<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 September 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
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Spinnaker Industries, Inc.
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(Exact name of Registrant as specified in its charter)
Delaware 06-0544125
- ------------------------------- ---------------------------------------
(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 3,775,680 shares
- ------------------------------------ ------------------------------------
Class Outstanding at September 30, 1998
Class A Common Stock, No Par Value 3,566,067 shares
- ------------------------------------ ------------------------------------
Class Outstanding at September 30, 1998
<PAGE>
SPINNAKER INDUSTRIES, INC.
INDEX
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<TABLE>
<CAPTION>
PAGE
NUMBER
------
<S> <C> <C>
PART I FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements ............................. 3
Condensed Consolidated Balance Sheets as of
September 30, 1998 and December 31, 1997 ...................... 3
Condensed Consolidated Statements of Operations
for the Three Months and Nine Months Ended
September 30, 1998 and 1997 ................................... 4
Condensed Consolidated Statements of Cash Flows
for the Nine Months Ended September 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 ........................... 11
PART II OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds ..................... 16
Item 5. Other Information ............................................. 16
Item 6. Exhibits ...................................................... 16
</TABLE>
2
<PAGE>
PART 1. - FINANCIAL INFORMATION
Item 1. - CONSOLIDATED FINANCIAL STATEMENTS
SPINNAKER INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, 1998 December 31, 1997
------------------ -----------------
(Unaudited) (Note)
ASSETS ($ In thousands)
<S> <C> <C>
Current assets:
Cash and cash equivalents ............. $ -- $ 5,977
Accounts receivable, net .............. 35,479 24,886
Inventories, net ...................... 47,176 30,745
Prepaid expenses and other ............ 6,242 4,516
--------- ---------
Total current assets .................. 88,897 66,124
Property plant and equipment:
Land .................................. 1,622 583
Buildings and improvements ............ 17,602 13,402
Machinery and equipment ............... 91,805 61,262
Accumulated depreciation .............. (20,914) (14,913)
--------- ---------
90,115 60,334
Goodwill, net .............................. 42,991 24,025
Other assets ............................... 8,315 6,235
--------- ---------
TOTAL ASSETS ............................... $ 230,318 $ 156,718
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ...................... $ 30,401 $ 14,529
Accrued liabilities ................... 6,170 6,319
Current portion of long term debt ..... 3,664 864
Working capital revolver .............. 40,883 446
Other current liabilities ............. 5,644 2,591
--------- ---------
Total current liabilities .................. 86,762 24,749
Long term debt, less current portion ....... 124,149 115,049
Deferred income taxes ...................... 5,554 5,554
Pension liabilities ........................ 2,608 1,097
Stockholders' equity:
Common stock .......................... 3,124 3,124
Additional paid in capital ............ 15,867 11,557
Retained earnings (deficit) ........... (7,248) (3,914)
Minimum pension liability ............. (386) (386)
Less: treasury stock .................. (112) (112)
--------- ---------
Total stockholders' equity ................. 11,245 10,269
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY . $ 230,318 $ 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 and July 1998, the Company acquired the assets of the pressure
sensitive business of S.D. Warren and the pressure sensitive industrial
electrical tape product line and manufacturing plant of tesa tape, inc.,
respectively. (See Note 1)
See accompanying notes to condensed consolidated financial statements, which are
an integral part of these financial statements.
3
<PAGE>
SPINNAKER INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED RESULTS OF OPERATIONS - UNAUDITED
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- ---------------------------
($ In thousands, except per share data) 1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net sales ................................. $ 74,449 $ 55,359 $ 205,811 $ 172,755
Cost of sales ............................. (64,872) (48,138) (179,381) (148,560)
--------- --------- --------- ---------
Gross margin .............................. 9,577 7,221 26,430 24,195
Selling, general and administrative expense (6,607) (5,357) (18,258) (16,465)
--------- --------- --------- ---------
Income from operations .................... 2,970 1,864 8,172 7,730
Interest expense .......................... (4,475) (3,309) (12,333) (9,914)
Other income (expense) - net .............. (46) 29 (38) 95
--------- --------- --------- ---------
Loss before income taxes .................. (1,551) (1,416) (4,199) (2,089)
Income tax benefit ........................ (290) (387) (865) (665)
--------- --------- --------- ---------
Net loss .................................. $ (1,261) $ (1,029) $ (3,334) $ (1,424)
--------- --------- --------- ---------
--------- --------- --------- ---------
Earnings per common share:
Net loss per common share ............ $ (0.17) $ (0.16) $ (0.47) $ (0.23)
Earnings per common share:
Net loss per common share
- assuming dilution .................. $ (0.17) $ (0.16) $ (0.47) $ (0.23)
</TABLE>
See accompanying notes to condensed consolidated financial statements which are
an integral part of these financial statements.
