<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, 1998
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Commission file number 2-66564
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________________ to ______________________
Spinnaker Industries, Inc.
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(Exact name of Registrant as specified in its charter)
Delaware 06-0544125
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
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.
<TABLE>
Common Stock, No Par Value 3,575,680 shares
- -------------------------------------- --------------------------------------
<S> <C>
Class Outstanding at June 30, 1998
Class A Common Stock, No Par Value 3,566,067 shares
- -------------------------------------- --------------------------------------
Class Outstanding at June 30, 1998
</TABLE>
Page 1 of 17
<PAGE>
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, 1998 and December 31, 1997 3
Condensed Consolidated Statements of Operations
for the Three Months and Six Months Ended 4
June 30, 1998 and 1997
Condensed Consolidated Statements of Cash Flows
for the Six Months Ended June 30, 1998
and 1997 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
PART II OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 6. Exhibits and Reports on Form 8-K 15
Page 2 of 17
<PAGE>
PART 1. - FINANCIAL INFORMATION
ITEM 1. - CONSOLIDATED FINANCIAL STATEMENTS
SPINNAKER INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
June 30, 1998 December 31, 1997
------------- -----------------
(Unaudited) (Note)
(In thousands)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ - $ 5,977
Accounts receivable, net 33,183 24,886
Inventories, net 44,237 30,745
Prepaid expenses and other 5,122 4,516
----------- -----------
Total current assets 82,542 66,124
Property plant and equipment:
Land 1,597 583
Buildings and improvements 15,499 13,402
Machinery and equipment 82,500 61,262
Accumulated depreciation (18,706) (14,913)
----------- -----------
80,890 60,334
Goodwill, net 42,970 24,025
Other assets 8,817 6,235
----------- -----------
TOTAL ASSETS $ 215,219 $ 156,718
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 27,316 $ 14,529
Accrued liabilities 5,778 6,319
Current portion of long term debt 2,918 864
Working capital revolver 39,744 446
Other current liabilities 2,598 2,591
----------- -----------
Total current liabilities 78,354 24,749
Long term debt, less current portion 119,928 115,049
Deferred income taxes 5,554 5,554
Pension liabilities 2,577 1,097
Stockholders' equity:
Common stock 3,124 3,124
Additional paid in capital 12,167 11,557
Retained earnings (deficit) (5,987) (3,914)
Minimum pension liability (386) (386)
Less: treasury stock (112) (112)
----------- -----------
Total stockholders' equity 8,806 10,269
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 215,219 $ 156,718
----------- -----------
----------- -----------
</TABLE>
NOTE: The balance sheet at December 31, 1997 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.
In March 1998, the Company acquired the assets of the pressure sensitive
business of S.D. Warren. (See Note 1)
See accompanying notes to condensed consolidated financial statements which are
an integral part of these financial statements.
Page 3 of 17
<PAGE>
SPINNAKER INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED RESULTS OF OPERATIONS - UNAUDITED
<TABLE>
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- ------------------------
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Net sales $ 71,835 $ 60,243 $ 131,362 $ 117,396
Cost of sales (62,580) (50,601) (114,509) (100,422)
--------- --------- ---------- ----------
Gross margin 9,255 9,642 16,853 16,974
Selling, general and administrative expense (5,954) (5,802) (11,651) (11,108)
--------- --------- ---------- ----------
Income from operations 3,301 3,840 5,202 5,866
Interest expense (4,376) (3,278) (7,858) (6,559)
Other income (expense) - net (7) 4 8 20
--------- --------- ---------- ----------
Income (loss) before income taxes (1,082) 566 (2,648) (673)
Income tax provision (benefit) 177 233 (575) (278)
--------- --------- ---------- ----------
Net income (loss) $ (1,259) $ 333 $ (2,073) $ (395)
--------- --------- ---------- ----------
--------- --------- ---------- ----------
Earnings per common share:
Net income (loss) per common share $ (0.18) $ 0.05 $ (0.29) $ (0.06)
Earnings per common share:
Net income (loss) per common share
- assuming dilution $ (0.18) $ 0.05 $ (0.29) $ (0.06)
</TABLE>
See accompanying notes to condensed consolidated financial statements which are
an integral part of these financial statements.
