<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 March 31, 1996
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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.
------------------------------------------------------
(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
- --------------------------------------------- -------------------------
(Address of principal executive offices) (Zip Code)
(214) 855-0322
----------------------------------------------------
(Registrant's telephone number, including area code)
N/A
-----------------------------------------------------
(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 2,903,170 shares
-------------------------- ----------------
Class Outstanding at April 30, 1996
Page 1 of 12
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SPINNAKER INDUSTRIES, INC.
INDEX
- ---------------------------------------------------------------------------
PAGE
NUMBER
------
PART I FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (Unaudited):
Condensed Consolidated Balance Sheets as of March 31,
1996 and December 31, 1995 3
Condensed Consolidated Statements of Operations for the
Three Months Ended March 31, 1996 and 1995 4
Condensed Consolidated Statements of Cash Flows
for the Three Months Ended March 31, 1996 and 1995 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
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>
March 31, December 31,
1996 1995
---- ----
(Unaudited) (Note)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 2,305,000 $ 3,048,000
Accounts receivable (less allowance 26,545,000 24,789,000
of $972,000 and $1,234,000)
Inventories (Net) 28,399,000 27,041,000
Prepaid expenses and other 2,468,000 2,318,000
Deferred income taxes 1,234,000 1,234,000
------------ ------------
Total current assets 60,951,000 58,430,000
Property plant and equipment
Land 598,000 583,000
Buildings and improvements 10,384,000 9,632,000
Machinery and equipment 45,030,000 44,485,000
Accumulated depreciation (5,619,000) (4,639,000)
------------ ------------
50,393,000 50,061,000
Goodwill 25,613,000 25,793,000
Other assets 4,112,000 3,300,000
------------ ------------
TOTAL ASSETS $141,069,000 $137,584,000
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 16,950,000 $ 12,699,000
Accrued liabilities 7,371,000 6,534,000
Current portion of long term debt 3,559,000 3,666,000
Working capital revolver 26,167,000 27,149,000
Other current liabilities 407,000 394,000
------------ ------------
Total current liabilities 54,454,000 50,442,000
Long term debt and capital lease, less
current portion 68,790,000 69,642,000
Deferred income taxes 7,164,000 7,164,000
Notes payable to related parties 1,618,000 1,583,000
Minority interest 1,792,000 1,691,000
Stockholders' equity
Common stock 3,124,000 3,124,000
Additional paid in capital 3,709,000 3,709,000
Retained earnings 530,000 341,000
Less: common stock in treasury (112,000) (112,000)
------------ ------------
Total stockholders' equity 7,251,000 7,062,000
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $141,069,000 $137,584,000
------------ ------------
------------ ------------
</TABLE>
NOTE: The balance sheet at December 31, 1995 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
<PAGE>
SPINNAKER INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED RESULTS OF INCOME - UNAUDITED
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------
(UNAUDITED)
1996 1995
---- ----
<S> <C> <C>
Net sales $ 62,003,000 $ 25,961,000
Cost of sales (53,211,000) (22,360,000)
Gross margin 8,792,000 3,601,000
Selling, general and administrative
expense (5,569,000) (2,499,000)
------------ ------------
Income from operations 3,223,000 1,102,000
Interest expense (2,323,000) (646,000)
Guarantee fee (375,000) -
Other income (expense)-Net (33,000) 33,000
------------ ------------
Income before income taxes and
minority interest 492,000 489,000
Income tax provision (202,000) (187,000)
Minority interest (101,000) (74,000)
------------ ------------
Net income $ 189,000 $ 228,000
------------ ------------
------------ ------------
Weighted average shares and common stock
equivalents outstanding 3,348,000 3,224,000
Net income per share $0.06 $0.07
</TABLE>
See accompanying notes to condensed consolidated financial statements which
are an integral part of these financial statements.
