<PAGE>
FORM 10Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
<TABLE>
(Mark One)
<S> <C>
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1995
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Commission file number 2-66564
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
-------------------------- -------------------------
Spinnaker Industries, Inc.
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(Exact name of Registrant as specified in its charter)
Delaware 06-0544125
- ---------------------------------- --------------------------------------
(State or other jurisdiction of) (I.R.S. Employer Identification No.)
600 N. Pearl St., #2160, L.B. 100, Dallas, TX 75201
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(Address of principal executive offices) (Zip Code)
(214)855-0322
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(Registrant's telephone number, including area code)
N/A
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(Former name, former address and former fiscal year, if changed since last report.)
Indicate check mark whether the Registrant (1) has filed all reports required to be
filed be Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Registrant was required to
file such reports), and (2) has been subject to such filing requirements for the
past 90 days.
Yes X No
----- -----
Indicate the number of shares outstanding of each of the Registrant's classes of
Common Stock, as of the latest practicable date.
Common Stock, No Par Value 1,810,504 shares
- ------------------------------------ ---------------------------------
Class Outstanding at July 31, 1995
</TABLE>
Page 1 of 12
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SPINNAKER INDUSTRIES, INC.
INDEX
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<TABLE>
<CAPTION>
PAGE
NUMBER
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<S> <C> <C>
PART I FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (Unaudited):
Condensed Consolidated Balance Sheets as of June 30,
1995 and December 31, 1994 (Audited). 3
Condensed Consolidated Statements of Operations for the
Three and Six Months Ended June 30, 1995 and 1994 4
Condensed Consolidated Statements of Cash Flows
for the Six Months Ended June 30, 1995 and 1994 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
PART II OTHER INFORMATION
Item 5. Other Information 11
</TABLE>
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Page 2 of 12
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PART I - FINANCIAL INFORMATION
Item 1. - FINANCIAL STATEMENTS
SPINNAKER INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
- -----------------------------------------------------------------
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1995 1994
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<S> <C> <C>
(Unaudited) (Note)
ASSETS
Current assets:
Cash and cash equivalents $ 27,000 $ 484,000
Short-term investments 0 4,000
Accounts receivable (less allowance 13,575,000 12,510,000
of $244,000 and $378,000)
Inventories 16,567,000 14,572,000
Income taxes due from Parent 33,000 70,000
Prepaid expenses and other 1,222,000 686,000
----------- -----------
Total current assets 31,424,000 28,326,000
Property plant and equipment
Land 420,000 420,000
Buildings and improvements 5,021,000 4,943,000
Machinery and equipment 10,803,000 10,059,000
Accumulated depreciation (3,377,000) (2,927,000)
----------- -----------
12,867,000 12,495,000
Other assets 471,000 508,000
----------- -----------
TOTAL ASSETS $44,762,000 $41,329,000
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 7,676,000 $ 5,003,000
Accrued liabilities 3,132,000 2,857,000
Current portion of long term debt 3,124,000 2,217,000
Working capital revolver 13,458,000 13,180,000
Other current liabilities 137,000 422,000
----------- -----------
Total current liabilities 27,527,000 23,679,000
Long term debt less current portion 6,455,000 7,797,000
Other liabilities 589,000 589,000
Notes payable to related parties 1,475,000 1,352,000
Minority interest 1,528,000 1,411,000
Stockholders' equity
Common stock 3,124,000 3,124,000
Additional paid in capital 3,709,000 3,709,000
Retained earnings (deficit) 467,000 (220,000)
Less: common stock in treasury (112,000) (112,000)
----------- -----------
Total stockholders' equity 7,188,000 6,501,000
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $44,762,000 $41,329,000
=========== ===========
NOTE: The balance sheet at December 31, 1994 has been derived from the audited financial statements at
that date but does not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements.
</TABLE>
See accompanying notes to condensed consolidated financial statements which
are an integral part of these financial statements.