Page 4 of 17
<PAGE>
SPINNAKER INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
<TABLE>
Six Months Ended
June 30,
-------------------------
(In thousands) 1998 1997
---------- --------
<S> <C> <C>
Operating activities:
Net loss $ (2,073) $ (395)
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation 3,801 2,698
Amortization of goodwill and deferred financing costs 1,067 927
Changes in operating assets and liabilities
Accounts receivable (3,698) (3,656)
Inventories (4,222) (360)
Prepaid expenses and other assets (789) (132)
Accounts payable, accrued liabilities, and
other current liabilities 12,031 417
--------- -------
Net cash provided by (used in) operating activities 6,117 (501)
--------- -------
Investing activities:
Acquisition of Spinnaker Coating - Maine (44,770) -
Purchase of property, plant and equipment (4,365) (3,430)
Other (2,007) (158)
--------- -------
Net cash used in investing activities (51,142) (3,588)
--------- -------
Financing activities:
Proceeds on revolving credit facility, net 39,298 73
Principal payments on long term debt and leases (67) (56)
Issuance of common stock 610 -
Deferred financing costs (793) -
--------- -------
Net cash provided by (used in) financing activities 39,048 17
--------- -------
Decrease in cash and cash equivalents (5,977) (4,072)
Cash and cash equivalents at beginning of period 5,977 9,699
--------- -------
Cash and cash equivalents at end of period $ - $ 5,627
--------- -------
--------- -------
</TABLE>
See accompanying notes to condensed consolidated financial statements which are
an integral part of these financial statements.
Page 5 of 17
<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 wholly owned subsidiaries, Central
Products Company, Spinnaker Coating, Inc. ("Spinnaker Coating") and
Entoleter, Inc. (collectively the "Company"). All significant
intercompany accounts and transactions have been eliminated in
consolidation.
Effective March 17, 1998, the Company acquired the assets of the pressure
sensitive business ("Pressure Sensitive Business") of S.D. Warren
("Warren"). Warren is a large pulp and paper producer owned by an
indirect wholly-owned subsidiary of SAPPI, Ltd., a public South African
conglomerate. The acquired pressure sensitive business, renamed Spinnaker
Coating - Maine, Inc. ("Coating - Maine") effective with the acquisition,
manufactures and markets label stock primarily for the EDP segment of the
label stock market. Coating - Maine's EDP products are used in various
labeling end uses, including form printing and product marking and
identification. The purchase price under the agreement was approximately
$51.8 million, plus the assumption of certain liabilities and was funded
from availability under the Company's amended $60 million revolving credit
facility (the "Revolving Credit Facility") and the issuance of a
subordinated convertible note (the "Note") by the Company to Warren in the
amount of $7.0 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 as follows:
<TABLE>
<S> <C>
Current assets $13,869
Property, plant and equipment 20,000
Goodwill 19,603
Current liabilities (262)
Non-current liabilities (1,440)
-------
$51,770
-------
-------
</TABLE>
Goodwill arising from the Coating - Maine acquisition is amortized using
the straight-line method over a period of 30 years.
The operating results of Coating - Maine are included in the consolidated
statements of operations from the March 17, 1998 acquisition date. The
following pro forma information, which is based on information currently
available to the Company, shows the results of the Company's operations
presented as though the purchase of Coating - Maine had been made at the
beginning of 1997.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended June 30,
June 30, 1997 1998 1997
------------------ -------------------------
<S> <C> <C> <C>
Net sales $76,821 $143,476 $150,196
Net income (loss) 866 (2,389) 539
Net income (loss) per common share 0.12 (0.34) 0.09
Net income (loss) per common share-assuming dilution 0.12 (0.34) 0.09
</TABLE>
2. The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions to
Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not
include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the
opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the period ended June 30, 1998 are not necessarily
indicative of the results that may be expected for the year ended December
31, 1998. 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, 1997.
