<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, 1997
Commission file number 2-66564
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
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(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 by 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 3,084,211 shares
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Class Outstanding at March 31, 1997
Class A Common Stock, No Par Value 3,074,598 shares
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Class Outstanding at March 31, 1997
Page 1 of 14
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SPINNAKER INDUSTRIES, INC.
INDEX
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PAGE
NUMBER
------
PART I FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of
March 31, 1997 and December 31, 1996 3
Condensed Consolidated Statements of Operations
for the Three Months Ended March 31, 1997 and 1996 4
Condensed Consolidated Statements of Cash Flows
for the Three Months Ended March 31, 1997 and 1996 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 10
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Page 2 of 14
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PART I - FINANCIAL INFORMATION
Item 1. - FINANCIAL STATEMENTS
SPINNAKER INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, December 31,
1997 1996
------------ ------------
(Unaudited) (Note)
(In thousands)
ASSETS
Current assets:
Cash and cash equivalents $ 8,185 $ 9,699
Accounts receivable, net 25,780 21,995
Inventories, net 31,096 32,638
Prepaid expenses and other 2,244 2,266
Deferred income taxes 1,590 1,590
--------- ---------
Total current assets 68,895 68,188
Property plant and equipment
Land 583 583
Buildings and improvements 13,171 12,606
Machinery and equipment 54,191 53,261
Accumulated depreciation (10,465) (9,155)
--------- ---------
57,480 57,295
Goodwill 24,781 25,062
Other assets 6,648 6,631
--------- ---------
TOTAL ASSETS $ 157,804 $ 157,176
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 13,550 $ 13,356
Accrued liabilities 5,974 7,524
Current portion of long term debt 1,020 1,049
Working capital revolver 194 686
Other current liabilities 5,530 2,301
--------- ---------
Total current liabilities 26,268 24,916
Long term debt, less current portion 115,117 115,113
Deferred income taxes 5,911 5,911
Stockholders' equity
Common stock 3,124 3,124
Additional paid in capital 10,631 10,631
Retained earnings (deficit) (2,855) (2,127)
Minimum pension liability (280) (280)
Less: treasury stock (112) (112)
--------- ---------
Total stockholders' equity 10,508 11,236
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 157,804 $ 157,176
========= =========
NOTE: The balance sheet at December 31, 1996 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 14
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SPINNAKER INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED RESULTS OF OPERATIONS
Three Months Ended
(In thousands) March 31,
------------------------
(unaudited)
1997 1996
--------- ---------
Net sales $ 57,153 $ 62,003
Cost of sales (49,821) (53,211)
--------- ---------
Gross margin 7,332 8,792
Selling, general and administrative expense (5,306) (5,554)
--------- ---------
Income from operations 2,026 3,238
Interest expense (3,281) (2,341)
Guarantee fee -- (375)
Other income (expense)-net 16 (30)
--------- ---------
Income (loss) before income taxes
and minority interest (1,239) 492
Income tax provision (benefit) (511) 202
Minority interest -- (101)
--------- ---------
Net income (loss) $ (728) $ 189
========= =========
Weighted average shares and
common stock equivalents outstanding 6,159 6,696
Net income (loss) per share $ (0.12) $ 0.03
See accompanying notes to condensed consolidated financial statements which are
an integral part of these financial statements.
Page 4 of 14
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SPINNAKER INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
Three Months Ended
March 31,
------------------------
(unaudited)
(In thousands) 1997 1996
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Operating activities
Net income (loss) $ (728) $ 189
Adjustments to reconcile net income
to net cash used in operating activities:
Depreciation 1,310 1,022
Amortization of goodwill and deferred
financing costs 374 358
Minority interest -- 101
Accrued interest on notes payable to related parties -- 35
Changes in operating assets and liabilities
Accounts receivable (3,785) (1,756)
Inventories 1,542 (1,358)
Prepaid expenses and other assets 22 (150)
Accounts payable, accrued liabilities, and
other current liabilities 1,873 5,101
--------- ---------
Net cash provided by operating activities 608 3,542
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Investing activities
Purchase of property, plant and equipment (1,495) (1,312)
Additions to other assets (110) (1,032)
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Net cash used in investing activities (1,605) (2,344)
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Financing activities
Payments on working capital revolvers, net (492) (982)
Principal payments on long term debt and leases (25) (1,058)
Other 0 99
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Net cash used in financing activities (517) (1,941)
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Decrease in cash and cash equivalents (1,514) (743)
Cash and cash equivalents at beginning of period 9,699 3,048
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Cash and cash equivalents at end of period $ 8,185 $ 2,305
========= =========
See accompanying notes to condensed consolidated financial statements which are
an integral part of these financial statements.
