<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, 1999
--------------------------------------------------
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.
- --------------------------------------------------------------------------------
(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)
1700 Pacific Avenue, Suite 1600, Dallas, TX 75201
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(214) 855-0322
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
N/A
- --------------------------------------------------------------------------------
(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 March 31, 1999
Class A Common Stock, No Par Value 3,566,067 shares
- ------------------------------------ ------------------------------------
Class Outstanding at March 31, 1999
<PAGE>
SPINNAKER INDUSTRIES, INC.
INDEX
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAGE
NUMBER
------
<S> <C>
PART I FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of
March 31, 1999 and December 31, 1998 3
Condensed Consolidated Statements of Operations
for the Three Months Ended March 31, 1999 and 1998 4
Condensed Consolidated Statements of Cash Flows
for the Three Months Ended March 31, 1999 and 1998 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
PART II OTHER INFORMATION
Item 6. Exhibits 19
</TABLE>
Page 2 of 19
<PAGE>
PART 1. - FINANCIAL INFORMATION
Item 1. - CONSOLIDATED FINANCIAL STATEMENTS
SPINNAKER INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, 1999 December 31, 1998
---------------- -----------------
(Unaudited) (Note)
ASSETS ($ in thousands)
<S> <C> <C>
Current assets:
Accounts receivable, net $ 21,453 $ 21,439
Inventories, net 27,144 24,217
Prepaid expenses and other 1,771 2,205
Net current assets of discontinued operations 33,642 38,625
----------- -----------
Total current 84,010 86,486
Property plant and equipment:
Land 573 573
Buildings and improvements 9,751 9,746
Machinery and equipment 43,144 42,497
Accumulated depreciation (12,282) (11,298)
----------- -----------
41,186 41,518
Goodwill, net 22,619 21,075
Other assets 5,851 7,201
Net non-current assets of discontinued operations 70,823 71,651
----------- -----------
TOTAL ASSETS $ 224,489 $ 227,931
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities:
Accounts payable $ 19,763 $ 16,782
Accrued liabilities 2,636 3,106
Current portion of long term debt 1,829 1,691
Working capital revolver 37,499 42,731
Other current liabilities 5,666 2,575
Net current liabilities of discontinued operations 16,573 18,162
----------- -----------
Total current liabilities 83,966 85,047
Long term debt, less current portion 125,925 126,086
Deferred income taxes 632 632
Pension liabilities 1,670 1,540
Net non-current liabilities of discontinued operations 6,280 6,280
Stockholders' equity:
Common stock 3,124 3,124
Additional paid in capital 15,867 15,867
Retained earnings (deficit) (12,863) (10,533)
Less: treasury stock (112) (112)
----------- -----------
Total stockholders' equity 6,016 8,346
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 224,489 $ 227,931
=========== ===========
</TABLE>
NOTE:The balance sheet at December 31, 1998 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 19
<PAGE>
SPINNAKER INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED RESULTS OF OPERATIONS - UNAUDITED
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------------------------------
($ in thousands, except per share data) 1999 1998
------------- -------------
<S> <C> <C>
Net sales $ 40,197 $ 30,718
Cost of sales 36,955 27,163
------------- -------------
Gross margin 3,242 3,555
Selling, general and administrative expense 3,028 2,483
------------- -------------
Operating profit 214 1,072
Interest expense 2,157 1,349
Other income (expense) - net (7) 23
------------- -------------
Loss from continuing operations before income taxes (1,950) (254)
Income tax benefit 702 122
------------- -------------
Net loss from continuing operations (1,248) (132)
Discontinued operations (Note 7):
Loss from discontinued operations of industrial
tape segment (net of applicable income taxes) (1,082) (682)
------------- -------------
Net loss $ (2,330) $ (814)
============= =============
Earnings per common share:
Net loss per common share from continuing operations $ (0.17) $ (0.02)
Net loss per common share from discontinued operations (0.15) (0.10)
------------- -------------
Net loss per common share $ (0.32) $ (0.12)
============= =============
</TABLE>
See accompanying notes to condensed consolidated financial statements which are
an integral part of these financial statements.