Page 6 of 17
<PAGE>
3. In October 1996, the Company acquired all of the approximately 25%
minority interest in its Spinnaker Coating 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 the Company's common stock, no par value ("Common Stock"). As
additional consideration for the shares of capital stock of Spinnaker
Coating, the minority shareholders received the right to a contingent
payment, which is exercisable at any time during the period beginning
October 1, 1998 and ending September 30, 2000.
4. Of inventory values at June 30, 1998 and December 31, 1997, approximately
41% and 47%, respectively, are valued using the last in, first out method
(LIFO), 57% and 49%, 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, 1998, and December 31, 1997:
<TABLE>
<CAPTION>
1998 1997
---- ----
(in thousands)
<S> <C> <C>
Finished goods $28,512 $18,028
Work-in-process 4,325 2,770
Raw materials and supplies 11,400 9,947
------- -------
TOTAL $44,237 $30,745
------- -------
------- -------
</TABLE>
5. In conjunction with the acquisition of Coating - Maine, the Revolving
Credit Facility was amended to increase the aggregate facility amount to
$60 million, subject to certain variables, including inventory and
receivables eligible to be included in the borrowing base.
Also, in conjunction with the acquisition of Coating - Maine, the Company
issued a Note to Warren, which had an original principal amount of $7.0
million, and bears payment-in-kind ("PIK") interest at 10% per annum. The
Note is convertible for shares of the Company's Common Stock on the basis
of 40 shares per $1,000 of the outstanding principal amount of the Note
(or $25 per share), subject to adjustment as set forth below. The Note's
PIK feature allows the Company to pay the first year's interest payment by
issuing an additional subordinated convertible note having similar terms;
thereafter, interest is payable in cash provided the Company is not in
default, after giving effect for the payment, of covenants under the
Revolving Credit Facility. If the Company is prohibited from paying
interest due in cash, the Company will continue to PIK the interest owed.
Prepayments of the original principal amount are due in two installments:
30% on March 31, 1999 and 70% on March 31, 2000, provided the Company is
not in default of covenants under the Revolving Credit Facility and has
availability in excess of $15 million under the Revolving Credit Facility
after giving effect for the payment. If the Company is prohibited from
satisfying the March 31, 1999 principal payment due to insufficient pro
forma availability, the unpaid portion of the payment will be deferred
until the next August 15 or March 15 as the Company could make such
payment, subject to the same conditions described above. Any unpaid
principal outstanding after March 31, 2000 will be considered due on
demand, however, the payment of such amount will still remain restricted
under the conditions described above. In any event, the Note and
remaining unpaid interest will mature on January 31, 2002.
Page 7 of 17
<PAGE>
Following is a summary of long term debt of the Company at June 30, 1998,
and December 31, 1997:
<TABLE>
<CAPTION>
1998 1997
-------- --------
(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
10% Subordinated Note with PIK interest and principle
payable on March 31, 1999 and 2000...................... 7,000 -
9 1/4% mortgage note from bank, payable on demand.
Secured by certain property of Entoleter ............... 752 777
Capital lease obligations............................... 94 136
-------- --------
122,846 115,913
Less current maturities................................ (2,918) (864)
-------- --------
$119,928 $115,049
-------- --------
-------- --------
</TABLE>
Credit availability under the Revolving Credit Facility is subject to
certain variables, such as the amount of inventory and receivables
eligible to be included in the borrowing base. The Company had cash
advances of approximately $39.7 million outstanding under the lines of
credit and available borrowings of approximately $8.5 million as of June
30, 1998. All cash collections are swept against the Company's
outstanding Revolving Credit Facility balance. The Company is charged an
unused line of credit fee every month based on an annual rate of 0.375%.
Interest on outstanding borrowings are at variable rates related to the
prime or LIBOR (London Interbank Offered Rate) rates. At June 30, 1998,
the combined effective interest rate in effect of all revolver borrowings
was approximately 8.5%. The Company carries approximately 83% of the
outstanding Revolving Credit Facility borrowings in LIBOR instruments.
