<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 10, 1996
REGISTRATION STATEMENT NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-3
REGISTRATION STATEMENT
UNDER THE
SECURITIES ACT OF 1933
---------------------------------------------
SPARTECH CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 43-0761773
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
</TABLE>
7733 FORSYTH BOULEVARD, SUITE 1450
ST. LOUIS, MISSOURI 63105
(314) 721-4242
(Address, including zip code, and telephone number including
area code, of registrant's principal executive offices)
---------------------------------------------
DAVID B. MUELLER
EXECUTIVE VICE PRESIDENT AND CHIEF OPERATING OFFICER
SPARTECH CORPORATION
7733 FORSYTH BOULEVARD, SUITE 1450
ST. LOUIS, MISSOURI 63105
(314) 721-4242
(Name, address, including zip code, and telephone number,
including area code of agent for service)
---------------------------------------------
Copies of all communications to:
<TABLE>
<S> <C>
Albert F. Bender, III, Esq. Peter D. Van Cleve, Esq.
Armstrong, Teasdale, Schlafly & Davis Bryan Cave LLP
One Metropolitan Square, Suite 2600 One Metropolitan Square, Suite 3600
St. Louis, Missouri 63102 St. Louis, Missouri 63102
(314) 621-5070 (314) 259-2000
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, check the following box: /
/
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box: / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of earlier effective
registration statement for the same offering. / / ______________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of earlier effective registration statement for
the same offering. / / ______________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
PROPOSED
PROPOSED MAXIMUM
NUMBER OF MAXIMUM OFFERING AGGREGATE
SHARES TO BE PRICE PER OFFERING AMOUNT OF
TITLE OF SHARES TO BE REGISTERED REGISTERED(1) SHARE(2) PRICE(2) REGISTRATION FEE
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $.75 par value.... 6,900,000 $10.688 $73,747,200 $25,430
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes 900,000 shares which may be purchased by the Underwriters pursuant
to an over-allotment option.
(2) Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457 under the Securities Act of 1933.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOT SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED JULY 10, 1996
6,000,000 Shares
SPARTECH CORPORATION
Common Stock
($.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 July 9, 1996, the reported last sale price of the
Common Stock on the New York Stock Exchange Composite Tape was $10 3/8
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 ADEQUACY 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............................. $ $ $ $
Total(2).............................. $ $ $ $
</TABLE>
(1) Before deduction of expenses payable by the Company estimated at $ .
(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
$ , Underwriting Discounts and Commissions will be $ ,
Proceeds to the Company will be $ , and Proceeds to Selling
Stockholders will be $ .
------------------
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 , 1996, against payment in immediately
available funds.
CS First Boston A.G. Edwards & Sons, Inc.
The date of this Prospectus is , 1996.
<PAGE> 3
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.
------------------------
[MAP]
Appearing at this point is a map of the United States and Canada displaying
the location of Spartech's corporate headquarters and each of its existing
fifteen extruded sheet & rollstock and merchant compounding facilities, as well
as the seven facilities operated by Hamelin.
[PHOTOS]
Appearing at this point are three photos. The first two photos display
samples of end-user products manufactured by Spartech's customers using
Spartech's extruded sheet & rollstock, specialty plastic alloys, compounds and
color concentrates. The third photo displays a Spartech extrusion line used to
produce rigid sheet & rollstock.
The Company's principal executive offices are located at 7733 Forsyth
Boulevard, Suite 1450, Clayton, Missouri 63105-1817, telephone (314) 721-4242.
2
<PAGE> 4
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 18 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> 5
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 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 and particularly the suitability of
different resins for specific 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
4
<PAGE> 6
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.
- - 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 $68.0 million, $79.6 million and $80.5 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 .7339 (the exchange rate reported in the May 3, 1996 edition of 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 $9.0 million at April 27, 1996), Spartech will pay to Hamelin a base
purchase price of $57.6 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 governmental and other third party consents,
satisfactory environmental inspections and legal opinions, and other customary
matters.
5
<PAGE> 7
THE FINANCING
In addition to the Offering, the Company expects to raise approximately $30
million of additional financing for the Hamelin Acquisition through additional
borrowings under its existing credit agreement or 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......................... 26,488,791 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 2,292,062 shares as of May 4, 1996 issuable upon exercise
of stock options granted, or 1,684,000 additional shares available for the
grant of future options, under the Company's stock option plans.
6
<PAGE> 8
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 six months ended May 4, 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 May 4,
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 May 4, 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 $465,697
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 $ 36,189
Operating Margin.......... 0.5% 5.4% 5.6% 6.4% 7.0% 7.8%
Net Earnings from
Continuing Operations
(1).................... $ (5,714) $ 4,220 $ 6,716 $ 10,835 $ 14,534 $ 19,499
Earnings Per Share (fully
diluted) (1)........... $ (1.85) $ .21 $ .30 $ .46 $ .60 $ .72
Dividends Per Share....... $ -- $ -- $ -- $ -- $ .09 NM
RATIO ANALYSIS:
Return on Equity (1)(2)... 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> 9
<TABLE>
<CAPTION>
PRO FORMA
COMBINED
SIX MONTHS ENDED (3) FOR SIX
--------------------------- MONTHS
APRIL 29, MAY 4, ENDED
1995 1996 MAY 4, 1996
------------ --------- -----------
(IN THOUSANDS, EXCEPT RATIOS AND PER SHARE
DATA)
<S> <C> <C> <C>
INCOME STATEMENT DATA:
Net Sales............................................ $174,907 $ 185,796 $ 243,650
Percent Change in Net Sales from Prior Year.......... 54.1% 6.2% N/A
Operating Earnings from Continuing Operations........ $ 12,119 $ 15,901 $ 22,337
Operating Margin..................................... 6.9% 8.6% 9.2%
Net Earnings from Continuing Operations (1).......... $ 7,075 $ 8,561 $ 11,552
Earnings Per Share (fully diluted) (1)............... $ .29 $ .35 $ .42
Dividends Per Share.................................. $ -- $ .07 N/A
</TABLE>
<TABLE>
<CAPTION>
PRO FORMA
AT APRIL 29, AT MAY 4, COMBINED AT
1995 1996 MAY 4, 1996
------------ --------- -----------
(IN THOUSANDS, EXCEPT RATIOS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Working Capital...................................... $ 34,881 $ 48,814 $ 59,548
Total Assets......................................... $180,100 $ 189,942 $ 287,566
Total Long-Term Debt................................. $ 54,963 $ 58,000 $ 104,426
Total Stockholders' Equity........................... $ 65,945 $ 78,830 $ 109,830
Total Long-Term Debt as a Percentage of Total
Capitalization.................................... 45.5% 42.4% 48.7%
</TABLE>
- -------------------------
(1) 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
six months of 1996. The effective tax rate for 1991 is not meaningful.
(2) 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.
(3) 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 six months ended May 4, 1996 consists of 27 weeks, compared to 26 weeks
for the corresponding 1995 period.
8
<PAGE> 10
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 $58
million at May 4, 1996, and pro forma to give effect to the May 9, 1996
acquisition of Portage, it would have been approximately $77 million at May 4,
1996, or approximately 50% of total consolidated capitalization. On a pro forma
basis, giving effect to the acquisition of Portage, 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 $104 million at May 4, 1996, or approximately 49% 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
9
<PAGE> 11
to incur additional indebtedness, create liens, sell assets, engage in mergers,
acquisitions or joint ventures, pay 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 1.9 million shares of its Spartech Common Stock in this Offering. At
such level, TCW's remaining shares of Common Stock will represent approximately
19.4% of the shares of Common Stock outstanding immediately following the
completion of the Offering. As a result, Vita and TCW, if they choose to act in
concert, would continue to be in a position to effectively control the
management and 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> 12
THE FINANCING
In addition to the Offering, the Company expects to raise approximately $30
million of additional financing for the Hamelin Acquisition through additional
borrowings under its existing credit agreement or 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 $31.0 million, assuming a public offering price of
$11.00 per share, the reported closing price on July 5, 1996. 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> 13
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 (through July 5, 1996)............... $11 7/8 $9 1/2 .04
</TABLE>
- -------------------------
(a) Represents special three cent per share dividend declared just following the
close of the Company's second quarter.
On July 5, 1996, the reported closing price of the Common Stock on the NYSE
was $11.00 per share. As of July 5, 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> 14
CAPITALIZATION
The following table sets forth the unaudited consolidated short-term debt,
long-term debt and capitalization (i) of the Company at May 4, 1996, (ii) as
adjusted to give effect to the acquisition of Portage as if such transaction had
occurred on May 4, 1996, and (iii) as adjusted to give effect to the
acquisitions of Portage and Hamelin, the Financing and the application of the
net proceeds therefrom (assuming a public offering price of $11.00 per share,
the reported closing price on July 5, 1996), as if such transactions had
occurred on May 4, 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>
MAY 4, 1996
------------------------------------------
AS ADJUSTED
AS ADJUSTED FOR PORTAGE,
FOR HAMELIN AND THE
ACTUAL PORTAGE FINANCING (A)
-------- ----------- ---------------
(IN THOUSANDS, EXCEPT RATIOS)
<S> <C> <C> <C>
Short-term debt:
Loans and current portion of long-term debt............ $ -- $ 1,150(b) $ 1,149
======== ========= =========
Long-term debt........................................... 58,000 77,385(b) 104,426
-------- --------- ---------
Stockholders' equity:
Common Stock, $.75 par value, 35,000,000 shares
authorized, 23,582,990 shares outstanding (as
adjusted, 26,582,990 shares outstanding) (c)........ 17,687 17,687 19,937
Contributed capital.................................... 67,094 67,094 95,844
Retained deficit....................................... (5,176) (5,176) (5,176)
Treasury stock, at cost, 94,199 shares................. (775) (775) (775)
-------- --------- ---------
Total stockholders' equity.......................... 78,830 78,830 109,830
-------- --------- ---------
Total capitalization.............................. $136,830 $ 156,215 $ 214,262
======== ========= =========
Total Long-Term Debt as a percentage of Total
Capitalization......................................... 42% 50% 49%
======== ========= =========
</TABLE>
- -------------------------
(a) Adjustments assume (i) the estimated net proceeds to the Company of the
Offering will be $31.0 million, (ii) the estimated net proceeds from the
Debt Financing will be $30.0 million, and (iii) the estimated net proceeds
to the Company from the Financing in excess of the cash purchase price for
the Hamelin Acquisition (approximately $3.0 million) will be utilized to pay
down existing Spartech bank borrowings.
(b) Represents bank borrowings of $17.7 million in connection with the purchase
of the net assets of Portage, borrowings of $600,000 under Portage's line of
credit and $2.3 million of Industrial Revenue Bonds ($550,000 current and
$1.7 million long-term).
(c) Does not include 2,292,062 shares as of May 4, 1996 issuable upon exercise
of stock options granted or 1,684,000 additional shares available for the
grant of future options under the Company's stock option plans.
13
<PAGE> 15
PRO FORMA FINANCIAL DATA
The following unaudited pro forma combined condensed balance sheet at May
4, 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 May 4, 1996, and the unaudited pro forma
combined condensed statement of operations for the fiscal year ended October 28,
1995, and for the six months ended May 4, 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 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 combined condensed statement of
operations for the six months ended May 4, 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 MAY 4, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
HISTORICAL HISTORICAL HISTORICAL PRO FORMA PRO FORMA
SPARTECH PORTAGE HAMELIN(a) ADJUSTMENTS COMBINED
---------- ---------- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C>
ASSETS:
Cash................................. $ 3,053 $ 123 $ 253 $ (253) (b) $ 3,176
Receivables.......................... 54,893 2,614 12,701 -- 70,208
Inventories.......................... 40,053 3,889 7,399 319 (c) 51,660
Prepayments and Other................ 1,192 433 419 894 (d) 2,938
--------- -------- -------- ------- ---------
Total Current Assets............ 99,191 7,059 20,772 960 127,982
Property, Plant and Equipment, Net... 65,487 5,030 19,263 20,751 (e) 110,531
Goodwill............................. 23,633 2,786 75 19,918 (f) 46,412
Other Assets......................... 1,631 1,010 418 (418) (g) 2,641
--------- -------- -------- ------- ---------
Total Assets $ 189,942 $ 15,885 $ 40,528 $41,211 $ 287,566
========= ======== ======== ======= =========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Loans and Current Portion of
Long-Term Debt.................... -- 1,150 1,850 (1,851) (h) 1,149
Accounts Payable and Accrued
Liabilities....................... 50,377 4,682 9,682 2,544 (i) 67,285
--------- -------- -------- ------- ---------
Total Current Liabilities....... 50,377 5,832 11,532 693 68,434
Long-Term Debt....................... 58,000 1,700 14,682 30,044 (j) 104,426
Other Liabilities.................... 2,735 364 1,833 (56) (k) 4,876
Total Stockholders' Equity........... 78,830 7,989 12,481 10,530 (l) 109,830
--------- -------- -------- ------- ---------
Total Liabilities and
Stockholders' Equity......... $ 189,942 $ 15,885 $ 40,528 $41,211 $ 287,566
========= ======== ======== ======= =========
</TABLE>
(footnotes on following page)
14
<PAGE> 16
(footnotes from previous page)
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
(IN THOUSANDS EXCEPT SHARE DATA)
(a) 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 .7339
(the currency exchange rate reported in the May 3, 1996 edition of the Wall
Street Journal).
(b) To eliminate the Hamelin cash not acquired, but settled in the purchase
price.
(c) To record the Portage inventory previously valued on a LIFO basis at its
estimated fair value.