4
<PAGE>
SPINNAKER INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-------------------------
($ In thousands) 1998 1997
-------- --------
<S> <C> <C>
Operating activities:
Net loss ..................................................... $ (3,334) $ (1,424)
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation ........................................ 6,007 4,170
Amortization of goodwill and deferred financing costs 1,689 1,404
Changes in operating assets and liabilities
Accounts receivable ............................ (5,994) (4,090)
Inventories .................................... (5,061) 1,087
Prepaid expenses and other assets .............. (1,795) (12)
Accounts payable, accrued liabilities, and
other current liabilities ................... 18,585 1,833
-------- --------
Net cash provided by operating activities .................... 10,097 2,968
-------- --------
Investing activities:
Acquisition of Spinnaker Coating - Maine ................ (47,690) --
Acquisition of Spinnaker Electrical Tape Company ........ (2,117) --
Purchase of property, plant and equipment ............... (6,115) (5,965)
Other ................................................... (158) (221)
-------- --------
Net cash used in investing activities ........................ (56,080) (6,186)
-------- --------
Financing activities:
Proceeds from revolving credit facilities, net .......... 40,237 (353)
Principal payments on long term debt and leases ......... (100) (246)
Issuance of common stock ................................ 610 702
Deferred financing costs ................................ (741) --
-------- --------
Net cash provided by financing activities .................... 40,006 103
-------- --------
Decrease in cash and cash equivalents ................... (5,977) (3,115)
Cash and cash equivalents at beginning of period ............. 5,977 9,699
-------- --------
Cash and cash equivalents at end of period ................... $ -- $ 6,584
-------- --------
-------- --------
</TABLE>
See accompanying notes to condensed consolidated financial statements which are
an integral part of these financial statements.
5
<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 Electrical Tape Company ("Spinnaker
Electrical"), 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 related acquisition costs. The purchase price was funded from
availability under the Company's amended $60 million revolving credit
facility (the "Spinnaker 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 20,716
Goodwill .................... 21,807
Current liabilities ......... (262)
Non-current liabilities ..... (1,440)
--------
$ 54,690
--------
--------
</TABLE>
Goodwill arising from the Coating - Maine acquisition is amortized
using the straight-line method over a period of 30 years.
Effective July 30, 1998, the Company completed its acquisition of tesa
tape, inc.'s pressure sensitive electrical tape product line and
manufacturing plant ("Electrical Tape Business"). The Electrical Tape
Business, renamed Spinnaker Electrical Tape Company ("Spinnaker
Electrical") effective with the acquisition, produces electrical tape
for insulating motors, coils and transformers for major customers in
Europe, Canada and the U.S. The purchase price under the agreement was
approximately $10.7 million plus related acquisition costs. The
purchase price was comprised of $3.7 million in Company common stock,
$4.5 million in term debt, $2.0 million in cash and a $0.5 million
subordinated note by Spinnaker Electrical to tesa tape, inc.
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 .............. $ 2,100
Property, plant and equipment 8,917
Current liabilities ......... (200)
--------
$ 10,817
--------
--------
</TABLE>
The operating results of Coating - Maine and Spinnaker Electrical are
included in the consolidated statements of operations from their
respective acquisition dates. 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 both
acquisitions occurred at the beginning of 1997.
6
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
1998 1997 1998 1997
-------------------------------- -------------------------------
<S> <C> <C> <C> <C>
NET SALES ............................ $ 75,705 $ 76,062 $ 226,719 $ 234,624
NET INCOME (LOSS) .................... (1,039) (37) (2,052) 2,612
NET INCOME (LOSS) PER COMMON SHARE ... (0.14) (0.01) (0.29) 0.42
NET INCOME (LOSS) PER COMMON
SHARE-ASSUMING DILUTION ............ (0.14) (0.01) (0.29) 0.42
</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 September 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.
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 September 30, 1998 and December 31, 1997,
approximately 44% and 47%, respectively, are valued using the last in,
first out method (LIFO), 54% 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 September 30, 1998, and December 31, 1997:
<TABLE>
<CAPTION>
1998 1997
------- -------
(in thousands)
<S> <C> <C>
Finished goods ........... $27,167 $18,028
Work-in-process .......... 6,179 2,770
Raw materials and supplies 13,830 9,947
------- -------
TOTAL .................... $47,176 $30,745
------- -------
------- -------
</TABLE>
5. In conjunction with the acquisition of Coating - Maine, the Spinnaker
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 with an original principal amount of
$7.0 million, bearing 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 Spinnaker 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,
7
<PAGE>
1999 and 70% on March 31, 2000, provided the Company is not in default
of covenants under the Spinnaker Credit Facility and has availability
in excess of $15 million under the Spinnaker 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.
In conjunction with the acquisition of Electrical Tape Business,
Spinnaker Electrical entered into a revolving credit agreement
("Electrical Credit Facility"). The Electrical Credit Facility is
secured by the receivables and inventory of Spinnaker Electrical and is
separate and independent of the Spinnaker Credit Facility.
Also in conjunction with the acquisition of the Electrical Tape
Business, Spinnaker Electrical issued $4.5 million in term debt which
bears interest at the lower of prime plus 0.50% or LIBOR (London
Interbank Offered Rate) plus 2.50% per annum. The term debt 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. In addition, the
Company issued a twelve month subordinated seller note to tesa tape,
inc. ("tesa Note") with an original principal amount of $0.5 million,
bearing PIK interest at the federal funds rate. Principal and interest
are payable in cash on July 30, 1999 unless Spinnaker Electrical is in
default, after giving effect for the payment, of covenants under the
Electrical Credit Facility. If Spinnaker Electrical is prohibited from
paying accrued interest and principal in cash, the Company will make
payment by issuing Company Common stock.