6. In September 1997, Boyle Fleming & Company ("BF") exercised Class "A"
warrants pursuant to which the Company issued to BF an aggregate 262,970
shares of Common Stock and 262,970 shares of no par value Class A common
stock ("Class A Common Stock"). On January 8, 1998, BF were issued
228,499 shares of Common Stock and 228,499 shares of Class A Common Stock
upon the exercise of the remaining warrants at a price of $2.67 per
warrant exercise. Richard J. Boyle and Ned N. Fleming, III, the Company's
Chairman and Chief Executive Officer, and President and Chief Operating
Officer, respectively, are shareholders, directors and officers of BF.
7. In 1997, the Company adopted Statement of Financial Accounting Standards
("SFAS") No. 128, EARNINGS PER SHARE. The Company changed the method used
to compute earnings per share and restated all prior periods. Under the
new requirements for calculating basic earnings per share, the dilutive
effect of stock options is excluded. The following table sets forth only
the computation of the basic earnings per share, as there are no dilutive
securities for the three months and six months ended June 30 (in
thousands, except per share data):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
1998 1997 1998 1997
------- ------ ------- ------
<S> <C> <C> <C> <C>
Numerator - net income (loss) $(1,259) $ 333 $(2,073) $ (395)
Denominator - denominator for earnings
per common share - weighted average shares 7,141 7,143 7,076 6,159
Net income (loss) per common share $ (0.18) $ 0.05 $ (0.29) $(0.06)
</TABLE>
Page 8 of 17
<PAGE>
As of June 30, 1998 and 1997, there were 30,000 directors' options to
purchase one share each of Class A Common Stock and Common Stock at a
total price of $40 per option exercised and 10,000 directors' options to
purchase one share of Common Stock at a price of $27 per option exercised.
Shares related to these options were not included in the computation of
diluted earnings per share in periods which resulted in a net loss because
the effect would be antidilutive.
8. As of March 31, 1998, the Company adopted SFAS No. 130, REPORTING
COMPREHENSIVE INCOME, issued in June of 1997. SFAS No. 130 requires the
reporting and display of comprehensive income, which is composed of net
income and other comprehensive income items, in a full set of general
purpose financial statements. Other comprehensive income items are
revenues, expenses, gains and losses that under generally accepted
accounting principles are excluded from net income and reflected as
components of equity; such as currency translation and minimum pension
liability adjustments. There were no comprehensive income items excluded
from net income and included as a component of equity in the periods ended
June 30, 1998 and 1997.
In June 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 131, DISCLOSURE ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED
INFORMATION, which establishes standards for the way that public business
enterprises report information about operating results in annual financial
statements and selected information in interim financial statements issued
to shareholders. This SFAS does not require application to interim
financial statements in the initial year of its application. The Company
is evaluating the effect of adopting SFAS No. 131 on its segment reporting
requirements.
In February 1998, the FASB issued SFAS No. 132, EMPLOYERS' DISCLOSURES
ABOUT PENSIONS AND OTHER POST-RETIREMENT BENEFITS, which is an amendment
to SFAS No.'s 87, 88 and 106. This SFAS revises employers' disclosures
about pension and other post-retirement benefit plans. It does not change
the measurement or recognition of those plans. Management believes that
the adoption of SFAS No. 132 in fiscal 1998 will not have a significant
impact on the Company's consolidated financial statements.
9. Effective July 31, 1998, the Company completed its acquisition of tesa
tape, inc.'s pressure sensitive electrical tape product line and
manufacturing plant ("Spinnaker Electrical" or "Electrical Tape
Business"). The Electrical Tape Business produces electrical tape for
insulating motors, coils and transformers for major customers in Europe,
Canada and the U.S. The purchase price for the Electrical Tape Business
was approximately $10.7 million, comprising of $3.7 million in Company
common stock, $4.5 million in term debt, $2.0 million in cash and a
subordinated note by Spinnaker Electrical to tesa tape, inc. The
Electrical Tape Business was renamed Spinnaker Electrical Tape Company
effective with the acquisition.