(d) Represents the deferred tax effects on the adjustments recorded to
inventory and accrued liabilities net of the elimination of current assets
not acquired:
<TABLE>
<S> <C>
Record deferred taxes....................................................... $ 1,114
Eliminate income tax credit................................................. (220)
--------
$ 894
========
</TABLE>
(e) Represents the write up of Portage and Hamelin net property, plant and
equipment to its estimated fair value:
<TABLE>
<S> <C>
Write-up of Portage fixed assets............................................ $ 4,676
Write-up of Hamelin fixed assets............................................ 16,075
--------
$ 20,751
========
</TABLE>
(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 (new goodwill) for each acquisition:
<TABLE>
<S> <C>
Eliminate Portage pre-acquisition goodwill.................................. $ (2,786)
Record new goodwill for Portage Acquisition................................. 9,525
Eliminate Hamelin pre-acquisition goodwill.................................. (75)
Record new goodwill for Hamelin Acquisition................................. 13,254
--------
$ 19,918
========
</TABLE>
(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
acquisitions:
<TABLE>
<S> <C>
Hamelin liabilities not assumed............................................. $ (709)
Severance, vacation pay, and other accrued liabilities...................... $ 3,253
--------
$ 2,544
========
</TABLE>
(j) Represents the net effect of the new borrowings under the debt financing
arrangements for the respective acquisitions, the elimination of the
Hamelin debt not assumed and the Hamelin Offering proceeds in excess of
purchase price used to pay down bank borrowings:
<TABLE>
<S> <C>
Portage bank borrowings..................................................... $ 17,685
Hamelin debt financing...................................................... 30,000
Hamelin debt not assumed.................................................... (14,688)
Hamelin additional Offering proceeds........................................ $ (2,953)
--------
$ 30,044
========
</TABLE>
(k) Represents the net effect of the elimination of Hamelin liabilities not
assumed and the deferred tax effect of the write-up in Portage fixed
assets:
<TABLE>
<S> <C>
Eliminate Hamelin liabilities not assumed................................... $ (1,833)
Record deferred taxes on Portage fixed asset write-up....................... 1,777
--------
$ (56)
========
</TABLE>
(l) Reflects the elimination of the Portage and Hamelin stockholders' equity
and the net proceeds to the Company from the Offering:
<TABLE>
<S> <C> <C>
Eliminate Portage equity............................................ $ (7,989)
Eliminate Hamelin equity............................................ (12,481)
Record Offering:
Gross proceeds to the Company (assuming a public offering price of
$11)............................................................ 33,000
Underwriter's discount and commissions............................ (1,650)
Direct costs of Offering.......................................... (350)
-------
-
31,000
--------
$ 10,530
========
</TABLE>
15
<PAGE> 17
UNAUDITED PRO FORMA
COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR THE FISCAL YEAR ENDED OCTOBER 28, 1995, AND
THE SIX MONTHS ENDED MAY 4, 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 $ 78,106 $ -- $465,697
Costs and Expenses
Cost of Sales............................. 302,394 31,059 66,665 (4,998)(b) 395,120
Selling and Administrative................ 24,545 2,829 7,167 (1,452)(c) 33,089
Goodwill Amortization..................... 730 105 4 460 (d) 1,299
-------- -------- -------- ------- --------
Operating Earnings from Continuing
Operations................................ 24,604 1,325 4,270 5,990 36,189
Interest Expense............................ 4,960 259 2,276 1,229 (e) 8,724
Other Expense............................... -- -- (188) -- (188)
-------- -------- -------- ------- --------
Earnings Before Provision for Income
Taxes..................................... 19,644 1,066 2,182 4,761 27,653
Provision for Income Taxes................ 5,110 437 686 1,921 (f) 8,154
-------- -------- -------- ------- --------
Net Earnings from Continuing Operations..... 14,534 629 1,496 2,840 19,499
Preferred Stock Accretion................. (1,098) -- -- -- (1,098)
-------- -------- -------- ------- --------
Net Earnings Applicable to Common Stock and
Equivalents............................... $ 13,436 $ 629 $ 1,496 $ 2,840 $ 18,401
======== ======== ======== ======= ========
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 $ 0.93
======== ========
Fully Diluted............................. $ 0.60 $ 0.72
======== ========
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED MAY 4, 1996
------------------------------------------------------------------
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................................... $185,796 $ 18,120 $ 39,734 $ -- $243,650
Costs and Expenses
Cost of Sales............................. 157,922 15,948 33,164 (2,340)(b) 204,694
Selling and Administrative................ 11,592 1,516 3,595 (751)(c) 15,952
Goodwill Amortization..................... 381 52 3 231 (d) 667
-------- ------- ------- ------- --------
Operating Earnings from Continuing
Operations................................ 15,901 604 2,972 2,860 22,337
Interest Expense............................ 2,201 108 915 615 (e) 3,839
Other Expense............................... -- -- (26) -- (26)
-------- ------- ------- ------- --------
Earnings Before Provision for Income
Taxes..................................... 13,700 496 2,083 2,245 18,524
Provision for Income Taxes................ 5,139 203 416 1,214 (f) 6,972
Provision for Non-Controlling Interest.... -- -- 12 (12) --
-------- ------- ------- ------- --------
Net Earnings from Continuing Operations..... $ 8,561 $ 293 $ 1,655 $ 1,043 $ 11,552
======== ======= ======= ======= ========
Weighted Average Shares:
Primary................................... 24,456 3,000 27,456
======== ======= ========
Fully Diluted............................. 24,759 3,000 27,759
======== ======= ========
PER SHARE INFORMATION:
Net Earnings per Share
Primary................................... $ 0.35 $ 0.42
======== ========
Fully Diluted............................. $ 0.35 $ 0.42
======== ========
</TABLE>
(Footnotes on following page)
16
<PAGE> 18
(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 .7339
(the currency exchange rate reported in the May 3, 1996 edition of the Wall
Street Journal).
(b) 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 SIX MONTHS
ENDED ENDED
OCTOBER 28, 1995 MAY 4, 1996
---------------- -----------
<S> <C> <C>
Reduction in costs of sales............................... $ (2,889) $(1,365)
Change in depreciation expense............................ (1,717) (872)
Nonrecurring severance and salary......................... (392) (103)
-------- -------
$ (4,998) $(2,340)
======== =======
</TABLE>
(c) 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 SIX MONTHS
ENDED ENDED
OCTOBER 28, 1995 MAY 4, 1996
---------------- -----------
<S> <C> <C>
Elimination of Hamelin management fee..................... $ (514) $ (257)
Change in depreciation expense............................ (123) (62)
Reduction of duplicate administrative expenses............ (502) (276)
Elimination of amortization on assets not acquired from
Hamelin................................................. (313) (156)
-------- -------
$ (1,452) $ (751)
======== =======
</TABLE>
(d) 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 SIX MONTHS
ENDED ENDED
OCTOBER 28, 1995 MAY 4, 1996
---------------- -----------
<S> <C> <C>
Portage goodwill ($9,525 over 40 years less historical
amortization)........................................... $ 133 $ 67
Hamelin goodwill ($13,254 over 40 years less historical
amortization)........................................... 327 164
-------- -------
$ 460 $ 231
======== =======
</TABLE>
(e) 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 SIX MONTHS
ENDED ENDED
OCTOBER 28, 1995 MAY 4, 1996
---------------- -----------
<S> <C> <C>
Portage acquisition ($17,686 at average 6.25% LIBOR)...... $ 1,105 $ 553
Debt Financing for Hamelin ($30,000 at 8%, net of
previously recorded interest expense)................... 124 62
-------- -------
$ 1,229 $ 615
======== =======
</TABLE>
(f) To adjust the tax rate for Portage and Hamelin to 38%
17
<PAGE> 19
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 six months ended May 4, 1996 and April 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>
SIX MONTHS ENDED(3)
FISCAL YEAR ENDED OCTOBER ---------------------
-------------------------------------------------------- APRIL 29, MAY 4,
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 $ 174,907 $185,796
Cost of Sales and Other Expenses........... 150,904 159,085 178,269 239,561 326,939 162,426 169,514
Amortization of Intangibles................ 532 537 563 622 730 362 381
Nonrecurring Transactions.................. (3,500) -- -- -- -- -- --
-------- -------- -------- -------- -------- --------- --------
Operating Earnings -- Continuing
Operations............................... 774 9,178 10,569 16,410 24,604 12,119 15,901
Interest Expense........................... 6,201 4,495 3,350 3,125 4,960 2,494 2,201
-------- -------- -------- -------- -------- --------- --------
Earnings Before Provision for Income
Taxes.................................... (5,427) 4,683 7,219 13,285 19,644 9,625 13,700
Provision for Income Taxes............... 287 463 503 2,450 5,110 2,550 5,139
-------- -------- -------- -------- -------- --------- --------
Net Earnings (Loss)(1)
Continuing Operations.................... (5,714) 4,220 6,716 10,835 14,534 7,075 8,561
Discontinued Operations.................. (12,000) -- -- -- -- -- --
-------- -------- -------- -------- -------- --------- --------
$(17,714) $ 4,220 $ 6,716 $ 10,835 $ 14,534 $ 7,075 $ 8,561
======== ======== ======== ======== ======== ========= ========
PER SHARE INFORMATION(1):
Fully Diluted Earnings
Continuing Operations.................... $ (1.85) $ .21 $ .30 $ .46 $ .60 $ .29 $ .35
Discontinued Operations.................. (3.17) -- -- -- -- -- --
-------- -------- -------- -------- -------- --------- --------
$ (5.02) $ .21 $ .30 $ .46 $ .60 $ .29 $ .35
======== ======== ======== ======== ======== ========= ========
Dividends Declared per Share............... $ -- $ -- $ -- $ -- $ .09 $ -- $ .07
======== ======== ======== ======== ======== ========= ========
RATIO ANALYSIS:
Operating Margin........................... 0.5% 5.4% 5.6% 6.4% 7.0% 6.9% 8.6%
Return on Equity (Annualized)(1)(2)........ NM 11.4% 15.8% 20.8% 22.3% 22.8% 22.6%
Total Long-Term Debt as a Percentage of
Total Capitalization..................... 92.9% 51.1% 44.2% 38.5% 45.2% 45.5% 42.4%
BALANCE SHEET DATA:
Working Capital............................ $ 22,299 $ 23,997 $ 25,032 $ 26,351 $ 45,108 $ 34,881 $ 48,814
======== ======== ======== ======== ======== ========= ========
Total Assets............................... $108,752 $106,546 $114,194 $135,720 $178,329 $ 180,100 $189,942
======== ======== ======== ======== ======== ========= ========
Long Term Debt, Less Current Maturities
Senior................................... $ 34,250 $ 30,783 $ 26,283 $ 26,285 $ 59,510 $ 44,829 $ 58,000
Subordinated............................. 40,297 10,134 10,134 10,134 -- 10,134 $ --
-------- -------- -------- -------- -------- --------- --------
$ 74,547 $ 40,917 $ 36,417 $ 36,419 $ 59,510 $ 54,963 $ 58,000
======== ======== ======== ======== ======== ========= ========
Stockholders' Equity....................... $ 5,705 $ 39,121 $ 46,041 $ 58,233 $ 72,128 $ 65,945 $ 78,830
======== ======== ======== ======== ======== ========= ========
</TABLE>
- -------------------------
(1) 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
six months of 1996. The effective tax rate for 1991 is not meaningful.
(2) 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.
(3) 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 six months ended May 4, 1996 consists of 27 weeks, compared to 26 weeks
for the corresponding 1995 period.
18
<PAGE> 20
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 Six Months Ended May 4, 1996 And The Six Months Ended April
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 six months ended May 4, 1996 consists of 27 weeks, compared to 26
weeks for the same 1995 period. The operating results presented below include
discussions as a percentage of sales for additional comparison.
Net sales of $185.8 million for the six months ended May 4, 1996 increased
6.2% from $174.9 million for the same period in 1995. The Extruded Sheet &
Rollstock Group's sales increased approximately 7% in 1996 representing a 2%
increase in pounds shipped and a change in mix to higher-priced engineered
thermoplastic products for the sign and advertising markets. Sales by the
Merchant Compounding Group for the six months ended May 4, 1996 were relatively
flat when compared to the same six month period in 1995.
Cost of sales increased 4.8% to $157.9 for the six months ended May 4,
1996, compared with $150.6 million for the same period of 1995, but decreased to
85.0% of net sales for the first six months of 1996 from 85.9% for the first six
months of 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 $11.6 million for the first six
months of 1996 decreased slightly when compared to $11.8 million for the
comparable period in 1995. The decrease in 1996 was primarily a result of cost
containment efforts implemented in 1996.
Operating earnings for the six months ended May 4, 1996 were $15.9 million
(8.6% of net sales) compared to $12.1 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 $2.2 million for the six months ended May 4, 1996
decreased from $2.5 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
during the first half of fiscal year 1996 compared to the same period in 1995.
The Company's effective tax rate increased to approximately 38% for the first
six 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 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
19
<PAGE> 21
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.
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.
20
<PAGE> 22
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 SIX MONTHS
1994 1995 1995 1996
------ ------ ------ -----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Net cash provided by operating activities...... $ 13.4 $ 16.5 $ 9.6 $ 8.1
Net cash used for investing activities......... (14.2) (33.5) (29.2) (5.2)
Net cash provided by/(used for) financing
activities................................... 1.1 18.8 19.4 (3.4)
</TABLE>
The Company continues to generate strong cash flows from operations,
resulting from the 34% and 21% increases in net earnings in fiscal year 1995 and
six months 1996 compared to the corresponding periods of the prior year,
respectively, net of the impact of changes in working capital. Working capital
increased $6.0 million (net of the Pawnee acquisition) in fiscal year 1995 and
$3.7 million in the six months ended May 4, 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 $4.2 million for the first six
months of 1996 versus $3.6 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 six months ended May 4,
1996, six months ended April 29, 1995 and fiscal years ended 1995 and 1994 were
$5.2 million, $5.7 million, $10.0 million and $8.2 million, respectively.
Highlights of the Company's sizable $10.0 million in capital expenditures for
1995 include the installation of new production lines at the Spartech
Plastics-Atlanta, Georgia, Paulding, Ohio, McMinnville, Oregon, and Arlington,
Texas plants and a new compounding line at Spartech Compounding-Cape Girardeau,
Missouri. In addition, the 22% increase in capital expenditures over the prior
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.
21
<PAGE> 23
During 1996, the Company anticipates making capital expenditures of
approximately $9.0 million. New extrusion lines, scheduled for the Spartech
Compounding-Cape Girardeau, Missouri, and Spartech Plastics-Richmond, Indiana
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 $17.7
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> 24
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 18 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. Five of Spartech's production
facilities are ISO 9002 certified, and the Company expects to have its remaining
ten 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
23
<PAGE> 25
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
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 and particularly the suitability of
different resins for specific 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
24
<PAGE> 26
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 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 $68.0 million, $79.6 million and $80.5 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 .7339 (the exchange rate reported in the May 3, 1996 edition of 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 $9.0 million at April 27, 1996), Spartech will pay to Hamelin a base
purchase price of $57.6 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
governmental and other third party consents, satisfactory environmental
inspections and legal opinions, 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.
25
<PAGE> 27
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 $17.7 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,
26
<PAGE> 28
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.
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,
27
<PAGE> 29
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.
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 May
4, 1996, was approximately $33.5 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 $32.3
million.
28
<PAGE> 30
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.
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, 44
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. The Company believes Mr. Powers' lawsuits are without
merit and will continue to defend against them vigorously.
The Company currently has no litigation with respect to any environmental
matters.
29
<PAGE> 31
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............. 33 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........... 49 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 Compounds 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> 32
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 arrangement 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> 33
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth, as of May 4, 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 AFTER OFFERING
OWNED PRIOR TO OFFERING NUMBER OF (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........................ 30,000 * -- 30,000 *
Bradley B. Buechler................... 928,562(b) 3.8% -- 928,562 3.4%
Thomas L. Cassidy..................... 7,035,288(c) 30.0% 1,900,350 5,134,938(c) 19.4%
W.R. Clerihue......................... 30,000 * -- 30,000 *
Francis J. Eaton...................... 8,734,987(d) 37.2% -- 8,734,987(d) 33.0%
David B. Mueller...................... 251,070(e) 1.1% -- 251,070(e) *
Jackson W. Robinson................... 37,000(f) * -- 37,000(f) *
Rodney H. Sellers..................... 8,734,987(d) 37.2% -- 8,734,987(d) 33.0%
Daniel J. Yoder....................... 42,295(g) * -- 42,295 *
All Directors and executive officers
as a Group.......................... 17,089,202(h) 69.4% 1,900,350 15,188,852(h) 55.0%
SELLING STOCKHOLDERS AND OTHER
BENEFICIAL OWNERS IN EXCESS OF 5% OF
THE OUTSTANDING COMMON STOCK
Vita International Limited............ 8,734,987(d) 37.2% -- 8,734,987(d) 33.0%
Soudan Street
Middleton, Manchester
M24 2DB England
The TCW Group (i)..................... 7,035,288(c) 30.0% 1,900,350 5,134,938(c) 19.4%
c/o TCW Special Placements
200 Park Avenue
New York, NY 10166
Phoenix Home Life..................... 1,099,650 4.7% 1,099,650 -- --
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 849,062 shares issuable upon exercise of options presently
exercisable or exercisable within 60 days after May 4, 1996.
(c) 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 includes the
common stock owned by TCW Group.
(d) 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.
(e) Includes 215,000 shares issuable upon exercise of options presently
exercisable or exercisable within 60 days after May 4, 1996.
(f) Includes 30,000 shares issuable upon exercise of options presently
exercisable or exercisable within 60 days of May 4, 1996.
(g) Includes 41,750 shares issuable upon exercise of options presently
exercisable or exercisable within 60 days after May 4, 1996.
(h) Includes 1,135,812 shares issuable upon exercise of options presently
exercisable or exercisable within 60 days after May 4, 1996.
(i) The TCW Group is comprised of TCW Special Placements Fund I, TCW Special
Placements Fund II and TCW Capital, all California limited partnerships.
32
<PAGE> 34
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, 26,488,791 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 May 4, 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> 35
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> 36
UNDERWRITING
Under the terms and subject to the conditions contained in an Underwriting
Agreement dated , 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........................................
--------
A.G. Edwards & Sons, Inc. .........................................
--------
Total.........................................................
========
</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 $ per Share, and the
Underwriters and such dealers may allow a discount of $ 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> 37
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> 38
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 Hamelin 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 have been so included in the
reliance upon the report of Coopers & Lybrand, LLP, independent accountants,
given on the authority of such firm as experts in accounting and auditing.
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 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;
(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
Registration Statement, certain items of which are omitted in accordance with
the rules and regulations of the
37
<PAGE> 39
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.