Page 4 of 19
<PAGE>
SPINNAKER INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------------------------------
($ in thousands) 1999 1998
------------- -------------
<S> <C> <C>
Operating activities:
Net loss $ (2,330) $ (814)
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation 984 614
Amortization of goodwill and deferred financing costs 403 194
Changes in operating assets and liabilities
Accounts receivable (14) (4,024)
Inventories (2,927) 413
Prepaid expenses and other assets (1) 89
Accounts payable, accrued liabilities, and
other current liabilities 5,732 3,283
Discontinued operations - non-cash charges and
working capital changes 4,966 2,890
------------- -------------
Net cash provided by operating activities 6,813 2,645
------------- -------------
Investing activities:
Acquisition of Spinnaker Coating - Maine - (44,770)
Purchase of property, plant and equipment (652) (620)
Other (39) (1,119)
Investing activities of discontinued operations (671) (1,226)
------------- -------------
Net cash used in investing activities (1,362) (47,735)
------------- -------------
Financing activities:
Proceeds from revolving credit facilities, net (5,232) 39,450
Principal payments on long term debt and leases (23) (34)
Issuance of common stock - 610
Deferred financing costs (123) (704)
Financing activities of discontinued operations (73) -
------------- -------------
Net cash provided by (used in) financing activities (5,451) 39,322
------------- -------------
Decrease in cash and cash equivalents - (5,768)
Cash and cash equivalents at beginning of period - 5,977
------------- -------------
Cash and cash equivalents at end of period $ - $ 209
============= =============
</TABLE>
See accompanying notes to condensed consolidated financial statements which are
an integral part of these financial statements.
Page 5 of 19
<PAGE>
SPINNAKER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited 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.
On April 12, 1999, the Company reached a definitive agreement to sell its two
industrial tape units, Central Products Company and Spinnaker Electrical, which
comprise its industrial tape segment, to Intertape Polymer Group, Inc. As a
result, the Company's industrial tape segment is being reported as a
discontinued operation in the accompanying consolidated financial statements.
Accordingly, certain prior year amounts have been restated to present the
industrial tape segment as discontinued.
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, 1999 are not
necessarily indicative of the results that may be expected for the year ended
December 31, 1999. 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, 1998.
2. ACQUISITIONS
ACQUISITION OF COATING - MAINE
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 Pressure
Sensitive Business, which was 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
"Warren 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
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 23,061
Current liabilities (262)
Non-current liabilities (1,440)
-------
$55,228
=======
</TABLE>
Goodwill arising from the Coating - Maine acquisition is amortized using the
straight-line method over a period of 30 years.
Page 6 of 19
<PAGE>
ACQUISITION OF SPINNAKER ELECTRICAL
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 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 shares of the Company's common stock, no par value ("Common
Stock"), $4.5 million in term debt, $2.0 million in cash and a $0.5 million
subordinated note issued 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 8,800
Acquisition costs 767
Current liabilities (200)
-----------
$ 11,467
===========
</TABLE>
ACQUISITION OF SPINNAKER COATING MINORITY INTEREST
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 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.
PRO FORMA INFORMATION
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 continuing operations presented as
though the acquisition occurred at the beginning of 1998.
<TABLE>
<CAPTION>
Three Months Ended
March 31, 1998
--------------
<S> <C>
Net sales $42,832
Net income (loss) from continuing operations (338)
Net income (loss) per common share
from continuing operations (0.05)
</TABLE>
Page 7 of 19
<PAGE>
3. INVENTORIES
Of inventory values at March 31, 1999 and December 31, 1998 for continuing
operations, approximately 97% and 96%, 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, 1999,
and December 31, 1998:
<TABLE>
<CAPTION>
1999 1998
------- -------
(in thousands)
<S> <C> <C>
Finished goods $24,581 $26,633
Work-in-process 4,357 3,648
Raw materials and supplies 12,745 12,103
------- -------
41,683 42,384
Less: inventory of discontinued operations 14,539 18,167
------- -------
$27,144 $24,217
======= =======
</TABLE>
4. LONG-TERM DEBT AND WORKING CAPITAL REVOLVER
On October 23, 1996, the Company issued $115,000,000 of 10 3/4% Senior Secured
Notes (the "Senior Notes") due 2006. The Senior Notes are redeemable, in whole
or in part, at the option of the Company on or after October 15, 2001, at the
redemption prices beginning at 105.375% of the principal amount declining to
100% of the principal amount on October 15, 2005, plus accrued and unpaid
interest. Spinnaker Coating, CPC and Entoleter ("Guarantors") unconditionally
guarantee the Senior Notes, jointly and severally. Spinnaker Electrical, an
unrestricted subsidiary, is not a guarantor of the Senior Notes.
