<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 June 30, 1997
---------------------------------------------
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.
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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
- ------------------------------------------ ----------------------------
Class Outstanding at June 30, 1997
Class A Common Stock, No Par Value 3,074,598 shares
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Class Outstanding at June 30, 1997
Page 1 of 15
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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
June 30, 1997 and December 31, 1996 3
Condensed Consolidated Statements of Operations
for the Three Months and Six Months Ended
June 30, 1997 and 1996 4
Condensed Consolidated Statements of Cash Flows
for the Six Months Ended June 30, 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 12
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Page 2 of 15
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PART I. - FINANCIAL INFORMATION
Item 1. - CONSOLIDATED FINANCIAL STATEMENTS
SPINNAKER INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, December 31,
1997 1996
----------- ------------
(Unaudited) (Note)
(In thousands)
ASSETS
Current assets:
Cash and cash equivalents $ 5,627 $ 9,699
Accounts receivable, net 25,651 21,995
Inventories, net 32,998 32,638
Prepaid expenses and other 2,398 2,266
Deferred income taxes 1,590 1,590
-------- --------
Total current assets 68,264 68,188
Property plant and equipment:
Land 583 583
Buildings and improvements 13,058 12,606
Machinery and equipment 56,180 53,261
Accumulated depreciation (11,842) (9,155)
-------- --------
57,979 57,295
Goodwill, net 24,517 25,062
Other assets 6,459 6,631
-------- --------
TOTAL ASSETS $157,219 $157,176
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 14,563 $ 13,356
Accrued liabilities 6,310 7,524
Current portion of long term debt 993 1,049
Working capital revolver 759 686
Other current liabilities 2,725 2,301
-------- --------
Total current liabilities 25,350 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) (2,522) (2,127)
Minimum pension liability (280) (280)
Less: treasury stock (112) (112)
-------- --------
Total stockholders' equity 10,841 11,236
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $157,219 $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 15
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SPINNAKER INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS - UNAUDITED
<TABLE>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- ---------------------
1997 1996 1997 1996
------- ------- -------- --------
<S> <C> <C> <C> <C>
Net sales $60,243 $60,241 $117,396 $122,244
Cost of sales 50,601 51,688 100,422 104,899
------- ------- -------- --------
Gross margin 9,642 8,553 16,974 17,345
Selling, general and administrative expense 5,802 5,455 11,108 11,034
------- ------- -------- --------
Income from operations 3,840 3,098 5,866 6,311
Interest expense 3,278 2,353 6,559 4,694
Guarantee fee - - - 375
Other income (expense) - net 4 (34) 20 (39)
------- ------- -------- --------
Income (loss) before income taxes
and minority interest 566 711 (673) 1,203
Income tax provision (benefit) 233 291 (278) 493
Minority interest expense - 89 - 190
------- ------- -------- --------
Net income (loss) $ 333 $ 331 $ (395) $ 520
------- ------- -------- --------
------- ------- -------- --------
Weighted average shares and
common stock equivalents outstanding 7,143 7,032 6,159 6,883
Net income (loss) per share $0.05 $0.05 ($0.06) $0.08
</TABLE>
See accompanying notes to condensed consolidated financial statements which
are an integral part of these financial statements.
Page 4 of 15
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SPINNAKER INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
<TABLE>
Six Months Ended
June 30,
----------------------
(In thousands) 1997 1996
------- -------
<S> <C> <C>
Operating activities
Net income (loss) $ (395) $ 520
Adjustments to reconcile net income
to net cash provided by (used in) operating activities:
Depreciation 2,698 2,195
Amortization of goodwill and deferred financing costs 927 509
Minority interest - 190
Accrued interest on notes payable to related parties - 95
Changes in operating assets and liabilities
Accounts receivable (3,656) (505)
Inventories (360) (5,684)
Prepaid expenses and other assets (132) (1,355)
Accounts payable, accrued liabilities, and
other current liabilities 417 4,481
------- -------
Net cash provided by (used in) operating activities (501) 446
------- -------
Investing activities:
Purchase of property, plant and equipment (3,430) (4,014)
Other (158) (628)
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Net cash used in investing activities (3,588) (4,642)
------- -------
Financing activities:
Proceeds on working capital revolvers, net 73 2,460
Issuance of long-term debt - 8,500
Principal payments on long term debt and leases (56) (7,533)
Issuance of common stock - 500
------- -------
Net cash provided by financing activities 17 3,927
------- -------
Decrease in cash and cash equivalents (4,072) (269)
Cash and cash equivalents at beginning of period 9,699 3,048
------- -------
Cash and cash equivalents at end of period $ 5,627 $ 2,779
------- -------
------- -------
</TABLE>
See accompanying notes to condensed consolidated financial statements which
are an integral part of these financial statements.
