backlog at the same time in 1995 was approximately $30.3
million.
EMPLOYEES
The Company employs approximately 1,300 people. There are approximately
1,000 production personnel at the Company's 15 plants, approximately 19% of whom
are union employees covered by several collective bargaining agreements. There
have been no strikes in the past three years. Management personnel total
approximately 300 supervisory/clerical employees, none of whom are unionized.
The Company believes that all of its employee and union relations are
satisfactory.
28
<PAGE> 29
GOVERNMENT REGULATION
The Company is subject to various laws governing employee safety and
environmental matters. The Company believes it is in material compliance with
all such laws and does not anticipate large expenditures in 1996 to comply with
any applicable regulations. The Company is subject to federal, state, and local
laws and regulations governing the quantity 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
has not incurred significant expenditures in order to comply with such laws and
regulations, nor does it anticipate continued compliance therewith to materially
affect its earnings or competitive position.
PROPERTIES
The Company operates in plants and offices aggregating approximately
1,296,000 square feet of space. Approximately 591,000 square feet of plant and
office space is leased with the remaining 705,000 square feet owned by the
Company. The Company's principal operating facilities are located in Arlington,
Texas, Atlanta, Georgia, Cape Girardeau, Missouri, Clare, Michigan, La Mirada,
California, Mankato, Minnesota, McMinnville, Oregon, Paulding, Ohio, Richmond,
Indiana, Wichita, Kansas, Conshohocken, Pennsylvania, Goddard, Kansas and
Kearny, New Jersey. In addition, the Company leases office facilities in St.
Louis, Missouri, the aggregate square footage of which is approximately 5,500.
The Company's plants are equipped with 64 sheet extrusion lines, 43
supplementary co-extruders, 10 compounding-milling lines, 5 color compounding
lines, a calendaring line, cutting and grinding machinery, resin storage
facilities, warehouse equipment, and quality laboratories at all locations. The
Company believes that the present facilities are adequate for the level of
business anticipated in fiscal year 1996.
The Company also owns plants and office facilities in Monroe, Louisiana,
and Brooklyn, New York, the aggregate square footage of which is approximately
128,000 and 65,000, respectively. The buildings are currently being leased to
independent third parties.
LEGAL PROCEEDINGS
On June 2, 1992, Mr. Lawrence M. Powers, a former Director and 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 stockholders. 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 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 million 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 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. On January
9, 1996, Mr. Powers filed a similar lawsuit in the Circuit Court of St. Louis
County, Missouri against the Company and certain of its officers and directors.
The Company believes that this lawsuit is simply a repackaging of the claims
made in the 1992 lawsuit and has filed a motion to dismiss or stay this lawsuit
pending the outcome of the 1992 lawsuit. This motion has not yet been ruled on
by the Circuit Court of St. Louis County, Missouri. The Company believes Mr.
Powers' lawsuits are without merit and will continue to defend against them
vigorously.
The Company is also subject to various other claims, lawsuits and
administrative proceedings arising in the ordinary course of business with
respect to commercial, product liability, employment and other matters, several
of which claim substantial amounts of damages. While it is not possible to
estimate with certainty the ultimate legal and financial liability with respect
to these other claims, lawsuits and administrative proceedings, the Company
believes that the outcome of these other matters will not have a material
adverse effect on the Company's financial position.
The Company currently has no litigation with respect to any environmental
matters.
29
<PAGE> 30
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company and their respective
ages and positions are set forth in the table below.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---------------------------- --- --------------------------------------------
<S> <C> <C>
W.R. Clerihue............... 73 Chairman of the Board
Bradley B. Buechler......... 47 President, Chief Executive Officer and
Director
David B. Mueller............ 43 Executive Vice President, Chief Operating
Officer, Secretary and Director
Randy C. Martin............. 34 Vice President -- Finance and Chief
Financial Officer
John F. Arning.............. 71 Director
Thomas L. Cassidy........... 68 Director
Francis J. Eaton............ 57 Director
Jackson W. Robinson......... 54 Director
Rodney H. Sellers........... 50 Director
</TABLE>
Mr. Clerihue became Chairman of the Board on October 1, 1991. He has served
as a consultant to International Paper Board Corporation, New York. He is
retired from Celanese Corporation, where he last served as Executive Vice
President and Chief of Staff.
Mr. Buechler is a Certified Public Accountant ("CPA") and was with Arthur
Andersen & Co. prior to becoming the Corporate Controller of the Company in
1981. He was 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 on October 1, 1991. Mr.
Buechler is also the immediate past Chairman of the Sheet Producers Division of
the Society of Plastics Industry ("SPI"), and currently a member of the
Executive Committee of the Color and Additive Compounders Division of the SPI.
Mr. Mueller is a CPA and was with Arthur Andersen & Co. from 1974 to 1981.
He was Corporate Controller of Apex Oil Company, from 1981 to 1988. He became
Vice President and Chief Financial Officer of the Company in 1988, was appointed
Secretary in 1991 and was appointed Executive Vice President and Chief Operating
Officer in May 1996.
Mr. Martin, a CPA, was previously with KPMG Peat Marwick LLP for 11 years
and became Corporate Controller for the Company in September, 1995. He was
appointed Vice President -- Finance and Chief Financial Officer in May 1996.
Mr. Arning is a retired partner of the law firm Sullivan & Cromwell, having
held that position from January 1957 through his retirement on January 1, 1992.
He also serves as a director of Box Energy Corporation.
Mr. Cassidy 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 DeVlieg -- Bullard, Inc. and Reunion Industries, Inc.
Mr. Eaton 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 Officer effective October 1, 1991. Mr. Eaton is President and a
council member of the British Rubber Manufacturers' Association in the United
Kingdom.
Mr. Robinson is President of Winslow Management Company, a separate
operating division of Eaton Vance Management in Boston, having held that
position since 1983. He is also a director of Jupiter
30
<PAGE> 31
International Green Investment Trust, Jupiter-European Investment Trust, The
National Gardening Association, and a Trustee of Suffield Academy.
Mr. Sellers 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, in July 1990, he became their Chief Executive until April 1996 when he was
appointed their Deputy Chairman.
There are no arrangements or understandings between any director or
executive officer and any other person pursuant to which such person was elected
or appointed as a director or executive officer. There are no family
relationships between any director or executive officer and any other director
or executive officer.
ELECTION OF DIRECTORS
The Board of Directors is divided into three classes. Classes A and B have
three directors each and Class C has two directors. All directors hold office
for a term of three years. Class A directors hold office until the Annual
Meeting of Stockholders in 1997, Class B directors hold office until the Annual
Meeting of Stockholders in 1998, and Class C directors will hold office until
the Annual Meeting of Stockholders in 1999, and, in each case, until their
successors are duly elected and qualified. Of the current members of the
Company's Board of Directors, three were nominated by significant stockholders
of the Company.
COMMITTEES OF THE BOARD
The Board of Directors has an Audit Committee and a Compensation Committee.
The Board does not have a Nominating Committee.
31
<PAGE> 32
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth, as of August 3, 1996, and as adjusted to
reflect the Offering, certain information concerning the beneficial ownership of
the Common Stock by (a) each stockholder who is known by the Company to own
beneficially in excess of 5% of the outstanding Common Stock, (b) each director,
(c) the Chief Executive Officer and each executive officer whose total annual
compensation exceeded $100,000 for the fiscal year ended October 28, 1995
("Named Executive Officers"), (d) each Selling Stockholder and (e) all directors
and executive officers as a group.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR TO OFFERING NUMBER OF OWNED AFTER OFFERING (A)
------------------------ SHARES BEING ------------------------
NAME OF BENEFICIAL OWNER NUMBER PERCENT OFFERED NUMBER PERCENT
- -------------------------------------------- ---------- ------- ------------ ---------- -------
<S> <C> <C> <C> <C> <C>
DIRECTORS AND NAMED EXECUTIVE OFFICERS
John F. Arning.............................. 35,000(b) * -- 35,000(b) *
Bradley B. Buechler......................... 928,562(c) 3.8% -- 928,562(c) 3.5%
Thomas L. Cassidy........................... 7,035,288(d) 30.0% 2,100,350 4,934,938(d) 18.7%
W.R. Clerihue............................... 40,000(e) * -- 40,000(e) *
Francis J. Eaton............................ 8,734,987(f) 37.2% -- 8,734,987(f) 33.0%
David B. Mueller............................ 251,070(g) 1.1% -- 251,070(g) *
Jackson W. Robinson......................... 42,000(h) * -- 42,000(h) *
Rodney H. Sellers........................... 8,734,987(f) 37.2% -- 8,734,987(f) 33.0%
Daniel J. Yoder............................. 42,295(i) * -- 42,295(i) *
All Directors and executive officers as a
Group..................................... 17,109,202(j) 69.5% 2,100,350 15,008,852(j) 56.7%
SELLING STOCKHOLDERS AND OTHER BENEFICIAL
OWNERS IN EXCESS OF 5% OF THE OUTSTANDING
COMMON STOCK
Vita International Limited.................. 8,734,987(f) 37.2% -- 8,734,987(f) 33.0%
Soudan Street
Middleton, Manchester
M24 2DB England
The TCW Group, Inc. (k)..................... 7,035,288(d) 30.0% 2,100,350 4,934,938(d) 18.7%
865 South Figueroa Street
Suite 1800
Los Angeles, CA 90017
Phoenix Home Life Mutual Insurance
Company................................... 1,099,650 4.7% 899,650 200,000 *
One American Row
Hartford, CT 06115
</TABLE>
- -------------------------
* Denotes that the percentage of Shares beneficially owned is less than 1.0%.
(a) Does not give effect to exercise by the Underwriters of the over-allotment
option.
(b) Includes 5,000 shares issuable upon exercise of options presently
exercisable or exercisable within 60 days after August 3, 1996.
(c) Includes 849,062 shares issuable upon exercise of options presently
exercisable or exercisable within 60 days after August 3, 1996.
(d) Mr. Cassidy, a director, is Managing Director of Trust Company of the West
and is a senior partner of TCW Capital; as such, this amount represents the
common stock owned by The TCW Group, Inc.
(e) Includes 10,000 shares issuable upon exercise of options presently
exercisable or exercisable within 60 days after August 3, 1996.
(f) Messrs. Eaton and Sellers, each a director of the Company, are also
directors of British Vita PLC and Vita International Limited; as such, these
amounts represent common stock owned by Vita International Limited.
(g) Includes 215,000 shares issuable upon exercise of options presently
exercisable or exercisable within 60 days after August 3, 1996.
(h) Includes 35,000 shares issuable upon exercise of options presently
exercisable or exercisable within 60 days of August 3, 1996.
(i) Includes 41,750 shares issuable upon exercise of options presently
exercisable or exercisable within 60 days after August 3, 1996.
(j) Includes 1,155,812 shares issuable upon exercise of options presently
exercisable or exercisable within 60 days after August 3, 1996.
(k) The shares of Common Stock are held beneficially by TCW Special Placements
Fund I (5,569,088 shares), TCW Special Placements Fund II (1,423,735 shares)
and TCW Capital, as Investment Manager, pursuant to an investment management
agreement dated as of June 30, 1987 (42,465 shares). The TCW Group, Inc.
owns 100% of the stock of TCW Asset Management Company ("TAMCO"). TAMCO is
the managing general partner of TCW Capital, a general partnership. TCW
Capital is a general partner of TCW Special Placements Fund I and TCW
Special Placements Fund II. An investment committee of TAMCO controls the
investment decisions and voting of the shares of Common Stock beneficially
owned by The TCW Group, Inc.; the identities of the members of such
investment committee are unknown to the Company.
32
<PAGE> 33
DESCRIPTION OF CAPITAL STOCK
Upon the closing of the Offering, the authorized capital stock of the
Company will consist of 35,000,000 shares of Common Stock, par value $0.75 per
share, 26,460,002 of which will be outstanding, and 4,000,000 shares of
preferred stock, par value $1.00 per share ("Preferred Stock"), none of which
will be outstanding. At August 22, 1996, the Company had approximately 5,000
holders of record of shares of Common Stock and no holders of Preferred Stock.