Following is a summary of long term debt of the Company at March 31, 1999, and
December 31, 1998:
<TABLE>
<CAPTION>
1999 1998
-------- --------
(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 August 15, 1999 and March 31, 2000........................... 7,000 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 4,500
Subordinated Note with PIK interest at Federal Funds rate,
principal and interest due July 30, 1999................................ 500 500
9 1/4% mortgage note from bank, payable on demand,
secured by certain property of Entoleter................................ 717 729
Capital lease obligations............................................... 37 48
-------- --------
127,754 127,777
Less current maturities................................................. (1,829) (1,691)
-------- --------
$125,925 $126,086
======== ========
</TABLE>
The Company also maintains short-term lines of credit with banks for working
capital needs at each subsidiary. In conjunction with the acquisition of
Coating - Maine, the Spinnaker Credit Facility was amended to increase the
aggregate facility amount from $40 million to $60 million. In conjunction with
the acquisition of the Electrical Tape Business, Spinnaker Electrical entered
into a separate $5 million revolving credit agreement ("Electrical Credit
Page 8 of 19
<PAGE>
Facility"). Credit availability under the Spinnaker Credit Facility and the
Electrical 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 is charged an unused line of credit fee every month for
each facility, based on an annual rate of 0.375%. All outstanding borrowings
under the Spinnaker Credit Facility bear interest at the prime interest rate
plus 1.75% or LIBOR plus 2.75%. All outstanding borrowings under the
Electrical Credit Facility bear interest at the prime interest rate plus
0.50% or LIBOR plus 2.5%. At March 31, 1999, the combined effective interest
rate for each facility's borrowings was approximately 7.7% and 7.9%,
respectively. The Company carries over 98% of the outstanding Spinnaker
Credit Facility borrowings in LIBOR instruments. The Company had cash
advances outstanding of approximately $35.9 million and $1.6 million and
available borrowings of approximately $10.9 million and $0.7 million under
the Spinnaker Credit Facility and Electrical Facility, respectively, as of
March 31, 1999. As there is no right of offset between the two facilities,
cash collections are swept against their respective facility's outstanding
balance.
In conjunction with the acquisition of Coating - Maine, the Company issued a
convertible subordinated 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 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 allowed the
Company to pay the first year's interest payment by issuing an additional
subordinated convertible note having similar terms; in the future, 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, 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. The Company was prohibited from satisfying
the March 31, 1999 principal payment due to insufficient pro forma availability.
The unpaid payment or portions of future payments 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 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. 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 Common Stock.
Proceeds from the sale of Central Products Company are anticipated to
satisfy transactions costs and repay certain of the working capital revolver
debt. The balance of the proceeds would be available to invest in any
business, capital expenditure or other tangible asset in the Permitted
Businesses, as defined in the Indenture. Any proceeds not so invested within
270 days after the closing of the sale or not used to permanently reduce
indebtedness (other than subordinated debt) shall be used to repurchase the
Senior Notes on a pro rata basis as required by the Indenture.
The proceeds from the sale of Spinnaker Electrical, an unrestricted
subsidiary, will repay certain term debt and working capital revolver debt
collateralized by the assets of Spinnaker Electrical. The remaining net
proceeds will be used for general purposes, which may include purchasing
Senior Notes in the open market where the Senior Notes trade at a substantial
discount from the principal amount.
5. RELATED PARTY TRANSACTIONS
On January 8, 1998, Boyle Fleming & Company ("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.
Page 9 of 19
<PAGE>
6. EARNINGS PER SHARE
The following table sets forth only the computation of the basic earnings per
share, as there are no dilutive securities for the three months ended March 31
(in thousands, except per share data):
<TABLE>
<CAPTION>
Three Months Ended
1999 1998
----------- -----------
<S> <C> <C>
Numerator -
Net income (loss) from continuing operations $ (1,248) $ (132)
Net income (loss) from discontinued operations,
net of applicable income taxes (1,082) (682)
----------- -----------
Net income (loss) $ (2,330) $ (814)
=========== ===========
Denominator - denominator for earnings per common
share - weighted average shares 7,342 7,027
Net income (loss) per common share from continuing operations $ (0.17) $ (0.02)
Net income (loss) per common share from discontinued operations,
net of applicable income taxes (0.15) (0.10)
----------- -----------
Net income (loss) per common share $ (0.32) $ (0.12)
=========== ===========
</TABLE>
As of March 31, 1999 and 1998, there were 20,000 and 30,000 respectively, of
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.
7. DISCONTINUED OPERATIONS
On April 12, 1999, the Company reached a definitive agreement to sell its two
industrial tape units, Central Products Company and Spinnaker Electrical, which
comprise its industrial tape segment, to Intertape Polymer Group, Inc.