Page 3 of 12
<PAGE>
SPINNAKER INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED RESULTS OF INCOME - UNAUDITED
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------- --------------------------
(unaudited) (unaudited)
1995 1994 1995 1994
------------ ----------- ------------ -----------
<S> <C> <C> <C> <C>
Total sales $26,685,000 $1,558,000 $52,646,000 $3,675,000
Cost of sales (22,804,000) (951,000) (44,908,000) (2,271,000)
Depreciation and amortization (252,000 (36,000) (508,000) (71,000)
------------ ----------- ------------ -----------
Gross margin 3,629,000 571,000 7,230,000 1,333,000
Selling, general and administrative expense (2,507,000) (554,000) (5,006,000) (1,099,000)
Litigation settlement -- -- -- (125,000)
------------ ----------- ------------ -----------
Income from operations 1,122,000 17,000 2,224,000 109,000
Interest expense (647,000) (25,000) (1,293,000) (51,000)
Other income-Net (5,000) 43,000 28,000 81,000
------------ ----------- ------------ -----------
Income before income taxes
and minority interest 470,000 35,000 959,000 139,000
Income tax (provision) benefit 73,000 (12,000) (114,000) (24,000)
Minority interest (84,000) -- (158,000) --
------------ ----------- ------------ -----------
Net income $459,000 $23,000 $687,000 $115,000
============ =========== ============ ===========
Weighted average shares and
common stock equivalents outstanding 2,197,651 1,810,504 2,179,990 1,810,504
Net income per share $0.21 $0.01 $0.32 $0.06
</TABLE>
See accompanying notes to condensed consolidated financial statements
which are an integral part of these financial statements.
Page 4 of 12
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SPINNAKER INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
---------------------------
1995 1994
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<S> <C> <C>
Operating activities
Net income $ 687,000 $ 115,000
Adjustments to reconcile net income
to net cash used in operating activities:
Depreciation and amortization 508,000 71,000
Sales of short-term investments,net 4,000 1,114,000
Minority interest 158,000 --
Changes in operating assets and liabilities
Accounts receivable (1,065,000) (175,000)
Inventories (1,995,000) (423,000)
Prepaid expenses and other assets (505,000) (82,000)
Accounts payable and accrued liabilities 2,948,000 315,000
Other current liabilities (285,000) --
------------ ------------
Net cash provided by operating activities 455,000 935,000
------------ ------------
Investing activities
Purchases of property, plant, and equipment (837,000) (104,000)
------------ ------------
Net cash used in investing activities (837,000) (104,000)
------------ ------------
Financing activities
Working capital revolver 278,000 --
Issuance of long-term debt 28,000 --
Principal payments on long-term debt (463,000) (9,000)
Proceeds from notes payable 123,000 --
Purchase of minority interest (41,000) --
------------ ------------
Net cash used in financing activities (75,000) (9,000)
------------ ------------
Decrease in cash and cash equivalents (457,000) 822,000
Cash and cash equivalents at beginning of period 484,000 2,745,000
------------ ------------
Cash and cash equivalents at end of period $ 27,000 $3,567,000
============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements which
are an integral part of these financial statements.
Page 5 of 12
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SPINNAKER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. The accompanying condensed consolidated financial statements include
Spinnaker Industries, Inc., formerly Safety Railway Service Corporation, and
its operating subsidiaries, Brown-Bridge Industries, Inc. (80.6% owned) and
Entoleter, Inc. (100.0% owned) (collectively the "Registrant"). On September
19, 1994, the Registrant purchased 80.1% of Brown-Bridge Industries, Inc.
("Brown-Bridge"), an entity formed to acquire Kimberly Clark's Brown-Bridge
operation which manufactures adhesive-coated stocks for labels and related
applications. The total cost of the transaction was approximately $36
million, which includes the assumption of approximately $7 million in
liabilities. The transaction was accounted for as a purchase and,
accordingly, the assets acquired and liabilities assumed were recorded at
their estimated fair market value.