Page 4 of 12
<PAGE>
SPINNAKER INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-----------------------
1996 1995
---- ----
<S> <C> <C>
Operating activities $ 189,000 $ 228,000
Net income
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 1,022,000 256,000
Sales of short-term investments, net - 4,000
Minority interest 101,000 74,000
Amortization of goodwill 240,000 -
Amortization of deferred financing costs 118,000 -
Accrued interest on notes payable to related parties 35,000 61,000
Changes in operating assets and liabilities
Accounts receivable (1,756,000) (29,000)
Inventories (1,358,000) (1,381,000)
Prepaid expenses and other assets (150,000) (140,000)
Accounts payable and accrued liabilities 5,088,000 3,471,000
Other current liabilities 13,000 (290,000)
----------- -----------
Net cash provided by operating activities 3,542,000 2,254,000
----------- -----------
Investing activities
Purchases of plant and property (1,312,000) (519,000)
Additions to other assets (1,032,000) -
----------- -----------
Net cash used in investing activities (2,344,000) (519,000)
----------- -----------
Financing activities
Working capital revolver (982,000) (1,885,000)
Principal payments on long-term debt (1,058,000) (5,000)
Long term capital leases 99,000 0
Purchase of minority interest - (41,000)
----------- -----------
Net cash used in financing activities (1,941,000) (1,931,000)
----------- -----------
Decrease in cash and cash equivalents (743,000) (196,000)
Cash and cash equivalents at beginning of period 3,048,000 484,000
----------- -----------
Cash and cash equivalents at end of period $ 2,305,000 $ 288,000
----------- -----------
----------- -----------
</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. and its operating subsidiaries, Central
Products Company (100% owned), Brown-Bridge Industries, Inc. (80.1%
owned) and Entoleter, Inc. (100.0% owned) (collectively the
"Registrant"). Effective October 4, 1995, Central Products Acquisition
Corporation entered into a Stock and Asset Purchase Agreement with
Unisource Worldwide, Inc. and Alco Standard Corporation ("Alco"), which
is Unisource's parent. Central Products Acquisition Corporation,
subsequently renamed Central Products Company, is a wholly-owned
subsidiary of Spinnaker Industries, Inc. and was formed to acquire
Central Products Company ("CPC"), which manufactures and sells
water-activated and pressure-sensitive carton sealing tapes. The
purchase price under the agreement was approximately $80 million.
The acquisition was accounted for as a purchase with the purchase price
(subject to adjustment upon finalization of certain acquisition costs)
allocated to the assets acquired and the liabilities assumed.
The operating results of Central Products Company are included in the
consolidated statements of operations for the first-quarter ended March
31, 1996. The following pro forma 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 Central
Products Company had been made at the beginning of 1995.
FIRST QUARTER ENDED
MARCH 31, 1995
--------------
Sales and Revenues $56,971,000
Net Income $ 674,000
Net Income Per Share $ 0.21
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
March 31, 1996, are not necessarily indicative of the results that may
be expected for the year ended December 31, 1996. 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, 1995.
Page 6 of 12
<PAGE>
3. Of inventory values at March 31, 1996, and December 31, 1995, 48% are
valued using the last in, first out method (LIFO), 47% are valued using
a specific identification method with the remaining inventories valued
using the first-in, first-out method (FIFO). Inventories consist of the
following at March 31, 1996, and December 31, 1995:
1996 1995
---- ----
Finished goods $ 9,267,000 $ 8,291,000
Work-in-process 9,679,000 9,459,000
Raw materials 9,453,000 9,291,000
----------- -----------
Total $28,399,000 $27,041,000
----------- -----------
----------- -----------
4. The Registrant maintains short-term lines of credit with banks for
working capital needs at each subsidiary that aggregate $45.5 million.
The Registrant had cash advances of approximately $26.2 million
outstanding under the lines of credit as of March 31, 1996. Credit
availability under these lines of credit at March 31, 1996 was $11.7
million. At March 31, 1996, the interest rates in effect ranged from
9.25% to 10.75%. Credit availability under these lines of credit is
subject to certain variables, such as the amount of inventory and
receivables eligible to be included in the borrowing base.
