<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, 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.
Common Stock, No Par Value 3,575,680 shares
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Class Outstanding at March 31, 1998
Class A Common Stock, No Par Value 3,566,067 shares
- ---------------------------------- ----------------------------------
Class Outstanding at March 31, 1998
Page 1 of 16
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SPINNAKER INDUSTRIES, INC.
INDEX
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<TABLE>
PAGE
NUMBER
------
<S> <C>
PART I FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of
March 31, 1998 and December 31, 1997 3
Condensed Consolidated Statements of Operations
for the Three Months Ended March 31, 1998 and 1997 4
Condensed Consolidated Statements of Cash Flows
for the Three Months Ended March 31, 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 2. Changes in Securities and Use of Proceeds 14
Item 6. Exhibits and Reports on Form 8-K 14
</TABLE>
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Page 2 of 16
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PART I. - FINANCIAL INFORMATION
ITEM 1. - CONSOLIDATED FINANCIAL STATEMENTS
SPINNAKER INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
March 31, 1998 December 31, 1997
-------------- -----------------
(Unaudited) (Note)
(In thousands)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 209 $ 5,977
Accounts receivable, net 33,942 24,886
Inventories, net 40,870 30,745
Prepaid expenses and other 3,233 2,594
Deferred income taxes 1,922 1,922
-------- --------
Total current assets 80,176 66,124
Property plant and equipment:
Land 1,583 583
Buildings and improvements 15,413 13,402
Machinery and equipment 80,097 61,262
Accumulated depreciation (16,638) (14,913)
-------- --------
80,455 60,334
Goodwill, net 44,133 24,025
Other assets 7,136 6,235
-------- --------
TOTAL ASSETS $211,900 $156,718
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 19,332 $ 14,529
Accrued liabilities 5,897 6,319
Current portion of long term debt 2,942 864
Working capital revolver 39,896 446
Other current liabilities 5,730 2,591
-------- --------
Total current liabilities 73,797 24,749
Long term debt, less current portion 119,937 115,049
Deferred income taxes 5,554 5,554
Pension liabilities 2,547 1,097
Stockholders' equity:
Common stock 3,124 3,124
Additional paid in capital 12,167 11,557
Retained earnings (deficit) (4,728) (3,914)
Minimum pension liability (386) (386)
Less: treasury stock (112) (112)
-------- --------
Total stockholders' equity 10,065 10,269
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $211,900 $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.
See accompanying notes to condensed consolidated financial statements
which are an integral part of these financial statements.
Page 3 of 16
<PAGE>
SPINNAKER INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED RESULTS OF OPERATIONS - UNAUDITED
<TABLE>
Three Months Ended
March 31,
-------------------------
1998 1997
----------- ----------
<S> <C> <C>
Net sales $ 59,527 $ 57,153
Cost of sales (51,929) (49,821)
---------- ----------
Gross margin 7,598 7,332
Selling, general and administrative expense (5,697) (5,306)
---------- ----------
Income from operations 1,901 2,026
Interest expense (3,482) (3,281)
Other income - net 15 16
---------- ----------
Loss before income taxes (1,566) (1,239)
Income tax benefit (752) (511)
---------- ----------
Net loss $ (814) $ (728)
---------- ----------
---------- ----------
Earnings per common share:
Net loss per common share $ (0.12) $ (0.12)
Earnings per common share:
Net loss per common share - assuming dilution $ (0.12) $ (0.12)
</TABLE>
See accompanying notes to condensed consolidated financial statements which are
an integral part of these financial statements.
Page 4 of 16
<PAGE>
SPINNAKER INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
<TABLE>
Three Months Ended
March 31,
--------------------------
(In thousands) 1998 1997
----------- -----------
<S> <C> <C>
Operating activities:
Net loss $ (814) $ (728)
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation 1,725 1,310
Amortization of goodwill and deferred financing costs 455 374
Changes in operating assets and liabilities
Accounts receivable (4,457) (3,785)
Inventories (855) 1,542
Prepaid expenses and other assets (677) 22
Accounts payable, accrued liabilities, and
other current liabilities 7,268 1,873
----------- -----------
Net cash provided by operating activities 2,645 608
----------- -----------
Investing activities:
Acquisition of Spinnaker Coating - Maine (44,770) --
Purchase of property, plant and equipment (1,846) (1,495)
Other (1,119) (110)
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Net cash used in investing activities (47,735) (1,605)
----------- -----------
Financing activities:
Proceeds (payments) on revolving credit facility, net 39,450 (492)
Principal payments on long term debt and leases (34) (25)
Issuance of common stock 610 --
Deferred financing costs (704) --
----------- -----------
Net cash provided by (used in) financing activities 39,322 (517)
----------- -----------
Decrease in cash and cash equivalents (5,768) (1,514)
Cash and cash equivalents at beginning of period 5,977 9,699
----------- -----------
Cash and cash equivalents at end of period $ 209 $ 8,185
----------- -----------
----------- -----------
</TABLE>
See accompanying notes to condensed consolidated financial statements which are
an integral part of these financial statements.