COMMON STOCK
Subject to preferences that may be applicable to any then outstanding
shares of Preferred Stock, holders of Common Stock are entitled to receive
ratably such dividends as may be declared by the Board of Directors out of funds
legally available therefore. In the event of a liquidation, dissolution or
winding up of the Company, holders of the Common Stock are entitled to share
ratably in all assets remaining after payment of liabilities and the liquidation
preference of any then outstanding shares of Preferred Stock. Holders of Common
Stock have no preemptive rights and no right to convert their Common Stock into
any other securities. There are no redemption or sinking fund provisions
applicable to the Common Stock. All outstanding shares of Common Stock are, and
all shares of Common Stock to be outstanding upon completion of the Offering
will be, fully paid and nonassessable. The holders of Common Stock are entitled
to one vote for each share held of record on all matters submitted to a vote of
stockholders. The holders of Common Stock do not have cumulative voting rights
in the election of directors.
PREFERRED STOCK
The Board of Directors has the authority to issue up to 4,000,000 shares of
Preferred Stock in one or more series and to fix the rights, preferences
privileges and restrictions thereof, including dividend rights, conversion
rights, voting rights, terms of redemption, liquidation preferences, sinking
fund terms and the number of shares constituting any series or the designation
of such series, all without any further vote or action by the stockholders. In
the event that dividends on all series of Preferred Stock shall be in arrears in
an aggregate amount equal to six quarterly dividends on all shares of all series
of Preferred Stock at that time outstanding, then the holders of all series of
Preferred Stock then outstanding, voting as a separate class, are entitled at
each meeting of stockholders to elect two of the total number of directors to be
elected at such meeting. Such class voting right shall continue until all
accumulated dividends on all series of Preferred Stock have been paid or
declared and set aside for payment. While the holders of Preferred Stock, voting
as a class, are so entitled to elect two directors, they shall not be entitled
to participate with the holders of the Common Stock in the election of any other
directors. Holders of Preferred Stock have no preemptive rights. The issuance of
Preferred Stock could adversely affect the voting power of holders of Common
Stock and the likelihood that such holders will receive dividend payments or
payments upon liquidation and could have the effect of delaying, deferring or
preventing a change in control of the Company.
DELAWARE LAW AND CERTAIN CHARTER AND BY-LAW PROVISIONS
The Company is subject to the provisions of Section 203 of the Delaware
General Corporation Law (the "Delaware Law"), an anti-takeover law. In general,
the statute prohibits a publicly held Delaware corporation from engaging in a
"business combination" with an "interested stockholder" for a period of three
years after the date of the transaction in which the person became an interested
stockholder, unless the business combination is approved in a prescribed manner.
A "business combination" includes a merger, asset sale or other transaction
resulting in a financial benefit to the stockholder. An "interested stockholder"
is a person who, together with affiliates and associates, owns (or within three
years prior to the proposed business combination, did own) 15% or more of the
corporation's voting stock.
The Company's certificate of incorporation provides that any merger or
consolidation, sale, lease or exchange of substantially all of the assets of the
Company, the issuance or transfer by the Company or any of its subsidiaries to
any other entity (an "Interested Party") of any securities of the Company or any
of its subsidiaries having total assets of $5,000,000 or more in exchange for
assets, securities of another entity or
33
<PAGE> 34
cash shall require the affirmative vote of the holders of at least 80% of the
outstanding shares of capital stock of the Company entitled to vote generally in
the election of directors and at least a majority of the outstanding shares of
capital stock not beneficially owned by any Interested Party that then owns,
directly or indirectly, 10% or more of the outstanding shares of capital stock
of the Company; provided, that this 80% voting requirement shall not apply to
the extent that the Board of Directors of the Company, has, by resolution,
approved a memorandum of understanding with such Interested Party with respect
to such transaction prior to the time that such Interested Party became the
beneficial owner of 10% or more of the outstanding shares of capital stock of
the Company or if, prior to the consummation of such transaction, the Board of
Directors of the Company either adopts by unanimous written consent a resolution
in favor of the transaction or adopts such resolution at a meeting at which 80%
of the directors then in office are present by the affirmative vote of both a
majority of the directors present at such meeting and at least 80% of those
directors voting on such resolution.
Directors of the Company may be removed for cause and only by the
affirmative vote of the holders of at least 80% of the outstanding capital stock
of the Company at any stockholders' meeting and, in addition, by the affirmative
vote of a majority of the outstanding shares of capital stock of the Company
which are not beneficially owned by any party which is the beneficial owner,
directly or indirectly, of 10% or more of the outstanding shares of the capital
stock of the Company.
The foregoing provisions may be amended only by affirmative vote of holders
of at least 80% of the capital stock of the Company entitled to vote generally
in the election of directors and by the affirmative vote of the holders of at
least a majority of the outstanding shares of capital stock which are not
beneficially owned by any party which is the beneficial owner, directly or
indirectly, of 10% or more of the outstanding shares of such capital stock.
On April 13, 1992, the Company's Board of Directors amended the Company's
By-laws so as to require, with respect to certain significant matters affecting
the Company, the affirmative vote of at least 50% of the members of the Board,
so long as a director nominated by each of Vita and TCW is included in such 50%
vote. Prior to the April 13, 1992 By-laws amendment, such affirmative vote
percentage was 85%. Matters requiring the aforesaid 50% vote include (i) merger
or consolidation of the Company with another corporation, (ii) sale or transfer
of more than 25% of the Company's assets or recommended acceptance of any offer
or proposal to acquire or acquisition of securities of the Company or involving
the Company's assets, (iii) purchase or acquisition of substantially all of
another corporation's assets, (iv) the Company's engaging in any new business or
ceasing to engage in an existing business, (v) issuance of shares of capital
stock or any options or warrants to purchase capital stock other than pursuant
to exercise or conversion of outstanding securities of the Company, (vi)
approval of, amendments, extensions to or cancellations of employment agreements
with executives of the Company, (vii) incurrence or renewal of indebtedness
exceeding $500,000, and (viii) redemption of preferred stock or acquisitions of
preferred or common stock of the Company from an interested shareholder. Any
merger, acquisition or business transaction with Vita or TCW, or any acquisition
or redemption of shares of common or preferred stock from Vita or TCW will
require a majority of directors other than directors designated by such
interested shareholder.
TRANSFER AGENT AND REGISTRAR
Boatmen's Trust Company is the transfer agent and registrar for the
Company's Common Stock.
34
<PAGE> 35
UNDERWRITING
Under the terms and subject to the conditions contained in an Underwriting
Agreement dated September 24, 1996 (the "Underwriting Agreement"), the
Underwriters named below (the "Underwriters"), for whom CS First Boston
Corporation and A.G. Edwards & Sons, Inc. are acting as representatives (the
"Representatives"), have severally but not jointly agreed to purchase from the
Company and the Selling Stockholders the following respective numbers of shares
of Common Stock:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
------------------------------------------------------------------- ---------
<S> <C>
CS First Boston Corporation........................................ 2,000,000
A.G. Edwards & Sons, Inc. ......................................... 2,000,000
Cruttenden Roth Incorporated....................................... 500,000
Huntleigh Securities Corporation................................... 500,000
Mesirow Financial Inc. ............................................ 500,000
Stifel, Nicolaus & Company, Incorporated........................... 500,000
--------
Total......................................................... 6,000,000
========
</TABLE>
The Underwriting Agreement provides that the obligations of the
Underwriters are subject to certain conditions precedent and that the
Underwriters will be obligated to purchase all of the shares of Common Stock
offered hereby (other than those shares covered by the over-allotment option
described below) if any are purchased. The Underwriting Agreement provides that,
in the event of a default by an Underwriter, in certain circumstances the
purchase commitments of non-defaulting Underwriters may be increased or the
Underwriting Agreement may be terminated.
One of the Selling Stockholders has granted to the Underwriters an option,
expiring at the close of business on the 30th day after the date of this
Prospectus, to purchase up to 900,000 additional shares at the initial public
offering price less the underwriting discounts and commissions, all as set forth
on the cover page of this Prospectus. Such option may be exercised only to cover
over-allotments in the sale of the shares of Common Stock. To the extent such
option is exercised, each Underwriter will become obligated, subject to certain
conditions, to purchase approximately the same percentage of such additional
shares of Common Stock as it was obligated to purchase pursuant to the
Underwriting Agreement.
The Company has been advised by the Representatives that the Underwriters
propose to offer the Shares to the public initially at the public offering price
set forth on the cover page of this Prospectus and, through the Representatives,
to certain dealers at such price less a concession of $0.28 per Share, and the
Underwriters and such dealers may allow a discount of $0.10 per Share on sales
to certain other dealers. After the initial public offering, the public offering
price and concession and discount to dealers may be changed by the
Representatives.
The Company, its officers and directors and the Selling Stockholders have
agreed that they will not offer, sell, contract to sell, announce its intention
to sell, pledge or otherwise dispose of, directly or indirectly, or, in the case
of the Company, file with the Securities and Exchange Commission a registration
statement under the Securities Act of 1933 (the "Securities Act") relating to,
any additional shares of its Common Stock or securities convertible into or
exchangeable or exercisable for any shares of the Company's Common Stock without
the prior written consent of CS First Boston Corporation for a period of 120
days after the date of this Prospectus.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including civil liabilities under the Securities Act, or contribute
to payments which the Underwriters may be required to make in respect thereof.
Certain of the Underwriters and their affiliates have from time to time
performed, and continue to perform, various investment banking services for the
Company, for which customary compensation has been received.
35
<PAGE> 36
NOTICE TO CANADIAN RESIDENTS
RESALE RESTRICTIONS
The distribution of the shares of Common Stock in Canada is being made only
on a private placement basis exempt from the requirement that the Company
prepare and file a prospectus with the securities regulatory authorities in each
province where trades of shares of Common Stock are effected. Accordingly, any
resale of the shares of Common Stock in Canada must be made in accordance with
applicable securities laws which will vary depending on the relevant
jurisdiction, and which may require resales to be made in accordance with
available statutory exemptions or pursuant to a discretionary exemption granted
by the applicable Canadian securities regulatory authority. Purchasers are
advised to seek legal advice prior to any resale of the Shares.
REPRESENTATIONS OF PURCHASERS
Each purchaser of shares of Common Stock in Canada who receives a purchase
confirmation will be deemed to represent to the Issuer, the Selling Stockholders
and the dealer from whom such purchase confirmation is received that (i) such
purchaser is entitled under applicable provincial securities laws to purchase
such shares of Common Stock without the benefit of a prospectus qualified under
such securities laws, (ii) where required by law, that such purchaser is
purchasing as principal and not as agent, and (iii) such purchaser has reviewed
the text above under "Resale Restrictions".
RIGHTS OF ACTION AND ENFORCEMENT
The securities being offered are those of a foreign issuer and Ontario
purchasers will not receive the contractual right of action prescribed by
section 32 of the Regulation under the Securities Act (Ontario). As a result,
Ontario purchasers must rely on other remedies that may be available, including
common law rights of action for damages or rescission or rights of action under
the civil liability provisions of the U.S. federal securities laws.
All of the issuer's directors and officers as well as the experts named
herein may be located outside of Canada and, as a result, it may not be possible
for Ontario purchasers to effect service of process within Canada upon the
issuer or such persons. All or a substantial portion of the assets of the issuer
and such persons may be located outside of Canada and, as a result, it may not
be possible to satisfy a judgment against the issuer or such persons in Canada
or to enforce a judgment obtained in Canadian courts against such issuer or
persons outside of Canada.
NOTICE TO BRITISH COLUMBIA RESIDENTS
A purchaser of shares of Common Stock to whom the Securities Act (British
Columbia) applies is advised that such purchaser is required to file with the
British Columbia Securities Commission a report within ten days of the sale of
any shares of Common Stock acquired by such purchaser pursuant to this offering.
Such report must be in the form attached to British Columbia Securities
Commission Blanket Order BOR #95/17, a copy of which may be obtained from the
Company. Only one such report must be filed in respect of shares of Common Stock
acquired on the same date and under the same prospectus exemption.
LEGAL MATTERS
Certain legal matters relating to the sale of the shares of Common Stock
offered hereby will be passed upon for the Company by Armstrong, Teasdale,
Schlafly & Davis, St. Louis, Missouri, and for the Underwriters by Bryan Cave
LLP, St. Louis, Missouri.