("Intertape"), for approximately $105 million and 300,000 seven-year warrants to
purchase shares of Intertape common stock at $35.00 each. Accordingly, operating
results of the industrial tape segment have been segregated from continuing
operations and reported as a separate line item on the statement of operations.
The Company has restated its prior financial statements to present the operating
results of the industrial tape segment as a discontinued operation. The
industrial tape segment net sales were $29.5 million and $28.8 million for the
three month periods ended March 31, 1999 and 1998, respectively, and $121.8
million, $119.7 million and $124.1 million for fiscal years ended December 31,
1998, 1997 and 1996, respectively.
General corporate office expenses related to finance and administrative
functions including public company compliance reporting, bank and investor
relations, taxes other than income taxes and holding company payroll,
historically allocated and charged to the industrial tape segment were
reversed and allocated back to continuing operations. These expenses were not
considered to be directly attributed to discontinued operations. Expenses
allocated back to continuing operations totaled $0.4 million in the
three-month periods ended March 31, 1999 and 1998.
Interest expense attributed to the Senior Notes and related deferred financing
has historically been allocated based on the pro rata share of subsidiary debt
obligations retired with the proceeds from the issuance of the Senior Notes, to
total debt obligations retired. The Senior Note proceeds were used to extinguish
certain outstanding term and revolver obligations in October 1996. Interest
expenses charged to the discontinued industrial tape segment totaled $2.1
million in the three-month periods ended March 31, 1999 and 1998.
Page 10 of 19
<PAGE>
Interest expense from continuing operations is subject to certain matters
associated with the use of the net proceeds from the sales of Central Products
Company and Spinnaker Electrical, including retirement of senior debt or
"permitted investments" as defined under the Indenture. As a result, interest
expense, as presented on a historical basis, may not necessarily be indicative
of interest expense of continuing operations for the year ended December 31,
1999.
The net assets of the industrial tape businesses included in the accompanying
consolidated balance sheets as of March 31, 1999 and December 31, 1998 consisted
of the following (in thousands):
<TABLE>
<CAPTION>
March 31, 1999 December 31, 1998
-------------- -----------------
<S> <C> <C>
Accounts receivable, net $ 13,423 $ 14,815
Inventories, net 14,539 18,167
Prepaids and other 5,680 5,643
------------- -------------
Current assets of discontinued operations $ 33,642 $ 38,625
Property, plant and equipment $ 47,679 $ 48,312
Goodwill and other assets 23,144 23,339
------------- -------------
Noncurrent assets of discontinued operations $ 70,823 $ 71,651
Accounts payable $ 12,995 $ 13,720
Accrued liabilities 3,578 4,442
------------- -------------
Current liabilities of discontinued operations $ 16,573 $ 18,162
Noncurrent liabilities of discontinued operations $ 6,280 $ 6,280
</TABLE>
The transactions are subject to U.S. government approval, which will govern the
closing dates.
Page 11 of 19
<PAGE>
8. SEGMENT INFORMATION
The Company's continuing operations compete in two business segments,
adhesive-backed label stock and industrial processing equipment. The Company's
third industry segment, industrial tape, is presented as discontinued operations
(see Note 7. DISCONTINUED OPERATIONS). Identifiable assets of each segment are
the assets used by the segment in its continuing operations, excluding general
corporate assets and intercompany balances. The assets of each segment have not
materially changed since the Company's "Segment Information" in its annual
report on Form 10-K for the year ended December 31, 1998. Net sales and
operating profit (loss) of continuing operations, by segment, for the
three-month periods ended March 31, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
Three Months Ended March 31,
1999 1998
------------- -------------
<S> <C> <C>
Net sales:
Adhesive-backed label stock $ 38,591 $ 28,873
Industrial processing equipment 1,606 1,845
------------- -------------
$ 40,197 $ 30,718
============= =============
Operating profit (loss):
Adhesive-backed label stock $ 799 1,551
Industrial processing equipment 135 103
General corporate expenses (720) (582)
------------- -------------
Operating profit 214 1,072
Interest and other expenses (2,164) (1,326)
------------- -------------
Loss from continuing operations
before income taxes $ (1,950) $ (254)
============= =============
</TABLE>
Page 12 of 19
<PAGE>
ITEM-2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF CONTINUING OPERATIONS
THREE MONTHS ENDED MARCH 31, 1999, COMPARED TO THREE MONTHS ENDED MARCH 31, 1998
NET SALES
The Company's net sales for the quarter ended March 31, 1999 were $40.2
million, compared to $30.7 million in the corresponding 1998 period. The
increase in net sales for 1999 is attributed to approximately $11.7 million
in sales from the acquisition of Coating - Maine and sales of pressure
sensitive postage, partially offset by lower unit sales of prime and variable
information adhesive-backed paper label stock from 1998 levels. Unit sales of
pressure sensitive postage paper stock continue to be impacted by the uneven
ordering pattern of the Bureau of Printing and Engraving. Unit sales of
pressure sensitive postage paper stock for the first quarter of 1999
represent increases of approximately 70% and 20% from corresponding 1998 and
1997 periods, however on an annual basis sales are still anticipated to
approximate prior year volumes. The adhesive-backed paper stock industry
continues to be impacted by increased domestic capacity and Asian imports.