Following is a summary of long term debt of the Company at September
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 --
Term loan with interest at prime plus 0.50% or LIBOR
plus 2.5%, interest only for 9 months, 7 year amortization 4,500 --
Subordinated Note with PIK interest at Federal Funds rate,
principal and interest due July 30, 1999 ................. 500 --
9 1/4% mortgage note from bank, payable on demand,
secured by certain property of Entoleter ................. 752 777
Capital lease obligations ................................ 69 136
--------- ---------
127,821 115,913
Less current maturities .................................. (3,672) (864)
--------- ---------
$ 124,149 $ 115,049
--------- ---------
--------- ---------
</TABLE>
Credit availability under the Spinnaker Credit Facility and the
Electrical Credit Facility are subject to certain variables, such as
the amount of inventory and receivables eligible to be included in
their respective borrowing bases. As of September 30, 1998, the Company
had cash advances outstanding of approximately $40.2 million and $0.7
million and available borrowings of approximately $11.6 million and
$1.3 million under the Spinnaker Credit Facility and the Electrical
Credit Facility, respectively. As there is no right of offset between
the facilities, cash collections are swept against their respective
facility's outstanding balance. The Company is charged an unused line
of credit fee every month, for each facility, based on an annual rate
of 0.375%.
8
<PAGE>
Interest on outstanding borrowings is at variable rates related to the
prime or LIBOR rates. At September 30, 1998, the combined effective
interest rate for revolver borrowings was approximately 8.6% and 8.5%
under the Spinnaker Credit Facility and Electrical Credit Facility,
respectively. The Company carries approximately 92.1% of the
outstanding Spinnaker 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 was
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 nine
months ended September 30 (in thousands, except per share data):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
Numerator - net income (loss) ................. $(1,261) $(1,029) $(3,334) $(1,424)
Denominator - denominator for earnings
per common share - weighted average shares 7,292 6,290 7,156 6,211
Net income (loss) per common share ............ $ (0.17) $ (0.16) $ (0.47) $ (0.23)
</TABLE>
As of September 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 September 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 September 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
<PAGE>
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.
10
<PAGE>
ITEM-2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1998, COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1997
NET SALES
The Company's net sales for the quarter ended September 30, 1998 were $74.4
million, compared to $55.4 million in the corresponding 1997 period. The
increase in net sales for 1998 is attributed to approximately $16.4 million in
sales from the recent acquisitions of Coating - Maine and Spinnaker Electrical
and increased unit sales of adhesive - backed paper label stock and industrial
carton sealing tape from 1997 levels. The increased unit sales of adhesive -
backed paper label stock include a 40% increase in pressure sensitive postage
volumes. Sales of industrial carton sealing tape were impacted by a successful
acrylic tape program and strong sales of water activated reinforced tapes, which
softened the impact of Asian imports and increased domestic market competition.
GROSS MARGIN
Gross margin as a percentage of net sales for the quarter ended September 30,
1998 was approximately 12.9% compared to approximately 13.0% in the
corresponding 1997 period. The increased sales of pressure sensitive postage
paper stock partially offset the impact of heightened market competition and
Asian imports, as well as new pricing and product mix under the recently awarded
five year $75 million postage contract.
The impact of Asian imports and increased domestic market competition resulted
in changes in sales mix which contributed to lower average selling prices in
both pressure sensitive label and industrial tape products, 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, resulting from recent capital investments, and updated material
procurement policies and procedures.
INCOME FROM OPERATIONS
Income from operations for the quarter ended September 30, 1998 was
approximately $3.0 million, compared to approximately $1.9 million in the
corresponding 1997 period. The 1998 operating results reflect increased sales,
both internal and through acquisitions, while maintaining lower administrative
costs. The Company has continued to rationalize administrative overhead and has
leveraged the knowledge within and between the subsidiaries. In addition,
operating results reflect approximately $0.9 million of increased depreciation
and amortization expense associated with the acquisition of Coating - Maine and
recent capital investments.
INTEREST EXPENSE
Interest expense for the quarter ended September 30, 1998 increased
approximately $1.2 million compared to the corresponding period in 1997,
primarily due to the financing associated with the Company's acquisition of
Coating - Maine.
INCOME TAXES
The Company's third quarter 1998 income tax rate for federal and state income
taxes reflects an annual effective tax rate of approximately 21%.
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 27%, however, the tax rate was reduced to approximately 20% by
the end of 1997.
11
<PAGE>
NINE MONTHS ENDED SEPTEMBER 30, 1998, COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1997
NET SALES
The Company's net sales for the nine months ended September 30, 1998 were $205.8
million, compared to $172.8 million in the corresponding 1997 period. The
increase in net sales for 1998 is attributed to approximately $33.6 million in
sales from the recent acquisitions of Coating - Maine and Spinnaker Electrical,
as well as increased unit sales of prime label stock and water activated
industrial carton sealing tape from 1997 levels. These increases partially
offset lower unit sales of pressure sensitive postage paper stock and certain
pressure sensitive tape products. Unit sales of pressure sensitive postage
paper stock, which were impacted by the timing of orders by the Bureau of
Engraving and Printing earlier in the year, increased significantly during
the most recent three month period. Sales of industrial tape products have
been impacted by Asian imports and increased domestic market competition,
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 nine months ended September 30,
1998 was approximately 12.8% compared to approximately 14.0% in the
corresponding 1997 period. The 1998 gross margins were lower due to changes in
sales mix, competitive pricing in both the adhesive label and industrial tape
markets, and the timing and new pricing of postage paper stock business.