36
<PAGE> 37
EXPERTS
The consolidated financial statements of the Company and its subsidiaries
as of October 28, 1995 and October 29, 1994, and for each of the three fiscal
years in the period ended October 28, 1995, included in this Prospectus and
elsewhere in the Registration Statement have been audited by Arthur Andersen
LLP, independent public accountants, as indicated in their report with respect
thereto, and are included herein in reliance upon the authority of said firm as
experts in giving said report.
The consolidated financial statements of Hamro Group Inc. and its
subsidiaries as of April 30, 1996 and 1995 and for each of the three years in
the period ended April 30, 1996, included in this Prospectus and elsewhere in
the Registration Statement have been audited by Coopers & Lybrand, chartered
accountants, as indicated in their report thereto, and are included herein in
reliance upon the authority of said firm as experts in giving said report.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed by the Company with the Commission pursuant
to the Exchange Act (File No. 1-5911) are incorporated in this Prospectus by
reference:
(1) The Company's Annual Report on Form 10-K for its fiscal year ended
October 28, 1995;
(2) The Company's Quarterly Reports on Form 10-Q for its fiscal quarters
ended August 3, 1996, May 4, 1996 and February 3, 1996;
(3) The Company's Current Reports on Form 8-K dated May 9, 1996 as filed
May 22, 1996, and dated June 7, 1996 as filed June 19, 1996, and August
21, 1996 as filed August 27, 1996;
(4) The Company's Proxy Statement dated January 19, 1996, relating to the
Annual Meeting of Stockholders held on March 13, 1996; and
(5) The description of the Company's Common Stock set forth in the
Company's Registration Statement on Form 8-A dated November 28, 1994,
filed December 1, 1994, heretofore filed with the Commission under the
Exchange Act.
All documents filed by the Company with the Commission pursuant to Sections
13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date of this
Prospectus and prior to the termination of the offering of the securities made
by this Prospectus shall be deemed to be incorporated herein by reference and to
be a part hereof on and from the date of filing of such documents.
Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained herein
or incorporated herein by reference or in any other subsequently filed document
that also is or is deemed to be incorporated by reference herein modifies or
supersedes such statement. Any statement so modified or superseded shall not be
deemed, except as so modified or superseded, to constitute a part of the
Prospectus.
The Company will provide without charge to each person, including any
beneficial owner, to whom this Prospectus is delivered, upon the written or oral
request of such person, a copy of any and all documents incorporated by
reference in this Prospectus (not including exhibits to such information unless
such exhibits are specifically incorporated by reference in such information).
Such requests should be directed to: Spartech Corporation, 7733 Forsyth
Boulevard, Suite 1450, St. Louis, Missouri 63105, Attention: Secretary,
telephone number (314) 721-4242.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") under the Securities Act of 1933, as amended (the "Securities
Act") a Registration Statement with respect to the Common Stock offered hereby.
This Prospectus does not contain all of the information set forth in the
37
<PAGE> 38
Registration Statement, certain items of which are omitted in accordance with
the rules and regulations of the Commission. Statements contained in this
Prospectus as to the contents of any contract or other document are not
necessarily complete and in each instance reference is made to the copy of such
contract or document filed as an exhibit to the Registration Statement, each
such statement being qualified in all respects by such reference.
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934 and, in accordance therewith, files reports, proxy or
information statements and other information with the Commission. Such reports,
proxy or information statements, schedules and other information filed by the
Company with the Commission may be inspected and copied at the public reference
facilities maintained by the Commission at 450 Fifth Street, N.W., Washington,
D.C. 20549; at its Chicago Regional Office, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661-2511; and at its New York Regional Office, Seven World
Trade Center, 13th Floor, New York, New York 10048. Copies of such material can
be obtained from the public reference section of the Commission, 450 Fifth
Street, N.W., Washington, D.C. 20549, at its prescribed rates. Such reports,
proxy or information statements and other information concerning the Company can
also be inspected at the offices of the New York Stock Exchange, Inc., Public
Reference Section, 20 Broad Street, New York, New York 10005. Such filings may
also be obtained from the Commission through the Internet at http://www.sec.gov.
38
<PAGE> 39
SPARTECH CORPORATION
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
SPARTECH CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS:
Report of Independent Public Accountants........................................ F-2
Consolidated Balance Sheet as of October 29, 1994 and October 28, 1995.......... F-3
Consolidated Statement of Operations for the Year Ended October 30 1993, October
29, 1994 and October 28, 1995.................................................. F-4
Consolidated Statement of Shareholders' Equity as of October 31, 1992, October
30, 1993, October 29, 1994 and October 28, 1995................................ F-5
Consolidated Statement of Cash Flows for the Year Ended October 30 1993, October
29, 1994 and October 28, 1995.................................................. F-6
Notes to Consolidated Financial Statements...................................... F-7
CONDENSED INTERIM FINANCIAL STATEMENTS
Consolidated Condensed Balance Sheet (Unaudited) as of October 28, 1995 and
August 3, 1996................................................................ F-15
Consolidated Condensed Statement of Operations (Unaudited) for the Nine Months
Ended July 29, 1995 and August 3, 1996......................................... F-16
Consolidated Condensed Statement of Cash Flows (Unaudited) for the Nine Months
Ended July 29, 1995 and August 3, 1996......................................... F-17
Notes to Consolidated Financial Statements...................................... F-18
HAMRO GROUP INC.*
CONSOLIDATED FINANCIAL STATEMENTS
Auditors' Report to the Shareholders............................................ F-21
Consolidated Balance Sheet as at April 30, 1995 and 1996........................ F-22
Consolidated Statement of Retained Earnings for the Year Ended April 30, 1994,
1995 and 1996.................................................................. F-23
Consolidated Statement of Earnings for the Year Ended April 30, 1994, 1995 and
1996........................................................................... F-24
Consolidated Statement of Changes in Financial Position for the Year Ended April
30, 1994, 1995 and 1996........................................................ F-25
Notes to Consolidated Financial Statements for the Year Ended April 30, 1996.... F-26
CONDENSED INTERIM FINANCIAL STATEMENTS
Consolidated Condensed Balance Sheet (Unaudited) as at July 27, 1996............ F-33
Consolidated Condensed Statement of Earnings (Unaudited) for the Three-Month
Periods Ended July 27, 1995 and 1996........................................... F-34
Consolidated Condensed Statement of Changes in Financial Position (Unaudited)
for the Three-Month Periods Ended July 27, 1995 and 1996....................... F-35
Notes to Consolidated Condensed Financial Statements (Unaudited) for the
Three-Month Period Ended July 27, 1996......................................... F-36
PRO FORMA FINANCIAL INFORMATION...................................................... F-38
Unaudited Pro Forma Combined Condensed Balance Sheet at August 3, 1996.......... F-39
Unaudited Pro Forma Combined Condensed Statement of Operations for the Fiscal
Year Ended October 28, 1995 and the Nine Months Ended August 3, 1996........... F-41
</TABLE>
- -------------------------
* Hamro Group Inc. is the parent company of Hamelin, having no operations other
than Hamelin Group Inc. and Hamelin Industries Inc. The Company has the
Canadian dollar (C$) as its functional currency. The Hamro financial
statements included in this section have been presented in the C$, which is
valued at an exchange rate of .7275 US$ (the currency exchange rate reported
as of August 3, 1996 in the Wall Street Journal).
F-1
<PAGE> 40
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 28, 1995, 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 29, 1994 and October 28, 1995, 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.
Arthur Andersen LLP
St. Louis, Missouri
December 6, 1995
F-2
<PAGE> 41
SPARTECH CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
OCTOBER 29, OCTOBER 28,
1994 1995
----------- -----------
(DOLLARS IN THOUSANDS,
EXCEPT SHARE AMOUNTS)
<S> <C> <C>
ASSETS
Current Assets
Cash.............................................................. $ 1,752 $ 3,505
Receivables, net of allowances of $1,592 in 1995 and $1,415 in
1994............................................................. 40,493 51,762
Inventories....................................................... 22,936 33,002
Prepayments and other............................................. 1,112 1,274
--------- ---------
Total Current Assets......................................... 66,293 89,543
Plant and Equipment, Net............................................. 46,656 63,150
Goodwill............................................................. 21,044 24,014
Debt Issuance Costs and Other........................................ 1,727 1,622
--------- ---------
$ 135,720 $ 178,329
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Current maturities of long-term debt.............................. $ 2,750 $ --
Accounts payable.................................................. 28,403 31,966
Accrued liabilities............................................... 8,789 12,469
--------- ---------
Total Current Liabilities.................................... 39,942 44,435
Long-Term Debt, Less Current Maturities.............................. 36,419 59,510
Other Liabilities.................................................... 1,126 2,256
--------- ---------
Total Long-Term Liabilities.................................. 37,545 61,766
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.......................................... 6,472 17,523
Contributed capital............................................... 74,438 66,771
Retained deficit.................................................. (23,449) (12,099)
Treasury stock, at cost, 11,291 shares in 1995 and 1,324 shares in
1994............................................................. (5) (67)
--------- ---------
Total Shareholders' Equity........................................ 58,233 72,128
--------- ---------
$ 135,720 $ 178,329
========= =========
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-3
<PAGE> 42
SPARTECH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
FISCAL YEAR
--------------------------------
1993 1994 1995
-------- -------- --------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
NET SALES $189,401 $256,593 $352,273
-------- -------- --------
Costs and Expenses
Cost of sales............................................... 161,393 219,595 302,394
Selling and administrative.................................. 16,876 19,966 24,545
Amortization of intangibles................................. 563 622 730
-------- -------- --------
178,832 240,183 327,669
-------- -------- --------
OPERATING EARNINGS............................................ 10,569 16,410 24,604
Interest.................................................... 3,350 3,125 4,960
-------- -------- --------
Earnings Before Provision for Income Taxes.................... 7,219 13,285 19,644
Provision for income taxes.................................. 503 2,450 5,110
-------- -------- --------
NET EARNINGS.................................................. 6,716 10,835 14,534
Preferred stock accretion................................... (2,015) (2,133) (1,098)
-------- -------- --------
Net Earnings Applicable to Common Shares and Equivalents...... $ 4,701 $ 8,702 $ 13,436
======== ======== ========
NET EARNINGS PER COMMON SHARE
Primary..................................................... $ .54 $ .97 $ .80
======== ======== ========
Fully Diluted............................................... $ .30 $ .46 $ .60
======== ======== ========
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-4
<PAGE> 43
SPARTECH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
TOTAL
PREFERRED COMMON CONTRIBUTED RETAINED TREASURY SHAREHOLDERS'
STOCK STOCK CAPITAL DEFICIT STOCK EQUITY
--------- ------- ----------- -------- -------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
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
===== ======= ======= ======== ======= =======
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-5
<PAGE> 44
SPARTECH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FISCAL YEAR
-------------------------------
1993 1994 1995
------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings................................................. $ 6,716 $ 10,835 $ 14,534
Adjustments to reconcile net earnings to Net cash provided by
operating activities:
Depreciation and amortization........................... 4,000 4,422 5,798
Change in current assets and liabilities, net of effects of
acquisitions
Receivables............................................. (4,409) (4,594) (4,447)
Inventories............................................. (1,154) (1,325) (6,504)
Prepayments and other................................... (418) 257 (17)
Accounts payable........................................ 5,642 2,726 3,563
Accrued liabilities..................................... 583 846 1,410
Other, net................................................... (315) 191 2,150
-------- --------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES............... 10,645 13,358 16,487
-------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures......................................... (2,610) (8,152) (10,015)
Retirement of assets......................................... 27 333 538
Business acquisitions........................................ (2,487) (6,840) (24,060)
Proceeds from note receivable................................ -- 495 --
-------- --------- ---------
NET CASH USED FOR INVESTING ACTIVITIES.................. (5,070) (14,164) (33,537)
-------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings (payments) on revolving credit facilities..... (505) (6,248) (6,525)
Issuance of 7.21% Senior Unsecured Notes..................... -- -- 50,000
Term loan additions (payments)............................... (5,000) 6,000 (13,000)
Redemption of 9% Convertible
Subordinated Debentures...................................... -- -- (10,134)
Debt issuance costs.......................................... -- -- (899)
Cash dividends on common stock............................... -- -- (2,086)
Stock options exercised...................................... 204 1,357 1,509
Treasury stock acquired...................................... -- -- (62)
-------- --------- ---------
NET CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES.... (5,301) 1,109 18,803
-------- --------- ---------
Increase In Cash............................................. 274 303 1,753
Cash At Beginning Of Year.................................... 1,175 1,449 1,752
-------- --------- ---------
CASH AT END OF YEAR.......................................... $ 1,449 $ 1,752 $ 3,505
======== ========= =========
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-6
<PAGE> 45
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
1993, 1994, and 1995 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 29, 1994 and October 28, 1995 are comprised of the
following components:
<TABLE>
<CAPTION>
1994 1995
------- --------
<S> <C> <C>
Raw materials............................................. $16,171 $ 23,368
Finished goods............................................ 6,765 9,634
------- --------
$22,936 $ 33,002
======= ========
</TABLE>
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:
<TABLE>
<CAPTION>
YEARS
-----
<S> <C>
Buildings and leasehold improvements.................................. 25
Machinery and equipment............................................... 12-16
Furniture and fixtures................................................ 5-10
</TABLE>
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 29, 1994 and
October 28, 1995:
<TABLE>
<CAPTION>
1994 1995
------- --------
<S> <C> <C>
Land...................................................... $ 4,326 $ 3,999
Buildings and leasehold improvements...................... 13,766 18,243
Machinery and equipment................................... 50,434 67,308
Furniture and fixtures.................................... 1,903 2,152
------- --------
70,429 91,702
Less accumulated depreciation............................. 23,773 28,552
------- --------
Plant and equipment, net.................................. $46,656 $ 63,150
======= ========
</TABLE>
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 $563, $622, and $730 in 1993, 1994,
and 1995, respectively. Accumulated amortization at October 28, 1995 totaled
$4,851.