The operating results of Brown-Bridge are included in the
consolidated statements of operations for the three and six month
periods ended June 30, 1995. The following proforma information, which
is based on information currently available to the Company, shows the
results of the Registrant's operations presented as though the purchase
of Brown-Bridge had been made at the beginning of 1994.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1994 JUNE 30, 1994
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<S> <C> <C>
Sales and Revenues $23,950,000 $48,962,000
Net Income 464,000 704,000
Net Income Per Share .21 .32
</TABLE>
2. The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly,
they do not include all of the information and footnotes required by
generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the period ended
June 30, 1995, are not necessarily indicative of the results that may be
expected for the year ended December 31, 1995. For further information,
refer to the consolidated financial statements and footnotes thereto
included in the Registrant's annual report on Form 10-K for the year
ended December 31, 1994.
3. Inventory values at June 30, 1995, and December 31, 1994, for
Brown-Bridge are valued using a specific identification method (92% and
88% of total inventories of the Registrant, respectively) for each item
of inventory with the remaining inventories valued using the first-in,
first-out (FIFO) method. Inventories consist of the following at June
30, 1995, and December 31, 1994.
Page 6 of 12
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<TABLE>
<CAPTION>
1995 1994
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<S> <C> <C>
Finished goods $ 3,193,000 $ 1,920,000
Work-in-process 8,863,000 7,208,000
Raw materials and supplies 4,511,000 5,444,000
----------- -----------
Total $16,567,000 $14,572,000
=========== ===========
</TABLE>
4. Brown-Bridge and Entoleter maintain revolving credit and/or letter
of credit arrangements with combined maximum availabilities of $19
million and $2.5 million, respectively. Credit availability under these
revolving credit arrangements is subject to certain variables, such as
the amount of inventory and receivables eligible to be included in a
borrowing base. At June 30, 1995, Brown-Bridge and Entoleter had cash
advances under these revolving credit arrangements of $13.0 million and
$.5 million, respectively. Credit availability under these revolving
credit arrangements at June 30, 1995, was $6.8 million. Interest on
these borrowings is payable monthly at an interest rate of prime plus
1.25% for Brown-Bridge and prime plus 2.5% for Entoleter.
Following is a summary of long-term debt of Registrant at June 30, 1995
and December 31, 1994:
<TABLE>
<CAPTION>
1995 1994
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<S> <C> <C>
Term loan maturing in 1999 secured
by the assets of Brown-Bridge at an $8,548,000 $ 9,000,000
interest rate of prime plus 1.25%
payable over five years maturing in
1999.
Mortgage note payable on demand in
1997 and secured by certain real
property of Entoleter 1,003,000 1,014,000
Other 28,000 --
----------- -----------
9,579,000 10,014,000
Current Maturities (3,124,000) (2,217,000)
----------- -----------
$ 6,455,000 $ 7,797,000
=========== ===========
</TABLE>
Spinnaker has pledged its shares of common stock of Brown-Bridge to
secure Brown-Bridge's indebtedness under the above referenced term loan
and line of credit.
Page 7 of 12
<PAGE>
5. The Directors of Spinnaker declared a 3-for-2 stock split of
Spinnaker's common shares, effective December 30, 1994. All
presentations of shares outstanding and amounts per share have been
restated to reflect the stock split.
Earnings per share is based on the weighted average number of
common and common equivalent shares outstanding during each year, after
giving effect to the 3-for-2 stock split. Fully diluted earnings per
share did not differ significantly from primary earnings per share in
any period presented.
6. In the first half of 1994 income from operations includes a $125,000
charge to earnings based on a settlement of litigation and related
matters at Entoleter.
7. The 1995 income tax provision for the three-month period ended June
30, 1995 has been reduced by $279,000 due to the reversal of the
company's valuation allowance related to net deferred tax assets. FASB
Statement 109, "Accounting for Income Taxes," generally provides that
net deferred tax assets are not recognized when a company has cumulative
losses in recent years. However, as a result of the Company's continued
profitability, and in accordance with FASB 109, the Company reversed its
valuation allowance related to net deferred tax assets, as the Company
believes it is more likely than not that the operations will generate
future taxable income. Deferred tax assets and liabilities have been
included in other current assets and other liabilities on the balance
sheet.
