<PAGE>
FORM 10Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended SEPTEMBER 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
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SPINNAKER INDUSTRIES, INC.
- ----------------------------------------------------------------------------
(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 October 31, 1995
Page 1 of 12
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SPINNAKER INDUSTRIES, INC.
INDEX
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PAGE
NUMBER
------
PART I FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (Unaudited):
Condensed Consolidated Balance Sheets as of
September 30, 1995 and December 31, 1994 (Audited). 3
Condensed Consolidated Statements of Operations for the
Three and Nine Months Ended September 30, 1995
and 1994 4
Condensed Consolidated Statements of Cash Flows
for the Nine Months Ended September 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
Item 6. Exhibits and Reports on Form 8-K 11
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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>
September 30, December 31,
1995 1994
------------- -------------
(Unaudited) (Note)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $11,000 $484,000
Short-term investments 4,000
Accounts receivable (less allowance 13,858,000 12,510,000
of $203,000 and $378,000)
Inventories (Net) 16,025,000 14,572,000
Income taxes due from Parent 21,000 70,000
Prepaid expenses and other 1,476,000 686,000
------------- -------------
Total current assets 31,391,000 28,326,000
Property plant and equipment
Land 437,000 420,000
Buildings and improvements 5,308,000 4,943,000
Machinery and equipment 11,051,000 10,059,000
Accumulated depreciation (3,622,000) (2,927,000)
------------- -------------
13,174,000 12,495,000
Deposits 2,000,000 --
Other assets 797,000 508,000
------------- -------------
TOTAL ASSETS $47,362,000 $41,329,000
------------- -------------
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $9,144,000 $5,003,000
Accrued liabilities 2,584,000 2,857,000
Current portion of long term debt 3,018,000 2,217,000
Working capital revolver 15,831,000 13,180,000
Other current liabilities 47,000 422,000
------------- -------------
Total current liabilities 30,624,000 23,679,000
Long term debt less current portion 6,126,000 7,797,000
Deferred income taxes 589,000 589,000
Notes payable to related parties 1,539,000 1,352,000
Minority interest 1,512,000 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) 251,000 (220,000)
Less: common stock in treasury (112,000) (112,000)
------------- -------------
Total stockholders' equity 6,972,000 6,501,000
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $47,362,000 $41,329,000
------------- -------------
------------- -------------
</TABLE>
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.
See accompanying notes to condensed consolidated financial statements which
are an integral part of these financial statements.
Page 3 of 12
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SPINNAKER INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED RESULTS OF INCOME - UNAUDITED
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------------------- --------------------------------
(unaudited) (unaudited)
1995 1994 1995 1994
--------------- -------------- ------------- -------------
<S> <C> <C> <C> <C>
Net sales $25,070,000 $4,613,000 $77,716,000 $8,288,000
Cost of sales (22,063,000) (3,825,000) (66,971,000) (6,096,000)
Depreciation and amortization (261,000) (59,000) (769,000) (130,000)
------------- ------------ ------------ -----------
Gross margin 2,746,000 729,000 9,976,000 2,062,000
Selling, general and administrative expense (2,467,000) (1,009,000) (7,473,000) (2,108,000)
Litigation settlement -- -- -- (125,000)
------------- ------------ ------------ -----------
Income (loss) from operations 279,000 (280,000) 2,503,000 (171,000)
Interest expense (649,000) (102,000) (1,942,000) (153,000)
Other income (expense)-Net (15,000) 23,000 13,000 104,000
------------- ------------ ------------ -----------
Income (loss) before income taxes
and minority interest (385,000) (359,000) 574,000 (220,000)
Income tax (provision) benefit 157,000 5,000 43,000 (19,000)
Minority interest 12,000 (26,000) (146,000) (26,000)
------------- ------------ ------------ -----------
Net income (loss) ($216,000) ($380,000) $471,000 ($265,000)
------------- ------------ ------------ -----------
------------- ------------ ------------ -----------
Weighted average shares and
common stock equivalents outstanding 2,232,022 1,810,504 2,209,705 1,810,504
Net income (loss) per share ($0.10) ($0.21) $0.21 ($0.15)
</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>
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------------
1995 1994
---------- ----------
<S> <C> <C>
Operating activities
Net income $471,000 ($265,000)
Adjustments to reconcile net income
to net cash used in operating activities:
Depreciation and amortization 769,000 130,000
Sales of short-term investments,net 4,000 1,985,000
Minority interest 146,000 26,000
Changes in operating assets and liabilities
Accounts receivable (1,348,000) (1,704,000)
Inventories (1,932,000) (510,000)
Prepaid expenses and other assets (1,104,000) (35,000)
Accounts payable and accrued liabilitie 3,636,000 2,629,000
---------- -----------
Net cash provided by (used in) operating activities 642,000 2,256,000
---------- -----------
Investing activities
Acquisition (total cost less debt assumed and
cash equivalents acquired):
Brown-Bridge Acquistion -- (30,073,000)
Purchases of plant and property (1,038,000) (163,000)
Deposits (2,000,000) --
---------- -----------
Net cash used in investing activities (3,038,000) (30,236,000)
---------- -----------
Financing activities
Issuance of long-term debt 28,000 23,892,000
Working capital revolver 2,651,000 322,000
Principal payments on long-term debt (898,000) (14,000)
Proceeds from notes payable 187,000 7,000
Purchase of minority interest (45,000) 1,314,000
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Net cash used in financing activities 1,923,000 25,521,000
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Decrease in cash and cash equivalents (473,000) (2,459,000)
Cash and cash equivalents at beginning of period 484,000 2,745,000
---------- -----------
Cash and cash equivalents at end of period $11,000 $286,000
---------- -----------
---------- -----------
</TABLE>
See accompanying notes to condensed consolidated financial statements which
are an integral part of these financial statements.