The Electrical Tape Business generated approximately $17 million of sales,
on a pro forma basis, in 1997. The $4.5 million term debt bears interest
at the lower of prime plus 0.50% or LIBOR plus 2.5% per annum. The note
is interest only for the first nine months, with monthly principal
payments beginning in May 1999. Principal payments are based on a seven-
year amortization with a balloon payment due July 2003.
10. 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.
11. Certain reclassifications have been made to conform prior period data to
the current year's presentation.
Page 9 of 17
<PAGE>
ITEM-2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1998, COMPARED TO THREE MONTHS ENDED JUNE 30, 1997
NET SALES
The Company's net sales for the quarter ended June 30, 1998 were $71.8 million,
compared to $60.2 million in the corresponding 1997 period. The increase in
net sales for 1998 is attributed to approximately $15 million in sales from the
recently acquired Pressure Sensitive Business and increased unit sales of prime
and variable information adhesive label stock from 1997 levels, which more than
offset lower unit sales of pressure sensitive postage paper stock and
industrial tapes. Unit sales of pressure sensitive postage paper stock were
impacted by the delayed release of orders by the Bureau of Engraving and
Printing ("BEP") to both the Company and private printers supplied by the
Company, attributed to the recently announced postage rate increase. Sales of
industrial tapes continue to be impacted by Asian imports, increased domestic
market competition and investments in capacity for certain tape products, which
have resulted in lower sales volumes of certain tape technologies and affected
product mix.
GROSS MARGIN
Gross margin as a percentage of net sales for the quarter ended June 30, 1998
was approximately 13% compared to approximately 16% in the corresponding 1997
period. The 1998 gross margin was lower due to changes in revenue mix, from
competitive pricing in both the adhesive label and industrial tape markets, and
the timing of postage paper stock orders.
Approximately 2% points of the gross margin percentage variance is attributed
to lower unit sales of pressure sensitive postage paper stock in comparison to
the corresponding 1997 period. The remaining variance is attributed to
competitive market conditions and increased global capacity for certain tape
products lowering the average selling prices of certain product categories
leading to product substitution.
The Company has offset a portion of these margin pressures by continuing to
lower average unit manufacturing costs through manufacturing efficiency
improvements, associated with recent capital investments, and updated material
procurement policies and procedures.
INCOME FROM OPERATIONS
Income from operations for the quarter ended June 30, 1998 was approximately
$3.3 million, compared to approximately $3.8 million in the corresponding 1997
period. The 1998 operating results reflect increased sales, offset primarily
by approximately $0.8 million of increased depreciation and amortization
expense associated with the acquisition of the Pressure Sensitive Business and
recent capital investments.
INTEREST EXPENSE
Interest expense for the quarter ended June 30, 1998 increased approximately
$1.1 million compared to the corresponding period in 1997. Of the increase,
approximately $1.0 million is attributable to the financing associated with the
Company's acquisition of the Pressure Sensitive Business.
INCOME TAXES
The Company's second quarter 1998 income tax rate for federal and state income
taxes reflects a revised annual effective tax rate of approximately 22%.
The estimated annual effective tax rate varies from statutory rates due to the
impact of non-deductible permanent tax differences on estimated annual earnings
before tax. In the corresponding period of 1997, the effective income tax rate
was approximately 41%, however, the tax rate was reduced to approximately 20%
by the end of 1997.