Page 5 of 16
<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>
Quarter Ended
March 31,
1998 1997
------- -------
<S> <C> <C>
Net sales $71,641 $73,375
Net loss 1,130 254
Net loss per common share 0.16 0.04
Net loss per common share - assuming dilution 0.16 0.04
</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 March 31, 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 16
<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 March 31, 1998 and December 31, 1997, approximately
38% and 47%, respectively, are valued using the last in, first out method
(LIFO), 59% 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
March 31, 1998, and December 31, 1997:
<TABLE>
1998 1997
---- ----
(in thousands)
<S> <C> <C>
Finished goods $26,229 $18,028
Work-in-process 3,617 2,770
Raw materials and supplies 11,024 9,947
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TOTAL $40,870 $30,745
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------- -------
</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 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 includes a payment-in-
kind ("PIK") feature that 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, on a proforma basis, 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
pro forma availability in excess of $15 million under the Revolving Credit
Facility. 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 16
<PAGE>
Following is a summary of long term debt of the Company at March 31, 1998,
and December 31, 1997:
<TABLE>
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 interest and principle
payable on April 1, 1999 and 2000 7,000 --
9 1/4% mortgage note from bank, payable on demand
Secured by certain property of Entoleter 763 777
Capital lease obligations 116 136
-------- --------
122,879 115,913
Less current maturities (2,942) (864)
-------- --------
$119,937 $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 $39.9 million outstanding under the lines of
credit and available borrowings of approximately $11.2 million as of
March 31, 1998. 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 March 31, 1998, the interest rate in
effect was 10.25%. Subsequent to March 31, 1998, approximately 90% of
the then outstanding Revolving Credit Facility borrowings were moved to
LIBOR instruments.
6. In September 1997, Boyle Fleming & Company ("BF") exercised Class "A"
warrants pursuant to which the Company has 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 quarter ended March 31:
<TABLE>
1998 1997
------ ------
(in thousands)
<S> <C> <C>
Numerator - net loss $ (814) $ (728)
Denominator - denominator for earnings
per common share - weighted average shares 7,027 6,159
Loss per common share $(0.12) $(0.12)
</TABLE>
As of March 31, 1998 and December 31, 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
a March 31, 1998 or December 31, 1997 computation of diluted earnings per
share because the effect would be antidilutive.
Page 8 of 16
<PAGE>
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
component 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
March 31, 1998 and 1997.
In June of 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 of 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. 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.
10. Certain reclassifications have been made to conform prior period data to
the current year's presentation.
Page 9 of 16
<PAGE>
ITEM-2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1998, COMPARED TO THREE MONTHS ENDED MARCH 31, 1997
NET SALES
The Company's net sales for the quarter ended March 31, 1998 were $59.5 million,
compared to $57.2 million in the corresponding 1997 period. Unit sales of prime
and variable information adhesive label stock increased from 1997 levels, which
more than offset lower unit sales (approximately 30%) of postage paper stock.
Unit sales of pressure sensitive postage paper stock were impacted by the
delayed release of orders by the Bureau of Printing and Engraving to both the
Company and private printers supplied by the Company. Unit sales of industrial
tapes were consistent with 1997 levels, however, changes in product mix and
increased market competition resulted in modestly lower average selling prices.
The increase in net sales for 1998 also includes approximately $2 million in
sales from the recently acquired Pressure Sensitive Business.
GROSS MARGIN
Gross margin as a percentage of net sales for the quarters ended March 31, 1998
and 1997 was approximately 12.8%. The 1998 gross margins reflect improved
manufacturing variances and lower average unit manufacturing costs of adhesive-
backed material products, offset by increased depreciation and amortization
expense burden of 20%, or $0.3 million.
The Company attributes these improvements 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 quarter ended March 31, 1998 was approximately
$1.9 million compared to approximately $2.0 million in the corresponding 1997
period. These operating results reflect increased net sales and related
contribution margins, offset by approximately $0.4 million of increased
depreciation and amortization expense in cost of sales and selling, general and
administrative expense associated with recent capital investments.