F-7
<PAGE> 46
SPARTECH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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
9,163,000, 8,985,000, and 16,858,000 for 1993, 1994, and 1995, 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 23,438,000,
23,434,000, and 24,111,000 for 1993, 1994, and 1995, 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 1993, 1994, and 1995 would have been $.30,
$.46, and $.60, 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 1993, 1994, and 1995 are as follows:
<TABLE>
<CAPTION>
1993 1994 1995
------ ------ ------
<S> <C> <C> <C>
Primary............................................... $ 300 $ 74 $ --
Fully diluted......................................... $2,315 $2,133 $1,098
</TABLE>
F-8
<PAGE> 47
SPARTECH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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:
<TABLE>
<CAPTION>
1994 1995
------- -------
<S> <C> <C>
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 --
-------- --------
39,169 59,510
Less current maturities.................................... 2,750 --
-------- --------
Total long-term debt....................................... $36,419 $59,510
======== ========
</TABLE>
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%.
Scheduled maturities of long-term debt, by fiscal year, are as follows:
<TABLE>
<CAPTION>
7.21% SENIOR UNSECURED
UNSECURED NOTES BANK CREDIT FACILITY
--------------- --------------------
<S> <C> <C>
1996........................................... $ -- $ --
1997........................................... -- --
1998........................................... -- --
1999........................................... 7,143 --
2000........................................... 7,143 9,510
Thereafter..................................... 35,714 --
-------- --------
$50,000 $9,510
======== ========
</TABLE>
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.
F-9
<PAGE> 48
SPARTECH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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:
<TABLE>
<CAPTION>
COMMON STOCK EQUIVALENT
NUMBER OF ISSUABLE COMMON SHARE
PREFERRED SHARES UPON VOTING
PREFERRED STOCK SERIES OUTSTANDING CONVERSION RIGHTS
- ---------------------------------------------------- ---------------- ------------ ------------
<S> <C> <C> <C>
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
</TABLE>
NOTE D -- INCOME TAXES
The provision for income taxes for fiscal years 1995, 1994, and 1993 is
comprised of the following:
<TABLE>
<CAPTION>
1993 1994 1995
------- ------- -------
<S> <C> <C> <C>
Federal:
Current........................................................ $ -- $ -- $ 2,715
Deferred....................................................... 2,466 4,488 3,680
State............................................................ 503 1,000 1,348
------- ------- -------
2,969 5,488 7,743
Utilization of operating loss carryforwards...................... (2,466) (3,038) (2,633)
------- ------- -------
Provision for income taxes....................................... $ 503 $ 2,450 $ 5,110
======= ======= =======
</TABLE>
The income tax provision on earnings of the Company differs from the
amounts computed by applying the U.S. Federal tax rate of 34% in 1993, and 35%
in 1994 and 1995 as follows:
<TABLE>
<CAPTION>
1993 1994 1995
------- ------- -------
<S> <C> <C> <C>
Federal income taxes at statutory rate........................... $ 2,454 $ 4,650 $ 6,875
State income taxes, net of applicable Federal income tax
benefits....................................................... 332 650 876
Operating loss carryforwards................................... (2,466) (3,038) (2,633)
Other.......................................................... 183 188 (8)
------- ------- -------
$ 503 $ 2,450 $ 5,110
======= ======= =======
</TABLE>
F-10
<PAGE> 49
SPARTECH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At October 29, 1994 and October 28, 1995, the Company's principal
components of deferred tax assets and liabilities consisted of the following:
<TABLE>
<CAPTION>
1994 1995
------ ------
<S> <C> <C>
Deferred tax assets:
Net operating loss and other tax carryforwards............. $5,700 $4,701
Bad debt reserves.......................................... 485 412
Inventories................................................ 395 222
Tax credit carryforwards................................... 600 952
Accrued liabilities........................................ 620 1,275
------ ------
$7,800 $7,562
====== ======
Deferred tax liabilities:
Depreciation............................................... $7,800 $8,208
Other...................................................... -- 471
------ ------
$7,800 $8,679
====== ======
</TABLE>
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 1993, 1994, and 1995
follows (in thousands, except exercise price range per share):
<TABLE>
<CAPTION>
EXERCISE PRICE
OPTIONS OPTIONS RANGE PER SHARE
BEGINNING OF YEAR GRANTED EXERCISED/CANCELED END OF YEAR AT END OF YEAR
----------------- ------- ------------------ ----------- ---------------
<S> <C> <C> <C> <C> <C>
Fiscal 1993
- ----------------------------
Incentive Plan.............. 62 66 51 77 $3.00-$4.00
Restricted Plan............. 2,056 -- 100 1,956 $1.25-$5.00
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 1995
- ----------------------------
Incentive Plan.............. 149 165 6 308 $3.00-$7.00
Restricted Plan............. 1,968 95 434 1,629 $1.25-$5.38
</TABLE>
F-11
<PAGE> 50
SPARTECH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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 1993, 1994, and 1995 was $1,670, $2,273, and $2,872, respectively.
Future minimum lease payments under non-cancelable operating leases, by
fiscal year, are as follows:
<TABLE>
<S> <C>
1996................................................................. $1,490
1997................................................................. 1,073
1998................................................................. 870
1999................................................................. 642
2000................................................................. 414
2001 and thereafter.................................................. 308
------
$4,797
======
</TABLE>
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 Directors' 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.
F-12
<PAGE> 51
SPARTECH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE G -- CASH FLOW INFORMATION
Supplemental information on cash flows is as follows:
<TABLE>
<CAPTION>
FISCAL YEAR
----------------------------
1993 1994 1995
------ ------- -------
<S> <C> <C> <C>
Cash paid during the year for:
Interest........................................................ $3,220 $ 2,974 $ 4,099
======= ======== ========
Income taxes.................................................... $ 394 $ 1,043 $ 3,517
======= ======== ========
Schedule of business acquisitions:
Fair value of assets acquired................................... $2,487 $12,274 $26,330
Liabilities assumed............................................. -- (5,434) (2,270)
------- -------- --------
Total cash paid for the net assets acquired................ $2,487 $ 6,840 $24,060
======= ======== ========
</TABLE>
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.
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
F-13
<PAGE> 52
SPARTECH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
<TABLE>
<CAPTION>
PRO FORMA (UNAUDITED)
---------------------
FISCAL YEAR
1994
---------------------
<S> <C>
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
=========
</TABLE>
NOTE I -- QUARTERLY FINANCIAL INFORMATION
Certain unaudited quarterly financial information for the years ended
October 29, 1994 and October 28, 1995 is as follows:
<TABLE>
<CAPTION>
QUARTER ENDED
---------------------------------------- FISCAL
JANUARY APRIL JULY OCTOBER YEAR
------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
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
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
</TABLE>
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.
F-14
<PAGE> 53
SPARTECH CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEET
(UNAUDITED AND DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
AUGUST 3,
1996
OCTOBER 28, ------------
1995
----------- (UNAUDITED)
<S> <C> <C>
ASSETS
Current Assets
Cash................................................................ $ 3,505 $ 3,131
Receivables, net.................................................... 51,762 55,329
Inventories......................................................... 33,002 44,768
Prepayments and other............................................... 1,274 1,752
-------- --------
Total Current Assets........................................... 89,543 104,980
Plant and Equipment................................................... 91,702 107,543
Less accumulated depreciation....................................... 28,552 32,868
-------- --------
Net Plant and Equipment........................................ 63,150 74,675
Goodwill.............................................................. 24,014 32,920
Other Assets.......................................................... 1,622 1,828
-------- --------
$ 178,329 $214,403
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Current maturities of long-term debt................................ $ -- $ 550
Accounts payable.................................................... 31,966 36,274
Accrued liabilities................................................. 12,469 15,103
-------- --------
Total Current Liabilities...................................... 44,435 51,927
-------- --------
Long-Term Debt........................................................ 59,510 75,250
Other Liabilities..................................................... 2,256 5,219
-------- --------
Total Long-Term Liabilities.................................... 61,766 80,469
-------- --------
Shareholders' Equity
Common stock, 23,609,090 shares issued in 1996 and 23,364,407 shares
issued in 1995................................................... 17,523 17,706
Contributed capital................................................. 66,771 66,772
Retained deficit...................................................... (12,099) (1,098)
Treasury stock, at cost, 149,088 shares in 1996 and 11,291 shares in
1995............................................................. (67) (1,373)
-------- --------
Total Shareholders' Equity..................................... 72,128 82,007
-------- --------
$ 178,329 $214,403
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-15
<PAGE> 54
SPARTECH CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS
(UNAUDITED AND DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
---------------------
JULY 29, AUGUST 3,
1995 1996
-------- ---------
<S> <C> <C>
NET SALES............................................................... $265,798 $ 287,019
-------- --------
Costs and Expenses
Cost of sales......................................................... 228,235 242,954
Selling and administrative............................................ 18,591 18,139
Amortization of intangibles........................................... 548 619
-------- --------
247,374 261,712
-------- --------
OPERATING EARNINGS...................................................... 18,424 25,307
Interest.............................................................. 3,779 3,577
-------- --------
Earnings Before Provision for Income Taxes.............................. 14,645 21,730
Provision for income taxes............................................ 3,750 8,149
-------- --------
NET EARNINGS............................................................ 10,895 13,581
Preferred stock accretion............................................. (1,098) --
-------- --------
Net Earnings Applicable to Common Shares and Equivalents................ $ 9,797 $ 13,581
======== ========
NET EARNINGS PER COMMON SHARE:
Primary............................................................... $ .68 $ .55
======== ========
Fully diluted......................................................... $ .45 $ .55
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-16
<PAGE> 55
SPARTECH CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS
(UNAUDITED AND DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
---------------------
JULY 29, AUGUST 3,
1995 1996
-------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings........................................................... $ 10,895 $ 13,581
Adjustments to reconcile net earnings to net cash provided by operating
activities:
Depreciation and amortization....................................... 4,533 5,065
Change in current assets and liabilities, net of effects of
acquisitions....................................................... (2,045) (6,557)
Other, net............................................................. 222 1,626
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES......................... 13,605 13,715
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures................................................... (7,403) (6,295)
Retirement of assets, net of depreciation.............................. 498 30
Business acquisitions, net of cash acquired............................ (24,060) (17,562)
-------- --------
NET CASH USED FOR INVESTING ACTIVITIES............................ (30,965) (23,827)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings (payments) on revolving credit facilities............... 15,546 13,440
Term loan additions (net of repayments)................................ 2,250 --
Cash dividends on common stock......................................... (1,387) (2,580)
Stock options exercised................................................ 963 184
Treasury stock acquired................................................ (62) (1,306)
-------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES......................... 17,310 9,738
-------- --------
Increase/(Decrease) In Cash.............................................. (50) (374)
Cash at Beginning of Period.............................................. 1,752 3,505
-------- --------
CASH AT END OF PERIOD.................................................... $ 1,702 $ 3,131
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-17
<PAGE> 56
SPARTECH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED 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 28, 1995 Annual Report on Form 10-K.