Page 5 of 14
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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. and its wholly-owned subsidiaries, Central
Products Company, Brown-Bridge Industries, Inc. and Entoleter, Inc.
(collectively the "Registrant"). All significant intercompany accounts and
transactions have been eliminated in consolidation.
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, 1997, are not necessarily indicative of the
results that may be expected for the year ended December 31, 1997. 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, 1996.
3. In October 1996, Company acquired all of the approximately 25% minority
interest in its Brown-Bridge Industries, Inc. subsidiary held by such
subsidiary's other shareholders. The terms of the acquisition involved
a cash payment of approximately $2.3 million and the issuance of 9,613
shares of Spinnaker's Common Stock. As additional consideration for the
shares of capital stock of Brown-Bridge, the minority shareholders received
the right to a contingent payment, which is exerciseable at any time during
the period beginning October 1, 1998 and ending September 30, 2000.
4. Of inventory values at March 31, 1997, and December 31, 1996, approximately
50% and 47%, respectively, are valued using the last in, first out method
(LIFO), 45% and 48%, respectively, 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, 1997, and December 31, 1996:
1997 1996
---- ----
(in thousands)
Finished goods $14,150 $10,351
Work-in-process 2,927 3,518
Raw materials 14,019 18,769
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TOTAL $31,096 $32,638
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Page 6 of 14
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5. On October 23, 1996, the Registrant issued $115,000,000 of 10 3/4% Senior
Secured Notes ("Notes") due 2006. The Notes were issued in a private
placement under Rule 144A and subsequently exchanged for notes with similar
terms that were registered under the Securities Act of 1933 in February
1997. The proceeds from the private placement of the Notes were used to
retire the Registrant's outstanding term and revolver obligations described
below, except the $963,000 mortgage note at Entoleter, Inc. and various
capital lease obligations.
Following is a summary of long term debt of Registrant at March 31, 1997,
and December 31, 1996:
1997 1996
---- ----
(in thousands)
10 3/4% Senior Secured Notes, due 2006 with interest
payable semi-annually each April 15 and October 15 .... $115,000 $115,000
9 1/4% mortgage note from bank, payable on demand
July 1, 1997. Secured by certain property of Entoleter. 963 969
Capital lease obligations ............................. 174 193
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116,137 116,162
Less current maturities ............................... (1,020) (1,049)
-------- --------
$115,117 $115,113
======== ========
6. In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, EARNINGS PER SHARE, which is required to be adopted
on December 31, 1997. At that time, the Company will be required to change
the method currently used to compute earnings per share and to restate all
prior periods. Under the new requirements for calculating primary earnings
per share, the dilutive effect of stock options will be excluded. The
impact of Statement 128 on the calculation of primary and fully diluted
earnings per share for the first quarters ended March 31, 1997 and 1996
is not expected to be material.
7. 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.
8. Certain reclassifications have been made to conform prior period data to
the current year's presentation.
Page 7 of 14
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ITEM-2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
NET SALES
Net sales were $57,153,000 for the three-month period ended March 31, 1997,
versus $62,003,000 for the comparable 1996 period. Consolidated unit volumes
increased and demand remained strong for major products, the change in sales is
attributable to differences in product revenue mix between periods.
COST OF SALES
Cost of sales, as a percentage of net sales, for the three-month period ended
March 31, 1997 was 87%, which is comparable to 86% in the corresponding
period in 1996. The current period's gross profit was decreased as a result
of the change in product revenue mix and certain manufacturing variances at
Central Products. The manufacturing variances, although continuing to improve
from late 1996 levels, have impacted gross profit percentages.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses ("SG&A") for the three months
ended March 31, 1997 decreased approximately 4.5% or $248,000 from the
comparable 1996 period. The decrease is primarily attributable to certain
actions taken in 1996 to reorganize the administration and management
organizations at Brown-Bridge, the benefits of which were offset, in part, by
higher consolidated depreciation and amortization expenses.
INTEREST EXPENSE
Interest expense for the three-month period ended March 31, 1997 increased by
$940,000 when compared with the corresponding period for 1996. The increase is
primarily attributable to higher average outstanding debt obligations and
related interest rates during the period, and amortization of deferred financing
costs associated with the Senior Notes (see Note 5 to Condensed Consolidated
Financial Statements).