Net sales of postage paper stock reflect year to date lower units and average
selling prices associated with the new five year $75 million contract for the
supply of postage paper stock. 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 nine months ended September 30, 1998 was
approximately $8.2 million, compared to approximately $7.7 million in the
corresponding 1997 period. The 1998 operating results reflect increased sales,
both internal and through acquisitions, while maintaining lower administrative
costs. The Company has continued to rationalize administrative overhead and has
leveraged the knowledge within and between the subsidiaries. In addition,
operating results reflect approximately $2.2 million of increased depreciation
and amortization expense associated with the acquisition of Coating - Maine and
recent capital investments.
INTEREST EXPENSE
Interest expense for the nine months ended September 30, 1998 increased
approximately $2.6 million compared to the corresponding period in 1997. Of the
increase, approximately $2.2 million is attributable to the financing associated
with the Company's acquisition of Coating - Maine.
INCOME TAXES
The Company's estimated annual effective income tax rate for federal and state
income taxes is approximately 21%, compared to approximately 20% in 1997 on an
annual basis. As of September 30, 1997, the effective tax rate was approximately
32%, 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.
12
<PAGE>
The Company has in excess of $9.5 million of net operating loss carryforwards to
offset future taxable income. These carryforwards begin to expire in the year
2011.
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.
The Coating - Maine Acquisition is consistent with the Company's long-term
strategy of pursuing acquisitions that 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 Spinnaker 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 Spinnaker 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 Spinnaker 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 Spinnaker Credit Facility.
In conjunction with the Coating - Maine Acquisition, the Spinnaker 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.
Effective July 30, 1998, the Company completed its acquisition of tesa tape,
inc.'s pressure sensitive electrical tape product line and manufacturing plant
("Electrical Tape Acquisition"). The Electrical Tape Business, renamed Spinnaker
Electrical Tape Company effective with the acquisition, produces electrical tape
for insulating motors, coils and transformers for major customers in Europe,
Canada and the U.S.
The Electrical Tape Acquisition is consistent with the Company's long-term
strategy of pursuing acquisitions that complement its position in the
adhesive-backed materials industry. 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.
In conjunction with the acquisition of the Electrical Tape Business, Spinnaker
Electrical entered into a $5 million revolving credit agreement. The Electrical
Credit Facility is separate and independent of the Spinnaker Credit Facility,
and is secured by the inventory and receivables of Spinnaker Electrical. The
Electrical Credit Facility is subject to certain variables, such as inventory
and receivables eligible to be included in the borrowing base.
Availability under the Electrical Credit Facility and cash flow from Electrical
Tape Business operations are Spinnaker Electrical's principal source of
liquidity. The Electrical Credit Facility is available to support periodic
fluctuations in working capital and other general business purposes of the
Electrical Tape Business. As of November 6, 1998, aggregate availability was
approximately $2.8 million, of which approximately $1.4 million was outstanding.
The Company's principal source of liquidity is cash flow from operations and
availability under the Spinnaker Credit Facility. The Spinnaker Credit Facility
is available to fund acquisitions and support periodic fluctuations in the
working capital. Credit availability under the Spinnaker Credit Facility is
subject to certain variables, such as
13
<PAGE>
inventory and receivables eligible to be included in the borrowing base. As of
November 6, 1998, aggregate availability was approximately $52.0 million, of
which approximately $46.1 million was outstanding.
The Company's September 30, 1998 cash balance was less than $0.1 million, as
cash collections are swept against outstanding revolver balances.
Net cash used in investing activities was $64.3 million in the nine months ended
September 30, 1998 compared to $6.2 million in the corresponding 1997 period.
Investing activities in 1998 primarily related to the acquisitions of Coating -
Maine and Spinnaker Electrical.
Financing activities during the nine months ended September 30, 1998 generated
approximately $48.2 million, which includes borrowings under the Spinnaker
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 amended $60 million Spinnaker Credit Facility and the Electrical Credit
Facility expire October 2001 and July 2003, respectively. The Company is charged
an unused credit fee every month, for each facility, of 0.375% per annum.
Interest on outstanding borrowings bear interest at variable rates related to
the prime or LIBOR rates. At September 30, 1998, the Company had approximately
$37.6 million of the then outstanding borrowings under the Spinnaker 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, fixed charge coverage, and minimum levels of
net worth and current ratio, as well as various other financial covenants.
YEAR 2000
The Year 2000 problem is the result of computer programs being written using two
digits (rather than four) to define the applicable year. This problem causes
some hardware and software to interpret a two-digit year expressed as "00" as
the year 2000. When the year 2000 begins, these computers may interpret "00" as
the year 1900 and either stop processing date-related computations or will
process them incorrectly. All software, computer hardware, building facilities
and equipment utilized by the Company require assessment to determine that they
will continue to operate accurately when they encounter a Year 2000 date before
and after January 1, 2000.
The Company has undertaken various initiatives intended to ensure that its
computer equipment and software will function properly with respect to dates in
the Year 2000 and thereafter. The Company's Year 2000 review is being performed
primarily by internal staff, and in certain operations, is supplemented by
outside consultants. For this purpose, the term "computer equipment and
software" includes systems that are commonly thought of as IT systems, including
accounting, data processing, and telephone/PBX systems, computerized
manufacturing equipment and other miscellaneous systems. Both IT and non-IT
systems may contain imbedded technology, which complicates the Company's Year
2000 identification, assessment, remediation, and testing efforts.
The assessment phase of the Company's initiatives is substantially complete.