Page 5 of 15
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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 "Company"). 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 June 30, 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 Company'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 June 30, 1997 and December 31, 1996, approximately
52% and 47%, respectively, are valued using the last in, first out method
(LIFO), 42% 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
June 30, 1997, and December 31, 1996:
1997 1996
---- ----
(in thousands)
Finished goods $10,238 $10,351
Work-in-process 3,863 3,518
Raw materials and supplies 18,897 18,769
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TOTAL $32,998 $32,638
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Page 6 of 15
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5. On October 23, 1996, the Company 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 Company's outstanding term and revolver obligations, except the
$956,000 mortgage note at Entoleter, Inc. and various capital lease
obligations.
Following is a summary of long term debt of the Company at June 30, 1997,
and December 31, 1996:
<TABLE>
1997 1996
---- ----
(in thousands)
<S> <C> <C>
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. . . 956 969
Capital lease obligations. . . . . . . . . . . . . . . . . . 154 193
-------- --------
116,110 116,162
Less current maturities. . . . . . . . . . . . . . . . . . . (993) (1,049)
-------- --------
$115,117 $115,113
-------- --------
-------- --------
</TABLE>
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 basic earnings per
share, the dilutive effect of stock options will be excluded. The impact
of Statement No. 128 on the calculation of earnings per share for the three
months and six months ended June 30, 1997 and 1996 is not expected to be
material.
7. The Company 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 15
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ITEM-2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
SECOND QUARTER ENDED JUNE 30, 1997, COMPARED TO SECOND QUARTER ENDED JUNE 30,
1996
NET SALES
The Company's net sales for the quarter ended June 30, 1997 were $60.2
million, which was comparable to the corresponding 1996 period. Net sales
during the second quarter of 1997 reflected generally higher unit sales in
the Company's adhesive-backed label stock and pressure sensitive tape
markets, and marginally lower average selling prices resulting from changes
in product mix over the corresponding 1996 period. These increases in unit
sales were offset by lower unit sales of water based tape resulting from the
Company's decision to terminate a relationship with an existing customer of
the Company's reinforced and box tape products reducing period to period net
sales by $1.4 million. Higher freight costs and lower sales of industrial
equipment also impacted net sales.
GROSS MARGIN
Gross margin dollars increased 12.7% to $9.6 million in the quarter ended
June 30, 1997 from $8.6 million in the comparable 1996 period. As a
percentage of net sales, gross margin increased to 16.0% from 14.2% in the
1996 period. These improvements were primarily due to improved manufacturing
variances and lower average unit manufacturing costs of adhesive-backed
material products.
The Company attributes improvements in manufacturing variances to
manufacturing efficiencies gained through reductions in manufacturing
personnel, material process and handling modifications and capital
investments made in the latter half of 1996 and early 1997. The capital
investments have been focused on improving manufacturing efficiencies by
increasing output and reducing manufacturing downtime.
The installation of a new silicone coater at the Company's adhesive-backed
label stock manufacturing facility, which became operational during
the first quarter of 1997, enabled the Company to significantly increase
internal silicone lining capacity and eliminate the need to purchase from
outside sources.
Lower average unit manufacturing costs were attributable to the foregoing
improvements, as well as variances in product mix. Product mix was impacted
by customer demands through changes in customers' product requirements and
specifications, such as application, length, width, and quantity.
INCOME FROM OPERATIONS
Income from operations increased 24.0% to $3.8 million in the quarter ended
June 30, 1997 from $3.1 million in the comparable 1996 period. These
operating results reflect improved gross margins offset by moderate increases
in selling, general and administrative ("SG&A") and depreciation and
amortization expenses from the comparable 1996 period.
INTEREST EXPENSE
Interest expense for the quarter ended June 30, 1997 increased approximately
$0.8 million compared to the corresponding period for 1996. The increase is
attributable to higher average outstanding debt obligations and related
interest rates during the period and amortization of deferred financing costs
associated with the 10 3/4% senior notes issued in October 1996.
Page 8 of 15
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Income taxes
The 1997 and 1996 estimated annual effective income tax rate for federal and
state income taxes was approximately 41%.