Page 5 of 12
<PAGE>
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. (80.1%
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.
In the third quarter of 1995, Spinnaker increased the inventory reserve and
allowance for doubtful accounts by $485,000 to properly reflect the value
of inventory and receivables of Brown-Bridge on September 1994, the date of
Spinnaker's acquisition of Brown-Bridge. The adjustment was accounted for
as a reallocation of purchase price, resulting in a corresponding increase
to the acquired value of property, plant and equipment.
The operating results of Brown-Bridge are included in the consolidated
statements of operations for the three and nine month periods ended
September 30, 1995. The following proforma information, which is based on
information currently available to the Registrant, 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 Nine Months Ended
September 30, 1994 September 30, 1994
------------------ ------------------
<S> <C> <C>
Sales and Revenues $23,796,000 $72,758,000
Net Income 22,000 726,000
Net Income Per Share $.01 $.33
</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 September 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.
Page 6 of 12
<PAGE>
3. Inventory values at September 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 September 30,
1995, and December 31, 1994.
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Finished goods $ 2,355,000 $ 1,920,000
Work-in-process 8,614,000 7,208,000
Raw materials and supplies 5,056,000 5,444,000
---------- ----------
Total $16,025,000 $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
September 30, 1995, Brown-Bridge and Entoleter had cash advances under
these revolving credit arrangements of $15.5 million and $.3 million,
respectively. Credit availability under these revolving credit
arrangements at September 30, 1995, was $3.2 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 September 30,
1995 and December 31, 1994:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Term loan maturing in 1999 secured
by the assets of Brown-Bridge at an $8,120,000 $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 998,000 1,014,000
Other 26,000 --
---------- -----------
9,144,000 10,014,000
Current Maturities (3,018,000) (2,217,000)
---------- -----------
$6,126,000 $ 7,797,000
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</TABLE>
Page 7 of 12
<PAGE>
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.
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. For the nine-month period ended September 30, 1994, income from operations
included 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 nine-month period ended September
30, 1995 has been reduced by $279,000 due to the reversal of the
Registrant'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 Registrant's continued
profitability, and in accordance with FASB 109, the Registrant reversed its
valuation allowance related to net deferred tax assets, as the Registrant
believes that the operations will generate future taxable income. Deferred
tax assets have been included in other current assets on the balance sheet.
8. On October 4, 1995, Central Products Acquisition Corp., a wholly-owned
subsidiary of the Registrant acquired from Alco Standard Corporation, the
assets and stock of Central Products Company ("CPC"). CPC manufactures and
markets a wide variety of carton sealing tapes and related equipment. The
cost of the acquisition was $80.0 million, of which the Registrant
deposited $2 million with Alco Standard on September 29, 1995. The
transaction will be accounted for as a purchase, and, accordingly, the
assets and liabilities will be recorded at their estimated fair market
value. CPC does not presently have audited financial statements. Unaudited
revenues for the twelve months ended 9/30/95 were approximately $120
million and profitability is in line with industry standards. For a more
detailed description of the purchase, please refer to the Registrant's
8-K filed on October 19, 1995. An amendment to Form 8-K is presently being
prepared and will include certain audited historical and proforma
financial information relative to the Registrant's acquisition of CPC
and is expected to be filed by December 18, 1995.
9. 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
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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 $25,070,000 for the three-month period ended September 30, 1995,
versus $4,613,000 for the comparable 1994 period, an increase of $20,457,000.
Brown-Bridge accounted for $20,113,000 of the net increase, with the balance
attributable to higher sales ($344,000) at Entoleter. For the first nine months
of 1995 revenues increased by $69,428,000 due primarily to the inclusion of
Brown-Bridge.