GROSS MARGIN
Gross margin as a percentage of net sales for the quarter ended March 31, 1999
was approximately 8.1%, which net of a charge impacting comparability, resulted
in 8.9% for the three months ended March 31, 1999 compared to approximately
11.6% in the corresponding 1998 period. The 1999 gross margins were lower due to
competitive pricing in the adhesive-backed materials industry, the timing and
new pricing of the current postage contract, and a restructuring charge for
severance and termination benefits associated with the termination of 20
indirect manufacturing personnel at Spinnaker Coating. This first quarter charge
totaled approximately $0.5 million, of which approximately $0.4 million was
reflected in manufacturing burden and the balance in selling, general and
administrative expense.
The impact of Asian imports and increased domestic market competition resulted
in changes in sales mix which contributed to lower average selling prices in
pressure sensitive label, leading to product substitution. The current postage
contract, a five year $75 million agreement, was awarded late in the first
quarter of 1998 and contained new pricing and product mix, which became
effective immediately.
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, updated material
procurement policies and procedures, and reductions in manufacturing and
administrative personnel.
OPERATING PROFIT
Operating profit from continuing operations for the quarter ended March 31,
1999 was approximately $0.2 million, which net of a charge impacting
comparability, resulted in $0.7 million for the three months ended March 31,
1999 compared to approximately $1.1 million in the corresponding 1998 period.
The 1999 operating results reflect increased sales, while maintaining lower
administrative costs. The Company has continued to rationalize administrative
overhead and has leveraged the knowledge within and between operating units.
In addition, operating results reflect approximately $0.5 million of
increased depreciation and amortization expense primarily associated with the
acquisition of Coating - Maine.
INTEREST EXPENSE
Interest expense from continuing operations for the quarter ended March 31, 1999
increased approximately $0.8 million compared to the corresponding period in
1998, primarily due to the financing associated with the Company's acquisition
of Coating - Maine.
Page 13 of 19
<PAGE>
INCOME TAXES
The Company's first quarter 1999 income tax rate for federal and state income
taxes reflects an annual effective tax rate of approximately 36% for continuing
operations. The estimated annual effective tax rate varies from statutory rates
due to the impact of non-deductible permanent tax differences, offset by state
income taxes, on estimated annual earnings before tax.
FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY. The principal sources of liquidity for the Company and its
subsidiaries (other than Spinnaker Electrical) have historically been cash flow
from operations, proceeds from the 1996 issuance of the Company's Senior Notes
and availability under the Spinnaker Credit Facility.
The Company's cash provided by operating activities for the three months ended
March 31, 1999 was $6.8 million compared to $2.6 million in the corresponding
1998 period. The increase was largely attributed to improved cash and inventory
management. These factors were the basis for the decrease in inventories and the
increase in accounts payable and accrued liabilities in continuing and
discontinued operations from the prior year.
The Spinnaker Credit Facility is available to fund acquisitions and support
periodic fluctuations in working capital. Credit availability under the
Spinnaker Credit Facility is subject to certain variables, such as inventory and
receivables eligible to be included in the borrowing base. The Spinnaker Credit
Facility will expire October 2001. The Company is charged an unused credit fee
every month of 0.375% per annum. Outstanding borrowings bear interest at
variable rates related to the prime interest rate or LIBOR. At March 31, 1999,
the combined effective interest rate in effect was 7.7%. The funding for the
Coating-Maine Acquisition was the Company's initial borrowing under the
Spinnaker Credit Facility with the exception of periodic working capital
borrowings by Entoleter. As of April 30, 1999, aggregate availability under the
Spinnaker Credit Facility was approximately $45.3 million, of which
approximately $40.3 million was outstanding. This outstanding balance includes
the Company's April 15, 1999 interest payment on the Senior Notes of
approximately $6.2 million.
In connection with the Coating-Maine acquisition, the Company issued the Warren
Note to Warren in the original principal amount of $7.0 million.