The Company's fiscal year ends on the Saturday closest to October 31.
Fiscal year 1996 will include 53 weeks compared to 52 weeks in 1995. As a
result, the first quarter ended February 3, 1996 and nine months ended August 3,
1996 consist of 14 and 40 weeks, compared to 13 and 39 weeks for the respective
1995 periods. Operating results for any quarter are traditionally 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 October 28, 1995 and August 3, 1996 are comprised of the
following components:
<TABLE>
<CAPTION>
1995 1996
------- -------
<S> <C> <C>
Raw materials.............................................. $23,368 $32,717
Finished goods............................................. 9,634 12,051
-------- --------
$33,002 $44,768
======== ========
</TABLE>
NOTE C -- EARNINGS PER SHARE
Primary net earnings per common 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. Such average shares were:
<TABLE>
<CAPTION>
PERIOD NINE MONTHS ENDED
------------------------------------------------------------- -----------------
<S> <C>
July 29, 1995................................................ 14,379,000
August 3, 1996............................................... 24,536,000
</TABLE>
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 to:
<TABLE>
<CAPTION>
PERIOD NINE MONTHS ENDED
------------------------------------------------------------- -----------------
<S> <C>
July 29, 1995................................................ 24,044,000
August 3, 1996............................................... 24,777,000
</TABLE>
The increase in the weighted average share total from 1995 was due to the
third quarter 1995 conversion of the Company's preferred stock. 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
F-18
<PAGE> 57
SPARTECH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
beginning of 1995, the primary net earnings per share reported for the nine
months ended July 29, 1995 would have been $.45.
NOTE D -- CASH FLOW INFORMATION
Supplemental information on cash flows and noncash transactions for the six
months ended July 29, 1995 and August 3, 1996 is as follows:
<TABLE>
<CAPTION>
1995 1996
------- -------
<S> <C> <C>
Cash paid for:
Interest................................................................ $ 3,463 $ 2,352
======= ======
Income taxes............................................................ $ 2,746 $ 6,205
======= ======
Schedule of business acquisition:
Fair value of assets acquired........................................ $26,330 $27,291
Liabilities assumed.................................................. 2,270 9,729
------- ------
Cash paid, net.......................................................... $24,060 $17,562
======= ======
</TABLE>
NOTE E -- COMMITMENTS AND CONTINGENCIES
On June 2, 1992, Mr. Lawrence M. Powers, a former Director and 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 Directors' 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 has
concluded in the litigation, and the Company, together with the other
defendants, have moved for summary judgment dismissing the complaint. On January
9, 1996, Mr. Powers filed a similar lawsuit in the Circuit Court of St. Louis
County, Missouri against the Company and two officer directors. The Company
believes that this is simply a restatement of the claims made in the 1992
lawsuit and has filed a motion to dismiss or stay this lawsuit pending the
outcome of the 1992 lawsuit. This motion has not yet been ruled on by the
Circuit Court of St. Louis County, Missouri. The Company believes Mr. Powers'
lawsuits are without merit and will continue defending against them vigorously.
NOTE F -- ACQUISITIONS
On May 9, 1996, the Company completed its acquisition of Portage Industries
Corporation ("Portage") by means of a cash merger pursuant to which Spartech
Plastics, Inc., a newly formed, wholly-owned subsidiary of the Company, was
merged with and into Portage. Pursuant to an Agreement and Plan of Merger among
the Company, Spartech Plastics, Inc., and Portage, each share of Portage Common
Stock was converted into the right to receive $6.60 in cash. The price for all
outstanding shares of Portage's stock totaled approximately $17.6 million in
cash, including estimated costs of the transaction. The fair value of assets
acquired, including $9.5 million of goodwill, and liabilities assumed were $27.3
million and $9.7 million,
F-19
<PAGE> 58
SPARTECH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
respectively. The purchase price was determined by arms' length negotiations
between the parties. The purchase was funded by the Company's existing unsecured
credit facility.
On June 7, 1996, the Company entered into an Asset Purchase and Sale
Agreement to purchase substantially all of the net assets of the extrusion,
color and molding divisions of Hamelin Group Inc. ("Hamelin"). Hamelin is a
leading manufacturer of extruded plastic sheet, color concentrate and molded
food packaging, industrial and housewares products and is based in Montreal,
Canada. It has two extruded sheet plants, one color concentrate facility and
three molding operations located in Canada and a molding operation located in
the United States, with consolidated sales for the seven facilities of
approximately $80 million for its fiscal year ended April 30, 1996. In addition
to the assumption of certain liabilities (estimated to be approximately $8
million at July 27, 1996), the Company will pay approximately $57 million in
cash for the net assets acquired from Hamelin (to be adjusted for Hamelin's
working capital, capital expenditures, and related matters as of the closing
date, on or about September 30, 1996). The acquisition will be financed through
a combination of additional borrowings and a common stock equity offering of the
Company.
F-20
<PAGE> 59
AUDITORS' REPORT TO THE SHAREHOLDERS
June 14, 1996
We have audited the consolidated balance sheet of Hamro Group Inc. as at
April 30, 1995 and 1996 and the consolidated statements of earnings, retained
earnings and changes in financial position for each of the years in the three
year period ended on April 30, 1996. These financial statements are the
responsibility of the company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
In our opinion, these consolidated financial statements present fairly, in
all material respects, the financial position of the company as at April 30,
1995 and 1996 and the results of its operations and the changes in its financial
position for each of the years in the three year period ended on April 30, 1996
in accordance with generally accepted accounting principles in Canada.
Coopers & Lybrand
GENERAL PARTNERSHIP
CHARTERED ACCOUNTANTS
F-21
<PAGE> 60
HAMRO GROUP INC.
CONSOLIDATED BALANCE SHEET AS AT APRIL 30, 1995 AND 1996
<TABLE>
<CAPTION>
1995 1996
C$ C$
---------- ----------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash in bank....................................................... -- 344,529
Accounts receivable (notes 3 and 8)................................ 16,740,249 17,305,530
Inventories (notes 3, 4 and 8)..................................... 12,523,205 10,081,279
Prepaid expenses................................................... 228,923 270,437
Income taxes....................................................... -- 300,190
---------- ----------
29,492,377 28,301,965
SECURED NOTES RECEIVABLE, less current maturities of $528,971 (1995
-- $32,469) (note 5)............................................... 540,283 13,620
CAPITAL ASSETS (notes 6 and 8)....................................... 27,184,104 26,248,116
OTHER ASSETS (note 7)................................................ 1,083,424 658,115
---------- ----------
58,300,188 55,221,816
========== ==========
LIABILITIES
CURRENT LIABILITIES
Bank loans (note 3)................................................ 2,685,392 --
Accounts payable and accrued liabilities........................... 14,163,952 13,061,413
Account payable to a related company............................... 132,500 131,645
Income taxes....................................................... 1,724,765 --
Current portion of long-term debt.................................. 2,330,201 2,520,765
---------- ----------
21,036,810 15,713,823
LONG-TERM DEBT (note 8).............................................. 20,092,865 20,004,916
DEFERRED INCOME TAXES................................................ 2,953,482 2,496,482
---------- ----------
44,083,157 38,215,221
---------- ----------
NON-CONTROLLING INTERESTS............................................ -- 42,027
---------- ----------
SHAREHOLDERS' EQUITY
CAPITAL STOCK (note 10).............................................. 4,840,100 4,600,100
RETAINED EARNINGS.................................................... 9,042,968 12,017,259
CUMULATIVE TRANSLATION ADJUSTMENT.................................... 333,963 347,209
---------- ----------
14,217,031 16,964,568
---------- ----------
58,300,188 55,221,816
========== ==========
</TABLE>
F-22
<PAGE> 61
HAMRO GROUP INC.
CONSOLIDATED STATEMENT OF RETAINED EARNINGS
FOR THE YEAR ENDED APRIL 30, 1994, 1995 AND 1996
<TABLE>
<CAPTION>
C$
----------
<S> <C>
BALANCE -- April 30, 1993....................................................... 4,936,318
Net earnings for year........................................................... 1,321,942
--------
6,258,260
Less: Dividends on Class "A" preferred shares................................... 76,000
--------
BALANCE -- April 30, 1994....................................................... 6,182,260
Net earnings for year........................................................... 2,914,708
--------
9,096,968
Less: Dividends on Class "A" Preferred shares................................... 54,000
--------
BALANCE -- April 30, 1995....................................................... 9,042,968
Net earnings for the year....................................................... 2,980,291
--------
12,023,259
Less: Dividends on Class "A" preferred shares................................... 6,000
--------
BALANCE -- April 30, 1996....................................................... 12,017,259
========
</TABLE>
F-23
<PAGE> 62
HAMRO GROUP INC.
CONSOLIDATED STATEMENT OF EARNINGS
FOR THE YEAR ENDED APRIL 30, 1994, 1995 AND 1996
<TABLE>
<CAPTION>
1994 1995 1996
C$ C$ C$
---------- ----------- -----------
<S> <C> <C> <C>
SALES.................................................. 92,679,894 108,348,633 109,613,688
========== =========== ===========
OPERATING INCOME BEFORE THE FOLLOWING:................. 10,057,306 12,902,824 11,698,046
---------- ----------- -----------
Amortization of capital assets......................... 5,004,077 5,449,327 5,469,572
Amortization of other assets........................... 62,522 395,017 425,981
Interest on long-term debt............................. 2,121,037 2,079,369 2,123,980
Interest and bank charges.............................. 451,938 553,687 247,406
Research and development, net of investment tax credits
of $900,000 (1995 - nil) (note 11(b))................ 768,611 466,552 (519,756)
Gain on sale of capital assets......................... (103,341) (210,125) (53,910)
---------- ----------- -----------
8,304,844 8,733,827 7,693,273
---------- ----------- -----------
1,752,462 4,168,997 4,004,773
---------- ----------- -----------
PROVISION FOR (RECOVERY OF) INCOME TAXES (note 11)
Current................................................ 193,920 1,708,289 1,465,759
Deferred............................................... 236,600 (454,000) (457,000)
---------- ----------- -----------
430,520 1,254,289 1,008,759
---------- ----------- -----------
Earnings before non-controlling interests.............. 1,321,942 2,914,708 2,996,014
Non-controlling interests in earnings of a
subsidiary........................................... -- -- 15,723
---------- ----------- -----------
NET EARNINGS FOR THE YEAR.............................. 1,321,942 2,914,708 2,980,291
========== =========== ===========
</TABLE>
F-24
<PAGE> 63
HAMRO GROUP INC.
CONSOLIDATED STATEMENT OF CHANGES IN FINANCIAL POSITION
FOR THE YEAR ENDED APRIL 30, 1994, 1995 AND 1996
<TABLE>
<CAPTION>
1994 1995 1996
C$ C$ C$
---------- ---------- ----------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net earnings for the year................................ 1,321,942 2,914,708 2,980,291
Items not affecting cash --
Amortization of capital assets...................... 5,004,077 5,449,327 5,469,572
Amortization of other assets........................ 62,522 395,017 425,981
Deferred income taxes............................... 236,600 (454,000) (457,000)
Gain on sale of capital assets...................... (103,341) (210,125) (53,910)
Non-controlling interests........................... -- -- 15,723
---------- ---------- ----------
6,521,800 8,094,927 8,380,657
Change in non-cash working capital items................. 4,378,985 (2,387,199) (796,716)
---------- ---------- ----------
10,900,785 5,707,728 7,583,941
---------- ---------- ----------
FINANCING ACTIVITIES
Increase in long-term debt............................... 2,040,875 4,646,579 2,442,489
Payment of long-term debt................................ (2,874,354) (2,491,598) (2,339,874)
Redemption of preferred shares........................... (80,000) (480,000) (240,000)
Dividends................................................ (76,000) (54,000) (6,000)
Net proceeds on issue of shares to a non-controlling
shareholder............................................ -- -- 26,304
---------- ---------- ----------
(989,479) 1,620,981 (117,081)
---------- ---------- ----------
INVESTING ACTIVITIES
Decrease (increase) in notes receivable.................. (26,551) 42,640 30,161
Purchase of capital assets............................... (6,186,873) (5,024,370) (5,114,724)
Proceeds from sale of capital assets..................... 308,446 305,533 635,050
Increase in other assets................................. (961,327) (248,995) (672)
Increase (decrease) in cumulative translation
adjustment............................................. 250,208 (91,420) 13,246
---------- ---------- ----------
(6,616,097) (5,016,612) (4,436,939)
---------- ---------- ----------
DECREASE IN BANK LOANS DURING THE YEAR................... 3,295,209 2,312,097 3,029,921
BANK LOANS -- BEGINNING OF YEAR.......................... (8,292,698) (4,997,489) (2,685,392)
---------- ---------- ----------
CASH IN BANK (BANK LOANS) -- END OF YEAR................. (4,997,489) (2,685,392) 344,529
========== ========== ==========
</TABLE>
F-25
<PAGE> 64
HAMRO GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED APRIL 30, 1996
1. NATURE OF OPERATIONS
Hamro Group Inc. operates in the plastic industry. The company manufactures
and distributes a wide range of plastic products as well as color concentrates.