Page 10 of 17
<PAGE>
SIX MONTHS ENDED JUNE 30, 1998, COMPARED TO SIX MONTHS ENDED JUNE 30, 1997
NET SALES
The Company's net sales for the six months ended June 30, 1998 were $131.4
million, compared to $117.4 million in the corresponding 1997 period. The
increase in net sales for 1998 is attributed to approximately $17 million in
sales from the recently acquired Pressure Sensitive Business and increased unit
sales of prime and variable information adhesive label stock from 1997 levels,
which more than offset lower unit sales of pressure sensitive postage paper
stock and industrial tapes. Unit sales of pressure sensitive postage paper
stock were impacted by the timing of orders by the BEP. The history of the BEP
business reflects consistent annual sales amounts, however the timing of the
orders have at times been difficult to predict. Over the past three years, a
significant portion of the annual sales have been concentrated in a four to six
month period with no single period being comparable to the corresponding period
of the prior year. Sales of industrial tape products have been impacted by
Asian imports, increased domestic market competition and investments in
capacity for certain tape products, which have resulted in lower sales volumes
of certain tape technologies and affected product mix.
GROSS MARGIN
Gross margin as a percentage of net sales in the six months ended June 30, 1998
was approximately 12.8% compared to approximately 14.5% in the corresponding
1997 period. The 1998 gross margins were lower due to changes in revenue mix,
from competitive pricing in both the adhesive label and industrial tape
markets, and the timing of postage paper stock orders.
Approximately 1% point of the gross margin percentage variance is attributed to
lower postage paper stock sales in comparison to the corresponding 1997 period.
The remaining variance is attributed to competitive market conditions and
increased global capacity for certain tape products lowering average selling
prices of certain product categories, thereby leading to product substitution.
The Company has offset a portion of these margin pressures by continuing to
improve manufacturing variances and lowering average unit manufacturing costs.
The Company attributes the improved manufacturing efforts to efficiencies
gained through reductions of manufacturing personnel, material process and
handling modifications and recent capital investments which have enabled the
Company to increase output and reduce manufacturing downtime.
INCOME FROM OPERATIONS
Income from operations for the six months ended June 30, 1998 was approximately
$5.2 million, compared to approximately $5.9 million in the corresponding 1997
period. The 1998 operating results reflect increased sales, offset by
approximately $1.3 million of increased depreciation and amortization expense
associated with the acquisition of the Pressure Sensitive Business and recent
capital investments.
INTEREST EXPENSE
Interest expense for the six months ended June 30, 1998 increased approximately
$1.3 million compared to the corresponding period in 1997. Of the increase,
approximately $1.2 million is attributable to the financing associated with the
Company's acquisition of the Pressure Sensitive Business.
INCOME TAXES
The Company's estimated annual effective income tax rate for federal and state
income taxes is approximately 22%, compared to approximately 20% in 1997 on an
annual basis. As of June 30, 1997, the effective tax rate was approximately
41%, however, the tax rate was subsequently revised due to the impact of
permanent tax differences, primarily non-deductible goodwill amortization, on
lower estimated earnings before taxes.
Page 11 of 17
<PAGE>
FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
Effective March 17, 1998, the Company closed the acquisition of the Pressure
Sensitive Business from Warren ("Coating - Maine Acquisition"), whereby
Coating - Maine acquired the Pressure Sensitive Business.
Warren, a large pulp and paper producer, is an indirect wholly-owned subsidiary
of SAPPI, Ltd., a public South African conglomerate. Coating - Maine is a
wholly-owned subsidiary of Spinnaker Coating (most recently known as Brown-
Bridge Industries, Inc., and a wholly-owned subsidiary of the Company) and was
formed to acquire the Pressure Sensitive Business which manufacturers and
markets label stock primarily for the EDP segment of the label stock market.
The Pressure Sensitive Business' EDP products are used in various labeling end
uses, including form printing and product marking and identification.
The Coating - Maine Acquisition is consistent with the Company's long-term
strategy of pursuing acquisitions which complement its position in the adhesive-
backed materials industry. The purchase price under the related asset purchase
agreement was approximately $51.8 million, plus the assumption of certain
liabilities (excluding substantially all trade payables), and was funded with
approximately $44.8 million from availability under the Revolving Credit
Facility and the Note issued by the Company to Warren in the original principal
amount of $7.0 million.
The Note includes a PIK feature that allows the Company to pay the first year's
interest payment by issuing an additional subordinated note under similar terms
as the Note, and the Company may also issue such a PIK note if at a future
interest payment date a default or event of default exists, or would be caused
by the payment of such interest in cash, under the Revolving Credit Facility.