Based upon its identification and assessment efforts to date, the Company
believes that certain of the computer equipment and software it currently uses
will require replacement or modification. A comprehensive contingency plan has
been developed for the adhesive-backed label platform and remediation and
testing is expected to be complete by March 1999. The development of a
comprehensive contingency plan is nearing completion for the industrial tape
platform and remediation and testing is estimated to be 60% complete. The
Company expects the industrial tape platform to be Year 2000 compliant by June
1999.
The Company is querying its third party vendors, and significant suppliers
and subcontractors that do not share information systems with the Company
(external agents). To date, the Company is not aware of any external agent
with a Year 2000 issue that would materially impact the Company's results of
operations, liquidity, or capital resources. However, the Company has no
means of ensuring that external agents will be Year 2000 ready. The inability
of external agents to complete their Year 2000 resolution process in a timely
manner could materially impact the Company. The effect of non-compliance by
external agents is not determinable.
Most Year 2000 issues have been or will be eliminated by the normal upgrading
process of computer systems and manufacturing equipment. Therefore, the cost of
addressing Year 2000 issues has been and will continue to be funded
14
<PAGE>
from operating cash flows. An estimate of the total cost of remediation has not
been determined. However, management believes that the cost will not materially
affect the results of operations.
The estimated costs and projected dates of completion for the Company's Year
2000 program are based on management's estimates and were developed using
numerous assumptions of future events, some of which are beyond the Company's
control. The Company presently believes that with modifications to existing
software and converting to new software, the Year 2000 issue will not pose
significant operational problems for the Company as a whole. However, if such
modifications and conversions are not completed timely or are ineffective, the
Year 2000 issue may materially and adversely impact the Company's financial
condition, results of operations and cash flows.
RECENT DEVELOPMENTS
The Company has retained Schroders & Co., Inc. to seek strategic alternatives,
including a possible sale, merger or other combination of Spinnaker. There is no
assurance that this initiative will be accomplished.
FORWARD LOOKING INFORMATION
This Form 10-Q contains certain forward looking information and other
information, including without limitation, certain of the statements in
"Management's Discussion and Analysis of Financial Condition and Results of
Operation; matters relating to strategic alternatives and "Year 2000." 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.
15
<PAGE>
PART II - OTHER INFORMATION
Item 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS
(C) On July 30, 1998, the Registrant acquired the Carbondale, Illinois
electrical tape manufacturing operations of tesa tape, inc. In
connection with such acquisition, the Registrant issued to tesa tape,
inc., as partial consideration for the assets acquired by the
Registrant, 200,000 shares its common stock, no par value. Such
issuance was consummated in reliance upon the exemption from
registration afforded by Section 4(2) of the Securities Act of 1933, as
amended. This exemption was relied upon, in part, based on the facts
that: tesa was the only recipient of shares in this transaction; the
shares were issued in a negotiated transaction without any general
solicitation; and tesa made representations to the Registrant, as to
its sophistication, experience, investment intent and status as an
accredited investor.
Item 5 - OTHER INFORMATION
The Registrant has retained Schroders & Co. to assist the Company in
seeking and evaluating strategic alternatives, including a possible
sale, merger, or other business combination of the Registrant. There
is no assurance that this initiative will be accomplished. In
addition, Lynch Corporation, which through a wholly owned subsidiary,
owns a 61% interest in the Registrant, has announced a plan to monetize
certain of its assets, including the Registrant
Item 6 - EXHIBITS
(A) Exhibits
99.1 Seventh Amendment to Credit Agreement dated as of October 23, 1996,
among Central Products Company, Spinnaker Coating, Inc., Spinnaker
Coating - Maine, Inc., Entoleter, Inc., the Registrant, as guarantor,
each of the financial institutions party thereto from time to time, BT
Commercial Corporation, as agent, Transamerica Business Credit
Corporation, as collateral agent, and Bankers Trust Company as issuing
bank (the "Credit Agreement"), made as of July 30, 1998. (1)
27. Financial Data Schedule (1)
- ---------------
(1) Filed herewith.
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: November 16, 1998
17
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Page No.
Exhibit Sequential
- ------- ----------
<S> <C> <C>
10.1 Seventh Amendment to the Credit Agreement
27. Financial Data Schedule
</TABLE>
18
<PAGE>
Exhibit 10.1
SEVENTH AMENDMENT AND CONSENT TO CREDIT AGREEMENT
THIS SEVENTH AMENDMENT AND CONSENT (this "Amendment"), to the
Credit Agreement dated as of October 23, 1996, among CENTRAL PRODUCTS COMPANY, a
Delaware corporation ("Central"), SPINNAKER COATING, INC., a Delaware
corporation formerly known as Brown-Bridge Industries, Inc. ("Coating"),
SPINNAKER COATING-MAINE, INC., a Delaware corporation ("SCM"), ENTOLETER, INC.,
a Delaware corporation ("Entoleter" and, together with Central, Coating and SCM,
the "Borrowers"), SPINNAKER INDUSTRIES, INC., a Delaware corporation (the
"Guarantor" and, together with the Borrowers, the "Credit Parties"), each of the
financial institutions from time to time parties thereto, as lenders (the
"Lenders"), BT COMMERCIAL CORPORATION, as agent (in such capacity, the "Agent")
for the Lenders, TRANSAMERICA BUSINESS CREDIT CORPORATION, as collateral agent
(in such capacity, the "Collateral Agent"), and BANKERS TRUST COMPANY, as
issuing bank (the "Issuing Bank"), is made as of June 30, 1998 among the
Borrowers, the Guarantor, the Agent, the Collateral Agent, the Issuing Bank and
the Lenders.