INTEREST EXPENSE
Interest expense for the quarter ended March 31, 1998 increased approximately
$0.2 million compared to the corresponding period for 1997. The increase is
attributable to the financing associated with the Company's acquisition of
the Pressure Sensitive Business.
Effective May 1, 1998 under the Revolving Credit Facility, the Company moved
approximately 90% of the then outstanding Revolving Credit Facility borrowings
into LIBOR instruments. The LIBOR instruments range in maturity from one to
three months. This action reduced the Company's effective interest rate on the
Revolving Credit Facility borrowings to approximately 8.74%.
INCOME TAXES
The Company's first quarter 1998 income tax rate for federal and state income
taxes reflects its estimated annual effective tax rate. The Company's tax rate
is impacted by permanent tax differences, primarily non-deductible goodwill
associated with the acquisition of Central Products.
Cash income taxes paid by the Company are currently limited to state income
taxes, as the Company has net operating loss carry-forwards of approximately
$9.5 million available to offset future taxable income.
Page 10 of 16
<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 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, 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.
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 May 1, 1998, aggregate availability was approximately
$49.1 million, of which approximately $38.5 million was outstanding. This
outstanding balance includes the Company's April 15, 1998 interest payment on
the Senior Notes of approximately $6.2 million.
The Company's March 31, 1998 cash balance was $0.2 million, as cash collections
are swept against the Company's outstanding Revolving Credit Facility balance.
Net cash used in investing activities was $54.7 million in the three months
ended March 31, 1998 compared to $1.6 million in the corresponding 1997 period.
Investing activities in 1998 primarily related to the Coating - Maine
Acquisition. Investing activities in 1998 also included capital investments
focused on improving manufacturing efficiencies in the Company's production
facilities, while investments in 1997 provided increased capacity, in addition
to improved manufacturing efficiencies in the Company's production facilities.
Page 11 of 16
<PAGE>
Financing activities during the three months ended March 31, 1998 generated
approximately $39.3 million, which includes borrowings under the Revolving
Credit Facility to financing 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 $704 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 March 31, 1998, the Company moved approximately
$32.3 million of the then outstanding borrowings under the Revolving Credit
Facility to LIBOR instruments. The LIBOR instruments range in life from one to
six months and have a combined effective interest rate of approximately 8.74%.
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 April 30, 1998, the Company signed a definitive agreement to acquire the
worldwide pressure sensitive electrical tape business of tesa tape, inc. of
Hamburg, Germany. The acquisition will be a wholly owned, unrestricted
subsidiary acquired to compliment the Company's line of adhesive back industrial
tapes. Consideration for the business will be a combination of cash and Common
Stock. The acquisition is anticipated to closing late in the second quarter of
1998. The business to be acquired generated net sales of approximately $20
million 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
Until recently, computer programs were written to store only two digits of date-
related information in order to more efficiently handle and store data. As a
result, these programs were unable to properly distinguish between the year 1900
and the year 2000. This is frequently referred to as the "Year 2000 Problem."
The Company recognizes the need to ensure its operations will not be adversely
impacted by Year 2000 software failures.
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 which was successfully completed in 1996. The system
implementation, which provided improved functionality and internal processing,
was necessitated to transition from the former parent's information system.
Central Products is in the process of implementing a new information system
with significantly improved functionality which the Company believes will
also address the Year 2000 computer program issues. The Company expects the
implementation project to be completed by the end of 1998.
Page 12 of 16
<PAGE>
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.
The costs of Year 2000 modifications and the date of completion will be closely
monitored and are based on management's best estimates. Actual results,
however, could differ from those anticipated.