Following is a summary of long term debt of Registrant at March 31,
1996, and December 31, 1995:
1996 1995
----- ----
Spinnaker subordinated note is comprised of a $25,000,000 $25,000,000
$15 million subordinated convertible note and a
$10 million subordinated convertible note, both
due to Alco. ($15 million note is carried at an
8% interest rate, $10 million note carried at an
11% interest rate)
Brown-Bridge Term Loan - secured by the assets 6,013,000 6,691,000
of Brown-Bridge at an interest rate of prime plus
1.25%, payable over five years maturing in 1999.
Entoleter mortgage note - payable on demand 987,000 992,000
in 1997 and secured by certain real property of
Entoleter.
Central Products Term Loan A - held by Central 19,250,000 19,625,000
Products at an interest rate 9.5%, principal payable
quarterly ranging from $375,000 to $1,500,000
maturing in September 2000.
Page 7 of 12
<PAGE>
Central Products Term Loan B - held at an 16,000,000 16,000,000
interest rate of 10%, principal payable in quarterly
installments of $2,000,000 from December
2000 to September 2002.
Central Products subordinated promissory note 5,000,000 5,000,000
due to Alco, interest free to September 1996, and
at an interest rate of 8% thereafter, principal pay-
ment of $1,000,000 due December 1998 and
$4,000,000 due December 1999 (unless senior debt
is still outstanding, then $4,000,000 due December
2000)
----------- -----------
Sub-Total $72,250,000 $73,308,000
Less: Current Maturities 3,559,000 3,666,000
----------- -----------
Total Long Term Debt $68,691,000 $69,642,000
Long Term Capital Lease relating
to Brown Bridge Industries 99,000 -0-
----------- -----------
Total Long Term Debt and Capital Lease $68,790,000 $69,642,000
----------- -----------
----------- -----------
On April 5, 1996, the Registrant refinanced the $25,000,000 notes due to
Alco and in connection with this transaction borrowed $8,500,000 from a
bank. The outstanding principal of this bank loan bears interest at an
adjustable rate (approximately 10.4% at April 5, 1996) and converts into a
five-year term loan if it is not paid in full on the December 1996 due date.
Concurrently with the closing of the bridge loan, the Registrant paid Alco
$7.5 million. The unpaid balance of the original $25 million subordinated
notes, together with the balance due on a warehouse facility newly acquired
from Alco was restructured into a series of new convertible subordinated
notes aggregating $20.25 million ("Convertible Notes"). In early May 1996,
$6 million of the Convertible Notes was converted into common stock of
the Registrant at a conversion price of approximately $35 per share.
5. The Directors of the Registrant declared a 3-for-2 stock split of
the Registrant's common shares, effective as of December 29, 1995. 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.
Page 8 of 12
<PAGE>
ITEM-2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
ACQUISITIONS
Effective October 4, 1995 Central Products Acquisition Corporation, a
wholly-owned subsidiary of the Registrant, entered into a Stock and Purchase
Agreement with Alco Standard Corporation to acquire CPC, which manufactures
and sells water-activated and pressure sensitive carton sealing tapes. (See
Note 1 to Notes to Condensed Consolidated Financial Statements).
SALES
Net sales were $62,003,000 for the three month period ended March 31, 1996,
versus $25,961,000 for the comparable 1995 period, an increase of
$36,042,000. The acquisition of CPC accounted for $31,977,000 of the
increase with the balance attributable to Brown-Bridge.