The Warren Note bears interest at the rate of 10%, and 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 Warren Note. 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 Senior Notes. The Warren Note matures on
January 31, 2002, however, it can 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. The Company did not have sufficient
unused availability under the terms of the Spinnaker Credit Facility to allow a
prepayment on March 31, 1999, nor does it anticipate having sufficient
availability in the near term and as a result has classified the debt as
non-current in the Company's financial statements.
Proceeds from the sale of Central Products Company are anticipated to satisfy
transactions costs and repay certain of the working capital revolver debt.
The balance of the proceeds would be available to invest in any business,
capital expenditure or other tangible asset in the Permitted Businesses, as
defined in the Indenture. Any proceeds not so invested within 270 days after
the closing of the sale or not used to permanently reduce indebtedness (other
than subordinated debt) shall be used to repurchase the Senior Notes on a pro
rata basis as required by the Indenture.
Page 14 of 19
<PAGE>
The proceeds from the sale of Spinnaker Electrical, an unrestricted
subsidiary, will repay certain term debt and working capital revolver debt
collateralized by the assets of Spinnaker Electrical. The remaining net
proceeds will be used for general purposes, which may include purchasing
Senior Notes in the open market where the Senior Notes trade at a substantial
discount from the principal amount.
CAPITAL RESOURCES. The Company originally budgeted capital expenditures of
approximately $4 to $4.5 million for 1999, however with the anticipated sale of
the industrial tape businesses, the 1999 budgeted capital expenditures have been
reduced to approximately $2 to $2.5 million with only a minor portion of such
expenditures under commitment. Capital expenditures for continuing operations
during the three months ended March 31, 1999 were $0.6 million. The Company
anticipates that it will have sufficient cash flow from continuing operations
and availability under the Spinnaker Credit Facility to fund its commitments for
such capital expenditures at March 31, 1999, as well as the additional capital
expenditures budgeted for 1999.
OTHER
In April 1999, Spinnaker (parent) entered into a contract for the sale of its
Denver, Colorado, warehouse facility for approximately $2.5 million. The
warehouse is currently leased from Spinnaker and utilized by the industrial tape
business of Central Products Company. The Company's warehouse consolidation
efforts, inventory reduction program, and improved manufacturing processes
provided the Company with an opportunity to reduce its warehouse footage and
liquefy its investment in the facility. Under the terms of the Spinnaker Credit
Facility, the net proceeds from the asset sale will temporarily reduce the
Spinnaker Credit Facility and are available under the Spinnaker Credit Facility
to fund anticipated capital expenditures. The transaction is anticipated to
close on or near May 21, 1999.
YEAR 2000
The Year 2000 issue is the result of computer programs being written using two
digits (rather than four) to define the applicable year. When the year 2000
begins, this issue may cause some hardware and software to interpret "00" as the
year 1900 and either stop processing date-related computations or process them
incorrectly. All computer hardware and software, 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. For this purpose, the term "computer hardware and
software" includes systems that are commonly thought of as information
technology ("IT") systems, including accounting, data processing, 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 Company has undertaken various initiatives intended to ensure that its IT
and non-IT systems will function properly with respect to dates in the Year 2000
and thereafter. The Company's Year 2000 initiatives are being performed
primarily by internal staff, and in certain operations, are supplemented by
outside consultants. No independent verification consultants have been hired by
the Company.
The Company's external agent assurance initiative is approximately 80% complete.
Within each of the principal continuing business segments, there is a
concentration of critical suppliers. Identifying, querying and processing
responses from critical groups has been the main thrust of the Company's
assurance initiative. However, responses received from mailings to substantially
all vendors, suppliers and subcontractors that do not share information systems
with the Company are being processed and additional inquiries are being made as
necessary. 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 continuing
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 Company's assessment initiative is approximately 90% 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. The Company expects the assessment phase to be
complete in June of 1999. Beginning in 1994, with the replacement of
manufacturing and accounting systems at Spinnaker Coating, the Company has
obtained replacements in the ordinary course of improving manufacturing and
reporting performance that are Year 2000 compliant. The Company's testing and
remediation initiatives are approximately 80% complete and are expected to be
100% complete in September of 1999. The remaining 20% relates primarily to the
completion of system conversions. No capital projects have been deferred or
delayed due to Year 2000 efforts.
Page 15 of 19
<PAGE>
Most Year 2000 issues have been or will be eliminated by the normal upgrading
process of computer systems and manufacturing equipment. Therefore, the
incremental cost of addressing Year 2000 issues has been and will continue to be
funded from operating cash flows. Beginning with the major system conversion
projects in 1994, the Company has spent $5.5 million on IT system replacements
and upgrades to improve manufacturing and reporting performance to date. The
total incremental cost of addressing Year 2000 issues on IT and non-IT systems
is estimated to be less than $100,000.