W I T N E S S E T H :
WHEREAS, the Borrowers, the Guarantor, the Lenders, the Agent,
the Collateral Agent and the Issuing Bank are parties to the Credit Agreement,
dated as of October 23, 1996 (as amended by the First Amendment dated as of
December 31, 1996, the Second Amendment dated as of March 31, 1997, the Third
Amendment dated as of September 30, 1997, the Fourth Amendment dated as of
December 31, 1997, the Fifth Amendment dated as of March 17, 1998 and the Sixth
Amendment dated as of March 17, 1998 and as the same may be further amended,
supplemented or otherwise modified from time to time, the "Credit Agreement";
capitalized terms used herein shall have the meanings assigned to them in the
Credit Agreement unless otherwise defined herein); and
WHEREAS, the Guarantor intends to form Spinnaker Electrical
Tape Company, a Delaware corporation and an Unrestricted Subsidiary ("Electrical
Tape"), to acquire substantially all of the assets of the electrical tape
business of tesa tape, inc. ("tesa") pursuant to an Asset and Operations
Purchase Agreement dated as of June 19, 1998 (the "Tesa Purchase Agreement")
between tesa and Electrical Tape (as assignee of the Guarantor);
WHEREAS, the Borrowers and the Guarantor have requested the
Lenders to permit (a) the Borrowers to apply the proceeds of a $2,000,000
Revolving Loan to pay a cash dividend to the Guarantor, (b) the Guarantor to
immediately apply the proceeds of such dividend to make a capital contribution
to Electrical Tape, (c) the Guarantor to issue to tesa shares of common stock of
the Guarantor to pay up to $4,500,000 of the purchase price under the Tesa
Purchase Agreement and (d) the Guarantor to issue to tesa additional shares of
common stock of the Guarantor to the extent necessary to make payments-in-kind
of principal and interest under the Nonnegotiable Subordinated Promissory made
by Electrical Tape in favor of tesa (collectively, the "Tape Investment");
WHEREAS, the Lenders are willing to consent to the Tape
Investment, but only on the terms and subject to the conditions set forth
herein;
NOW, THEREFORE, in consideration of the foregoing and other
good and valuable consideration, the parties hereto hereby agree as follows:
1
<PAGE>
SECTION 1. AMENDMENTS TO CREDIT AGREEMENT. Effective as of the
date hereof, but subject to the satisfaction of the conditions precedent set
forth in Section 3, the Credit Agreement is hereby amended as follows:
(a) Section 1.1 of the Credit Agreement is amended by
inserting the following definitions in their proper
alphabetical order:
"'Consolidated Fixed Charge Coverage Ratio' means
with respect to the Guarantor and its Restricted
Subsidiaries for any period, the ratio of (X) (i)
EBITDA for such period, less (ii) all Capital
Expenditures paid or payable by such Persons during
such period (other than Capital Expenditures financed
with (A) the proceeds of Indebtedness permitted
hereunder and (B) the Equity Proceeds Amount), to (Y)
(i) scheduled principal amounts of all Indebtedness
paid or payable by such Person in such period,
whether or not such payments are actually made (other
than (A) payments on the Line of Credit which do not
permanently reduce the Commitments, (B) payments
under the SDW Subordinated Note and (C) payments made
under the Tesa Note solely in shares of common stock
of the Guarantor), plus (ii) all interest and fees
for the use of money or the availability of money,
including commitment, facility and like fees and
charges upon Indebtedness (including Indebtedness to
the Lenders) payable by such Persons during such
period whether or not such interest or fees are
actually paid, but excluding the amortization of
deferred financing fees incurred and/or paid between
October 1996 and July 28, 1998, plus (iii) all loans
and Investments made by such Persons in or to any
other Person made during such period (other than (A)
Investments financed with the Equity Proceeds Amount
and (B) Investments made with shares of common stock
of the Guarantor), plus (iv) all cash dividends paid
or declared by the Guarantor during such period,
regardless of whether or when such dividends are
actually paid, plus (v) all cash taxes paid or
payable by such Persons during such period."
2
<PAGE>
"'Electrical Tape' means Spinnaker Electrical Tape
Company, a Delaware corporation and an Unrestricted
Subsidiary."
"'Tesa Note' means the nonnegotiable subordinated
promissory note dated July 30, 1998 made by Electrical Tape in
favor of tesa tape, Inc., as amended, supplemented or
otherwise modified from time to time."
(b) The definition of "Brown Line of Credit" in Section
1.1 of the Credit Agreement is amended by deleting
"$20,000,000" and substituting therefor
"$24,000,000".
(c) The definition of "Central Line of Credit" in Section
1.1 of the Credit Agreement is amended by deleting
"$20,000,000" and substituting therefor
"$22,000,000".
(d) The definition of "Entoleter Line of Credit" in
Section 1.1 of the Credit Agreement is amended by
deleting "$5,000,000" and substituting therefor
"$1,000,000".
(e) The definition of "SCM Line of Credit" in Section 1.1
of the Credit Agreement is amended by deleting
"$15,00,000" and substituting therefor "13,000,000".
(f) Section 7.2(g) of the Credit Agreement is amended by
adding at the end thereof the following new sentence:
"The Credit Parties will not, nor will they permit
any of their Restricted Subsidiaries to, sell any
goods or render any services to Electrical Tape on
credit terms (it being understood that Electrical
Tape shall pay for any such goods or services
immediately upon its receipt thereof)."