Page 13 of 16
<PAGE>
PART II - OTHER INFORMATION
ITEM 2 CHANGES IN SECURITIES AND USE OF PROCEEDS
(C) On January 8, 1998, the Registrant issued an aggregate 228,499 shares
of Common Stock and 228,499 shares of Class A Common Stock to BF upon
the exercise of the Class A Warrant granted to BF by the Registrant
in June 1994. See Note 6 to Notes to Condensed Consolidated Financial
Statements. The shares were issued upon payment of a price of $2.67
for both one share of Common Stock and one share of Class A Common
Stock, or $610,092.33 in the aggregate. The issuance was exempt from
registration under the Securities Act of 1933, as amended (the
"Securities Act") in accordance with Section 4(2) thereof, based in
part upon certain contractual investment representations made to the
Registrant by BF. On March 17, 1998, the Registrant issued a
subordinated convertible promissory note in an original principal
amount of $7.0 million to Warren. See Note 5 to Notes to Condensed
Consolidated Financial Statements. Additional information relating to
the Note and the consideration received therefore was previously
reported in the Registrant's Current Report on Form 8-K dated March
30, 1998, which is incorporated herein by reference. The issuance was
exempt from registration under the Securities Act in accordance with
Section 4(2) thereof, based in part upon certain contractual
investment representations made to the Registrant by Warren.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
10.1 Asset Purchase Agreement, dated as of November 18, 1997, by and between the
Registrant and S.D. Warren Company ("Seller"). (1)
10.2 First Amendment to Asset Purchase Agreement, dated March 17, 1998, by and
between the Registrant and Seller. (1)
10.3 Subordinated Note dated March 17, 1998, issued by the Registrant to Seller
in the original principal amount of $7 million, bearing interest at a rate
of 10% per annum. (1)
10.4 Site Separation and Services Agreement, dated March 17, 1998, by and
between Spinnaker Coating-Maine, Inc., a wholly owned subsidiary of the
Registrant ("Coating-Maine"), and Seller. (1)
10.5 Lease Agreement dated March 17, 1998, by and between Coating-Maine and
Seller. (1)
10.6 Fourth Amendment to Credit Agreement dated as of October 23, 1996, among
Central Products Company, Spinnaker Coating, Inc. (f/k/a Brown-Bridge
Industries, Inc.), and Entoleter, Inc., the Registrant, as guarantor, each
of the financial institutions party thereto from time to time, BT
Commercial Corporation, as collateral agent, and Bankers Trust Company as
issuing bank (the "Credit Agreement"), made effective as of December 31,
1997. (1)
10.7 Fifth Amendment to Credit Agreement. (1)
10.8 Sixth Amendment to Credit Agreement. (1)
10.9 First Supplemental Indenture dated as of March 17, 1998, among the
Registrant, Central Products Company, Entoleter, Inc., Spinnaker Coating,
Inc. (f/k/a Brown-Bridge Industries, Inc.), Coating-Maine and The Chase
Manhattan Bank, as Trustee. (1)
27. Financial Data Schedule (2)
- -------------
(1) Filed as an exhibit to the Registrant's Current Report on Form 8-K
dated March 30, 1998.
(2) Filed herewith.
(B) REPORTS ON FORM 8-K
1. On February 5, 1998, the Registrant filed a Current Report on Form 8- K,
which in accordance with "Item 5. Other Events" was filed in connection
with the press release made by the Registrant with respect to its proposed
private offering of shares of a new class of preferred stock.
2. On February 5, 1998, the Registrant filed a Current Report on Form 8-K,
which in accordance with "Item 5. Other Events" provided the public and the
holders of its common stock with pro forma financial information and other
general information relating to the proposed acquisition of the pressure
sensitive business of Seller, which was to be provided to potential
investors in the Registrant's new class of preferred stock.
3. On March 30, 1998, the Registrant filed a Current Report on Form 8-K, which
in accordance with "Item 5.
Other Events" reported the Registrant's acquisition of the pressure
sensitive business of Seller; however, the required financial statements
were not filed therewith and will be filed by amendment.
Page 14 of 16
<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: May 15, 1998
Page 15 of 16
<PAGE>
EXHIBIT INDEX
Exhibit
Page No. Sequential
- -------- ----------
27. Financial Data Schedule
Page 16 of 16
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 209
<SECURITIES> 0
<RECEIVABLES> 34,673
<ALLOWANCES> 731
<INVENTORY> 40,870
<CURRENT-ASSETS> 80,176
<PP&E> 97,093
<DEPRECIATION> 16,638
<TOTAL-ASSETS> 211,900
<CURRENT-LIABILITIES> 73,797
<BONDS> 119,937
0
0
<COMMON> 3,124
<OTHER-SE> 6,941
<TOTAL-LIABILITY-AND-EQUITY> 211,900
<SALES> 59,527
<TOTAL-REVENUES> 59,527
<CGS> 51,929
<TOTAL-COSTS> 57,626
<OTHER-EXPENSES> (15)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,482
<INCOME-PRETAX> (1,566)
<INCOME-TAX> (752)
<INCOME-CONTINUING> (814)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (814)
<EPS-PRIMARY> (0.12)
<EPS-DILUTED> (0.12)
</TABLE>