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 effect of non-compliance by external agents is not determinable.
The Company presently believes that with modifications to existing systems and
converting to new systems, the Year 2000 issue will not pose significant
operational problems for the Company as a whole. Due to the general uncertainty
inherent in the Year 2000 process, resulting in part from the incertitude
surrounding the state of readiness of third party suppliers and vendors, the
Company is unable to determine a reasonable worst case scenario at this time.
However, the Company is currently assessing the impact of a worst case scenario
in conjunction with the development of contingency plans, which are expected to
be complete by June of 1999. 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.
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 a 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.
Page 16 of 19
<PAGE>
PART II - OTHER INFORMATION
ITEM 6 - EXHIBITS
(A) EXHIBITS
<TABLE>
<S> <C>
99.1 Eighth Amendment to Credit Agreement dated and effective 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 "Spinnaker Credit Agreement"), made as of December
31, 1998. (1)
99.2 First Amendment to Credit Agreement dated and effective as of July 30,
1998, among Spinnaker Electrical Tape Company, as borrower, each of the
financial institutions party thereto from time to time, and
Transamerica Business Credit Corporation as agent (the "Electrical
Credit Agreement"), made as of March 31, 1999 (1).
27. Financial Data Schedule (1)
</TABLE>
- ---------------
(1) Filed herewith.
Page 17 of 19
<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 14, 1999
Page 18 of 19
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Page No. Sequential
- ---------------- ----------
<S> <C> <C>
10.1 Eighth Amendment
10.2 First Amendment
27. Financial Data Schedule
</TABLE>
Page 19 of 19
<PAGE>
EXHIBIT 10.1 EIGHTH AMENDMENT
EIGHTH AMENDMENT TO CREDIT AGREEMENT
THIS EIGHTH AMENDMENT (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 December 31, 1998 among the Credit Parties, the Agent, the Collateral
Agent, the Issuing Bank and the Lenders.
W I T N E S S E T H :
WHEREAS, the Credit Parties, 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, the Sixth
Amendment dated as of March 17, 1998 and the Seventh Amendment and Consent
dated as of June 30, 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);
WHEREAS, the Borrowers have requested that the Lenders agree to
amend certain provisions of the Credit Agreement as set forth herein; and
WHEREAS, the Lenders are agreeable to such amendments, 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:
<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 2, 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:
"'EQUIPMENT' is defined in the Security Agreement."
"'INDENTURE' means the Indenture dated as of October 23,
1996 among the Credit Parties and The Chase Manhattan Bank, as
Trustee, as amended, supplemented or otherwise modified from time
to time."
"'INDENTURE BORROWING BASE' means, on any day, the
outstanding principal amount of Indebtedness permitted under
Section 4.09(b)(i) of the Indenture on such day."
"'INDENTURE BORROWING BASE CERTIFICATE' is defined in
Section 7.1(b)(iv)."
(b) The definition of "Borrowing Base" in Section 1.1 of the
Credit Agreement is amended and restated as follows:
"'BORROWING BASE' means, on any day, the lesser of (a)
the sum of the Brown Borrowing Base, the Central Borrowing Base,
the Entoleter Borrowing Base and the SCM Borrowing Base on such
day and (b) the Indenture Borrowing Base on any such day."
(c) The definition of "Brown Borrowing Base" in Section 1.1 of
the Credit Agreement is amended by adding the following immediately before
the period at the end thereof: "and (c) $3,000,000"
(d) The definition of "Collateral" in Section 1.1 of the Credit
Agreement is amended by adding ", Equipment" after "Inventory."
(e) The definition of "Consolidated Fixed Charge Coverage
Ratio" in Section 1.1 of the Credit Agreement is amended and restated as
follows:
-2-
<PAGE>
"'CONSOLIDATED FIXED CHARGE COVERAGE RATIO' means with respect to
the Guarantor and its Restricted Subsidiaries for any period, the
ratio of (X) EBITDA for such period 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 (A) the amortization of deferred financing fees incurred
or paid between October 1996 and July 28, 1998 and (B) the
amendment fee payable to the Lenders pursuant to Section 2(b)(i)
of the Eighth Amendment to this Credit Agreement, 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, PLUS (vi) 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)."