COST OF SALES
Cost of sales for the three month period ended March 31, 1996, increased by
$30,851,000 compared with the corresponding period in of 1994. The addition
of CPC accounted for approximately $27,100,000 of the net increase. The
remainder of the increase is attributable primarily to direct costs
associated with increased sales volume at Brown-Bridge. Gross margins for
Brown-Bridge for the three month period ended March 31, 1996, did not vary
materially from the comparable 1995 period. However, due to high volume from
new business, particularly for stock to produce pressure sensitive stamps,
Brown-Bridge has been unable internally to silicon-coat all of the pressure
sensitive liner required to support the additional business. This forces the
company to purchase coated liner material and pay a premium price compared to
the cost of manufacturing it in-house. These cost premiums negatively
affected margins by approximately $250,000 for the three months ended March 31,
1996. Brown-Bridge is in the process of adding a flexible silicon and
adhesive coater which will allow it to coat all of its liner requirements
internally. The new coater is scheduled to become operational in the fourth
quarter of 1996 at which time all liner will be silicon coated in-house,
immediately eliminating the outsourcing penalties.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses increased by $3,070,000 during
the three months ended March 31, 1996, compared to the corresponding 1995
period. Approximately $2,800,000 of the increase is attributable to the
acquisition of CPC with the remainder attributable to Brown-Bridge and
Entoleter.
Page 9 of 12
<PAGE>
INTEREST EXPENSE
Interest expense for the three-month period ended March 31, 1996 increased by
$1,677,000 compared with corresponding 1995 period. The increase is
attributable to the additional debt incurred in the acquisition of CPC,
$1,753,000, partially reduced by lower interest expense at Brown Bridge of
$79,000 due to a reduction in debt balances in the first quarter of 1996.
GUARANTEE FEE
As part of the acquisition of CPC, the Registrant's parent (Lynch
Corporation) agreed to guarantee a $25 million note to Alco at a rate of 0.5%
of the principal amount per month ($125,000). This guarantee ended on March
31, 1996, upon the completion of the refinancing of the Alco notes.
INCOME TAXES
The 1996 income tax provision provides for federal and state income taxes at
an effective rate of 41%.
FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
The Registrant generated $3,542,000 in net cash provided by operating
activities for the three months ended March 31, 1996, an increase of
$1,288,000 over the comparable 1995 period. Net working capital at March 31,
1996 was $6,497,000 versus $7,988,000 at December 31, 1995, a decrease of
$1,491,000.
At March 31, 1996, total debt of the Registrant was $100,134,000 versus
$102,040,000 at December 31, 1995, a decrease of $1,906,000. The Registrant's
subsidiaries have credit facilities available for future use, including
revolving credit agreements with maximum availability of $45,500,000 and
current availability of $11,700,000 at March 31, 1996 (See Note 4 to Condensed
Consolidated Financial Statements). Borrowings under these credit facilities
totaled $26,167,000 at March 31, 1996. Interest on all outstanding borrowings
bear interest at variable rates related to the prime interest rate or the
lender's base rate. At March 31, 1996, the interest rate in effect ranged from
8% to 10.75%. Credit availability under the lines of credit are subject to
certain variables, such as the amount of inventory and receivables eligible to
be included in the borrowing base.
In connection with the acquisition of Central, the Registrant and Central
issued subordinated notes to the seller in the amounts of $25 million and $5
million, respectively. On April 5, 1996, the Registrant refinanced these
notes and in connection with this transaction borrowed $8,500,000 from a
bank. The outstanding principal of this bank loan bears interest at an
adjustable rate (approximately 10.4% at April 5, 1996) and converts into a
five-year term loan if it is not paid in full on the December 1996 due date.
Concurrently with the closing of the bridge loan, the Registrant paid Alco
$7.5 million, of which $5.5 million was a principal payment on the $25
million subordinated notes, approximately $1 million related to accrued
interest, and $1 million was applied toward the purchase price of a warehouse
facility. The unpaid balance of the original $25 million subordinated notes,
together with the balance due on the warehouse facility was restructured into
a series of new convertible
Page 10 of 12
<PAGE>
subordinated notes aggregating $20.25 million ("Convertible Notes"). In
early May, 1996, $6 million of the Convertible Notes was converted into
common stock of the Registrant at a conversion price of approximately $35 per
share.