Payments of principal and interest are subject to restrictions contained in,
and in any event are junior and subordinate in right of payment to, the payment
of indebtedness outstanding under the Revolving Credit Facility and the
Company's 10 3/4% Senior Notes due 2006 ("Senior Notes"). The Note matures on
January 31, 2002, however, it is expected to be prepaid earlier if certain
conditions or events occur. Prepayments of principal of 30% and 70% of the
original principal amount are due on March 31, 1999 and March 31, 2000,
respectively, subject to there being sufficient unused availability and no
existing default or event of default under the Revolving Credit Facility.
In conjunction with the Coating - Maine Acquisition, the Revolving Credit
Facility was amended to increase the aggregate facility amount from $40 to $60
million, subject to certain variables, including inventory and receivables
eligible to be included in the borrowing base.
The Company's principal source of liquidity is cash flow from operations and
availability under the Revolving Credit Facility. The Revolving Credit
Facility is available to fund acquisitions and support periodic fluctuations in
the working capital.
Credit availability under the Revolving Credit Facility is subject to certain
variables, such as inventory and receivables eligible to be included in the
borrowing base. As of July 31, 1998, aggregate availability was approximately
$51.7 million, of which approximately $45.4 million was outstanding.
The Company's June 30, 1998 cash balance was less than $0.1 million, as cash
collections are swept against the Company's Revolving Credit Facility balance.
Net cash used in investing activities was $51.1 million in the six months ended
June 30, 1998 compared to $3.6 million in the corresponding 1997 period.
Investing activities in 1998 primarily related to the Coating - Maine
Acquisition.
Page 12 of 17
<PAGE>
Financing activities during the six months ended June 30, 1998 generated
approximately $39.0 million, which includes borrowings under the Revolving
Credit Facility to finance the Coating - Maine Acquisition and the issuance of
228,499 shares of Common Stock and 228,499 shares of Class A Common Stock, no
par value, upon the exercise of the remaining Class A warrants held by BF at a
total price of $610 thousand. The cash generated by the BF exercise of its
Class A warrant was offset by capital lease payments and $793 thousand of
deferred financing costs associated with amending the Revolving Credit Facility
to increase the aggregate facility amount to $60 million.
The amended $60 million Revolving Credit Facility will expire October 2001,
which is consistent with the maturity date of the original $40 million
revolver. The Company is charged an unused credit fee every month of 0.375%
per annum. Interest on outstanding borrowings bear interest at variable rates
related to the prime or LIBOR rates. At June 30, 1998, the Company had
approximately $33.6 million of the then outstanding borrowings under the
Revolving Credit Facility in LIBOR instruments. The LIBOR instruments range in
life from one to three months and have an effective interest rate of
approximately 8.4%.
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.
The Company continues to investigate the possibility of pursuing an offering of
equity, however, there can be no assurance that an offering will be
accomplished on terms satisfactory to the Company.
OTHER
On July 31, 1998, the Company completed its acquisition of tesa tape, inc.'s
pressure sensitive electrical tape product line and Carbondale, Illinois,
manufacturing plant. The acquisition was through a newly formed, unrestricted
subsidiary, Spinnaker Electrical and was acquired to complement the Company's
line of adhesive back industrial tapes. The purchase price was approximately
$10.7 million, comprising of $3.7 million in Company common stock, $4.5 million
in term debt, $2.0 million in cash and a subordinated note by Spinnaker
Electrical to tesa tape, inc.
The business generated approximately $17 million of sales, on a pro forma
basis, through the sale of electrical tape for insulating motors, coils and
transformers in 1997, with major customers in Europe, the U.S. and Canada.
YEAR 2000
The Company began addressing Year 2000 compliance in early 1995 in conjunction
with the implementation of a new management information system at Spinnaker
Coating, a task successfully completed in 1996.
Central Products is in the process of implementing a new information system
with significantly improved functionality which should also address the Year
2000 computer program issues. The Company expects the implementation project
and other related Y2K modifications to be completed by the end of 1999.