COST OF SALES
Cost of sales for the three and nine-month periods ended September 30, 1995,
increased by $18,238,000 and $60,875,000 respectively, when compared with the
corresponding periods of 1994. The increases were attributable to the inclusion
of Brown-Bridge. In addition, in the third quarter of 1995, Brown-Bridge
incurred certain start-up costs related to the addition of a new product line
under a long-term contract.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, General and Administrative expenses were $2,467,000 for the three-month
period ended September 30, 1995. The three-month period ended September 30,
1994, included $203,000 of non-recurring expenses related to acquisition efforts
prior to the management agreement with BFG and the management restructuring in
1994.
LITIGATION SETTLEMENT
The 1994 results include a $125,000 charge for the settlement of litigation and
related matters at Entoleter.
INTEREST EXPENSE
Interest expense for the three and nine-month periods ended September 30, 1995,
increased by $547,000 and $1,789,000 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 $612,000 for three months and $1,836,000 for nine
months).
Page 9 of 12
<PAGE>
INCOME TAXES
The 1995 income tax provision for the nine-month period ended September 30, 1995
has been reduced by $279,000 due to the reversal of the Registrant'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 Registrant's continued profitability, and in accordance with FASB
109, the Registrant reversed its valuation allowance related to net deferred tax
assets, as the Registrant believes that the operations will generate future
taxable income.
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 nine months
ended September 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 nine months
ended September 30, 1995, excluding sales of short-term investments, was
$642,000, an increase of $371,000 over the comparable 1994 period.
Net working capital at September 30, 1995 was $767,000 versus $4,647,000 at
December 31, 1994, a decrease of $3,880,000. Internally generated funds are
being used to finance the growth of the Registrant primarily through increased
capital investments.
At September 30, 1995, total debt of the Registrant was $26,514,000 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 $3.2 million at
September 30, 1995. (See Note 4 to Notes to Condensed Consolidated Financial
Statements.) Borrowings under these credit facilities totaled $15,831,000 at
September 30, 1995. Borrowings include $2 million for a deposit given to Alco
Standard Corporation in connection with the Registrant's acquisition of Central
Products Company. Reference is made to the Form 8-K filed by Registrant on
October 19, 1995, which is incorporated herein by reference, for a description
of the purchase of CPC. Agreements with its lenders imposes restrictions on
the ability of Brown-Bridge and Entoleter to pay dividends to the Registrant.
The Registrant has engaged an investment banking firm to assist it in exploring
various financing alternatives in order to provide additional capital to repay
$25 million in subordinated notes issues by the Registrant to the Seller in
connection with the CPC acquisition as referenced by the 8-K and 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 substantial equity securities of the Registrant. As of the
date of this filing, the Registrant has not entered into any
Page 10 of 12
<PAGE>
definitive agreements or arrangements regarding the terms of any financing
and there can be no assurance that such financing will be available on terms
satisfactory to the Registrant.
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.
ITEM 6.- EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS:
27. Financial Data Schedule
(b) REPORTS ON FORM 8-K
(I) A Form 8-K dated October 4, 1995, which under ITEM 2 -
ACQUISITION OR DISPOSITION OF ASSETS reported the acquisition by
a subsidiary of Registrant of the assets and stock of Central
Products Company from Alco Standard was filed on October 19,
1995. The monthly guarantee fee to be paid by the Registrant
with respect to the Conversion Notes as described in the third
sentence of the next to last paragraph in ITEM 2 - should be
0.5% rather than the .05% set forth. An amendment containing
financial statements is expected to be filed by December 18,
1995.
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/ James W. Toman, Controller
-----------------------------------------
James W. Toman, Controller
Date: November 13, 1995
Page 12 of 12
<PAGE>
INDEX TO EXHIBITS
Exh. No. Description
- -------- -----------
27 Financial Data Schedule
<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
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JUL-01-1995
<PERIOD-END> SEP-30-1995
<CASH> 11
<SECURITIES> 0
<RECEIVABLES> 14,061
<ALLOWANCES> 203
<INVENTORY> 16,025
<CURRENT-ASSETS> 31,391
<PP&E> 16,796
<DEPRECIATION> (3,622)
<TOTAL-ASSETS> 47,362
<CURRENT-LIABILITIES> 30,624
<BONDS> 0
<COMMON> 3,124
0
0
<OTHER-SE> 3,848
<TOTAL-LIABILITY-AND-EQUITY> 47,362
<SALES> 25,070
<TOTAL-REVENUES> 25,070
<CGS> 22,063
<TOTAL-COSTS> 24,791
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 649
<INCOME-PRETAX> (385)
<INCOME-TAX> (157)
<INCOME-CONTINUING> (228)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (216)
<EPS-PRIMARY> (0.10)
<EPS-DILUTED> (0.10)
</TABLE>