38
<PAGE> 40
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............................................. F-15
Consolidated Condensed Balance Sheet (Unaudited) as of October 28, 1995 and
May 4, 1996................................................................... F-16
Consolidated Condensed Statement of Operations (Unaudited) for the Six Month
Periods Ended April 29, 1995 and May 4, 1996................................... F-17
Consolidated Condensed Statement of Cash Flows (Unaudited) for Six Months Ended
April 29, 1995 and May 4, 1996................................................. F-18
Notes to Consolidated Financial Statements...................................... F-19
HAMRO GROUP INC.*
CONSOLIDATED FINANCIAL STATEMENTS.................................................. F-21
Auditors' Report to the Shareholders............................................ F-22
Consolidated Balance Sheet as at April 30, 1995 and 1996........................ F-23
Consolidated Statement of Retained Earnings for the Year Ended April 30, 1994,
1995 and 1996.................................................................. F-24
Consolidated Statement of Earnings for the Year Ended April 30, 1994, 1995 and
1996........................................................................... F-25
Consolidated Statement of Changes in Financial Position for the Year Ended April
30, 1994, 1995 and 1996........................................................ F-26
Notes to Consolidated Financial Statements...................................... F-27
PRO FORMA FINANCIAL INFORMATION...................................................... F-34
Unaudited Pro Forma Combined Condensed Balance Sheet at May 4, 1996............. F-35
Unaudited Pro Forma Combined Condensed Statement of Operations for the Fiscal
Year Ended October 28, 1995 and the Six Months Ended May 4, 1996............... F-38
</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 .7339 US$ (the currency exchange rate reported
in the May 3, 1996 edition of the Wall Street Journal).
F-1
<PAGE> 41
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.
/s/ Arthur Andersen LLP
St. Louis, Missouri
December 6, 1995
F-2
<PAGE> 42
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> 43
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> 44
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> 45
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> 46
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> 47
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> 48
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> 49
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> 50
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> 51
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> 52
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> 53
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> 54
SPARTECH CORPORATION
CONDENSED INTERIM FINANCIAL STATEMENTS
F-15
<PAGE> 55
SPARTECH CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEET
(UNAUDITED AND DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
OCTOBER 28, MAY 4,
1995 1996
----------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash................................................................ $ 3,505 $ 3,053
Receivables, net.................................................... 51,762 54,893
Inventories......................................................... 33,002 40,053
Prepayments and other............................................... 1,274 1,192
-------- --------
Total Current Assets........................................... 89,543 99,191
Plant and Equipment................................................... 91,702 96,768
Less accumulated depreciation....................................... 28,552 31,281
-------- --------
Net Plant and Equipment........................................ 63,150 65,487
Goodwill.............................................................. 24,014 23,633
Other Assets.......................................................... 1,622 1,631
-------- --------
$178,329 $189,942
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable.................................................... $ 31,966 $ 37,189
Accrued liabilities................................................. 12,469 13,188
-------- --------
Total Current Liabilities...................................... 44,435 50,377
-------- --------
Long-Term Debt........................................................ 59,510 58,000
Other Liabilities..................................................... 2,256 2,735
-------- --------
Total Long-Term Liabilities.................................... 61,766 60,735
-------- --------
Shareholders' Equity
Common stock, 23,582,990 shares issued in 1996 and 23,364,407 shares
issued in 1995................................................... 17,523 17,687
Contributed capital................................................. 66,771 67,094
Retained deficit...................................................... (12,099) (5,176)
Treasury stock, at cost, 94,199 shares in 1996 and 11,291 shares in
1995............................................................. (67) (775)
-------- --------
Total Shareholders' Equity..................................... 72,128 78,830
-------- --------
$178,329 $189,942
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-16
<PAGE> 56
SPARTECH CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS
(UNAUDITED AND DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
---------------------
APRIL 29, MAY 4,
1995 1996
--------- --------
<S> <C> <C>
Net Sales............................................................... $ 174,907 $185,796
-------- --------
Costs and Expenses
Cost of sales......................................................... 150,648 157,922
Selling and administrative............................................ 11,778 11,592
Amortization of intangibles........................................... 362 381
-------- --------
162,788 169,895
-------- --------
Operating Earnings...................................................... 12,119 15,901
Interest.............................................................. 2,494 2,201
-------- --------
Earnings Before Income Taxes............................................ 9,625 13,700
Provision for income taxes............................................ 2,550 5,139
-------- --------
Net Earnings............................................................ 7,075 8,561
Preferred stock accretion............................................. 1,098 --
-------- --------
Net Earnings Applicable to Common Shares and Equivalents................ $ 5,977 $ 8,561
-------- --------
Net Earnings Per Common Share:
Primary............................................................... $ .63 $ .35
======== ========
Fully diluted......................................................... $ .29 $ .35
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-17
<PAGE> 57
SPARTECH CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS
(UNAUDITED AND DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
--------------------
APRIL 29, MAY 4,
1995 1996
--------- -------
<S> <C> <C>
Cash Flows From Operating Activities
Net earnings........................................................... $ 7,075 $ 8,561
Adjustments to reconcile net earnings to net cash provided by operating
activities:
Depreciation and amortization....................................... 2,989 3,229
Change in current assets and liabilities, net of effects of
acquisitions..................................................... (411) (4,158)
Other, net.......................................................... (61) 470
------- -------
Net cash provided by operating activities......................... 9,592 8,102
------- -------
Cash Flows From Investing Activities
Capital expenditures................................................... (5,709) (5,187)
Retirement of assets, net of depreciation.............................. 556 2
Business acquisition................................................... (24,060) --
------- -------
Net cash used for investing activities............................ (29,213) (5,185)
------- -------
Cash Flows From Financing Activities
Net borrowings (payments) on revolving credit facilities............... 15,794 (1,510)
Term loan additions (net of repayments)................................ 3,000 --
Cash dividends on common stock......................................... -- (1,638)
Stock options exercised................................................ 699 487
Treasury stock acquired................................................ (62) (708)
------- -------
Net cash provided by (used for) financing activities.............. 19,431 (3,369)
------- -------
Increase/(Decrease) In Cash.............................................. (190) (452)
Cash at Beginning of Period.............................................. 1,752 3,505
------- -------
Cash at End of Period.................................................... $ 1,562 $ 3,053
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-18
<PAGE> 58
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 six months ended May 4,
1996 consist of 14 and 27 weeks, compared to 13 and 26 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 May 4, 1996 are comprised of the
following components:
<TABLE>
<CAPTION>
1995 1996
------- -------
<S> <C> <C>
Raw materials.............................................. $23,368 $28,807
Finished goods............................................. 9,634 11,246
-------- --------
$33,002 $40,053
======== ========
</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 SIX MONTHS ENDED
-------------------------------------------------------------- ----------------
<S> <C>
April 29, 1995................................................ 9,478,000
May 4, 1996................................................... 24,456,000
</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 SIX MONTHS ENDED
-------------------------------------------------------------- ----------------
<S> <C>
April 29, 1995................................................ 23,986,000
May 4, 1996................................................... 24,759,000
</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-19
<PAGE> 59
SPARTECH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
beginning of 1995, the primary net earnings per share reported for the six
months ended April 29, 1995 would have been $.29.
NOTE D -- CASH FLOW INFORMATION
Supplemental information on cash flows and noncash transactions for the six
months ended April 29, 1995 and May 4, 1996 is as follows:
<TABLE>
<CAPTION>
1995 1996
------- ------
<S> <C> <C>
Cash paid for:
Interest................................................................. $ 2,423 $2,145
======= ======
Income taxes............................................................. $ 1,635 $4,228
======= ======
Schedule of business acquisition:
Fair value of assets acquired......................................... $26,030 $ --
Liabilities assumed................................................... 1,970 --
------- ------
Total cash paid for the net assets acquired.............................. $24,060 $ --
======= ======
</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. The Company believes Mr. Powers' lawsuits are without merit and will
continue defending against them vigorously.
NOTE F -- SUBSEQUENT EVENT
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 total price for all outstanding
shares of Portage's stock totaled approximately $17 million in cash, including
estimated costs of the transaction. The purchase price was determined by arms'
length negotiations between the parties. The purchase was funded by the
Company's existing unsecured credit facility.
F-20
<PAGE> 60
HAMRO GROUP INC.
CONSOLIDATED FINANCIAL STATEMENTS
F-21
<PAGE> 61
AUDITORS' REPORT TO THE SHAREHOLDERS
June 14, 1996
We have audited the consolidated balance sheet of Hamro Group Inc. as at
April 30, 1995 and 1996 and the consolidated statements of earnings, retained
earnings and changes in financial position for each of the years in the three
year period ended on April 30, 1996. These financial statements are the
responsibility of the company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
In our opinion, these consolidated financial statements present fairly, in
all material respects, the financial position of the company as at April 30,
1995 and 1996 and the results of its operations and the changes in its financial
position for each of the years in the three year period ended on April 30, 1996
in accordance with generally accepted accounting principles in Canada.
/s/ Coopers & Lybrand
GENERAL PARTNERSHIP
CHARTERED ACCOUNTANTS
F-22
<PAGE> 62
HAMRO GROUP INC.
CONSOLIDATED BALANCE SHEET AS AT APRIL 30, 1995 AND 1996
<TABLE>
<CAPTION>
1995 1996
C$ 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
-- $32,469) (note 5)............................................... 540,283 13,620
CAPITAL ASSETS (notes 6 and 8)....................................... 27,184,104 26,248,116
OTHER ASSETS (note 7)................................................ 1,083,424 658,115
---------- ----------
58,300,188 55,221,816
========== ==========
LIABILITIES
CURRENT LIABILITIES
Bank loans (note 3)................................................ 2,685,392 --
Accounts payable and accrued liabilities........................... 14,163,952 13,061,413
Account payable to a related company............................... 132,500 131,645
Income taxes....................................................... 1,724,765 --
Current portion of long-term debt.................................. 2,330,201 2,520,765
---------- ----------
21,036,810 15,713,823
LONG-TERM DEBT (note 8).............................................. 20,092,865 20,004,916
DEFERRED INCOME TAXES................................................ 2,953,482 2,496,482
---------- ----------
44,083,157 38,215,221
---------- ----------
NON-CONTROLLING INTERESTS............................................ -- 42,027
---------- ----------
SHAREHOLDERS' EQUITY
CAPITAL STOCK (note 10).............................................. 4,840,100 4,600,100
RETAINED EARNINGS.................................................... 9,042,968 12,017,259
CUMULATIVE TRANSLATION ADJUSTMENT.................................... 333,963 347,209
---------- ----------
14,217,031 16,964,568
---------- ----------
58,300,188 55,221,816
========== ==========
</TABLE>
F-23
<PAGE> 63
HAMRO GROUP INC.
CONSOLIDATED STATEMENT OF RETAINED EARNINGS
FOR THE YEAR ENDED APRIL 30, 1994, 1995 AND 1996
<TABLE>
<CAPTION>
C$
----------
<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-24
<PAGE> 64
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 $900,000 (1995 - nil) (note 11(b))................ 768,611 466,552 (519,756)
Gain on sale of capital assets......................... (103,341) (210,125) (53,910)
---------- ----------- -----------
8,304,844 8,733,827 7,693,273
---------- ----------- -----------
1,752,462 4,168,997 4,004,773
---------- ----------- -----------
PROVISION FOR (RECOVERY OF) INCOME TAXES (note 11)
Current................................................ 193,920 1,708,289 1,465,759
Deferred............................................... 236,600 (454,000) (457,000)
---------- ----------- -----------
430,520 1,254,289 1,008,759
---------- ----------- -----------
Earnings before non-controlling interests.............. 1,321,942 2,914,708 2,996,014
Non-controlling interests in earnings of a
subsidiary........................................... -- -- 15,723
---------- ----------- -----------
NET EARNINGS FOR THE YEAR.............................. 1,321,942 2,914,708 2,980,291
========== =========== ===========
</TABLE>
F-25
<PAGE> 65
HAMRO GROUP INC.
CONSOLIDATED STATEMENT OF CHANGES IN FINANCIAL POSITION
FOR THE YEAR ENDED APRIL 30, 1994, 1995 AND 1996
<TABLE>
<CAPTION>
1994 1995 1996
C$ 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-26
<PAGE> 66
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-27
<PAGE> 67
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-28
<PAGE> 68
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$83,605................... 108,000 101,851
Financing fees and other................................................ 302,327 220,619
---------- --------
1,083,424 658,115
========== ========
</TABLE>
F-29
<PAGE> 69
HAMRO GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEAR ENDED APRIL 30, 1996
8. LONG-TERM DEBT
(a) Long-term debt is comprised of the following:
<TABLE>
<CAPTION>
1995 1996
C$ 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 $1.7 million mortgage bond issued under a second rank Trust Deed
creating a fixed charge on all the company's assets as well as a floating
charge on all the company's assets not specifically pledged, except those
located in the United States;
a commercial pledge on machinery and equipment.
As additional consideration for the participating loan, the company granted an
option to SDI to purchase capital stock (note 10(c)).
(d) Substantially all the United States subsidiary's assets have been
pledged as collateral for the term loan.
F-30
<PAGE> 70
HAMRO GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEAR ENDED APRIL 30, 1996
(e) The aggregate amount of payments required in each of the next five
years to meet retirement provisions of long-term debt exclusive of obligations
under capital leases is as follows:
<TABLE>
<S> <C>
1997.................................................................. C$ 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-31
<PAGE> 71
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$1,001,626) were
paid to a related company.
13. SUBSEQUENT EVENT
On June 7, 1996, the company entered into an agreement to dispose of
substantially all its operating assets and certain liabilities, for proceeds
exceeding book value.
F-32
<PAGE> 72
HAMRO GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEAR ENDED APRIL 30, 1996
14. RECONCILIATION OF CANADIAN TO UNITED STATES GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES
The following reconciles the Company's financial information according to
generally accepted accounting principles in Canada to those in the United
States:
a) Statement of Earnings:
<TABLE>
<CAPTION>
YEARS ENDED APRIL 30,
----------------------
1995 1996
C$ 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 from financing activities................ 2,305,730 3,933,078 2,568,331
========= ========= =========
Cash at end of year........................... -- -- 344,529
========= ========= =========
</TABLE>
F-33
<PAGE> 73
PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma combined condensed balance sheet at May
4, 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 May 4, 1996, and the unaudited pro forma
combined statement of operations for the fiscal year ended October 28, 1995, and
for the six months ended May 4, 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 October 30, 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 six months ended May 4, 1996, should not
necessarily be taken as indicative of earnings for a full year.
F-34
<PAGE> 74
UNAUDITED PRO FORMA
COMBINED CONDENSED BALANCE SHEET
AT MAY 4, 1996
<TABLE>
<CAPTION>
HISTORICAL HISTORICAL HISTORICAL PRO FORMA PRO FORMA
SPARTECH PORTAGE HAMELIN(A) ADJUSTMENTS COMBINED
---------- ---------- ---------- ----------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
ASSETS:
Cash................................. $ 3,053 $ 123 $ 253 $ (253)(b) $ 3,176
Receivables.......................... 54,893 2,614 12,701 -- 70,208
Inventories.......................... 40,053 3,889 7,399 319 (c) 51,660
Prepayments and Other................ 1,192 433 419 894 (d) 2,938
-------- -------- -------- ------- --------
Total Current Assets............ 99,191 7,059 20,712 960 127,982
Property, Plant and Equipment, Net... 65,487 5,030 19,263 20,751 (e) 110,531
Goodwill............................. 23,633 2,786 75 19,918 (f) 46,412
Other Assets......................... 1,631 1,010 418 (418)(g) 2,641
-------- -------- -------- ------- --------
Total Assets.................... $189,942 $ 15,885 $ 40,528 $41,211 $287,566
======== ======== ======== ======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current Maturities of Long-Term
Debt.............................. $ -- $ 1,150 $ 1,850 $(1,851)(h) $ 1,150
Accounts Payable and
Accrued Liabilities............... 50,377 4,682 9,682 2,544 (i) 67,285
-------- -------- -------- ------- --------
Total Current Liabilities....... $ 50,377 $ 5,832 $ 11,532 $ 693 $ 68,434
Long-Term Debt....................... 58,000 1,700 14,682 30,044 (j) 104,426
Other Liabilities.................... 2,735 364 1,833 (56)(k) 4,876
Total Stockholders' Equity........... 78,830 7,989 12,481 10,530 109,830
-------- -------- -------- ------- --------
Total Liabilities and
Stockholders' Equity......... $189,942 $ 15,885 $ 40,528 $41,211 $287,566
======== ======== ======== ======= ========
</TABLE>
(footnotes on following page)
F-35
<PAGE> 75
(footnotes from previous page)
(a) 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 .7339 (the currency
exchange rate reported in the May 3, 1996 edition of the Wall Street
Journal).
(b) To eliminate the Hamelin cash not acquired, but settled in the purchase
price.