SIX MONTHS ENDED JUNE 30, 1997, COMPARED TO SIX MONTHS ENDED JUNE 30, 1996
NET SALES
The Company's net sales for the six months ended June 30, 1997 were $117.4
million compared to $122.2 million in 1996. Unit sales of postage stamp
paper stock for the first six months of 1997 increased significantly,
(approximately 25%) compared to 1996, and unit sales of pressure sensitive
adhesive-backed label stock and pressure sensitive tapes increased
approximately 5% during this period. These increases in unit sales were
offset by marginally lower average selling prices resulting from variances in
product mix that were attributable to changes in customers' requirements and
specifications, such as product application, length, width, and quantity, and
the Company's decision to terminate a relationship with an existing customer
of the Company's reinforced and box tape products, reducing period to period
net sales approximately $2.4 million. The decrease in net sales for the
six-month period also reflect higher freight costs and lower sales of
industrial equipment.
GROSS MARGIN
Gross margin declined 1.7% to $17.0 million in the six months ended June 30,
1997 from $17.3 million in the comparable 1996 period. As a percentage of
net sales, gross margin increased to 14.5% from 14.2% in the 1996 period.
The improved gross margin percentage was due to improved manufacturing
variances and lower average unit manufacturing costs of adhesive-backed
material products.
The tape production operations have continued to improve from those
experienced in 1996, and have shown significant improvement from the
variances experienced as recently as the first quarter of 1997. The Company
attributes these improvements in manufacturing variances to efficiencies
gained through reductions of manufacturing personnel, material process and
handling modifications and capital investments made in the latter half of
1996 and early 1997. The Company is continuing to focus its management
efforts and capital investments on improving manufacturing efficiencies and
increasing capacity.
The installation of a new silicone coater at the Company's adhesive-backed
label stock manufacturing facility, which became operational in January 1997,
enabled the Company to significantly increase internal silicone lining
capacity and eliminate the need to purchase from outside sources, resulting
in estimated savings of approximately $1.2 million during the six-month
period.
Lower average unit manufacturing costs were attributable to variances in
product mix and improved manufacturing efficiencies during the period.
Product mix was impacted by changes in customers' product requirements and
specifications, such as application, length, width, and quantity. The
manufacturing efficiencies were primarily a result of recent capital
investments to increase output and reduce manufacturing downtime.
INCOME FROM OPERATIONS
Income from operations was $5.9 million or 5.0% of net sales in the six
months ended June 30, 1997 compared to $6.3 million or 5.2% of net sales in
the comparable 1996 period, a decrease of 6.3%. These operating results
reflect lower gross margins dollars and higher depreciation and amortization
expenses, offset by lower administrative expenses relating to personnel
reductions at the Company's operating entities as compared to the 1996 period.
Page 9 of 15
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INTEREST EXPENSE
Interest expense for the six months ended June 30, 1997 increased approximately
$1.6 million compared to the corresponding period for 1996. The increase is
attributable to higher average outstanding debt obligations and related interest
rates during the period, and amortization of deferred financing costs associated
with the 10 3/4% senior notes issued in October 1996.
OTHER INCOME (EXPENSE) - GUARANTEE FEE
As part of the acquisition of Central Products, Lynch Corporation agreed to
guarantee a $25.0 million note to Alco Standard Corporation at a rate of 0.5% of
the principal amount per month ($125,000 per month). This guarantee ended March
31, 1996, upon the completion of the refinancing of certain notes.
INCOME TAXES
The 1997 and 1996 estimated annual effective income tax rate for federal and
state income taxes is approximately 41%.
FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash balance at June 30, 1997 was approximately $5.6 million. The
cash balance represents an increase of approximately $2.8 million from a year
earlier. Additionally, the Company's current portion of long-term debt and
working capital revolver obligations was approximately $1.8 million compared to
$40.2 million at June 30, 1996. The Company's availability under the working
capital revolver was approximately $37.0 million.
The Company used $501,000 in net cash for operating activities for the six
months ended June 30, 1997, compared to $446,000 in net cash generation in the
corresponding period in 1996. The difference was attributable to lower net
income and year to year changes in net operating assets and liabilities.
Net cash used in investing activities was $3.6 million in the first six months
of 1997 compared to $4.6 million in the comparable 1996 period. Investing
activities in 1997 were primarily to increase capacity and improve manufacturing
efficiencies in the tape production facilities, while 1996 activity included a
new silicone and adhesive coater for the label stock business. In addition, in
1996 the Company acquired the Brighton, Colorado, facility and funded financing
costs associated with the Company's October 1996 issuance of $115 million of
10 3/4% Senior-Secured Notes.