In the second half of 1998, the Company's industrial equipment manufacturer,
Entoleter, Inc., will begin the process of defining, assessing and converting
or replacing, various programs hardware and instrumentation systems to make
them Year 2000 compatible. The Company does not expect the Year 2000
compliance to have a significant effect on operations, nor does it expect the
cost to be material to the Company's consolidated results of operations or
financial position.
Upon completion of the remaining projects, the Company's internal and external
information system professionals believe the Company will be Y2K compliant.
Page 13 of 17
<PAGE>
FORWARD LOOKING INFORMATION
This Form 10-Q contains certain forward looking information, including without
limitation, certain of the statements in "Management's Discussion and Analysis
of Financial Condition and Results of Operation." It should be recognized that
such information represents estimates or forecasts based upon various
assumptions, including the matters referred to therein, as well as meeting the
Company's internal performance assumptions regarding expected operating
performance and the expected performance of the economy as it impacts Company's
businesses. As a result, such information is subject to various uncertainties,
inaccuracies and risks.
Page 14 of 17
<PAGE>
PART II - OTHER INFORMATION
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Registrant held its Annual Meeting of Stockholders (the "Annual Meeting")
on May 28, 1998, in Dallas, Texas. At the Annual Meeting, the Registrant's
stockholders considered (i) the election of seven directors to serve until the
next Annual Meeting of Stockholders, all of whom were currently serving as
directors of the Registrant, and (ii) a proposal to restate the Registrant's
certificate of incorporation in order to reflect all prior amendments to the
Certificate of Incorporation.
At the Annual Meeting, each of the nominees for the Board of Directors was
elected by the stockholders. The results of the vote of the stockholders of
the Registrant upon the election of the nominees for the Board of Directors of
the Registrant was as follows:
<TABLE>
Votes Cast Votes Withheld Votes
For Nominee From Nominee Abstaining
----------- -------------- ----------
<S> <C> <C> <C>
Richard J. Boyle 2,689,340 330 0
Ned N. Fleming, III 2,689,340 330 0
Philip Wm. Colburn 2,689,340 330 0
Robert E. Dolan 2,689,340 330 0
Frank Grzelecki 2,689,340 330 0
Joseph P. Rhein 2,689,340 330 0
Anthonie C. van Ekris 2,689,340 330 0
</TABLE>
The proposal to restate the Certificate of Incorporation was also passed by the
stockholders of the Registrant. The results of the votes on such proposal were
3,348,329 votes cast for the proposal, 121 votes cast against the proposal and
165 votes abstained from voting.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
27. Financial Data Schedule (1)
(B) REPORTS ON FORM 8-K
On May 29, 1998, the Registrant filed an amendment to its Current Report on
Form 8-K filed on March 30, 1998, which reported the Registrant's acquisition
of the Pressure Sensitive Business. The amendment was filed with the required
financial statements of the Pressure Sensitive Business, which had been omitted
from the original filing.
- ---------------
(1) Filed herewith.
Page 15 of 17
<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, Finance and Treasurer
Date: August 14, 1998
Page 16 of 17
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> APR-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 33,938
<ALLOWANCES> 755
<INVENTORY> 44,237
<CURRENT-ASSETS> 82,542
<PP&E> 99,596
<DEPRECIATION> 18,706
<TOTAL-ASSETS> 215,219
<CURRENT-LIABILITIES> 78,354
<BONDS> 119,928
0
0
<COMMON> 3,124
<OTHER-SE> 5,682
<TOTAL-LIABILITY-AND-EQUITY> 8,806
<SALES> 71,835
<TOTAL-REVENUES> 71,835
<CGS> 62,580
<TOTAL-COSTS> 68,534
<OTHER-EXPENSES> 7
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,376
<INCOME-PRETAX> (1,082)
<INCOME-TAX> 177
<INCOME-CONTINUING> (1,259)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,259)
<EPS-PRIMARY> (0.18)
<EPS-DILUTED> (0.18)
</TABLE>