(c) To record the Portage inventory previously valued on a LIFO basis at its
estimated fair value.
(d) Represents the deferred tax effects on the adjustments recorded to
inventory and accrued liabilities net of the elimination of current assets
not acquired:
<TABLE>
<S> <C>
Record deferred taxes................................................ $1,114
Eliminate income tax credit.......................................... (220)
------
$ 894
======
</TABLE>
(e) Represents the write up of Portage and Hamelin net property, plant and
equipment to its estimated fair value:
<TABLE>
<S> <C>
Write-up of Portage fixed assets.................................... $ 4,676
Write-up of Hamelin fixed assets.................................... 16,075
-------
$20,751
=======
</TABLE>
(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 (new goodwill) for each
acquisition:
<TABLE>
<S> <C>
Eliminate Portage pre-acquisition goodwill.......................... $(2,786)
Record new goodwill for Portage Acquisition......................... 9,525
Eliminate Hamelin pre-acquisition goodwill.......................... (75)
Record new goodwill for Hamelin Acquisition......................... 13,254
-------
$19,918
=======
</TABLE>
(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 acquisitions:
<TABLE>
<S> <C>
Hamelin liabilities not assumed...................................... $ (709)
Severance, vacation pay, and other accrued liability................. 3,253
------
$2,544
======
</TABLE>
(j) Represents the net effect of the new borrowings under the debt financing
arrangements for the respective acquisitions, the elimination of the
Hamelin debt not assumed and the Hamelin Offering proceeds in excess of
purchase price used to pay down bank borrowings:
<TABLE>
<S> <C>
Portage bank borrowings............................................ $ 17,685
Hamelin private debt financing..................................... 30,000
Hamelin debt not assumed........................................... (14,688)
Hamelin additional Offering proceeds............................... $ (2,953)
--------
$ 30,044
========
</TABLE>
F-36
<PAGE> 76
(k) Represents the net effect of the elimination of Hamelin liabilities not
assumed and the deferred tax effect of the write-up in Portage fixed
assets:
<TABLE>
<S> <C>
Eliminate Hamelin liabilities not assumed........................... $(1,833)
Record deferred taxes of Portage fixed asset write-up............... 1,777
-------
$ (56)
=======
</TABLE>
(l) Represents the elimination of the Portage and Hamelin stockholder's equity
and reflecting the net proceeds of the Offering:
<TABLE>
<S> <C> <C>
Eliminate Portage equity................................... $ (7,989)
Eliminate Hamelin Equity................................... (12,481)
Record Offering:
Gross proceeds to the Company (assuming a public offering
price of $11)......................................... 33,000
Underwriter's discount and commissions................... (1,650)
Direct costs of Offering................................. (350)
------
$ 31,000
--------
$ 10,530
========
</TABLE>
F-37
<PAGE> 77
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 $78,106 $ -- $465,697
Costs and Expenses
Cost of Sales......................... 302,394 31,059 66,665 (4,998)(b) 395,120
Selling and Administrative............ 24,545 2,829 7,167 (1,452)(c) 33,089
Goodwill Amortization................. 730 105 4 460 (d) 1,299
-------- ------- ------- ------- --------
Operating Earnings from Continuing
Operations............................ 24,604 1,325 4,270 5,990 36,189
Interest Expense......................... 4,960 259 2,276 1,229 (e) 8,724
Other Expense............................ -- -- (188) -- (188)
-------- ------- ------- ------- --------
Earnings Before Provision for Income
Taxes................................. 19,644 1,066 2,182 4,761 27,653
Provision for Income Taxes............ 5,110 437 686 1,921 (f) 8,154
-------- ------- ------- ------- --------
Net Earnings from Continuing
Operations............................ 14,534 629 1,496 2,840 19,499
Preferred Stock Accretion............. (1,098) -- -- -- (1,098)
-------- ------- ------- ------- --------
Net Earnings Applicable to Common Stock
and Equivalents....................... $ 13,436 $ 629 $ 1,496 $ 2,840 $ 18,401
======== ======= ======= ======= ========
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 $ 0.93
======== ========
Fully Diluted......................... $ 0.60 $ 0.72
======== ========
</TABLE>
F-38
<PAGE> 78
UNAUDITED PRO FORMA
COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR THE SIX MONTH PERIOD ENDED MAY 4, 1996
<TABLE>
<CAPTION>
SIX MONTHS ENDED MAY 4, 1996
----------------------------------------------------------------
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................................ $ 185,796 $ 18,120 $39,734 $ -- $ 243,650
Costs and Expenses
Cost of Sales......................... 157,922 15,948 33,164 (2,340)(b) 204,694
Selling and Administrative............ 11,592 1,516 3,595 (751)(c) 15,952
Goodwill Amortization................. 381 52 3 231 (d) 667
--------- -------- ------- ------- ---------
Operating Earnings from Continuing
Operations............................ 15,901 604 2,972 2,860 22,337
Interest Expense......................... 2,201 108 915 615 (e) 3,839
Other Expense............................ -- -- (26) -- (26)
--------- -------- ------- ------- ---------
Earnings Before Provision for Income
Taxes................................. 13,700 496 2,083 2,245 18,524
Provision for Income Taxes............ 5,139 203 416 1,214 (f) 6,972
Provision for Non-Controlling
Interest............................ -- -- 12 (12) --
--------- -------- ------- ------- ---------
Net Earnings from Continuing
Operations............................ $ 8,561 $ 293 $ 1,655 $ 1,043 $ 11,552
========= ======== ======= ======= =========
Weighted Average Shares:
Primary............................... 24,456 3,000 27,456
========= ======= =========
Fully Diluted......................... 24,759 3,000 27,759
========= ======= =========
PER SHARE INFORMATION:
Net Earnings per Share Primary........... $ 0.35 $ 0.93
========= =========
Fully Diluted.................... $ 0.35 $ 0.72
========= =========
</TABLE>
(footnotes on following page)
F-39
<PAGE> 79
(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
.7339 (the currency exchange rate reported in the May 3, 1996 edition of
the Wall Street Journal).
(b) 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 SIX MONTHS ENDED
OCTOBER 28, 1995 MAY 4, 1996
---------------- -----------------
<S> <C> <C>
Reduction in costs of sales.................... $ (2,889) $(1,365)
Change in depreciation expense................. (1,717) (872)
Nonrecurring severance and salary.............. (392) (103)
-------- -------
$ (4,998) $(2,340)
======== =======
</TABLE>
(c) 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 SIX MONTHS ENDED
OCTOBER 28, 1995 MAY 4, 1996
---------------- -----------------
<S> <C> <C>
Elimination of Hamelin management fee.......... $ (514) $(257)
Change in depreciation expense................. (123) (62)
Reduction of duplicate administrative
expenses..................................... (502) (276)
Elimination of amortization on assets not
acquired from Hamelin........................ (313) (156)
-------- -----
$ (1,452) $(751)
======== =====
</TABLE>
(d) 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 SIX MONTHS ENDED
OCTOBER 28, 1995 MAY 4, 1996
---------------- -----------------
<S> <C> <C>
Portage goodwill ($9,525 over 40 years less
historical amortization)..................... $133 $ 67
Hamelin goodwill ($13,254 over 40 years less
historical amortization)..................... 327 164
---- -----
$460 $ 231
==== =====
</TABLE>
F-40
<PAGE> 80
(e) 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 SIX MONTHS ENDED
OCTOBER 28, 1995 MAY 4, 1996
---------------- -----------------
<S> <C> <C>
Portage acquisition ($17,686 at average 6.25%
LIBOR)....................................... $1,105 $ 553
Debt Financing for Hamelin ($30,000 at 8%, net
of previously recorded interest expense)..... 124 62
------ -----
$1,229 $ 615
====== =====
</TABLE>
(f) To adjust the tax rate for Portage and Hamelin to 38%.
F-41
<PAGE> 81
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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
CORPORATION
6,000,000 Shares
Common Stock
($.75 par value)
PROSPECTUS
CS First Boston
A.G. Edwards & Sons, Inc.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 82
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the estimated expenses in connection with
the issuance and distribution of the securities registered hereby, other than
underwriting discounts and commissions:
<TABLE>
<CAPTION>
<S> <C>
Securities and Exchange commission registration fee............... $25,428.88
NASD filing fee................................................... 7,874.38
Blue sky fees and expenses........................................ *
Transfer agent fees and expenses.................................. *
Printing and engraving fees....................................... *
Legal fees and expenses........................................... *
Accounting fees and expenses...................................... *
New York Stock Exchange listing fee............................... *
Miscellaneous..................................................... *
-----------
Total........................................................ $ *
===========
------------------------
* To be provided by amendment.
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law and Section Eight of
the Registrant's Certificate of Incorporation provide for indemnification of the
Registrant's directors and officers in a variety of circumstances, which may
include liabilities under the Securities Act of 1933, as amended.
ITEM 16. EXHIBITS
A list of exhibits is set forth in the Exhibit Index appearing elsewhere in
this Registration Statement and is incorporated herein by reference.
ITEM 17. UNDERTAKINGS
(a) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 (and, where applicable, each filing of any employee benefit
plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of
1934) that is incorporated by reference in the registration statement shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(b) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 (the "Act") may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
II-1
<PAGE> 83
(c) The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Act, the
information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained
in a form of prospectus filed by the registrant pursuant to Rule
424(b)(1) or (4) or 497(h) under the Act shall be deemed to be part
of the registration statement as of the time it was declared
effective.
(2) For the purpose of determining any liability under the Act, each
post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
II-2
<PAGE> 84
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in St. Louis, Missouri on July 10, 1996.
SPARTECH CORPORATION
By: /s/ BRADLEY B. BUECHLER
------------------------------------
Bradley B. Buechler
President and Chief Executive
Officer
Each person whose signature appears below hereby constitutes and appoints
Bradley B. Buechler and David B. Mueller, and each of them, the true and lawful
attorneys-in-fact and agents of the undersigned, with full power of substitution
and resubstitution, for and in the name, place and stead of the undersigned, in
any and all capacities, to sign any and all amendments (including post-effective
amendments) to this Registration Statement, and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, and hereby grants to such attorneys-in-fact
and agents, and each of them, full power and authority to do and perform each
and every act and thing requisite and necessary to be done, fully to all intents
and purposes as the undersigned might or could do in person, hereby ratifying
and confirming all that said attorney-in-fact and agents, or any of them, or
their or his substitute or substitutes, may lawfully do or cause to be done by
virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities indicated and on July 10, 1996.
<TABLE>
<CAPTION>
SIGNATURE TITLE
- ------------------------------------- -----------------------------------------------------
<C> <S>
/s/ BRADLEY B. BUECHLER President, Chief Executive Officer and Director
- ------------------------------------- (Principal Executive Officer)
Bradley B. Buechler
/s/ DAVID B. MUELLER Executive Vice President, Chief Operating Officer,
- ------------------------------------- Secretary and Director
David B. Mueller
/s/ RANDY C. MARTIN Vice President Finance and Chief Financial Officer
- ------------------------------------- (Principal Financial and Accounting Officer)
Randy C. Martin
/s/ JOHN F. ARNING Director
- -------------------------------------
John F. Arning
/s/ THOMAS L. CASSIDY Director
- -------------------------------------
Thomas L. Cassidy
/s/ W.R. CLERIHUE Director
- -------------------------------------
W.R. Clerihue
/s/ FRANCIS J. EATON Director
- -------------------------------------
Francis J. Eaton
/s/ JACKSON W. ROBINSON Director
- -------------------------------------
Jackson W. Robinson
/s/ RODNEY H. SELLERS Director
- -------------------------------------
Rodney H. Sellers
</TABLE>
II-3
<PAGE> 85
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION PAGE NO.
- ------ -------------------------------------------------------------------------- ----------
<C> <S> <C>
1.1 Form of Underwriting Agreement
5.1* Opinion of Armstrong, Teasdale, Schlafly & Davis as to the legality of the
shares
23.1 Consent of Arthur Andersen LLP
23.2 Consent of Coopers & Lybrand
23.3* Consent of Armstrong, Teasdale, Schlafly & Davis (included in Exhibits
5.1)
24.1 Power of Attorney (included on Page II-3)
</TABLE>
- -------------------------
* To be filed by amendment.
<PAGE> 1
6,000,000 SHARES EXHIBIT 1.1
SPARTECH CORPORATION
COMMON STOCK
UNDERWRITING AGREEMENT
JULY __, 1996
CS FIRST BOSTON CORPORATION
A.G. EDWARDS & SONS, INC.,
As Representatives of the Several Underwriters,
c/o CS First Boston Corporation,
Park Avenue Plaza,
New York, N.Y. 10055
Dear Sirs:
1. Introductory. Spartech Corporation, a Delaware corporation
("Company") proposes to issue and sell 3,000,000 shares of its Common Stock
("Securities") and the stockholders listed in Schedule A hereto ("Selling
Stockholders") propose severally to sell an aggregate of 3,000,000 outstanding
shares of the Securities (such 6,000,000 shares of Securities being hereinafter
referred to as the "Firm Securities"). One of the Selling Stockholders also
proposes to sell to the Underwriters, at the option of the Underwriters, an
aggregate of not more than 900,000 additional outstanding shares of the
Company's Securities, as set forth below (such 900,000 additional shares being
hereinafter referred to as the "Optional Securities"). The Firm Securities and
the Optional Securities are herein collectively called the "Offered
Securities". The Company and the Selling Stockholders hereby agree with the
several Underwriters named in Schedule B hereto ("Underwriters") as follows:
2. Representations and Warranties of the Company and the Selling
Stockholders.
(a) The Company represents and warrants to, and agrees with, the
several Underwriters that:
(i) A registration statement (No. 33- ) relating to the
Offered Securities, including a form of prospectus, has been filed
with the Securities and Exchange Commission ("Commission") and either
(A) has been declared effective under the Securities Act of 1933
("Act") and is not proposed to be amended or (B) is proposed to be
amended by amendment or post-effective amendment. If such registration
statement (the "initial registration statement") has been declared
effective, either (A) an additional registration statement (the
"additional registration statement") relating to the Offered
Securities may have been filed with the Commission pursuant to Rule
462(b) ("Rule 462(b)") under the Act and, if so filed, has become
effective upon filing pursuant to such Rule and the Offered Securities
all have been duly registered under the Act pursuant to the initial
registration statement and, if applicable, the additional registration
statement or (B) such an additional registration statement is proposed
to be filed with the Commission pursuant to Rule 462(b) and will
become effective upon filing pursuant to such Rule and upon such
filing the Offered Securities will all have been duly registered under
the Act pursuant to the initial registration statement and such
additional registration statement. If the Company does not propose to
amend the initial registration statement or if an additional
registration statement has been filed and the Company does not propose
to amend it, and if any post-effective amendment to either such
registration statement has been filed with the Commission prior to the
execution and delivery of this Agreement, the most recent amendment
(if any) to each such registration statement has been declared
effective by the Commission or has become effective upon filing
pursuant to Rule 462(c) ("Rule 462(c)") under the Act or, in the case
of the additional
<PAGE> 2
registration statement, Rule 462(b). For purposes of this Agreement,
"Effective Time" with respect to the initial registration statement
or, if filed prior to the execution and delivery of this Agreement,
the additional registration statement means (A) if the Company has
advised the Representatives that it does not propose to amend such
registration statement, the date and time as of which such
registration statement, or the most recent post-effective amendment
thereto (if any) filed prior to the execution and delivery of this
Agreement, was declared effective by the Commission or has become
effective upon filing pursuant to Rule 462(c), or (B) if the Company
has advised the Representatives that it proposes to file an amendment
or post-effective amendment to such registration statement, the date
and time as of which such registration statement, as amended by such
amendment or post-effective amendment, as the case may be, is declared
effective by the Commission. If an additional registration statement
has not been filed prior to the execution and delivery of this
Agreement but the Company has advised the Representatives that it
proposes to file one, "Effective Time" with respect to such additional
registration statement means the date and time as of which such
registration statement is filed and becomes effective pursuant to Rule
462(b). "Effective Date" with respect to the initial registration
statement or the additional registration statement (if any) means the
date of the Effective Time thereof. The initial registration
statement, as amended at its Effective Time, including all material
incorporated by reference therein, including all information contained
in the additional registration statement (if any) and deemed to be a
part of the initial registration statement as of the Effective Time of
the additional registration statement pursuant to the General
Instructions of the Form on which it is filed and including all
information (if any) deemed to be a part of the initial registration
statement as of its Effective Time pursuant to Rule 430A(b) ("Rule
430A(b)") under the Act, is hereinafter referred to as the "Initial
Registration Statement". The additional registration statement, as
amended at its Effective Time, including the contents of the initial
registration statement incorporated by reference therein and including
all information (if any) deemed to be a part of the additional
registration statement as of its Effective Time pursuant to Rule
430A(b), is hereinafter referred to as the "Additional Registration
Statement". The Initial Registration Statement and the Additional
Registration are hereinafter referred to collectively as the
"Registration Statements" and individually as a "Registration
Statement". The form of prospectus relating to the Offered Securities,
as first filed with the Commission pursuant to and in accordance with
Rule 424(b) ("Rule 424(b)") under the Act or (if no such filing is
required) as included in a Registration Statement, including all
material incorporated by reference in such prospectus, is hereinafter
referred to as the "Prospectus". No document has been or will be
prepared or distributed in reliance on Rule 434 under the Act.