During 1996, the Registrant intends to pursue actively various alternatives
to refinance the indebtedness of the Registrant and its subsidiaries in order
to pay off the $8,500,000 loan before it converts into a term loan, to
simplify the Registrant's capital structure, to remove restrictions imposed
by various lenders and to reduce the administrative burdens resulting from
having multiple lenders.
The Registrant has identified possible environmental issues 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.
PART II - OTHER INFORMATION
ITEM 5 - OTHER INFORMATION
The Registrant is considering acquiring the approximately 19.9% minority
interest in its Brown-Bridge Industries subsidiary in exchange for its shares
of common stock. The terms of any such exchange have not been agreed to and
there can be no assurance that this transaction will ultimately be
consummated.
The Registrant's Parent, Lynch Corporation, intends to request that the
Registrant's Board of Directors give the 90-day notice of termination under
Spinnaker's Management Agreement with Boyle, Fleming, George & Co., Inc.,
with the intent of having Messrs. Boyle and Fleming, Chairman and Chief
Executive Officer and President, respectively, enter into employment
arrangements with the Registrant.
ITEM 6. - EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
11. Statement of Computation of Per Share Earnings.
(B) REPORTS ON FORM 8-K
During the first quarter of 1996, the Registrant filed five amendments
to the Current Report on Form 8-K, dated October 18, 1995. Current Report on
Form 8-K/A(2), dated January 4, 1996, Current Report on Form 8-K/A(3), dated
February 2, 1996, Current Report on Form 8-K/A(4), dated March 1, 1996,
Current Report on Form 8-K/A(5), dated March 15, 1996, and Current Report on
Form 8-K/A(6), dated April 19, 1996, all disclosed in Item 2 and Item 5 the
status of the Registrant's financial obligation to Alco Standard Corporation,
incurred in connection with the acquisition of Central Products Company.
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
--------------------------
James W. Toman, Controller
Date: May 15, 1996
Page 12 of 12
<PAGE>
EXHIBIT INDEX
SEQUENTIAL
EXHIBIT PAGE NO.
11. Statement of Computation of Per Share Earnings 14
<PAGE>
Exhibit 11 - Computation of Per Share Earnings
(Amounts in 000's except for share amounts)
THREE MONTHS ENDED
MARCH 31
1996 1995
---- ----
Primary
Average shares outstanding 2,716 2,716
Net effect of dilutive stock options --
based on the treasury stock method
using average market price 632 508
----- -----
Total 3,348 3,224
----- -----
----- -----
Net Income $ 189 $ 228
----- -----
----- -----
Per Share Amount $0.06 $0.07
----- -----
----- -----
Fully diluted
Average shares outstanding 2,716 2,716
Net effect of dilutive stock options --
based on the treasury stock method
using the period-end market price, if
higher than average market price 642 540
----- -----
Total 3,358 3,256
----- -----
----- -----
Net Income $ 189 $ 228
----- -----
----- -----
Per share amount $0.06 $0.07
----- -----
----- -----
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 2,305
<SECURITIES> 0
<RECEIVABLES> 27,517
<ALLOWANCES> 972
<INVENTORY> 28,399
<CURRENT-ASSETS> 60,951
<PP&E> 56,012
<DEPRECIATION> 5,619
<TOTAL-ASSETS> 141,069
<CURRENT-LIABILITIES> 54,454
<BONDS> 0
0
0
<COMMON> 3,124
<OTHER-SE> 4,127
<TOTAL-LIABILITY-AND-EQUITY> 141,069
<SALES> 62,003
<TOTAL-REVENUES> 62,003
<CGS> 53,211
<TOTAL-COSTS> 5,569
<OTHER-EXPENSES> 408
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,323
<INCOME-PRETAX> 492
<INCOME-TAX> 202
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 189
<EPS-PRIMARY> 0.06
<EPS-DILUTED> 0.06
</TABLE>