(g) Section 7.2(r) of the Credit Agreement is amended by
(i) deleting "6,000,000" from the second place it
appears and substituting therefor "$5,000,000" and
(ii) deleting the proviso in clause (i) of such
Section and substituting therefor the following:
"provided, however, that for any six-month period
commencing with the six-month period ending June 30,
1997 (excluding the six-month period ending June 30,
1999), the Base Amount set forth above may be
increased by carrying over to any such six-month
period any portion of the Base Amount not spent in
the immediately preceding six-month period (but not
in any period prior thereto); and"
(h) Section 7.2(s) of the Credit Agreement is amended and
restated as follows:
"(s) Minimum Consolidated Net Worth. The Credit
Parties will not, on the last day of each fiscal
quarter set forth below, permit Consolidated Net
Worth to be less than the amount set forth below
opposite such quarter:
3
<PAGE>
<TABLE>
<CAPTION>
Fiscal Quarter Ended Amount
-------------------- ------
<S> <C>
June 30, 1998 $7,300,000
September 30, 1998 7,974,000
December 31, 1998 8,986,000
March 31, 1999 8,986,000
June 30, 1999 8,986,000
September 30, 1999 8,986,000
December 31, 1999 9,149,000
March 31, 2000 9,149,000
June 30, 2000 9,234,000
September 30, 2000 9,320,000
December 31, 2000 9,832,000
March 31, 2001 9,832,000
June 30, 2001 10,167,000
September 30, 2001 10,501,000
December 31, 2001 11,292,000
</TABLE>
(i) Section 7.2(u) of the Credit Agreement is amended by
(i) deleting "(U) Minimum Consolidated Interest
Coverage Ratio." and substituting therefor "(U)
Minimum Consolidated Interest Coverage Ratio; Minimum
Consolidated Fixed Charge Coverage Ratio. (i)" and
(ii) adding the following at the end of such Section:
"(ii) The Credit Parties will not permit Consolidated Fixed
Charge Coverage Ratio, for each fiscal period set
forth below, to be less than the ratio set forth
below opposite such period:
<TABLE>
<CAPTION>
Period Ratio
------ -----
<S> <C>
July 1, 1998 through September 30, 1998 1.0:1.0
July 1, 1998 through December 31, 1998 1.0:1.0
July 1, 1998 through March 31, 1999 1.0:1.0
four fiscal quarters ended each June 30, September 30, 1.0:1.0"
December 31 and March 31 thereafter
</TABLE>
4
<PAGE>
(j) Exhibit M to the Credit Agreement is amended and
restated in the form of Annex I hereto.
SECTION 2. CONSENT. Effective as of the date hereof, but
subject to the satisfaction of the conditions precedent set forth in Section 3,
the Agent and the Lenders hereby consent to the Tape Investment.
SECTION 3. EFFECTIVENESS; CONDITIONS PRECEDENT This Amendment
shall become effective upon the satisfaction of each of the following conditions
precedent, only if the Agent receives each of the following on or before August
31, 1998, each in form and substance satisfactory to the Agent and the
Collateral Agent:
(a) counterparts of this Amendment, duly executed by each
of the Credit Parties, the Issuing Bank, the Agent,
the collateral Agent and the Lenders;
(b) Certified copies of the resolutions of the respective
Board of Directors of the Guarantor, Central and
Coating approving this Amendment and the transactions
contemplated hereby.
(c) An opinion of Haynes and Boone, counsel for the
Guarantor, to the effect that the transactions
contemplated hereby do not conflict with or
constitute a default under any of the Senior Note
Documents.
(d) Evidence that the transactions contemplated by the
Tesa Purchase Agreement have closed (or will close
contemporaneously with the effectiveness of this
Amendment).
(e) A certificate signed by a duly authorized officer of
the Guarantor certifying that (i) the representations
and warranties contained in Section 4 hereof are true
and correct on and as of the date of such certificate
as though made on and as of such date, (ii) the
representations and warranties contained in Section
6.1 of the Credit Agreement are true and correct on
and as of the date of such certificate as though made
on and as of such date, except to the extent that
such representations and warranties expressly relate
solely to an earlier date (in which case such
representations and warranties shall have been true
and correct on and as of such earlier date), (iii) no
Default or Event of Default has occurred and is
continuing and (iv) no holder of any Indebtedness of
Electrical Tape or any of its Subsidiaries has or
will have any recourse to any of the assets of the
Guarantor or any of its Restricted Subsidiaries with
respect to such Indebtedness.
5
<PAGE>
(f) Revolving Notes, substantially in the form of Exhibit
A, duly executed by Central in favor of each Lender.
(g) Revolving Notes, substantially in the form of Exhibit
B, duly executed by Coating in favor of each Lender.
(h) Revolving Notes, substantially in the form of Exhibit
C, duly executed by SCM in favor of each Lender.
(i) Revolving Notes, substantially in the form of Exhibit
D, duly executed by Entoleter in favor of each
Lender.
SECTION 4. REPRESENTATIONS AND WARRANTIES OF THE CREDIT
PARTIES. Each of the Credit Parties represents and warrants as follows:
(a) The execution, delivery and performance by such
Credit Party of this Amendment and the documents
delivered in connection herewith to which such Credit
Party is a party (i) are within such Credit Party's
corporate powers and authority, have been duly
authorized by all necessary corporate action and do
not contravene (A) such Credit Party's Governing
Documents, (B) any Requirement of Law applicable to
it or any of its properties or (C) any franchise,
license, permit, indenture, contract, lease,
agreement, instrument or other commitment to which it
is a party or by which it or any of its properties
are bound, (ii) will not result in a Default or an
Event of Default and (iii) will not result in or
require the creation or imposition of any Lien upon
or with respect to any property now owned or
hereafter acquired by such Credit Party (other than
Liens permitted by the Credit Agreement).