(ii) If the Effective Time of the Initial Registration
Statement is prior to the execution and delivery of this Agreement:
(A) on the Effective Date of the Initial Registration Statement, the
Initial Registration Statement conformed in all respects to the
requirements of the Act and the rules and regulations of the
Commission ("Rules and Regulations") and did not include any untrue
statement of a material fact or omit to state any material fact
required to be stated therein or necessary to make the statements
therein not misleading, (B) on the Effective Date of the Additional
Registration Statement (if any), each Registration Statement conformed
or will conform, in all respects to the requirements of the Act and
the Rules and Regulations and did not include, or will not include,
any untrue statement of a material fact and did not omit, or will not
omit, to state any material fact required to be stated therein or
necessary to make the statements therein not misleading, and (C) on
the date of this Agreement, the Initial Registration Statement and, if
the Effective Time of the Additional Registration Statement is prior
to the execution and delivery of this Agreement, the Additional
Registration Statement each conforms, and at the time of filing of the
Prospectus pursuant to Rule 424(b) or (if no such filing is required)
at the Effective Date of the Additional Registration Statement in
which the Prospectus is included, each Registration Statement and the
Prospectus will conform, in all respects to the requirements of the
Act and the Rules and Regulations, and neither of such documents
includes, or will include, any untrue statement of a material fact or
omits, or will omit, to state any material fact required to be stated
therein or necessary to make the statements therein not misleading. If
the Effective Time of the Initial Registration Statement is subsequent
to the execution and delivery of this Agreement: on the Effective Date
of the Initial Registration Statement, the Initial Registration
Statement and the Prospectus will conform in all respects to the
requirements of the Act and the Rules and
-2-
<PAGE> 3
Regulations, neither of such documents will include any untrue
statement of a material fact or will omit to state any material fact
required to be stated therein or necessary to make the statements
therein not misleading, and no Additional Registration Statement has
been or will be filed. The two preceding sentences do not apply to
statements in or omissions from a Registration Statement or the
Prospectus based upon written information furnished to the Company by
any Underwriter through the Representatives specifically for use
therein, it being understood and agreed that the only such information
is that described as such in Section 7(c).
(iii) The Company has been duly incorporated and is an
existing corporation in good standing under the laws of the State of
Delaware, with power and authority (corporate and other) to own its
properties and conduct its business as described in the Prospectus;
and the Company is duly qualified to do business as a foreign
corporation in good standing in all other jurisdictions in which its
ownership or lease of property or the conduct of its business requires
such qualification except where the failure to qualify would not have
a material adverse effect on the Company and its subsidiaries, taken
as a whole.
(iv) Each subsidiary of the Company has been duly
incorporated and is an existing corporation in good standing under the
laws of the jurisdiction of its incorporation, with power and
authority (corporate and other) to own its properties and conduct its
business as described in the Prospectus; and each subsidiary of the
Company is duly qualified to do business as a foreign corporation in
good standing in all other jurisdictions in which its ownership or
lease of property or the conduct of its business requires such
qualification except where the failure to qualify would not have a
material adverse effect on the Company and its subsidiaries, taken as
a whole; all of the issued and outstanding capital stock of each
subsidiary of the Company has been duly authorized and validly issued
and is fully paid and nonassessable; and the capital stock of each
subsidiary owned by the Company, directly or through subsidiaries, is
owned free from liens, encumbrances and defects.
(v) The Offered Securities and all other outstanding shares
of capital stock of the Company have been duly authorized and validly
issued, fully paid and nonassessable and conform to the description
thereof contained in the Prospectus; and the stockholders of the
Company have no preemptive rights with respect to the Securities.
(vi) Except as disclosed in the Prospectus, there are no
contracts, agreements or understandings between the Company and any
person that would give rise to a valid claim against the Company or
any Underwriter for a brokerage commission, finder's fee or other like
payment in connection with the Offered Securities.
(vii) There are no contracts, agreements or understandings
between the Company and any person granting such person the right to
require the Company to file a registration statement under the Act
with respect to any securities of the Company owned or to be owned by
such person or to require the Company to include such securities in
the securities registered pursuant to a Registration Statement or in
any securities being registered pursuant to any other registration
statement filed by the Company under the Act.
(viii) The Common Stock of the Company is listed and the
Securities have been approved for listing subject to notice of
issuance on the New York Stock Exchange.
(ix) No consent, approval, authorization, or order of, or
filing with, any governmental agency or body or any court is required
to be obtained or made by the Company for the consummation of the
transactions contemplated by this Agreement in connection with the
sale of the Offered Securities, except such as have been obtained and
made under the Act and such as may be required under state securities
laws.
(x) The execution, delivery and performance of this
Agreement, and the consummation of the transactions herein
contemplated will not result in a breach or violation of any of the
terms and
-3-
<PAGE> 4
provisions of, or constitute a default under, any statute, any rule,
regulation or order of any governmental agency or body or any court,
domestic or foreign, having jurisdiction over the Company or any
subsidiary of the Company or any of their properties, or any agreement
or instrument to which the Company or any such subsidiary is a party
or by which the Company or any such subsidiary is bound or to which
any of the properties of the Company or any such subsidiary is
subject, or the charter or by-laws of the Company or any such
subsidiary except where such breach or violation would not have a
material adverse effect on the Company or any of its subsidiaries.
(xi) This Agreement has been duly authorized, executed and
delivered by the Company.
(xii) Except as disclosed in the Prospectus, the Company and
its subsidiaries have good and marketable title to all real properties
and all other properties and assets owned by them, in each case free
from liens, encumbrances and defects that would have a material
adverse effect on the Company or any of its subsidiaries; and except
as disclosed in the Prospectus, the Company and its subsidiaries hold
any leased real or personal property under valid and enforceable
leases with no exceptions that would have a material adverse effect on
the Company or any of its subsidiaries.
(xiii) The Company and its subsidiaries possess adequate
certificates, authorities or permits issued by appropriate
governmental agencies or bodies necessary to conduct the business now
operated by them and have not received any notice of proceedings
relating to the revocation or modification of any such certificate,
authority or permit that, if determined adversely to the Company or
any of its subsidiaries, would individually or in the aggregate have a
material adverse effect on the Company and its subsidiaries taken as a
whole.
(xiv) No labor dispute with the employees of the Company or
any subsidiary exists or, to the knowledge of the Company, is imminent
that might have a material adverse effect on the Company and its
subsidiaries taken as a whole.
(xv) The Company and its subsidiaries own, possess or can
acquire on reasonable terms, adequate trademarks, trade names and
other rights to inventions, know-how, patents, copyrights,
confidential information and other intellectual property
(collectively, "intellectual property rights") necessary to conduct
the business now operated by them, or presently employed by them, and
have not received any notice of infringement of or conflict with
asserted rights of others with respect to any intellectual property
rights that, if determined adversely to the Company or any of its
subsidiaries, would individually or in the aggregate have a material
adverse effect on the Company and its subsidiaries taken as a whole.
(xvi) Except as disclosed in the Prospectus, neither the
Company nor any of its subsidiaries is in violation of any statute,
any rule, regulation, decision or order of any governmental agency or
body or any court, domestic or foreign, relating to the use, disposal
or release of hazardous or toxic substances or relating to the
protection or restoration of the environment or human exposure to
hazardous or toxic substances (collectively, "environmental laws"),
owns or operates any real property contaminated with any substance
that is subject to any environmental laws, is liable for any off-site
disposal or contamination pursuant to any environmental laws, or is
subject to any claim relating to any environmental laws, which
violation, contamination, liability or claim would individually or in
the aggregate have a material adverse effect on the Company and its
subsidiaries taken as a whole; and the Company is not aware of any
pending investigation which might lead to such a claim.
(xvii) Except as disclosed in the Prospectus, there are no
pending actions, suits or proceedings against or affecting the
Company, any of its subsidiaries or any of their respective properties
that, if determined adversely to the Company or any of its
subsidiaries, would individually or in the aggregate have a material
adverse effect on the financial condition, business, properties or
results of operations of the Company and its subsidiaries taken as a
whole, or would materially and adversely affect the ability of the
Company to perform its obligations under this Agreement, or which are
otherwise material in the
-4-
<PAGE> 5
context of the sale of the Offered Securities; and no such actions,
suits or proceedings are threatened or, to the Company's knowledge,
contemplated.
(xviii) The financial statements of the Company included in
each Registration Statement and the Prospectus present fairly the
financial position of the Company and its consolidated subsidiaries as
of the dates shown and their results of operations and cash flows for
the periods shown, and such financial statements have been prepared in
conformity with the generally accepted accounting principles in the
United States applied on a consistent basis; and the assumptions used
in preparing the pro forma financial information included in each
Registration Statement and the Prospectus provide a reasonable basis
for presenting the significant effects directly attributable to the
transactions or events described therein, the related pro forma
adjustments give appropriate effect to those assumptions, and the pro
forma columns therein reflect the proper application of those
adjustments to the corresponding historical financial statement
amounts.
(xix) The financial information derived from the financial
statements of Portage Industries Corporation, a Delaware corporation
("Portage") included in each Registration Statement and the Prospectus
present fairly the financial position of Portage as of the dates shown
and its results of operations and cash flows for the periods shown,
and such financial statements have been prepared in conformity with
the generally accepted accounting principles in the United States
applied on a consistent basis.
(xx) The financial statements of Hamelin Group Inc., a Quebec
corporation ("Hamelin"), included in each Registration Statement and
the Prospectus present fairly the financial position of Hamelin and
its consolidated subsidiary as of the dates shown and their results of
operations and cash flows for the periods shown, and such financial
statements have been prepared in conformity with the generally
accepted accounting principles in Canada applied on a consistent
basis.
(xxi) Except as disclosed in the Prospectus, since the date
of the latest audited financial statements included in the Prospectus
there has been no material adverse change, nor any development or
event involving a prospective material adverse change, in the
financial condition, business, properties or results of operations of
the Company and its subsidiaries taken as a whole, and, except as
disclosed in or contemplated by the Prospectus, there has been no
dividend or distribution of any kind declared, paid or made by the
Company on any class of its capital stock.
(xxii) The Company is not and, after giving effect to the
offering and sale of the Offered Securities and the application of the
proceeds thereof as described in the Prospectus, will not be an
"investment company" as defined in the Investment Company Act of 1940.
(xxiii) Neither the Company nor any of its affiliates does
business with the government of Cuba or with any person or affiliate
located in Cuba within the meaning of Section 517.075, Florida
Statutes and the Company agrees to comply with such Section if prior
to the completion of the distribution of the Offered Securities it
commences doing such business.
(xxiv) All of the conditions precedent to closing of the
Asset Purchase and Sale Agreement among the Company, Hamelin Group
Inc., and Hamelin Industries Inc. and Robert Hamelin and Hambro Group
Inc., subject only to the transfer of the purchase price, shall have
been fulfilled or waived prior to the date hereof.
(b) Each Selling Stockholder severally represents and warrants
to, and agrees with, the several Underwriters that:
(i) Such Selling Stockholder has and on each Closing Date
hereinafter mentioned will have valid and unencumbered title to the
Offered Securities to be delivered by such Selling Stockholder on such
Closing Date and full right, power and authority to enter into this
Agreement and to sell, assign,
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<PAGE> 6
transfer and deliver the Offered Securities to be delivered by such
Selling Stockholder on such Closing Date hereunder; and upon the
delivery of and payment for the Offered Securities on each Closing
Date hereunder the several Underwriters will acquire valid and
unencumbered title to the Offered Securities to be delivered by such
Selling Stockholder on such Closing Date.
(ii) If the Effective Time of the Initial Registration
Statement is prior to the execution and delivery of this Agreement:
(A) on the Effective Date of the Initial Registration Statement, the
Initial Registration Statement conformed in all respects to the
requirements of the Act and the Rules and Regulations and did not
include any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the
statements therein not misleading, (B) on the Effective Date of the
Additional Registration Statement (if any), each Registration
Statement conformed, or will conform, in all respects to the
requirements of the Act and the Rules and Regulations did not include,
or will not include, any untrue statement of a material fact and did
not omit, or will not omit, to state any material fact required to be
stated therein or necessary to make the statements therein not
misleading, and (C) on the date of this Agreement, the Initial
Registration Statement and, if the Effective Time of the Additional
Registration Statement is prior to the execution and delivery of this
Agreement, the Additional Registration Statement each conforms, and at
the time of filing of the Prospectus pursuant to Rule 424(b) or (if no
such filing is required) at the Effective Date of the Additional
Registration Statement in which the Prospectus is included, each
Registration Statement and the Prospectus will conform, in all
respects to the requirements of the Act and the Rules and Regulations,
and neither of such documents includes, or will include, any untrue
statement of a material fact or omits, or will omit, to state any
material fact required to be stated therein or necessary to make the
statements therein not misleading. If the Effective Time of the
Initial Registration Statement is subsequent to the execution and
delivery of this Agreement: on the Effective Date of the Initial
Registration Statement, the Initial Registration Statement and the
Prospectus will conform in all respects to the requirements of the Act
and the Rules and Regulations, neither of such documents will include
any untrue statement of a material fact or will omit to state any
material fact required to be stated therein or necessary to make the
statements therein not misleading. The two preceding sentences do not
apply to statements in or omissions from a Registration Statement or
the Prospectus based upon written information furnished to the Company
by any Underwriter through the Representatives specifically for use
therein, it being understood and agreed that the only such information
is that described as such in Section 7(c).
3. Purchase, Sale and Delivery of Offered Securities. On the basis of
the representations, warranties and agreements herein contained, but subject to
the terms and conditions herein set forth, the Company and each Selling
Stockholder agree, severally and not jointly, to sell to each Underwriter, and
each Underwriter agrees, severally and not jointly, to purchase from the
Company and each Selling Stockholder, at a purchase price of $ per
share, that number of Firm Securities (rounded up or down, as determined by CS
First Boston Corporation ("CS First Boston") in its discretion, in order to
avoid fractions) obtained by multiplying Firm Securities in the case
of the Company and the number of Firm Securities set forth opposite the name of
such Selling Stockholder in Schedule A hereto, in the case of a Selling
Stockholder, in each case by a fraction the numerator of which is the number of
Firm Securities set forth opposite the name of such Underwriter in Schedule B
hereto and the denominator of which is the total number of Firm Securities.
The Company and the Selling Stockholders will deliver the Firm
Securities to the Representatives for the accounts of the Underwriters against
payment of the purchase price by official bank check or checks in Federal
Reserve (same day) funds or wire transfer to a bank acceptable to CS First
Boston drawn to the order of the Company in the case of ____________ shares of
Firm Securities, [The TCW Group] in the case of _____________ shares of Firm
Securities and [Phoenix Home Life Insurance Company] in the case of _________
shares of Firm Securities, at the office of ___________________, at ____A.M.,
New York time, on ______________________, or at such other time not later than
seven full business days thereafter as CS First Boston and the Company
determine, such time being herein referred to as the "First Closing Date". The
certificates for the Firm Securities so to be delivered will be in definitive
form, in such denominations and
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<PAGE> 7
registered in such names as CS First Boston requests and will be made available
for checking and packaging at the office of ______________________ at least 24
hours prior to the First Closing Date.