2. ACCOUNTING POLICIES
Basis of consolidation
The consolidated financial statements include the accounts of the
subsidiary, Hamelin Group Inc., and its American subsidiary, Hamelin Industries
Inc., which have been accounted for using the purchase method.
Inventories
Inventories are valued at the lower of cost and market. Market is defined
as net realizable value for finished goods, and as replacement cost for raw
materials and spare parts. Cost of inventories is determined as follows:
(a) raw materials using the first-in, first-out method;
(b) spare parts using the specific identification method; and
(c) finished goods using the accumulation of actual cost of raw
materials and labour, plus a percentage of overhead.
Capital assets and amortization
Capital assets are recorded at cost less government grants and accumulated
amortization. The cost of capital assets purchased under capital leases is
established at present value of minimum lease payment requirements, without
exceeding the fair value of the property.
Amortization is charged against income using the straight-line method in
amounts sufficient to amortize the cost of capital assets over their estimated
useful lives at the following annual rates:
<TABLE>
<CAPTION>
UNAMORTIZED BALANCE OF CAPITAL ASSETS
CAPITAL ASSETS ACQUIRED BEFORE ACQUIRED AFTER
MAY 1, 1993 MAY 1, 1993
------------------------------ --------------
<S> <C> <C>
Land development...................................... 10 years 10 years
Buildings............................................. 30 years 30 or 40 years
Machinery and equipment............................... 5 years 5 to 10 years
Rolling stock......................................... 3 years 3 to 5 years
Furniture and fixtures................................ 2 to 3 years 3 to 5 years
Leasehold improvements................................ Term of lease Term of lease
</TABLE>
Deferred charges
Deferred charges represent the costs relating to the reorganization and
rationalization of certain of the company's production plants. The deferred
charges are mainly comprised of consulting fees and relocalization expenses and
are amortized using the straight-line method over three years.
Financing fees related to the long-term debt are amortized using the
straight-line method over a period of five years according to the term of the
loan.
F-26
<PAGE> 65
HAMRO GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEAR ENDED APRIL 30, 1996
Income taxes
Income taxes are provided at current rates for all items included in the
statement of earnings, regardless of the period when such items are reported for
income tax purposes. The principal item which results in timing differences for
financial and tax reporting purposes is amortization. Deferred income taxes are
not adjusted for subsequent changes in income tax rates.
Foreign currency translation
Foreign currency transactions
Monetary assets and liabilities resulting from foreign currency
transactions are translated into Canadian dollars using the year-end exchange
rates. Sales, purchases, and capital expenditures are translated throughout the
year at the exchange rates prevailing at the transaction date. All exchange
gains and losses are included in the determination of net earnings for the year.
Foreign subsidiary
The foreign subsidiary is considered a self-sustaining entity. The assets
and liabilities are translated at the exchange rate prevailing at the balance
sheet date. Revenue and expenses are translated at the weighted average exchange
rate for the year. Translation gains or losses are deferred and shown as a
separate component of shareholders' equity.
3. SECURITY FOR BANK LOANS
Inventories and a moveable hypothec on accounts receivable have been
pledged as security for bank loans.
4. INVENTORIES
<TABLE>
<CAPTION>
1995 1996
C$ C$
---------- ----------
<S> <C> <C>
Raw materials......................................... 6,770,406 4,853,359
Finished goods........................................ 5,124,140 4,601,240
Spare parts........................................... 628,659 626,680
---------- ----------
12,523,205 10,081,279
========== ==========
</TABLE>
F-27
<PAGE> 66
HAMRO GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEAR ENDED APRIL 30, 1996
5. SECURED NOTES RECEIVABLE
<TABLE>
<CAPTION>
1995 1996
C$ C$
------- -------
<S> <C> <C>
Note receivable, secured by certain land and buildings, bearing interest
at 9%, payable in blended monthly installments of C$5,525 (U.S. $4,057)
and a final installment of approximately C$512,112 (U.S. $376,000) in
September 1996.......................................................... 532,066 515,351
Note receivable, secured by certain assets, bearing interest at 11%,
payable in semi-annual installments varying from C$3,405 (U.S. $2,500)
to C$6,810 (U.S. $5,000) ending in 1998................................. 40,686 27,240
------- -------
572,752 542,591
Less: Current portion included in accounts receivable..................... 32,469 528,971
------- -------
540,283 13,620
======= =======
</TABLE>
6. CAPITAL ASSETS
<TABLE>
<CAPTION>
1996
1995 ----------------------------------------
---------- ACCUMULATED
NET COST AMORTIZATION NET
C$ C$ C$ C$
---------- ---------- ------------ ----------
<S> <C> <C> <C> <C>
Land and land development..................... 670,094 1,007,395 365,631 641,764
Buildings..................................... 5,309,926 10,420,201 5,168,783 5,251,418
Machinery and equipment....................... 15,540,182 56,868,782 41,977,970 14,890,812
Rolling stock................................. 133,172 1,022,937 728,285 294,652
Furniture and fixtures........................ 541,468 2,597,665 2,038,470 559,195
Leasehold improvements........................ 715,192 1,167,712 588,734 578,978
Machinery and equipment held under capital
leases...................................... 3,892,109 5,277,804 1,651,963 3,625,841
Deposits and capital assets under
construction................................ 381,961 405,456 -- 405,456
----------- ----------- ----------- -----------
27,184,104 78,767,952 52,519,836 26,248,116
=========== =========== =========== ===========
</TABLE>
7. OTHER ASSETS
<TABLE>
<CAPTION>
1995 1996
C$ C$
--------- -------
<S> <C> <C>
Deferred charges, net of accumulated amortization of $675,504........... 673,097 335,645
Goodwill, net of accumulated amortization of C$83,605................... 108,000 101,851
Financing fees and other................................................ 302,327 220,619
---------- --------
1,083,424 658,115
========== ========
</TABLE>
F-28
<PAGE> 67
HAMRO GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEAR ENDED APRIL 30, 1996
8. LONG-TERM DEBT
(a) Long-term debt is comprised of the following:
<TABLE>
<CAPTION>
1995 1996
C$ C$
---------- ----------
<S> <C> <C>
Term loan payable in monthly installments of $75,000,
$125,000, $150,000 and $175,000 for years ending in 1997,
1998, 1999 and 2000 respectively and the balance of
$8,100,000 maturing on April 15, 2000 (note 8(b)) -- at a
fixed rate of 10.535%...................................... 10,000,000 9,647,056
at prime rate plus 1.25%................................... 5,000,000 6,752,944
Participating loan bearing interest at variable rates
repayable in a maximum of seven annual installments on
September 15 of each year commencing in 1995 based on 7.5%
of the company's annual income (as defined) (note 8(c)).... 1,834,464 1,272,756
Term loan (U.S. $1,703,000) bearing interest at 9.5%, payable
in monthly installments of $42,296 (U.S. $31,054) including
capital and interest until February 2000 and the balance of
$962,934 (U.S. $707,000 maturing in March 2000 (note
8(d))...................................................... 2,576,780 2,319,116
Non-interest bearing loan facility totalling $346,615 payable
in five annual consecutive installments starting on April
30, 1997................................................... 148,531 311,954
---------- ----------
19,559,775 20,303,826
Obligations under capital leases maturing between 1996 and
2001, bearing interest at rates varying from 7.5% to 9.4%
of which C$823,255 is repayable next year (note 9)......... 2,863,291 2,221,855
---------- ----------
22,423,066 22,525,681
Less: Current portion...................................... 2,330,201 2,520,765
---------- ----------
20,092,865 20,004,916
========== ==========
</TABLE>
(b) An immovable and movable first rank hypothec of $17 million on all
current and future assets of the company has been given as security for this
term loan, subject to the bank's prior charge on accounts receivable and
inventory to secure the operating line of credit and other prior charges, mainly
on machinery and equipment under capital leases.
Furthermore, the United States subsidiary's shares were pledged as
collateral for the term loan.
(c) The participating loan from SDI is secured by:
a $1.7 million mortgage bond issued under a second rank Trust Deed
creating a fixed charge on all the company's assets as well as a floating
charge on all the company's assets not specifically pledged, except those
located in the United States;
a commercial pledge on machinery and equipment.
As additional consideration for the participating loan, the company granted an
option to SDI to purchase capital stock (note 10(c)).
(d) Substantially all the United States subsidiary's assets have been
pledged as collateral for the term loan.
F-29
<PAGE> 68
HAMRO GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEAR ENDED APRIL 30, 1996
(e) The aggregate amount of payments required in each of the next five
years to meet retirement provisions of long-term debt exclusive of obligations
under capital leases is as follows:
<TABLE>
<S> <C>
1997.................................................................. C$ 1,698,000
1998.................................................................. 2,291,000
1999.................................................................. 2,623,000
2000.................................................................. 13,596,000
2001.................................................................. 69,000
</TABLE>
9. COMMITMENTS
(a) Future minimum lease payments under capital and operating leases are as
follows:
<TABLE>
<CAPTION>
CAPITAL LEASES OPERATING LEASES
C$ C$
-------------- ----------------
<S> <C> <C>
Year ending April 30, 1997................................ 988,918 606,000
1998.............................. 972,852 280,000
1999.............................. 352,552 32,000
2000.............................. 140,184 20,000
2001.............................. 71,662 13,000
-------- --------
Total future minimum lease payments....................... 2,526,168 951,000
========
Less: Interest............................................ 304,313
--------
Balance of obligations.................................... 2,221,855
========
</TABLE>
(b) Commitments under signed agreements with respect to the purchase of
capital assets total $836,000 as at April 30, 1996.
(c) During the year, the company entered into an agreement to guarantee
certain financial obligations of a client to its supplier.
The maximum amount guaranteed under this agreement amounts to $477,000
(U.S. $350,000).
10. CAPITAL STOCK
(a) Authorized in unlimited number --
10% cumulative dividend, non-voting Class "A" preferred shares,
redeemable at their stated value of $100 each
8% non-cumulative dividend, non-voting Class "B" preferred shares,
redeemable at their paid-up value
Class "A" and Class "B" common shares, without par value
<TABLE>
<CAPTION>
1995 1996
C$ C$
--------- ---------
<S> <C> <C>
Issued and fully paid --
Nil (1995 - 2,400) Class "A" preferred shares................ 240,000 --
813,223 Class "B" preferred shares........................... 813,223 813,223
70,000 Class "A" common shares............................... 2,651,054 2,651,054
30,000 Class "B" common shares............................... 1,135,823 1,135,823
-------- --------
4,840,100 4,600,100
======== ========
</TABLE>
F-30
<PAGE> 69
HAMRO GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEAR ENDED APRIL 30, 1996
(b) During the year, the company redeemed 2,400 Class "A" preferred shares
for cash consideration of C$240,000.
(c) As consideration for the participating loan from SDI as described in
note 8(c), the company has granted SDI the option to purchase 1,396 Class "A"
common shares as well as 598 Class "B" common shares for the price of $77.13 per
share, payable in cash.
Upon exercising the option, SDI can request from the company the immediate
repurchase of shares based on their book value.
11. INCOME TAXES
(a) As of April 30, 1996, the American subsidiary has a deferred income tax
debit which has not been recorded in the financial statements, of approximately
C$369,000 (U.S. $271,000).