8. Certain reclassifications have been made to conform prior period
data to the current year's presentation.
Page 8 of 12
<PAGE>
ITEM-2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
ACQUISITIONS
On September 19, 1994, Spinnaker purchased 80.1% of Brown-Bridge, an
entity formed to acquire Kimberly-Clark's Brown-Bridge operation which
manufactures adhesive-coated stocks for labels and related applications
(See Note 1 to Notes to Condensed Consolidated Financial Statements).
SALES
Net sales were $26,685,000 for the three-month period ended June 30,
1995, versus $1,558,000 for the comparable 1994 period, an increase of
$25,127,000. Brown-Bridge accounted for $24,755,000 of the net
increase, with the balance attributable to higher sales ($372,000) at
Entoleter. For the first six months of 1995 revenues increased by
$48,971,000 due primarily to the inclusion of Brown-Bridge.
COST OF SALES
Cost of sales for the three and six-month periods ended June 30, 1995,
increased by $21,853,000 and $42,637,000 respectively, when compared
with the corresponding periods of 1994. The increases were attributable
to the inclusion of Brown-Bridge.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, General and Administrative expenses increased by $1,953,000 for
the three-month period ended June 30, 1995, when compared to the
comparable 1994 period. Brown-Bridge accounted for 94% of the increase.
LITIGATION
The 1994 income from operations includes a $125,000 charge to earnings
based on the settlement of litigation and related matters at Entoleter.
INTEREST EXPENSE
Interest expense for the three and six-month periods ended June 30,
1995, increased by $622,000 and $1,242,000 respectively, when compared
with the comparable 1994 periods. The increases are primarily the
result of the additional debt incurred in the acquisition of
Brown-Bridge (interest expense related to this debt was $610,000 for
three months and $1,224,000 for six months).
INCOME TAXES
The 1995 income tax provision for the three-month period ended June 30,
1995 has been reduced by $279,000 due to the reversal of the company's
valuation allowance related to net deferred tax assets. FASB Statement
109, "Accounting for Income Taxes," generally provides that net deferred
tax assets
Page 9 of 12
<PAGE>
are not recognized when a company has cumulative losses in recent years.
However, as a result of the Company's continued profitability, and in
accordance with FASB 109, the Company reversed its valuation allowance
related to net deferred tax assets, as the Company believes it is more
likely than not that the operations will generate future taxable income.
Deferred tax assets and liabilities have been included in other current
assets and other liabilities on the balance sheet.
The 1995 income tax provision provides for federal and state income
taxes at an effective tax rate of 41% while the comparable 1994 tax
provision included only state taxes. No federal income tax provision
was provided for the six months ended June 30, 1994, due to the use of
net operating loss carry forwards which were fully utilized during 1994
through the reversal of a portion of the valuation allowance.
FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
The Registrant's net cash provided by operating activities for the six
months ended June 30, 1995, excluding sales of short-term investments,
was $451,000, an increase of $630,000 over the comparable 1994 period.
Net cash used in investing activities increased by $733,000 versus 1994,
almost all of which was for capital expenditures at Brown-Bridge and
Entoleter.
Net working capital at June 30, 1995 was $3,897,000 versus $4,647,000 at
December 31, 1994, a decrease of $750,000. Internally generated funds
are being used to finance the growth of the Registrant primarily
through increased capital investments.
At June 30, 1995, total debt of the Registrant was $24,512,000 versus
$24,546,000 at December 31, 1994. The Registrant's subsidiaries have
credit facilities available for future use, including revolving credit
agreements with maximum availability of $21,500,000 and current
availability of $6,700,000 at June 30, 1995. (See Note 4 to Notes to
Condensed Consolidated Financial Statements.) Borrowings under these
credit facilities totaled $13,458,000 at June 30, 1995. Agreements with
its lenders imposes restrictions on the ability of Brown-Bridge and
Entoleter to pay dividends to the Registrant.