In addition, upon written notice from CS First Boston given to the
Company and [The TCW Group] from time to time not more than 30 days subsequent
to the date of the Prospectus, the Underwriters may purchase all or less than
all of the Optional Securities at the purchase price per Security to be paid
for the Firm Securities. The TCW Group agrees to sell to the Underwriters the
number of Optional Securities specified in such notice, and the Underwriters
agree, severally and not jointly, to purchase such Optional Securities. Such
Optional Securities shall be purchased for the account of each Underwriter in
the same proportion as the number of Firm Securities set forth opposite such
Underwriter's name bears to the total number of Firm Securities (subject to
adjustment by CS First Boston to eliminate fractions) and may be purchased by
the Underwriters only for the purpose of covering over-allotments made in
connection with the sale of the Firm Securities. No Optional Securities shall
be sold or delivered unless the Firm Securities previously have been, or
simultaneously are, sold and delivered. The right to purchase the Optional
Securities or any portion thereof may be exercised from time to time and to the
extent not previously exercised may be surrendered and terminated at any time
upon notice by CS First Boston to the Company and The TCW Group.
Each time for the delivery of and payment for the Optional Securities,
being herein referred to as an "Optional Closing Date", which may be the First
Closing Date (the First Closing Date and each Optional Closing Date, if any,
being sometimes referred to as a "Closing Date"), shall be determined by CS
First Boston but shall be not later than five full business days after written
notice of election to purchase Optional Securities is given. The TCW Group will
deliver the Optional Securities being purchased on each Optional Closing Date
to the Representatives for the accounts of the several Underwriters, at the
office of ___________________, against payment of the purchase price therefor
by certified or official bank check or checks in Federal Reserve (same day)
funds or wire transfer to a bank acceptable to CS First Boston drawn to the
order of [The TCW Group] at the office of _____________________. The
certificates for the Optional Securities being purchased on each Optional
Closing Date will be in definitive form, in such denominations and registered
in such names as CS First Boston requests upon reasonable notice prior to such
Optional Closing Date and will be made available for checking and packaging at
the office of _____________________________ at a reasonable time in advance of
such Optional Closing Date.
4. Offering by Underwriters. It is understood that the several
Underwriters propose to offer the Offered Securities for sale to the public as
set forth in the Prospectus.
5. Certain Agreements of the Company and the Selling Stockholders.
The Company agrees with the several Underwriters and the Selling Stockholders
that:
(a) If the Effective Time of the Initial Registration Statement is
prior to the execution and delivery of this Agreement, the Company
will file the Prospectus with the Commission pursuant to and in
accordance with subparagraph (1) (or, if applicable and if consented
to by CS First Boston, subparagraph (4)) of Rule 424(b) not later than
the earlier of (A) the second business day following the execution and
delivery of this Agreement or (B) the fifteenth business day after the
Effective Date of the Initial Registration Statement. The Company
will advise CS First Boston promptly of any such filing pursuant to
Rule 424(b). If the Effective Time of the Initial Registration
Statement is prior to the execution and delivery of this Agreement and
an additional registration statement is necessary to register a
portion of the Offered Securities under the Act but the Effective Time
thereof has not occurred as of such execution and delivery, the
Company will file the additional registration statement or, if filed,
will file a post-effective amendment thereto with the Commission
pursuant to and in accordance with Rule 462(b) on or prior to 10:00
P.M., New York time, on the date of this Agreement or, if earlier, on
or prior to the time the Prospectus is printed and distributed to any
Underwriter, or will make such filing at such later date as shall have
been consented to by CS First Boston.
(b) The Company will advise CS First Boston promptly of any
proposal to amend or supplement the initial or any additional
registration statement as filed or the related prospectus or the
Initial
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<PAGE> 8
Registration Statement, the Additional Registration Statement (if any)
or the Prospectus and will not effect such amendment or
supplementation without CS First Boston's consent; and the Company
will also advise CS First Boston promptly of the effectiveness of each
Registration Statement (if its Effective Time is subsequent to the
execution and delivery of this Agreement) and of any amendment or
supplementation of a Registration Statement or the Prospectus and of
the institution by the Commission of any stop order proceedings in
respect of a Registration Statement and will use its best efforts to
prevent the issuance of any such stop order and to obtain as soon as
possible its lifting, if issued.
(c) If, at any time when a prospectus relating to the Offered
Securities is required to be delivered under the Act in connection
with sales by any Underwriter or dealer, any event occurs as a result
of which the Prospectus as then amended or supplemented would include
an untrue statement of a material fact or omit to state any material
fact necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading, or if it is
necessary at any time to amend the Prospectus to comply with the Act,
the Company will promptly notify CS First Boston of such event and
will promptly prepare and file with the Commission, at its own
expense, an amendment or supplement which will correct such statement
or omission or an amendment which will effect such compliance.
Neither CS First Boston's consent to, nor the Underwriters' delivery
of, any such amendment or supplement shall constitute a waiver of any
of the conditions set forth in Section 6.
(d) As soon as practicable, but not later than the Availability
Date (as defined below), the Company will make generally available to
its securityholders an earnings statement covering a period of at
least 12 months beginning after the Effective Date of the Initial
Registration Statement (or, if later, the Effective Date of the
Additional Registration Statement) which will satisfy the provisions
of Section 11(a) of the Act. For the purpose of the preceding
sentence, "Availability Date" means the 45th day after the end of the
fourth fiscal quarter following the fiscal quarter that includes such
Effective Date, except that, if such fourth fiscal quarter is the last
quarter of the Company's fiscal year, "Availability Date" means the
90th day after the end of such fourth fiscal quarter.
(e) The Company will furnish to the Representatives copies of each
Registration Statement (three of which will be signed and will include
all exhibits), each related preliminary prospectus, and, so long as
delivery of a prospectus relating to the Offered Securities is
required to be delivered under the Act in connection with sales by any
Underwriter or dealer, the Prospectus and all amendments and
supplements to such documents, in each case in such quantities as CS
First Boston requests. The Prospectus shall be so furnished on or
prior to 3:00 P.M., New York time, on the business day following the
later of the execution and delivery of this Agreement or the Effective
Time of the Initial Registration Statement. All other such documents
shall be so furnished as soon as available. The Company and the
Selling Stockholders will pay the expenses of printing and
distributing to the Underwriters all such documents.
(f) The Company will arrange for the qualification of the Offered
Securities for sale under the laws of such jurisdictions as CS First
Boston designates and will continue such qualifications in effect so
long as required for the distribution.
(g) During the period of 5 years hereafter, the Company will
furnish to the Representatives and, upon request, to each of the other
Underwriters, as soon as practicable after the end of each fiscal
year, a copy of its annual report to stockholders for such year; and
the Company will furnish to the Representatives (i) as soon as
available, a copy of each report and any definitive proxy statement of
the Company filed with the Commission under the Securities Exchange
Act of 1934 or mailed to stockholders, and (ii) from time to time,
such other information concerning the Company as CS First Boston may
reasonably request.
(h) For a period of 120 days after the date of the initial public
offering of the Offered Securities, the Company will not offer, sell,
contract to sell, pledge or otherwise dispose of, directly or
indirectly,
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<PAGE> 9
or file with the Commission a registration statement under the Act
relating to, any additional shares of its Securities or securities
convertible into or exchangeable or exercisable for any shares of its
Securities, or publicly disclose the intention to make any such offer,
sale, pledge, disposal or filing, without the prior written consent of
CS First Boston, except grants of employee stock options pursuant to
the terms of a plan in effect on the date hereof, issuances of
Securities pursuant to the exercise of such options or the exercise of
any other employee stock options outstanding on the date hereof.
(i) Prior to the first Closing Date, the Company will furnish to
the Representatives "lock-up" letters, in a form satisfactory to the
Representatives, signed by the officers and directors of the Company
in which each agrees, for a period of 120 days after the date of the
initial public offering of the Offered Securities, not to offer, sell,
contract to sell, pledge or otherwise dispose of, directly or
indirectly, any additional shares of the Securities of the Company or
securities convertible into or exchangeable or exercisable for any
shares of Securities, or publicly disclose the intention to make any
such offer, sale, pledge or disposal, without the prior written
consent of CS First Boston.
The Company and each Selling Stockholder agree with the several
Underwriters that the Company and such Selling Stockholder will pay all
expenses incident to the performance of the obligations of the Company and such
Selling Stockholder, as the case may be, under this Agreement, and will jointly
and severally, reimburse the Underwriters (if and to the extent incurred by
them) for any filing fees and other expenses (including fees and disbursements
of counsel) incurred by them in connection with qualification of the Offered
Securities for sale under the laws of such jurisdictions as CS First Boston
designates and the printing of memoranda relating thereto for the filing fee of
the National Association of Securities Dealers, Inc. relating to the Offered
Securities, for any travel expenses of the Company's officers and employees and
any other expenses of the Company in connection with attending or hosting
meetings with prospective purchasers of the Offered Securities, for any
transfer taxes on the sale by the Selling Stockholders of the Offered
Securities to the Underwriters and for expenses incurred in distributing
preliminary prospectuses and the Prospectus (including any amendments and
supplements thereto) to the Underwriters.
Each Selling Stockholder agrees to deliver to CS First Boston,
attention: Transactions Advisory Group on or prior to the First Closing Date a
properly completed and executed United States Treasury Department Form W-9 (or
other applicable form or statement specified by Treasury Department regulations
in lieu thereof).
Each Selling Stockholder agrees, for a period of 120 days after the
date of the initial public offering of the Offered Securities, not to offer,
sell, contract to sell, pledge or otherwise dispose of, directly or indirectly,
any additional shares of the Securities of the Company or securities
convertible into or exchangeable or exercisable for any shares of Securities,
or publicly disclose the intention to make any such offer, sale, pledge or
disposal, without the prior written consent of CS First Boston.
6. Conditions of the Obligations of the Underwriters. The obligations
of the several Underwriters to purchase and pay for the Firm Securities on the
First Closing Date and the Optional Securities to be purchased on each Optional
Closing Date will be subject to the accuracy of the representations and
warranties on the part of the Company and the Selling Stockholders herein, to
the accuracy of the statements of Company officers made pursuant to the
provisions hereof, to the performance by the Company and the Selling
Stockholders of their obligations hereunder and to the following additional
conditions precedent:
(a) The Representatives shall have received a letter, dated the
date of delivery thereof (which, if the Effective Time of the Initial
Registration Statement is prior to the execution and delivery of this
Agreement, shall be on or prior to the date of this Agreement or, if
the Effective Time of the Initial Registration Statement is subsequent
to the execution and delivery of this Agreement, shall be prior to the
filing of the amendment or post-effective amendment to the
registration statement to be filed shortly prior to such Effective
Time), of Arthur Andersen LLP confirming that they are independent
public accountants within the meaning of the Act and the applicable
published Rules and Regulations thereunder and stating to the effect
that:
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<PAGE> 10
(i) in their opinion the financial statements of the Company
examined by them and included or incorporated by reference in the
Registration Statements comply as to form in all material respects
with the applicable accounting requirements of the Act and the related
published Rules and Regulations;
(ii) they have performed the procedures specified by the
American Institute of Certified Public Accountants for a review of
interim financial information as described in Statement of Auditing
Standards No. 71, Interim Financial Information, on the unaudited
financial statements of the Company included in the Registration
Statements;
(iii) on the basis of the review referred to in clause (ii)
above, a reading of the latest available interim financial statements
of the Company, inquiries of officials of the Company who have
responsibility for financial and accounting matters and other
specified procedures, nothing came to their attention that caused them
to believe that:
(A) the unaudited financial statements of the Company
included in the Registration Statements do not comply as to
form in all material respects with the applicable accounting
requirements of the Act and the related published Rules and
Regulations or any material modifications should be made to
such unaudited financial statements for them to be in
conformity with generally accepted accounting principles;
(B) the unaudited consolidated net sales, operating
earnings, net income and net income per share amounts of the
Company for the nine month periods ended July __, 1996 and
July __, 1995 included in the Prospectus do not agree with the
amounts set forth in the unaudited consolidated financial
statements for those same periods or were not determined on a
basis substantially consistent with that of the corresponding
amounts in the audited statements of income;
(C) at the date of the latest available balance sheet of
the Company read by such accountants, or at a subsequent
specified date not more than five days prior to the date of
this Agreement, there was any change in the capital stock or
any increase in short-term indebtedness or long-term debt of
the Company and its consolidated subsidiaries or, at the date
of the latest available balance sheet read by such
accountants, there was any decrease in consolidated net
current assets or net assets, as compared with amounts shown
on the latest balance sheet included in the Prospectus; or
(D) for the period from the closing date of the latest
income statement of the Company included in the Prospectus to
the closing date of the latest available income statement read
by such accountants there were any decreases, as compared with
the corresponding period of the previous year and with the
period of corresponding length ended the date of the latest
income statement included in the Prospectus, in consolidated
net sales or net operating income in the total or per share
amounts of consolidated net income;
except in all cases set forth in clauses (C) and (D) above for
changes, increases or decreases which the Prospectus discloses
have occurred or may occur or which are described in such letter;
and
(iv) they have compared specified dollar amounts (or
percentages derived from such dollar amounts) and other financial
information contained in the Registration Statements (in each case to
the extent that such dollar amounts, percentages and other financial
information are derived from the general accounting records of the
Company and its subsidiaries subject to the internal controls of the
Company's accounting system or are derived directly from such records
by analysis or computation) with the results obtained from inquiries,
a reading of such general accounting records and other procedures
specified in such letter and have found such dollar amounts,
percentages and other financial information to be in agreement with
such results, except as otherwise specified in such letter.
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<PAGE> 11
For purposes of this subsection, (i) if the Effective Time of the
Initial Registration Statements is subsequent to the execution and
delivery of this Agreement, "Registration Statements" shall mean the
initial registration statement as proposed to be amended by the
amendment or post-effective amendment to be filed shortly prior to its
Effective Time, (ii) if the Effective Time of the Initial Registration
Statements is prior to the execution and delivery of this Agreement
but the Effective Time of the Additional Registration Statement is
subsequent to such execution and delivery, "Registration Statements"
shall mean the Initial Registration Statement and the additional
registration statement as proposed to be filed or as proposed to be
amended by the post-effective amendment to be filed shortly prior to
its Effective Time, and (iii) "Prospectus" shall mean the prospectus
included in the Registration Statements. All financial statements
included in material incorporated by reference into the Prospectus
shall be deemed included in the Registration Statements for purposes
of this subsection.
(b) The Representatives shall have received a letter, dated the
date of delivery thereof (which, if the Effective Time of the Initial
Registration Statement is prior to the execution and delivery of this
Agreement, shall be on or prior to the date of this Agreement or, if
the Effective Time of the Initial Registration Statement is subsequent
to the execution and delivery of this Agreement, shall be prior to the
filing of the amendment or post-effective amendment to the
registration statement to be filed shortly prior to such Effective
Time), of Coopers & Lybrand, LLP confirming that they are independent
public accountants within the meaning of the Act and the applicable
published Rules and Regulations thereunder and stating to the effect
that:
(i) in their opinion the financial information derived from
the financial statements of Portage examined by them and included in
the Registration Statements comply as to form in all material respects
with the applicable accounting requirements of the Act and the related
published Rules and Regulations;
(ii) they have performed the procedures specified by the
American Institute of Certified Public Accountants for a review of
interim financial information as described in Statement of Auditing
Standards No. 71, Interim Financial Information, on the unaudited
financial information derived from the financial statements of Portage
included in the Registration Statements;
(iii) on the basis of the review referred to in clause (ii)
above, a reading of the latest available interim financial statements
of Portage, inquiries of officials of Portage who have responsibility
for financial and accounting matters and other specified procedures,
nothing came to their attention that caused them to believe that:
(A) the unaudited financial information derived from the
financial statements of Portage included in the Registration
Statements do not comply as to form in all material respects
with the applicable accounting requirements of the Act and the
related published Rules and Regulations or any material
modifications should be made to such unaudited financial
statements for them to be in conformity with generally
accepted accounting principles;
(B) the unaudited consolidated net sales, operating
earnings, net income and net income per share amounts of
Portage for the ____________ periods ended ____________ and
______________ included in the Prospectus do not agree with
the amounts set forth in the unaudited consolidated financial
information derived from the financial statements for those
same periods or were not determined on a basis substantially
consistent with that of the corresponding amounts in the
audited statements of income;
(C) at the date of the latest available balance sheet of
Portage read by such accountants, or at a subsequent specified
date not more than five days prior to the date of this
Agreement, there was any change in the capital stock or any
increase in short-term indebtedness or long-term debt of
Portage or, at the date of the latest available balance sheet
read by such
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<PAGE> 12
accountants, there was any decrease in consolidated net current assets
or net assets, as compared with amounts shown on the latest balance
sheet included in the Prospectus; or
(D) for the period from the closing date of the latest
income statement information of Portage included in the
Prospectus to the closing date of the latest available income
statement read by such accountants there were any decreases,
as compared with the corresponding period of the previous year
and with the period of corresponding length ended the date of
the latest income statement included in the Prospectus, in
consolidated net sales or net operating income in the total or
per share amounts of consolidated net income;
except in all cases set forth in clauses (C) and (D) above for
changes, increases or decreases which the Prospectus discloses
have occurred or may occur or which are described in such letter;
and
(iv) they have compared specified dollar amounts (or
percentages derived from such dollar amounts) and other financial
information contained in the Registration Statements (in each case to
the extent that such dollar amounts, percentages and other financial
information are derived from the general accounting records of Portage
subject to the internal controls of Portage's accounting system or are
derived directly from such records by analysis or computation) with
the results obtained from inquiries, a reading of such general
accounting records and other procedures specified in such letter and
have found such dollar amounts, percentages and other financial
information to be in agreement with such results, except as otherwise
specified in such letter.