GUARANTEE FEE
As part of the acquisition of Central Products, the Registrant's parent, (Lynch
Corporation) agreed to guarantee a $25,000,000 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 1997 and 1996 estimated effective income tax rate for federal and state
income taxes is approximately 41%.
Page 8 of 14
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FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
The Registrant generated $608,000 in net cash from operating activities during
the three months ended March 31, 1997, compared to $3,542,000 in net cash
generation in the corresponding period ended in 1996. The change in cash from
operations is attributable to higher net income in 1996 and the increase in
accounts payable and accrued liabilities in the 1996 quarter caused by the
timing of cash payments.
Earnings before interest, taxes, depreciation and amortization ("EBITDA") for
the three months ended March 31, 1997 was $3,639,000 compared to $4,600,000
in the comparable 1996 period. The fluctuation is primarily attributable to
adverse manufacturing variances at Central Products.
Net working capital at March 31, 1997 was $42,627,000 versus $43,272,000 at
December 31, 1996, a change of $645,000. The change in working capital is
primarily attributable to accrued interest on the $115,000,000 Senior Notes,
offset in part by the timing of payments for other obligations.
Cash used in investing activities was for capital improvements at Central
Products and Brown-Bridge, principally for the purchase of manufacturing
equipment and management information systems. Cash used in financing
activities was related to the decrease in working capital borrowings and
payments on capital lease obligations.
The Registrant also maintains short-term lines of credit with banks for
working capital needs at each subsidiary that aggregate $40 million. The
Registrant had cash advances of approximately $194,000 outstanding under the
lines of credit and available borrowings of approximately $35.6 million as of
March 31, 1997. The Registrant is charged an unused line of credit fee every
month based on an annual rate of 0.375%. Interest on all outstanding
borrowings bears interest at variable rates related to the prime interest
rate or the lenders base rate. At March 31, 1997, the interest rate in effect
was 10.0%. At December 31, 1996, the Registrant had cash advances outstanding
of approximately $686,000.
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. These lines are secured by the operating assets of the
Registrant's subsidiaries.
The Registrant is in discussions with potential underwriters concerning the
possible offering of Registrant common stock, although there can be no
assurance that an offering will be accomplished on terms satisfactory to the
Registrant.
Page 9 of 14
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PART II - OTHER INFORMATION
Item 6 - EXHIBITS AND REPORTS ON FORM 8-K
(A) Exhibits
11. Statement of Computation of Per Share Earnings.
27. Financial Data Schedule
(B) Reports on Form 8-K
None
Page 10 of 14
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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/ Craig J. Jennings
---------------------------
Vice President, Controller and Treasurer
Date: May 15, 1997
Page 11 of 14
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EXHIBIT INDEX
Sequential
Exhibit Page No.
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11. Statement of Computation of Per Share Earnings 13
27. Financial Data Schedule 14
Page 12 of 14
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Exhibit 11 - Computation of Per Share Earnings
(in thousands, except per share amounts)
Three Months Ended
March 31
------------------
1997 1996
---- ----
Primary
Average shares outstanding 6,159 5,432
Net effect of dilutive stock options --
based on the treasury stock method
using average market price -0- 1,264
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Total 6,159 6,696
======= ======
Net Income (loss) $ (728) $ 189
======= ======
Per Share Amount $ (0.12) $ 0.03
======= ======
Fully diluted
Average shares outstanding 6,159 5,432
Net effect of dilutive stock options --
based on the treasury stock method
using the period-end market price, if
higher than average market price -0- 1,284
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Total 6,159 6,716
======= ======
Net Income (loss) $ (728) $ 189
======= ======
Per share amount $ (0.12) $ 0.03
======= ======
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 8,185
<SECURITIES> 0
<RECEIVABLES> 26,838
<ALLOWANCES> 1,058
<INVENTORY> 31,096
<CURRENT-ASSETS> 68,895
<PP&E> 67,945
<DEPRECIATION> 10,465
<TOTAL-ASSETS> 157,804
<CURRENT-LIABILITIES> 26,268
<BONDS> 115,117
0
0
<COMMON> 3,124
<OTHER-SE> 7,384
<TOTAL-LIABILITY-AND-EQUITY> 157,804
<SALES> 57,153
<TOTAL-REVENUES> 57,153
<CGS> 49,821
<TOTAL-COSTS> 49,821
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,281
<INCOME-PRETAX> (1,239)
<INCOME-TAX> (511)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (728)
<EPS-PRIMARY> (0.12)
<EPS-DILUTED> (0.12)
</TABLE>