The Registrant believes it has adequate capital resources for its current
operations. In addition, the Registrant has engaged an investment banking
firm to assist it in exploring various financing alternatives in order to
provide additional capital for acquisitions, working capital and other
corporate purposes. The Registrant is actively pursuing financing
alternatives and any such financing may involve the issuance of debt and
additional equity securities of the Registrant. As of the date of this
filing, the Registrant has not entered into any definitive agreements or
arrangements regarding the terms of any financing and there can be no
assurance that such financing will be available on terms acceptable to the
Registrant. A substantial portion of any consummated financing will be
required for the acquisition discussed in Part II - Item 5 of this report.
The Registrant has previously identified possible environmental issues
at Entoleter related to portions of its land in Hamden, Connecticut.
The appropriate regulatory agencies have been notified, but to date no
action has been required by any regulatory agency.
Page 10 of 12
<PAGE>
PART II - OTHER INFORMATION
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Shareholders of the Registrant was held on May 16,
1995, at which Annual Meeting the shareholders were asked to elect four
directors to serve until the next Annual Meeting of Shareholders.
Set forth below is the (i) list of nominees elected at the Meeting, all
of whom were serving as Directors prior to the Meeting, and (ii) the
shares vested as indicated for each nominee:
<TABLE>
<CAPTION>
NAME FOR WITHHELD
---- --- --------
<S> <C> <C>
Richard J. Boyle 1,717,480 1,112
Ned N. Fleming, III 1,717,480 1,112
Michael J. Small 1,717,480 1,112
Joseph P. Rhein 1,717,480 1,112
</TABLE>
In addition, the Shareholders were asked to authorize a resolution to
increase the authorized capital of the Registrant to 10,000,000 shares,
no par value. The results of such vote were 1,714,810 votes for the
resolution, 2,720 votes against the resolution and 1,062 abstentions.
Item 5. OTHER INFORMATION
On June 20, 1995, the Company announced an agreement in principal to
acquire the assets and stock of Central Products Company ("Central
Products"), a wholly-owned subsidiary of Alco Standard Corporation.
Central Products, which manufactures and markets a wide variety of
carton sealing tapes, is the second largest U.S. carton sealing tape
manufacturer. Central Products is headquartered in Menasha, Wisconsin,
next to its 175,000 square foot manufacturing facility, which
manufactures water activated tape. Central Products also maintains a
200,000 square foot manufacturing facility in Brighton, Colorado, where
it manufactures pressure sensitive tape.
The Company is currently negotiating the terms of the definitive
agreement relating to the proposed acquisition of Central Products. It
is anticipated that the definitive agreement will contain several
significant conditions to the obligations of both parties to consummate
the transaction.
Page 11 of 12
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
SPINNAKER INDUSTRIES, INC.
(Registrant)
/s/ Ned N. Fleming, III, President
-----------------------------------
Ned N. Fleming III, President
Date: August 11, 1995
Page 12 of 12
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Condensed Consolidated Statements of Operations and Condensed Consolidated
Balance Sheets and is qualified in its entirety by reference to such
Form 10-Q.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> APR-01-1995
<PERIOD-END> JUN-30-1995
<CASH> 27
<SECURITIES> 0
<RECEIVABLES> 13819
<ALLOWANCES> 244
<INVENTORY> 16567
<CURRENT-ASSETS> 31424
<PP&E> 16244
<DEPRECIATION> 3377
<TOTAL-ASSETS> 44762
<CURRENT-LIABILITIES> 27527
<BONDS> 0
<COMMON> 3124
0
0
<OTHER-SE> 4064
<TOTAL-LIABILITY-AND-EQUITY> 44762
<SALES> 26685
<TOTAL-REVENUES> 26685
<CGS> 22804
<TOTAL-COSTS> 25563
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 647
<INCOME-PRETAX> 470
<INCOME-TAX> (73)
<INCOME-CONTINUING> 543
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 459
<EPS-PRIMARY> 0.21
<EPS-DILUTED> 0.21
</TABLE>