For purposes of this subsection, (i) if the Effective Time of the
Initial Registration Statements is subsequent to the execution and
delivery of this Agreement, "Registration Statements" shall mean the
initial registration statement as proposed to be amended by the
amendment or post-effective amendment to be filed shortly prior to its
Effective Time, (ii) if the Effective Time of the Initial Registration
Statements is prior to the execution and delivery of this Agreement
but the Effective Time of the Additional Registration Statement is
subsequent to such execution and delivery, "Registration Statements"
shall mean the Initial Registration Statement and the additional
registration statement as proposed to be filed or as proposed to be
amended by the post-effective amendment to be filed shortly prior to
its Effective Time, and (iii) "Prospectus" shall mean the prospectus
included in the Registration Statements. All financial statements
included in material incorporated by reference into the Prospectus
shall be deemed included in the Registration Statements for purposes
of this subsection.
(c) The Representatives shall have received a letter, dated the
date of delivery thereof (which, if the Effective Time of the Initial
Registration Statement is prior to the execution and delivery of this
Agreement, shall be on or prior to the date of this Agreement or, if
the Effective Time of the Initial Registration Statement is subsequent
to the execution and delivery of this Agreement, shall be prior to the
filing of the amendment or post-effective amendment to the
registration statement to be filed shortly prior to such Effective
Time), of Coopers & Lybrand, LLP confirming that they are independent
public accountants within the meaning of the Act and the applicable
published Rules and Regulations thereunder and stating to the effect
that:
(i) in their opinion the financial statements of Hamelin
examined by them and included or incorporated by reference in the
Registration Statements comply as to form in all material respects
with the applicable accounting requirements of the Act and the related
published Rules and Regulations;
(ii) they have performed the procedures specified by the
American Institute of Certified Public Accountants for a review of
interim financial information as described in Statement of Auditing
Standards No. 71, Interim Financial Information, on the unaudited
financial statements of Hamelin included in the Registration
Statements;
(iii) on the basis of the review referred to in clause (ii)
above, a reading of the latest available interim financial statements
of Hamelin, inquiries of officials of Hamelin who have responsibility
for
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<PAGE> 13
financial and accounting matters and other specified procedures, nothing came
to their attention that caused them to believe that:
(A) the unaudited financial statements of Hamelin included
in the Registration Statements do not comply as to form in all
material respects with the applicable accounting requirements
of the Act and the related published Rules and Regulations or
any material modifications should be made to such unaudited
financial statements for them to be in conformity with
generally accepted accounting principles;
(B) the unaudited consolidated net sales, operating
earnings, net income and net income per share amounts of
Hamelin for the ____________ periods ended ____________ and
______________ included in the Prospectus do not agree with
the amounts set forth in the unaudited consolidated financial
statements for those same periods or were not determined on a
basis substantially consistent with that of the corresponding
amounts in the audited statements of income;
(C) at the date of the latest available balance sheet of
Hamelin read by such accountants, or at a subsequent specified
date not more than five days prior to the date of this
Agreement, there was any change in the capital stock or any
increase in short-term indebtedness or long-term debt of
Hamelin and its consolidated subsidiary or, at the date of the
latest available balance sheet read by such accountants, there
was any decrease in consolidated net current assets or net
assets, as compared with amounts shown on the latest balance
sheet included in the Prospectus; or
(D) for the period from the closing date of the latest
income statement of Hamelin included in the Prospectus to the
closing date of the latest available income statement read by
such accountants there were any decreases, as compared with
the corresponding period of the previous year and with the
period of corresponding length ended the date of the latest
income statement included in the Prospectus, in consolidated
net sales or net operating income in the total or per share
amounts of consolidated net income;
except in all cases set forth in clauses (C) and (D) above for
changes, increases or decreases which the Prospectus discloses
have occurred or may occur or which are described in such letter;
and
(iv) they have compared specified dollar amounts (or
percentages derived from such dollar amounts) and other financial
information contained in the Registration Statements (in each case to
the extent that such dollar amounts, percentages and other financial
information are derived from the general accounting records of Hamelin
and its subsidiary subject to the internal controls of Hamelin's
accounting system or are derived directly from such records by
analysis or computation) with the results obtained from inquiries, a
reading of such general accounting records and other procedures
specified in such letter and have found such dollar amounts,
percentages and other financial information to be in agreement with
such results, except as otherwise specified in such letter.
For purposes of this subsection, (i) if the Effective Time of the
Initial Registration Statements is subsequent to the execution and
delivery of this Agreement, "Registration Statements" shall mean the
initial registration statement as proposed to be amended by the
amendment or post-effective amendment to be filed shortly prior to its
Effective Time, (ii) if the Effective Time of the Initial Registration
Statements is prior to the execution and delivery of this Agreement
but the Effective Time of the Additional Registration Statement is
subsequent to such execution and delivery, "Registration Statements"
shall mean the Initial Registration Statement and the additional
registration statement as proposed to be filed or as proposed to be
amended by the post-effective amendment to be filed shortly prior to
its Effective Time, and (iii) "Prospectus" shall mean the prospectus
included in the Registration Statements. All financial statements
included in material incorporated by reference into the Prospectus
shall be deemed included in the Registration Statements for purposes
of this subsection.
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<PAGE> 14
(d) If the Effective Time of the Initial Registration Statement is
not prior to the execution and delivery of this Agreement, such
Effective Time shall have occurred not later than 10:00 P.M., New York
time, on the date of this Agreement or such later date as shall have
been consented to by CS First Boston. If the Effective Time of the
Additional Registration Statement (if any) is not prior to the
execution and delivery of this Agreement, such Effective Time shall
have occurred not later than 10:00 P.M., New York time, on the date of
this Agreement or, if earlier, the time the Prospectus is printed and
distributed to any Underwriter, or shall have occurred at such later
date as shall have been consented to by CS First Boston. If the
Effective Time of the Initial Registration Statement is prior to the
execution and delivery of this Agreement, the Prospectus shall have
been filed with the Commission in accordance with the Rules and
Regulations and Section 5(a) of this Agreement. Prior to such Closing
Date, no stop order suspending the effectiveness of a Registration
Statement shall have been issued and no proceedings for that purpose
shall have been instituted or, to the knowledge of any Selling
Stockholder, the Company or the Representatives, shall be contemplated
by the Commission.
(e) Subsequent to the execution and delivery of this Agreement,
there shall not have occurred (i) any change, or any development or
event involving a prospective change, in the financial condition,
business, properties or results of operations of the Company or its
subsidiaries which, in the judgment of a majority in interest of the
Underwriters including the Representatives, materially impairs the
investment quality of the Offered Securities; (ii) any downgrading in
the rating of any debt securities of the Company by any "nationally
recognized statistical rating organization" (as defined for purposes
of Rule 436(g) under the Act), or any public announcement that any
such organization has under surveillance or review its rating of any
debt securities of the Company (other than an announcement with
positive implications of a possible upgrading, and no implication of a
possible downgrading, of such rating); (iii) any suspension or
limitation of trading in securities generally on the New York Stock
Exchange or any setting of minimum prices for trading on such
exchange, or any suspension of trading of any securities of the
Company on any exchange or in the over-the-counter market; (iv) any
banking moratorium declared by U.S. Federal or New York authorities;
or (v) any outbreak or escalation of major hostilities in which the
United States is involved, any declaration of war by Congress or any
other substantial national or international calamity or emergency if,
in the judgment of a majority in interest of the Underwriters
including the Representatives, the effect of any such outbreak,
escalation, declaration, calamity or emergency makes it impractical or
inadvisable to proceed with completion of the public offering or the
sale of and payment for the Offered Securities.
(f) The Representatives shall have received an opinion, dated such
Closing Date, of Armstrong, Teasdale, Schlafly & Davis, counsel for
the Company, to the effect that:
(i) The Company has been duly incorporated and is an existing
corporation in good standing under the laws of the State of Delaware,
with corporate power and authority to own its properties and conduct
its business as described in the Prospectus; and the Company is duly
qualified to do business as a foreign corporation in good standing in
all other jurisdictions in which its ownership or lease of property or
the conduct of its business requires such qualification, except where
the failure to qualify would not have a material adverse effect on the
Company and its subsidiaries, taken as a whole;
(ii) The Offered Securities delivered on such Closing Date
and all other outstanding shares of the Common Stock of the Company
have been duly authorized and validly issued, are fully paid and
nonassessable and conform to the description thereof contained in the
Prospectus; and, to the knowledge of such counsel, the stockholders of
the Company have no preemptive rights with respect to the Securities;
(iii) There are no contracts, agreements or understandings
known to such counsel between the Company and any person granting such
person the right to require the Company to file a registration
statement under the Act with respect to any securities of the Company
owned or to be owned by such person or to require the Company to
include such securities in the securities registered pursuant to the
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<PAGE> 15
Registration Statement or in any securities being registered pursuant
to any other registration statement filed by the Company under the
Act;
(iv) No consent, approval, authorization or order of, or
filing with, any governmental agency or body or any court is required
to be obtained or made by the Company or any Selling Stockholder for
the consummation of the transactions contemplated by this Agreement in
connection with the sale of the Offered Securities, except such as
have been obtained and made under the Act and such as may be required
under state securities laws;
(v) The execution, delivery and performance of this Agreement
and the consummation of the transactions herein or therein
contemplated will not result in a breach or violation of any of the
terms and provisions of, or constitute a default under, any order
known to such counsel, any statute, any rule, regulation or any
governmental agency or body or any court having jurisdiction over the
Company or any subsidiary of the Company or any of their properties,
or any agreement or instrument identified in writing by the Company to
such counsel as a material contract or instrument to which the Company
or any such subsidiary is a party or by which the Company or any such
subsidiary is bound or to which any of the properties of the Company
or any such subsidiary is subject, or the charter or by-laws of the
Company or any such subsidiary;
(vi) The Initial Registration Statement was declared
effective under the Act as of the date and time specified in such
opinion, the Additional Registration Statement (if any) was filed and
became effective under the Act as of the date and time (if
determinable) specified in such opinion, the Prospectus either was
filed with the Commission pursuant to the subparagraph of Rule 424(b)
specified in such opinion on the date specified therein or was
included in the Initial Registration Statement or the Additional
Registration Statement (as the case may be), and, to the best of the
knowledge of such counsel, no stop order suspending the effectiveness
of a Registration Statement or any part thereof has been issued and no
proceedings for that purpose have been instituted or are pending or
contemplated under the Act, and each Registration Statement and the
Prospectus, and each amendment or supplement thereto, as of their
respective effective or issue dates, complied as to form in all
material respects with the requirements of the Act and the Rules and
Regulations; such counsel have no reason to believe that any part of a
Registration Statement or any amendment thereto, as of its effective
date or as of such Closing Date, contained any untrue statement of a
material fact or omitted to state any material fact required to be
stated therein or necessary to make the statements therein not
misleading; or that the Prospectus or any amendment or supplement
thereto, as of its issue date or as of such Closing Date, contained
any untrue statement of a material fact or omitted to state any
material fact necessary in order to make the statements therein, in
the light of the circumstances under which they were made, not
misleading; the descriptions in the Registration Statements and
Prospectus of statutes, legal and governmental proceedings and
contracts and other documents are accurate and fairly present the
information required to be shown; and such counsel do not know of any
legal or governmental proceedings required to be described in a
Registration Statement or the Prospectus which are not described as
required or of any contracts or documents of a character required to
be described in a Registration Statement or the Prospectus or to be
filed as exhibits to a Registration Statement which are not described
and filed as required; it being understood that such counsel need
express no opinion as to the financial statements or other financial
data contained in the Registration Statements or the Prospectus; and
(vii) This Agreement has been duly authorized, executed and
delivered by the Company.
(g) The Representatives shall have received an opinion, dated such
Closing Date, of ________________________, counsel for the Selling
Stockholders, to the effect that:
(i) Each Selling Stockholder had valid and unencumbered title
to the Offered Securities delivered by such Selling Stockholder on
such Closing Date and had full right, power and authority to sell,
assign, transfer and deliver the Offered Securities delivered by such
Selling Stockholder on such
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<PAGE> 16
Closing Date hereunder; and the several Underwriters have acquired
valid and unencumbered title to the Offered Securities purchased by
them from the Selling Stockholders on such Closing Date hereunder;
(ii) No consent, approval, authorization or order of, or
filing with, any governmental agency or body or any court is required
to be obtained or made by any Selling Stockholder for the
consummation of the transactions contemplated by this Agreement in
connection with the sale of the Offered Securities sold by the Selling
Stockholders, except such as have been obtained and made under the Act
and such as may be required under state securities laws;
(iii) The execution, delivery and performance of this
Agreement and the consummation of the transactions herein contemplated
will not result in a breach or violation of any of the terms and
provisions of, or constitute a default under, any statute, any rule,
regulation or order of any governmental agency or body or any court
having jurisdiction over any Selling Stockholder or any of their
properties or any agreement or instrument to which any Selling
Stockholder is a party or by which any Selling Stockholder is bound or
to which any of the properties of any Selling Stockholder is subject,
or the [charter or by-laws] of any Selling Stockholder; and
(iv) This Agreement has been duly authorized, executed and
delivered by each Selling Stockholder.
(h) The Representatives shall have received from Bryan Cave LLP,
counsel for the Underwriters, such opinion or opinions, dated such
Closing Date, with respect to the incorporation of the Company, the
validity of the Offered Securities delivered on such Closing Date, the
Registration Statements, the Prospectus and other related matters as
the Representatives may require, and the Selling Stockholders and the
Company shall have furnished to such counsel such documents as they
request for the purpose of enabling them to pass upon such matters.
(i) The Representatives shall have received a certificate, dated
such Closing Date, of the President or any Vice-President and a
principal financial or accounting officer of the Company in which such
officers, to the best of their knowledge after reasonable
investigation, shall state that: the representations and warranties of
the Company in this Agreement are true and correct; the Company has
complied with all agreements and satisfied all conditions on its part
to be performed or satisfied hereunder at or prior to such Closing
Date; no stop order suspending the effectiveness of any Registration
Statement has been issued and no proceedings for that purpose have
been instituted or are contemplated by the Commission; the Additional
Registration Statement (if any) satisfying the requirements of
subparagraphs (1) and (3) of Rule 462(b) was filed pursuant to Rule
462(b), including payment of the applicable filing fee in accordance
with Rule 111(a) or (b) under the Act, prior to the time the
Prospectus was printed and distributed to any Underwriter; and,
subsequent to the dates of the most recent financial statements in the
Prospectus, there has been no material adverse change, nor any
development or event involving a prospective material adverse change,
in the financial condition, business, properties or results of
operations of the Company and its subsidiaries taken as a whole except
as set forth in or contemplated by the Prospectus or as described in
such certificate.
(j) The Representatives shall have received a letter, dated such
Closing Date, of Arthur Andersen LLP which meets the requirements of
subsection (a) of this Section, except that the specified date
referred to in such subsection will be a date not more than five days
prior to such Closing Date for the purposes of this subsection.
(k) The Representatives shall have received a letter, dated such
Closing Date, of Coopers & Lybrand, LLP which meets the requirements
of subsection (b) of this Section, except that the specified date
referred to in such subsection will be a date not more than five days
prior to such Closing Date for the purposes of this subsection.