Financing activities during the six-months ended June 30, 1997 were not
significant as proceeds from working capital revolvers were offset by principal
payments on long-term debt and capital lease obligations. Cash generated from
financing activities in the corresponding period in 1996 included net working
capital borrowings of $2.5 million and a net increase in long-term debt
obligations of $1.0 million subsequent to certain debt refinancing. In
addition, on April 5, 1996, the Company issued approximately 187,000 shares of
common stock upon the exercise of warrants held by Boyle Fleming & Co. at a
price of $2.67 per share.
The Company's subsidiaries have unused credit facilities available for future
use, including revolving credit agreements with a maximum aggregate availability
of $40.0 million expiring October 2001. Borrowings under these credit lines
totaled less than $0.8 million at June 30, 1997. The Company is charged an
unused credit fee every month of 0.375% per annum. Interest on outstanding
borrowings bears interest at variable rates related to the prime interest rate
or the lenders base rate. At June 30, 1997, the interest rate in effect was
10.25%.
Page 10 of 15
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Credit availability under the lines of credit is subject to certain variables,
such as inventory and receivables eligible to be included in the borrowing base.
As of August 8, 1997, aggregate availability was $35.7 million, of which, less
than $0.4 million was outstanding. The operating assets of the subsidiaries
secure these lines.
Certain agreements with the Company's lenders impose restrictions on the ability
of the Company or the Company's subsidiaries to pay dividends. The Company is
required to comply with various covenants including limitations on capital
expenditures, interest coverage, and minimum levels of net worth and current
ratio, as well as various other financial covenants.
Page 11 of 15
<PAGE>
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 12 of 15
<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/ Craig J. Jennings
------------------------------
Vice President and Controller
Date: August 14, 1997
Page 13 of 15
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EXHIBIT INDEX
Exhibit Page No. Sequential
- ---------------- ----------
11. Statement of Computation of Per Share Earnings 15
27. Financial Data Schedule
Page 14 of 15
<PAGE>
Exhibit 11 - Computation of Per Share Earnings
(in thousands, except per share amounts)
<TABLE>
Three Months Ended Six Months Ended
June 30, June 30,
------------------ -------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Primary
Average shares outstanding 6,159 5,970 6,159 5,740
Net effect of dilutive stock options --
based on the treasury stock method
using average market price 984 1,062 -0- 1,143
------- ------- ------ -------
Total 7,143 7,032 6,159 6,883
------- ------- ------ -------
------- ------- ------ -------
Net income (loss) $ 333 $ 331 $ (395) $ 520
------- ------- ------ -------
------- ------- ------ -------
Per share amount $ 0.05 $ 0.05 $(0.06) $ 0.08
------- ------- ------ -------
------- ------- ------ -------
Fully diluted
Average shares outstanding 6,159 5,970 6,159 5,740
Net effect of dilutive stock options --
based on the treasury stock method
using the period-end market price, if
higher than average market price 984 1,068 -0- 1,164
------- ------- ------ -------
Total 7,143 7,038 6,159 6,904
------- ------- ------ -------
------- ------- ------ -------
Net income (loss) $ 333 $ 331 $ (395) $ 520
------- ------- ------ -------
------- ------- ------ -------
Per share amount $ 0.05 $ 0.05 $(0.06) $ 0.08
------- ------- ------ -------
------- ------- ------ -------
</TABLE>
Page 15 of 15
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> APR-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 5627
<SECURITIES> 0
<RECEIVABLES> 26668
<ALLOWANCES> 1017
<INVENTORY> 32998
<CURRENT-ASSETS> 3988
<PP&E> 69821
<DEPRECIATION> 11842
<TOTAL-ASSETS> 157219
<CURRENT-LIABILITIES> 25350
<BONDS> 115117
0
0
<COMMON> 3124
<OTHER-SE> 7717
<TOTAL-LIABILITY-AND-EQUITY> 10841
<SALES> 60243
<TOTAL-REVENUES> 60243
<CGS> 50601
<TOTAL-COSTS> 5802
<OTHER-EXPENSES> (4)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3278
<INCOME-PRETAX> 566
<INCOME-TAX> 233
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 333
<EPS-PRIMARY> .05
<EPS-DILUTED> 0
</TABLE>