(b) This Amendment and the documents delivered in
connection herewith to which such Credit Party is a
party constitute the legal, valid and binding
obligations of such Credit Party enforceable against
such Credit Party in accordance with its terms,
except as such enforceability may be limited by
bankruptcy, insolvency or similar laws affecting
creditor's rights generally and general principles of
equity.
(c) There is no pending or, to the best of its knowledge,
threatened litigation, proceeding, inquiry or other
action seeking an injunction or other restraining
order, damages or other relief with respect to the
transactions contemplated by this Amendment, the Tesa
Purchase Agreement or the transactions contemplated
hereby and thereby or any Credit Party's other
business activities.
6
<PAGE>
(d) Since March 31, 1998 there has occurred no material
adverse change in the financial condition,
operations, assets or prospects of the Credit
Parties.
SECTION 5. REFERENCE TO AND EFFECT ON THE CREDIT DOCUMENTS.
(a) Upon the effectiveness of this Amendment, on and
after the date hereof, each reference in the Credit
Agreement to (i) "this Agreement," "hereunder,"
"hereof," "herein" and words of like import, and such
words or words of like import in each reference in
the Credit Documents, shall mean and be a reference
to the Credit Agreement as amended hereby.
(b) Except as specifically amended hereby, all of the
terms and provisions of the Credit Agreement shall
remain in full force and effect and are hereby
ratified and confirmed.
(c) The execution, delivery and effectiveness of this
Amendment shall not, except as expressly provided
herein, operate as an amendment to or a waiver of any
right, power or remedy of the Agent or the Lenders
under any of the Credit Documents, or constitute an
amendment to or a waiver of any provision of any of
the Credit Documents.
(d) This Amendment shall be deemed to be a Credit
Document for all purposes.
SECTION 6. EXECUTION IN COUNTERPARTS; ETC. This Amendment may
be executed in counterparts each of which when so executed and delivered shall
be deemed to be an original and all of which taken together shall constitute one
and the same instrument. This Amendment and each of the other documents
delivered in connection herewith may be executed and delivered by telecopier
with the same force and effect as if the same was a fully executed and delivered
original manual counterpart.
SECTION 7. EXPENSES. The Borrowers shall, jointly and
severally, pay for all of the reasonable costs and expenses incurred by the
Agent and the Collateral Agent in connection with the transaction contemplated
by this Amendment, including, without limitation, the reasonable fees and
expenses of counsel to the Agent.
SECTION 8. GOVERNING LAW. THE VALIDITY, INTERPRETATION AND
ENFORCEMENT OF THIS AMENDMENT SHALL BE GOVERNED BY THE LAWS OF THE STATE OF NEW
YORK WITHOUT GIVING EFFECT TO THE CONFLICTS OF LAW PRINCIPLES THEREOF (OTHER
THAN SECTION 5-1401 OF THE NEW YORK GENERAL OBLIGATIONS LAW).
[Remainder of page intentionally left blank]
7
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this
Amendment to be executed by their respective officers thereunto duly authorized
as of the date first above written.
BORROWERS
---------
CENTRAL PRODUCTS COMPANY
By: /s/ M.R. Matteson
----------------------------------
Name: M.R. Matteson
Title: Vice President
SPINNAKER COATING, INC.,
formerly known as
BROWN-BRIDGE INDUSTRIES, INC.
By: /s/ M.R. Matteson
----------------------------------
Name: M.R. Matteson
Title: Vice President
ENTOLETER, INC.
By: /s/ M.R. Matteson
----------------------------------
Name: M.R. Matteson
Title: Vice President
SPINNAKER COATING-MAINE, INC.
By: /s/ M.R. Matteson
----------------------------------
Name: M.R. Matteson
Title: Vice President
GUARANTOR
---------
SPINNAKER INDUSTRIES, INC.
By: /s/ M.R. Matteson
----------------------------------
Name: M.R. Matteson
Title: Vice President, Corporate Development
[Signature page to Seventh Amendment]
8
<PAGE>
AGENT
-----
BT COMMERCIAL CORPORATION, as Agent
By: /s/ F.A. Chiovari
----------------------------------
Name: F.A. Chiovari
Title: Vice President
COLLATERAL AGENT
----------------
TRANSAMERICA BUSINESS CREDIT CORPORATION, as
Collateral Agent
By: /s/ R.L. Heinz
----------------------------------
Name: R.L. Heinz
Title: Division Credit Manager
ISSUING BANK
------------
BANKERS TRUST COMPANY, as Issuing Bank
By: /s/ F.A. Chiovari
----------------------------------
Name: F.A. Chiovari
Title: Vice President
LENDERS
-------
BT COMMERCIAL CORPORATION
By: /s/ F.A. Chiovari
----------------------------------
Name: F.A. Chiovari
Title: Vice President
TRANSAMERICA BUSINESS CREDIT CORPORATION
By: /s/ R.L. Heinz
----------------------------------
Name: R.L. Heinz
Title: Division Credit Manager
[Signature page to Seventh Amendment]
9
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<S> <C>
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0
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