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<PAGE> 17
(l) The Representatives shall have received a letter, dated such
Closing Date, of Coopers & Lybrand LLP which meets the requirements of
subsection (c) of this Section, except that the specified date
referred to in such subsection will be a date not more than five days
prior to such Closing Date for the purposes of this subsection.
The Selling Stockholders and the Company will furnish the Representatives with
such conformed copies of such opinions, certificates, letters and documents as
the Representatives reasonably request. CS First Boston may in its sole
discretion waive on behalf of the Underwriters compliance with any conditions
to the obligations of the Underwriters hereunder, whether in respect of an
Optional Closing Date or otherwise.
7. Indemnification and Contribution.
(a) The Company will indemnify and hold harmless each Underwriter
against any losses, claims, damages or liabilities, joint or several,
to which such Underwriter may become subject, under the Act or
otherwise, insofar as such losses, claims, damages or liabilities (or
actions in respect thereof) arise out of or are based upon any untrue
statement or alleged untrue statement of any material fact contained
in any Registration Statement, the Prospectus, or any amendment or
supplement thereto, or any related preliminary prospectus, or arise
out of or are based upon the omission or alleged omission to state
therein a material fact required to be stated therein or necessary to
make the statements therein not misleading, and will reimburse each
Underwriter for any legal or other expenses reasonably incurred by
such Underwriter in connection with investigating or defending any
such loss, claim, damage, liability or action as such expenses are
incurred; provided, however, that the Company will not be liable in
any such case to the extent that any such loss, claim, damage or
liability arises out of or is based upon an untrue statement or
alleged untrue statement in or omission or alleged omission from any
of such documents in reliance upon and in conformity with written
information furnished to the Company by any Underwriter through the
Representatives specifically for use therein, it being understood and
agreed that the only such information furnished by any Underwriter
consists of the information described as such in subsection (c) below.
(b) The Selling Stockholders and the Trust Company of the West,
jointly and severally, will indemnify and hold harmless each
Underwriter against any losses, claims, damages or liabilities, joint
or several, to which such Underwriter may become subject, under the
Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based
upon any untrue statement or alleged untrue statement of any material
fact contained in any Registration Statement, the Prospectus, or any
amendment or supplement thereto, or any related preliminary
prospectus, or arise out of or are based upon the omission or alleged
omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading,
and will reimburse each Underwriter for any legal or other expenses
reasonably incurred by such Underwriter in connection with
investigating or defending any such loss, claim, damage, liability or
action as such expenses are incurred; provided, however, that the
Selling Stockholders will not be liable in any such case to the extent
that any such loss, claim, damage or liability arises out of or is
based upon an untrue statement or alleged untrue statement in or
omission or alleged omission from any of such documents in reliance
upon and in conformity with written information furnished to the
Company by an Underwriter through the Representatives specifically for
use therein, it being understood and agreed that the only such
information furnished by any Underwriter consists of the information
described as such in subsection (c) below.
(c) Each Underwriter will severally and not jointly indemnify and
hold harmless the Company and each Selling Stockholder against any
losses, claims, damages or liabilities to which the Company or such
Selling Stockholder may become subject, under the Act or otherwise,
insofar as such losses, claims, damages or liabilities (or actions in
respect thereof) arise out of or are based upon any untrue statement
or alleged untrue statement of any material fact contained in any
Registration Statement, the Prospectus, or any amendment or supplement
thereto, or any related preliminary prospectus, or arise out of or are
based upon the omission or the alleged omission to state therein a
material fact required to
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<PAGE> 18
be stated therein or necessary to make the statements therein not
misleading, in each case to the extent, but only to the extent, that
such untrue statement or alleged untrue statement or omission or
alleged omission was made in reliance upon and in conformity with
written information furnished to the Company by such Underwriter
through the Representatives specifically for use therein, and will
reimburse any legal or other expenses reasonably incurred by the
Company and each Selling Stockholder in connection with investigating
or defending any such loss, claim, damage, liability or action as such
expenses are incurred, it being understood and agreed that the only
such information furnished by any Underwriter consists of the
following information in the Prospectus furnished on behalf of each
Underwriter: the last paragraph at the bottom of the cover page
concerning the terms of the offering by the Underwriters, the legends
concerning (i) over-allotments and stabilizing and (ii) transactions
for the accounts of certain persons affiliated with persons
participating in the distribution on the inside front cover page and
the concession and reallowance figures appearing in the fourth
paragraph under the caption "Underwriting."
(d) Promptly after receipt by an indemnified party under this
Section of notice of the commencement of any action, such indemnified
party will, if a claim in respect thereof is to be made against an
indemnifying party under subsection (a), (b) or (c) above, notify the
indemnifying party of the commencement thereof; but the omission so to
notify the indemnifying party will not relieve it from any liability
which it may have to any indemnified party otherwise than under
subsection (a), (b) or (c) above. In case any such action is brought
against any indemnified party and it notifies an indemnifying party of
the commencement thereof, the indemnifying party will be entitled to
participate therein and, to the extent that it may wish, jointly with
any other indemnifying party similarly notified, to assume the defense
thereof, with counsel satisfactory to such indemnified party (who
shall not, except with the consent of the indemnified party, be
counsel to the indemnifying party), and after notice from the
indemnifying party to such indemnified party of its election so to
assume the defense thereof, the indemnifying party will not be liable
to such indemnified party under this Section for any legal or other
expenses subsequently incurred by such indemnified party in connection
with the defense thereof other than reasonable costs of investigation.
No indemnifying party shall, without the prior written consent of the
indemnified party, effect any settlement of any pending or threatened
action in respect of which any indemnified party is or could have been
a party and indemnity could have been sought hereunder by such
indemnified party unless such settlement includes an unconditional
release of such indemnified party from all liability on any claims
that are the subject matter of such action.
(e) If the indemnification provided for in this Section is
unavailable or insufficient to hold harmless an indemnified party
under subsection (a), (b) or (c) above, then each indemnifying party
shall contribute to the amount paid or payable by such indemnified
party as a result of the losses, claims, damages or liabilities
referred to in subsection (a), (b) or (c) above (i) in such proportion
as is appropriate to reflect the relative benefits received by the
Company and the Selling Stockholders on the one hand and the
Underwriters on the other from the offering of the Securities or (ii)
if the allocation provided by clause (i) above is not permitted by
applicable law, in such proportion as is appropriate to reflect not
only the relative benefits referred to in clause (i) above but also
the relative fault of the Company and the Selling Stockholders on the
one hand and the Underwriters on the other in connection with the
statements or omissions which resulted in such losses, claims, damages
or liabilities as well as any other relevant equitable considerations.
The relative benefits received by the Company and the Selling
Stockholders on the one hand and the Underwriters on the other shall
be deemed to be in the same proportion as the total net proceeds from
the offering (before deducting expenses) received by the Company and
the Selling Stockholders bear to the total underwriting discounts and
commissions received by the Underwriters. The relative fault shall be
determined by reference to, among other things, whether the untrue or
alleged untrue statement of a material fact or the omission or alleged
omission to state a material fact relates to information supplied by
the Company, the Selling Stockholders or the Underwriters and the
parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such untrue statement or omission.
The amount paid by an indemnified party as a result of the losses,
claims, damages or liabilities referred to in the first sentence of
this subsection (e) shall be deemed to include any legal or other
expenses reasonably incurred by
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<PAGE> 19
such indemnified party in connection with investigating or defending
any action or claim which is the subject of this subsection (e).
Notwithstanding the provisions of this subsection (e), no Underwriter
shall be required to contribute any amount in excess of the amount by
which the total price at which the Securities underwritten by it and
distributed to the public were offered to the public exceeds the
amount of any damages which such Underwriter has otherwise been
required to pay by reason of such untrue or alleged untrue statement
or omission or alleged omission. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Act)
shall be entitled to contribution from any person who was not guilty
of such fraudulent misrepresentation. The Underwriters' obligations in
this subsection (e) to contribute are several in proportion to their
respective underwriting obligations and not joint.
(f) The obligations of the Company and the Selling Stockholders
under this Section shall be in addition to any liability which the
Company and the Selling Stockholders may otherwise have and shall
extend, upon the same terms and conditions, to each person, if any,
who controls any Underwriter within the meaning of the Act; and the
obligations of the Underwriters under this Section shall be in
addition to any liability which the respective Underwriters may
otherwise have and shall extend, upon the same terms and conditions,
to each director of the Company, to each officer of the Company who
has signed a Registration Statement and to each person, if any, who
controls the Company within the meaning of the Act.
8. Default of Underwriters. If any Underwriter or Underwriters
default in their obligations to purchase Offered Securities hereunder on either
the First or any Optional Closing Date and the aggregate number of shares of
Offered Securities that such defaulting Underwriter or Underwriters agreed but
failed to purchase does not exceed 10% of the total number of shares of Offered
Securities that the Underwriters are obligated to purchase on such Closing
Date, CS First Boston may make arrangements satisfactory to the Company and the
Selling Stockholders for the purchase of such Offered Securities by other
persons, including any of the Underwriters, but if no such arrangements are
made by such Closing Date, the non-defaulting Underwriters shall be obligated
severally, in proportion to their respective commitments hereunder, to purchase
the Offered Securities that such defaulting Underwriters agreed but failed to
purchase on such Closing Date. If any Underwriter or Underwriters so default
and the aggregate number of shares of Offered Securities with respect to which
such default or defaults occur exceeds 10% of the total number of shares of
Offered Securities that the Underwriters are obligated to purchase on such
Closing Date and arrangements satisfactory to CS First Boston, the Company and
the Selling Stockholders for the purchase of such Offered Securities by other
persons are not made within 36 hours after such default, this Agreement will
terminate without liability on the part of any non-defaulting Underwriter, the
Company or the Selling Stockholders, except as provided in Section 9 (provided
that if such default occurs with respect to Optional Securities after the First
Closing Date, this Agreement will not terminate as to the Firm Securities or
any Optional Securities purchased prior to such termination). As used in this
Agreement, the term "Underwriter" includes any person substituted for an
Underwriter under this Section. Nothing herein will relieve a defaulting
Underwriter from liability for its default.
9. Survival of Certain Representations and Obligations. The
respective indemnities, agreements, representations, warranties and other
statements of the Selling Stockholders, of the Company or its officers and of
the several Underwriters set forth in or made pursuant to this Agreement will
remain in full force and effect, regardless of any investigation, or statement
as to the results thereof, made by or on behalf of any Underwriter, any Selling
Stockholder, the Company or any of their respective representatives, officers
or directors or any controlling person, and will survive delivery of and
payment for the Offered Securities. If this Agreement is terminated pursuant to
Section 8 or if for any reason the purchase of the Offered Securities by the
Underwriters is not consummated, the Company and the Selling Stockholders shall
remain responsible for the expenses to be paid or reimbursed by them pursuant
to Section 5 and the respective obligations of the Company, the Selling
Stockholders, and the Underwriters pursuant to Section 7 shall remain in
effect, and if any Offered Securities have been purchased hereunder the
representations and warranties in Section 2 and all obligations under Section 5
shall also remain in effect. If the purchase of the Offered Securities by the
Underwriters is not consummated for any reason other than solely because of the
termination of this Agreement pursuant to Section 8 or the
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<PAGE> 20
occurrence of any event specified in clause (iii), (iv) or (v) of Section 6(e),
the Company and the Selling Stockholders will, jointly and severally, reimburse
the Underwriters for all out-of-pocket expenses (including fees and
disbursements of counsel) reasonably incurred by them in connection with the
offering of the Offered Securities.
10. Notices. All communications hereunder will be in writing and, if
sent to the Underwriters, will be mailed, delivered or telegraphed and
confirmed to the Representatives, c/o CS First Boston Corporation, Park Avenue
Plaza, New York, N.Y. 10055, Attention: Investment Banking Department -
Transactions Advisory Group, or, if sent to the Company, will be mailed,
delivered or telegraphed and confirmed to it at 7733 Forsyth Boulevard, Suite
1450, St. Louis, MO 63105, Attention: David B. Mueller, or, if sent to the
Selling Stockholders or any of them, will be mailed, delivered or telegraphed
and confirmed to ______________________________________
at_____________________; provided, however, that any notice to an Underwriter
pursuant to Section 7 will be mailed, delivered or telegraphed and confirmed to
such Underwriter.
11. Successors. This Agreement will inure to the benefit of and be
binding upon the parties hereto and their respective personal representatives
and successors and the officers and directors and controlling persons referred
to in Section 7, and no other person will have any right or obligation
hereunder.
12. Representation. The Representatives will act for the several
Underwriters in connection with the transactions contemplated by this
Agreement, and any action under this Agreement taken by the Representatives
jointly or by CS First Boston will be binding upon all the Underwriters.
13. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original, but all such
counterparts shall together constitute one and the same Agreement.
14. APPLICABLE LAW. THIS AGREEMENT SHALL BE GOVERNED BY, AND
CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD
TO PRINCIPLES OF CONFLICTS OF LAWS.
The Company hereby submits to the non-exclusive jurisdiction of the
Federal and state courts in the Borough of Manhattan in The City of New York in
any suit or proceeding arising out of or relating to this Agreement or the
transactions contemplated hereby.
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<PAGE> 21
If the foregoing is in accordance with the Representatives'
understanding of our agreement, kindly sign and return to the Company one of
the counterparts hereof, whereupon it will become a binding agreement among the
Selling Stockholders, the Company and the several Underwriters in accordance
with its terms.
Very truly yours,
[THE TCW GROUP]
By:___________________________________________________
Title:________________________________________________
[PHOENIX HOME LIFE INSURANCE COMPANY]
By:___________________________________________________
Title:________________________________________________
SPARTECH CORPORATION
By:___________________________________________________
Title:________________________________________________
and for purposes of agreeing to the provisions of
Section 7(b) hereof:
[TRUST COMPANY OF THE WEST]
By:___________________________________________________
Title:________________________________________________
The foregoing Underwriting Agreement is hereby confirmed and accepted as of the
date first above written.
CS FIRST BOSTON CORPORATION
A.G. EDWARDS & SONS, INC.
Acting on behalf of themselves and as the Representatives of the several
Underwriters.
By: CS FIRST BOSTON CORPORATION
By:_________________________________________________________
Title:______________________________________________________
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<PAGE> 22
SCHEDULE A
<TABLE>
<CAPTION>
NUMBER OF
NUMBER OF OPTIONAL
FIRM SECURITIES SECURITIES TO
TO BE
SELLING STOCKHOLDER BE SOLD SOLD
<S> <C> <C>
[The TCW Group]* 1,900,350 900,000
[Phoenix Home Life Insurance Company] 1,099,650 0
----------- ----------
Total......................................................... 3,000,000 900,000
=========== ==========
</TABLE>
* The TCW Group is comprised of TCW Special Placements Fund I, TCW Special
Placement Fund II and TCW Capital, all California limited partnerships.
-22-
<PAGE> 23
SCHEDULE B
<TABLE>
<CAPTION>
NUMBER OF
FIRM SECURITIES
UNDERWRITER TO BE PURCHASED
----------- ---------------
<S> <C>
CS First Boston Corporation . . . . . . . . . . . . . . . . . . . . . . .
A.G. Edwards & Sons, Inc. . . . . . . . . . . . . . . . . . . . . . . . .
---------------
Total . . . . . . . . . . . . . . . . . . . . . 6,000,000
===============
</TABLE>
-23-
<PAGE> 1
EXHIBIT 23.1
CONSENT OF ARTHUR ANDERSEN LLP
As independent public accountants, we hereby consent to the use of our
report dated December 6, 1995 included in this registration statement and to all
references to our Firm included in or made a part of this registration
statement.
/S/ ARTHUR ANDERSEN LLP
ARTHUR ANDERSEN LLP
St. Louis, Missouri
July 10, 1996
<PAGE> 1
EXHIBIT 23.2
CONSENT OF COOPERS & LYBRAND
The Shareholders
Hamro Group, Inc.
We consent to the inclusion of our report dated June 14, 1996, with respect
to the consolidated balance sheets of Hamro Group, Inc. and subsidiaries as of
April 30, 1996 and 1995, and the related consolidated statements of earnings,
retained earnings, and changes in financial position for each of the years in
the three-year period ended April 30, 1996, which report appears in the Form S-3
of Spartech Corporation dated July 10, 1996 and to the reference to our firm
under the heading "Experts" in the Prospectus.
/s/ COOPERS & LYBRAND
COOPERS & LYBRAND
Montreal, Quebec
July 10, 1996