The unrecognized deferred income tax debit is comprised of the following:
<TABLE>
<CAPTION>
FEDERAL STATE
U.S. $ U.S. $ EXPIRATION
-------- ------- ----------
<S> <C> <C> <C> <C>
Losses carried forward..................... 603,000 46,000 2003-2008
Amounts claimed for income tax purposes in
excess of amounts provided in the
financial statements..................... (376,000) (93,000) --
-------- -------
Total...................................... 227,000 (47,000) 180,000
======== =======
Income tax credits......................... 91,000 1997-2001
-------
U.S. $271,000
=======
</TABLE>
Previous years unrecognized tax benefit on losses carried forward reduced the
consolidated income tax charge by C$238,000 (U.S. $175,000) for the current year
and C$274,000 (U.S. $201,000) in 1995.
(b) During the year, the tax authorities granted additional investment tax
credits of approximately C$900,000 related to years 1987 to 1995 of which
C$131,000 are related to 1995. These credits were not previously recorded in the
books and have been accounted for against the research and development expense
for the year ended April 30, 1996.
12. RELATED PARTY TRANSACTIONS
During the year, management fees of C$1,141,530 (1995 -- C$1,001,626) were
paid to a related company.
13. SUBSEQUENT EVENT
On June 7, 1996, the company entered into an agreement to dispose of
substantially all its operating assets and certain liabilities, for proceeds
exceeding book value.
F-31
<PAGE> 70
HAMRO GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEAR ENDED APRIL 30, 1996
14. RECONCILIATION OF CANADIAN TO UNITED STATES GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES
The following reconciles the Company's financial information according to
generally accepted accounting principles in Canada to those in the United
States:
a) Statement of Earnings:
<TABLE>
<CAPTION>
YEARS ENDED APRIL 30,
----------------------
1995 1996
C$ C$
--------- ---------
<S> <C> <C>
Net earnings as shown in the financial statements....... 2,914,708 2,980,291
Decrease in recovery of deferred income taxes........... 73,000 43,000
--------- ---------
Net income according to generally accepted accounting
principles in the United States....................... 2,841,708 2,937,291
========= =========
</TABLE>
b) Balance Sheet:
<TABLE>
<CAPTION>
AS OF APRIL 30,
----------------------
1995 1996
C$ C$
--------- ---------
<S> <C> <C>
Deferred income taxes as shown in the financial
statements............................................ 2,953,482 2,496,482
Deferred income taxes according to generally accepted
accounting principles in the United States............ 2,762,000 2,348,000
--------- ---------
Difference resulting in an increase in retained earnings
under generally accepted accounting principles in the
United States......................................... 191,482 148,482
========= =========
</TABLE>
c) Statement of Changes in Financial Position:
Under generally accepted accounting principles in the United States,
bank loans would be excluded from the amount of cash, and changes in bank
loans would be reflected as financing activities in the statement of
changes in financial position. As a result, the amount of cash from
financing activities in the year, and the cash at the end of the year,
would be reported as follows:
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30,
------------------------------------
1994 1995 1996
C$ C$ C$
---------- -------- ----------
<S> <C> <C> <C>
Cash used in financing activities.......... (4,284,688) (691,116) (2,802,473)
========= ========= =========
Cash at end of year........................ -- -- 344,529
========= ========= =========
</TABLE>
F-32
<PAGE> 71
HAMRO GROUP INC.
CONSOLIDATED CONDENSED BALANCE SHEET AS AT JULY 27, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
C$
----------
<S> <C>
ASSETS
CURRENT ASSETS
Accounts receivable, net...................................................... 15,559,249
Inventories (note 4).......................................................... 10,744,538
Prepaid expenses.............................................................. 505,652
Income taxes.................................................................. 116,667
-----------
26,926,106
SECURED NOTES RECEIVABLE, less current maturities of $528,949................... 13,750
CAPITAL ASSETS, net............................................................. 25,923,297
OTHER ASSETS.................................................................... 554,965
-----------
53,418,118
===========
LIABILITIES
CURRENT LIABILITIES
Bank loans.................................................................... 485,518
Accounts payable and accrued liabilities...................................... 10,722,078
Accounts payable to a related company......................................... 295,869
Current portion of long-term debt............................................. 2,787,111
-----------
14,290,576
LONG-TERM DEBT.................................................................. 19,266,885
DEFERRED INCOME TAXES........................................................... 2,296,482
-----------
35,853,943
-----------
NON-CONTROLLING INTERESTS....................................................... 38,297
-----------
SHAREHOLDERS' EQUITY
CAPITAL STOCK................................................................... 4,600,100
RETAINED EARNINGS............................................................... 12,544,379
CUMULATIVE TRANSLATION ADJUSTMENT............................................... 381,399
-----------
17,525,878
-----------
53,418,118
===========
</TABLE>
F-33
<PAGE> 72
HAMRO GROUP INC.
CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS
FOR THE THREE-MONTH PERIODS ENDED JULY 27, 1995 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
1995 1996
C$ C$
---------- ----------
<S> <C> <C>
SALES................................................................ 25,818,715 26,800,833
=========== ===========
OPERATING INCOME BEFORE THE FOLLOWING................................ 2,325,274 2,914,447
----------- -----------
Amortization of capital assets....................................... 1,428,012 1,450,547
Amortization of other assets......................................... 104,156 103,150
Interest on long-term debt........................................... 557,035 514,963
Interest and bank charges............................................ 61,010 (9,903)
Gain on sale of capital assets....................................... (24,861) (12,556)
----------- -----------
2,125,352 2,046,201
----------- -----------
199,922 868,246
PROVISION FOR (RECOVERY OF) INCOME TAXES
Current.............................................................. 268,383 544,856
Deferred............................................................. (115,000) (200,000)
----------- -----------
153,383 344,856
----------- -----------
Earnings before non-controlling interests............................ 46,539 523,390
Non-controlling interests in loss of a subsidiary.................... -- 3,730
----------- -----------
NET EARNINGS FOR THE PERIOD.......................................... 46,539 527,120
=========== ===========
</TABLE>
F-34
<PAGE> 73
HAMRO GROUP INC.
CONSOLIDATED CONDENSED STATEMENTS OF CHANGES IN FINANCIAL POSITION
FOR THE THREE-MONTH PERIODS ENDED JULY 27, 1995 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
1995 1996
C$ C$
---------- ----------
<S> <C> <C>
OPERATING ACTIVITIES
Net earnings for the period......................................... 46,539 527,120
Items not affecting cash --
Amortization of capital assets................................. 1,428,012 1,450,547
Amortization of other assets................................... 104,156 103,150
Deferred income taxes.......................................... (115,000) (200,000)
Gain on sale of capital assets................................. (24,861) (12,556)
Non-controlling interests...................................... -- (3,730)
----------- -----------
1,438,846 1,864,531
Change in non-cash working capital items............................ (3,317,907) (1,143,803)
----------- -----------
(1,879,061) 720,728
----------- -----------
FINANCING ACTIVITIES
Increase in long-term debt.......................................... 391,372 0
Payment of long-term debt........................................... (455,564) (471,685)
Redemption of preferred shares...................................... (240,000) 0
Dividends........................................................... (6,000) 0
----------- -----------
(310,192) (471,685)
----------- -----------
INVESTING ACTIVITIES
Decrease in notes receivable........................................ 138 (108)
Purchase of capital assets.......................................... (768,513) (1,185,328)
Proceeds from sale of capital assets................................ 30,616 72,156
Increase in other assets............................................ (672) 0
Increase in cumulative translation adjustment....................... 23,933 34,190
----------- -----------
(714,498) (1,079,090)
----------- -----------
INCREASE IN BANK LOANS DURING THE PERIOD............................ (2,903,751) (830,047)
CASH IN BANK (BANK LOANS) -- BEGINNING OF PERIOD.................... (2,685,392) 344,529
----------- -----------
BANK LOANS -- END OF PERIOD......................................... (5,589,143) (485,518)
=========== ===========
</TABLE>
F-35
<PAGE> 74
HAMRO GROUP INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
FOR THE THREE-MONTH PERIOD ENDED JULY 27, 1996
(UNAUDITED)
1. NATURE OF OPERATIONS
Hamro Group Inc. operates in the plastic industry. The company manufactures
and distributes a wide range of plastic products as well as color concentrates.
2. BASIS OF PRESENTATION
These consolidated 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 Hamro Group Inc. April 30, 1996
financial statements.
3. BASIS OF CONSOLIDATION
The consolidated financial statements include the accounts of the
subsidiary, Groupe Hamelin Inc., and its American subsidiary, Hamelin Industries
Inc., which have been accounted for using the purchase method.
4. INVENTORIES
<TABLE>
<CAPTION>
1996
C$
----------
<S> <C>
Raw materials................................................................... 5,558,343
Finished goods.................................................................. 4,564,420
Spare parts..................................................................... 621,775
-----------
10,744,538
===========
</TABLE>
5. RECONCILIATION OF CANADIAN TO UNITED STATES GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES
The following reconciles the Company's financial information according to
generally accepted accounting principles in Canada to those in the United
States:
a) Statement of Earnings:
<TABLE>
<CAPTION>
THREE MONTH PERIOD
ENDED JULY 27
----------------------
1996 1995
C$ C$
------- ------
<S> <C> <C>
Net earnings as shown in the financial statements....... 527,120 46,539
Decrease in recovery of deferred income taxes........... 18,000 11,000
------- ------
Net income according to generally accepted accounting
principles in the United States....................... 509,120 35,539
======= ======
</TABLE>
F-36
<PAGE> 75
HAMRO GROUP INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
FOR THE THREE-MONTH PERIOD ENDED JULY 27, 1996
(UNAUDITED)
b) Balance Sheet:
<TABLE>
<CAPTION>
AS OF JULY 27
1996
C$
-------------
<S> <C>
Deferred income taxes as shown in the financial statements........ 2,296,482
Deferred income taxes according to general accepted accounting
principles in the United States................................. 2,166,000
---------
Difference resulting in an increase in retained earnings under
generally accepted accounting principles in the United States... 130,482
=========
</TABLE>
c) Statement of Changes in Financial Position:
Under generally accepted accounting principles in the United States, bank
loans would be excluded from the amount of cash, and changes in bank loans would
be reflected as financing activities in the statement of changes in financial
position. As a result, the amount of cash from financing activities in the year,
and the cash at the end of the year, would be reported as follows:
<TABLE>
<CAPTION>
THREE MONTH PERIOD
ENDED JULY 27
---------------------
1996 1995
C$ C$
------ ---------
<S> <C> <C>
Cash from financing activities........................... 13,833 2,593,559
====== =========
Cash at end of period.................................... -- --
====== =========
</TABLE>
F-37
<PAGE> 76
PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma combined condensed balance sheet at
August 3, 1996 gives effect to the acquisition of Hamelin, the consummation of
the Financing and the application of the net proceeds therefrom as if such
events had occurred at August 3, 1996, and the unaudited pro forma combined
statement of operations for the fiscal year ended October 28, 1995, and for the
nine months ended August 3, 1996, give effect to the acquisitions of Hamelin and
Portage, the consummation of the Financing and the application of the net
proceeds therefrom as if such events had occurred at October 30, 1994.
The pro forma financial information should be read in conjunction with the
historical financial statements of the Company and the historical financial
statements of Hamelin included elsewhere herein. The pro forma information may
not be indicative of future financial position or financial position that would
have been reported had the transactions been completed as of August 3, 1994 or
May 4, 1996, and is not necessarily indicative of future earnings or earnings
that would have been reported for the periods indicated had the transactions
been completed at October 30, 1994. Further, the pro forma consolidated
statement of operations for the nine months ended August 3, 1996, should not
necessarily be taken as indicative of earnings for a full year.
F-38
<PAGE> 77
UNAUDITED PRO FORMA
COMBINED CONDENSED BALANCE SHEET
AT AUGUST 3, 1996
<TABLE>
<CAPTION>
HISTORICAL HISTORICAL PRO FORMA PRO FORMA
SPARTECH(a) HAMELIN(b) ADJUSTMENTS COMBINED
----------- ---------- ----------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
ASSETS:
Cash......................................... $ 3,131 $ -- $ -- $ 3,131
Receivables, Net............................. 55,329 11,320 (48)(c) 66,601
Inventories.................................. 44,768 7,817 -- 52,585
Prepayments and Other........................ 1,752 452 1,038 (d) 3,242
------- ------- -------- ---------
Total Current Assets.................... 104,980 19,589 990 125,559
Property, Plant and Equipment, Net........... 74,675 18,859 16,479 (e) 110,013
Goodwill..................................... 32,920 73 12,774 (f) 45,767
Other Assets................................. 1,828 341 (331)(g) 1,838
------- ------- -------- ---------
Total Assets............................ $ 214,403 $ 38,862 $29,912 $ 283,177
======= ======= ======== =========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current Maturities of Long-Term Debt......... 550 2,381 (2,028)(h) 903
Accounts Payable and
Accrued Liabilities....................... 51,377 8,015 2,315 (i) 61,707
------- ------- -------- ---------
Total Current Liabilities............... 51,927 10,396 287 62,610
Long-Term Debt............................... 75,250 14,017 18,084 (j) 107,351
Other Liabilities............................ 5,219 1,671 (1,671)(k) 5,219
Total Stockholders' Equity................... 82,007 12,778 13,212 (l) 107,997
------- ------- -------- ---------
Total Liabilities and Stockholders'
Equity............................... $ 214,403 $ 38,862 $29,912 $ 283,177
======= ======= ======== =========
</TABLE>
(footnotes on following page)
F-39
<PAGE> 78
UNAUDITED PRO FORMA
COMBINED CONDENSED BALANCE SHEET
AT AUGUST 3, 1996
(footnotes from previous page)
(a) The Portage Acquisition was effective May 9, 1996 and is therefore included
in the Historical Spartech balance sheet as of August 3, 1996.
(b) Hamelin operates with the Canadian $(C$) as its functional currency. For
the purposes of the Pro Forma balance sheet, Hamelin's historical balances
have been translated using a C$ in US$ exchange rate of .7275 (the currency
exchange rate reported as of August 3, 1996 in the Wall Street Journal).
(c) To eliminate the Hamelin tax receivable not acquired.
(d) Represents the deferred tax effects on the adjustments to accrued
liabilities net of the elimination of the tax credit not acquired:
<TABLE>
<S> <C>
Record deferred taxes................................................ $1,140
Eliminate income tax credit.......................................... (102)
------
$1,038
======
</TABLE>
(e) Represents the write up of Hamelin net property, plant and equipment to its
estimated fair value.
(f) Represents the net effect of writing off of the goodwill which existed
prior to the acquisition and recording the excess of the purchase price
over the estimated value of the assets acquired from Hamelin.
(g) To eliminate Hamelin other assets not acquired.
(h) To eliminate the current maturities of Hamelin's debt not assumed.
(i) Represents the net effect of the elimination of the Hamelin liabilities
not assumed and the accrued liabilities not recorded in connection with
the acquisition:
<TABLE>
<S> <C>
Hamelin liabilities not assumed...................................... $ (686)
Severance, vacation pay, and other accrued liability................. $3,001
------
$2,315
======
</TABLE>
(j) Represents the net effect of the borrowings under financing arrangements
for the acquisition and the elimination of the Hamelin debt not assumed:
<TABLE>
<S> <C>
Hamelin Debt Financing............................................. $ 32,101
Hamelin debt not assumed........................................... (14,017)
--------
$ 18,084
========
</TABLE>
(k) Represents the net effect of the elimination of Hamelin liabilities not
assumed.
(l) Represents the elimination of the Hamelin stockholder's equity and
reflecting the net proceeds of the Offering:
<TABLE>
<S> <C> <C>
Eliminate Hamelin Equity................................... $(12,778)
Record Offering:
Gross proceeds to the Company............................ 27,750
Underwriter's discount and commissions................... (1,410)
Direct costs of Offering................................. (350)
------
$ 25,990
--------
$ 13,212
========
</TABLE>
F-40
<PAGE> 79
UNAUDITED PRO FORMA
COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR THE FISCAL YEAR ENDED OCTOBER 28, 1995
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 28, 1995
-------------------------------------
HISTORICAL HISTORICAL HISTORICAL PRO FORMA PRO FORMA
SPARTECH PORTAGE HAMELIN(a) ADJUSTMENTS COMBINED
---------- ---------- ---------- ----------- ---------
(IN THOUSANDS, EXCEPT RATIOS AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS:
Net Sales................................ $ 352,273 $ 35,318 $ 77,392 $ -- $ 464,983
Costs and Expenses
Cost of Sales......................... 302,394 31,059 66,055 (4,968)(c) 394,540
Selling and Administrative............ 24,545 2,829 7,101 (1,441)(d) 33,034
Goodwill Amortization................. 730 105 4 450 (e) 1,289
-------- ------- ------- ------- --------
Operating Earnings from Continuing
Operations............................ 24,604 1,325 4,232 5,959 36,120
Interest Expense......................... 4,960 259 2,255 1,381 (f) 8,855
Other Expense (Income)................... -- -- (227) -- (227)
-------- ------- ------- ------- --------
Earnings Before Provision for Income
Taxes................................. 19,644 1,066 2,204 4,578 27,492
Provision for Income Taxes............ 5,110 437 680 1,865 (g) 8,092
-------- ------- ------- ------- --------
Net Earnings from Continuing
Operations............................ 14,534 629 1,524 2,713 19,400
Preferred Stock Accretion............. (1,098) -- -- -- (1,098)
-------- ------- ------- ------- --------
Net Earnings Applicable to Common Stock
and Equivalents....................... $ 13,436 $ 629 $ 1,524 $ 2,713 $ 18,302
======== ======= ======= ======= ========
Weighted Average Shares:
Primary............................... 16,858 3,000 19,858
======== ======= ========
Fully Diluted......................... 24,111 3,000 27,111
======== ======= ========
PER SHARE INFORMATION:
Net Earnings per Share
Primary............................... $ 0.80 $ 0.92
======== ========
Fully Diluted......................... $ 0.60 $ 0.72
======== ========
</TABLE>
F-41
<PAGE> 80
UNAUDITED PRO FORMA
COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED AUGUST 3, 1996
<TABLE>
<CAPTION>
NINE MONTHS ENDED AUGUST 3, 1996
---------------------------------------------------------------------
HISTORICAL PRE-ACQUISITION HISTORICAL PRO FORMA PRO FORMA
SPARTECH PORTAGE (b) HAMELIN (a) ADJUSTMENTS COMBINED
---------- --------------- ----------- ----------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS:
Net Sales............................. $ 287,019 $18,120 $58,083 $ -- $ 363,222
Costs and Expenses
Cost of Sales...................... 242,954 15,948 48,633 (3,176)(c) 304,359
Selling and Administrative......... 18,139 1,516 5,482 (1,045)(d) 24,092
Goodwill Amortization.............. 619 52 4 305 (e) 980
-------- ------- ------- ------- --------
Operating Earnings from Continuing
Operations......................... 25,307 604 3,964 3,916 33,791
Interest Expense...................... 3,577 108 1,331 1,120 (f) 6,136
Other Expense (Income)................ -- -- (716) 545 (h) (171)
-------- ------- ------- ------- --------
Earnings Before Provision for Income
Taxes.............................. 21,730 496 3,349 2,251 27,826
Provision for Income Taxes......... 8,149 203 852 1,261 (g) 10,465
Non-Controlling Interest........... -- -- 9 (9) --
-------- ------- ------- ------- --------
Net Earnings from Continuing
Operations......................... $ 13,581 $ 293 $ 2,488 $ 999 $ 17,361
======== ======= ======= ======= ========
Weighted Average Shares:
Primary............................ 24,536 3,000 27,536
======== ======= ========
Fully Diluted...................... 24,777 3,000 27,777
======== ======= ========
PER SHARE INFORMATION:
Net Earnings per Share Primary........ $ 0.55 $ 0.63
======== ========
Fully Diluted................. $ 0.55 $ 0.63
======== ========
</TABLE>
(footnotes on following page)
F-42
<PAGE> 81
(footnotes from previous page)
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
(IN THOUSANDS EXCEPT PER SHARE DATA)
(a) Hamelin operates with the Canadian $ (C$) as its functional currency. For
the purposes of the Pro Forma income statements, Hamelin's historical
balances have been translated using a C$ in US$ currency exchange rate of
.7275 (the currency exchange rate reported as of August 3, 1996 in the Wall
Street Journal).
(b) Portage was acquired by the Company on May 9, 1996. Therefore, the
pre-acquisition statement of operations of Portage represents approximately
six months of operations from November 1, 1995 through May 8, 1996. Pro
forma adjustments related to Portage represent adjustments to this six
month period prior to the acquisition.
Results of operations of Portage subsequent to the acquisition date (May 9,
1996 through August 3, 1996) are included in the Historical Spartech
statement of operations. Total sales for Portage during this period were
approximately $8.5 million.
(c) Represents the reduction in costs of materials and conversion costs related
to the effect of Spartech's contractual arrangements and the change in
depreciation expense of plant assets and the elimination of nonrecurring
severance and salary.
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
OCTOBER 28, 1995 AUGUST 3, 1996
---------------- ------------------
<S> <C> <C>
Reduction in costs of sales................... $ (2,874) $ (1,855)
Change in depreciation expense................ (1,706) (1,168)
Nonrecurring severance and salary............. (388) (153)
------- -------
$ (4,968) $ (3,176)
======= =======
</TABLE>
(d) Represents the elimination of the management fee and related expenses of
previous owner, the change in depreciation expense on the office assets,
reductions for duplicate administrative expenses, and the elimination of
the amortization on other assets not acquired from Hamelin:
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
OCTOBER 28, 1995 AUGUST 3, 1996
---------------- ------------------
<S> <C> <C>
Elimination of Hamelin management fee......... $ (509) $ (382)
Change in depreciation expense................ (122) (85)
Reduction of duplicate administrative
expenses.................................... (500) (346)
Elimination of amortization on assets not
acquired from Hamelin....................... (310) (232)
------- -----
$ (1,441) $ (1,045)
======= =====
</TABLE>
(e) Represents the amortization of new goodwill from the acquisition, net of
the elimination of amortization on goodwill which existed prior to the
acquisition:
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
OCTOBER 28, 1995 AUGUST 3, 1996
---------------- ------------------
<S> <C> <C>
Portage goodwill ($9,525 over 40 years less
historical amortization).................... $133 $ 67
Hamelin goodwill ($12,847 over 40 years less
historical amortization).................... 317 238
---- ----
$450 $305
==== ====
</TABLE>
F-43
<PAGE> 82
(f) Represents interest expense at Portage on the amount of the purchase price
and the increase in interest at Hamelin for the amount borrowed under the
Debt Financing:
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
OCTOBER 28, 1995 AUGUST 3, 1996
---------------- ------------------
<S> <C> <C>
Portage acquisition ($17,686 at average 6.25%
LIBOR)...................................... $1,105 $ 553
Spartech bank borrowings ($2,101 at average
6.25% LIBOR)................................ 131 98
Debt financing for Hamelin ($30,000 at 8%, net
of previously recorded interest expense).... 145 469
------ ----
$1,381 $1,120
====== ====
</TABLE>
(g) To adjust the tax rate for Portage and Hamelin to 38%.
(h) To eliminate the non-recurring income from research and development
investment tax credits related to Hamelin's fiscal years 1987 through 1995,
received and recorded in the nine-month period ended August 3, 1996.
F-44
<PAGE> 83
------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY, THE SELLING STOCKHOLDERS OR ANY
UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY IN ANY
JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER IN SUCH
JURISDICTION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE
INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF OR
THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE SUCH DATE.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 9
The Financing......................... 11
Use of Proceeds....................... 11
Price Range of Common Stock and
Dividends........................... 12
Capitalization........................ 13
Pro Forma Financial Data.............. 14
Selected Historical Financial Data.... 18
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 19
Business.............................. 23
Management............................ 30
Principal and Selling Stockholders.... 32
Description of Capital Stock.......... 33
Underwriting.......................... 35
Notice to Canadian Residents.......... 36
Legal Matters......................... 36
Experts............................... 37
Incorporation of Certain Documents by
Reference........................... 37
Additional Information................ 37
Index to Financial Statements......... F-1
</TABLE>
------------------------------------------------------
------------------------------------------------------
SPARTECH LOGO
6,000,000 Shares
Common Stock
($.75 par value)
PROSPECTUS
CS First Boston
A.G. Edwards & Sons, Inc.
------------------------------------------------------