(f) Section 7.1(b) of the Credit Agreement is amended by adding
at the end thereof the following:
"(iv) WEEKLY AND MONTHLY INDENTURE BORROWING BASE
CERTIFICATES. Weekly, before 12:00 noon on the second Business Day
of each week (except the last week of each month), monthly, within
two (2) Business Days after the last Business Day of each month,
and at any other time requested by the Agent or the Collateral
Agent in its reasonable discretion, a borrowing base certificate
(an "INDENTURE BORROWING BASE CERTIFICATE"), which shall be: (A)
completed substantially in the form of Exhibit O, detailing the
Indenture Borrowing Base as of each Friday of the immediately
preceding week and as of the last day of each month, as applicable
(or as of such other date as the Agent or the Collateral Agent may
request); (B) prepared by or under the supervision of an
Authorized Officer of the Guarantor and certified by such officer
subject only to adjustment upon completion of the normal year-end
audit of physical inventory; and (C) attached to such additional
schedules and other information as the Agent or the Collateral
Agent may reasonably request."
(g) Section 7.2(r) of the Credit Agreement is amended and restated
as follows:
"(r) CAPITAL EXPENDITURES. The Credit Parties and their
Restricted Subsidiaries will not at any time make or commit to
make any payments for Capital Expenditures other than Capital
Expenditures which are directly related to the business conducted
by the Borrowers and their Restricted Subsidiaries on the Closing
Date
(i) in the aggregate not exceeding the
amount (the "Base Amount") for each six month period (or
portion thereof) set forth below:
-3-
<PAGE>
<TABLE>
<CAPTION>
PERIOD AMOUNT
------ ------
<S> <C>
July 1, 1998 through December 31, 1998 $5,000,000
January 1, 1999 through June 30, 1999 $2,300,000
July 1, 1999 through December 31, 1999 $2,200,000
January 1, 2000 through June 30, 2000 $2,500,000
July 1, 2000 through December 31, 2000 $2,500,000
Each six month period ended each June 30
and December 31 thereafter $3,000,000
</TABLE>
PROVIDED, HOWEVER, that for any six month period commencing with
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
(ii) at any time in an aggregate amount
equal to the Equity Proceeds Amount at such time (which
Capital Expenditures will not be included in any
determination under clause (i) above)."
(h) Section 7.2(s) of the Credit Agreement is amended and
restated as follows:
"(s) [Intentionally Omitted]"
(i) Section 7.2(u) of the Credit Agreement is amended and restated
as follows:
"(u) MINIMUM CONSOLIDATED INTEREST COVERAGE RATIO; MINIMUM
CONSOLIDATED FIXED CHARGE COVERAGE RATIO. (i) The Credit Parties
will not permit the Consolidated Interest Coverage Ratio, for each
fiscal period set forth below, to be less than the ratio set forth
below opposite such period:
-4-
<PAGE>
<TABLE>
<CAPTION>
PERIOD RATIO
------ -----
<S> <C>
January 1, 1998 through December 31, 1998 1.00:1.00
January 1, 1999 through March 31, 1999 0.62:1.00
January 1, 1999 through June 30, 1999 0.89:1.00
January 1, 1999 through September 30, 1999 1.05:1.00
January 1, 1999 through December 31, 1999 1.18:1.00
April 1, 1999 through March 31, 2000 1.20:1.00
July 1, 1999 through June 30, 2000 1.30:1.00
October 1, 1999 through September 30, 2000 1.40:1.00
Four fiscal quarters ended each December 31, March 31, June 30 and 1.50:1.00
September 30 thereafter
</TABLE>
(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 December 31, 1998 0.75:1.00
January 1, 1999 through March 31, 1999 0.48:1.00
January 1, 1999 through June 30, 1999 0.69:1.00
January 1, 1999 through September 30, 1999 0.81:1.00
January 1, 1999 through December 31, 1999 0.91:1.00
April 1, 1999 through March 31, 2000 1.00:1.00
July 1, 1999 through June 30, 2000 1.00:1.00
Four fiscal quarters ended each September 30, 1.10:1.00"
December 31 March 31 and June 30 thereafter
</TABLE>
(j) Schedule 6.1(k) to the Credit Agreement is amended and
restated in the form of Annex I.
(k) The Credit Agreement is amended by adding thereto a new
Exhibit O in the form of Annex II.
SECTION 2. EFFECTIVENESS. This Amendment shall become effective
upon the Agent's receipt of (a) this Amendment, duly executed by the Credit
Parties, the Collateral Agent, the Issuing Bank and the Lenders, (b) payment (i)
of an amendment fee of $200,000 for the ratable benefit of the Lenders and (ii)
of all costs and expenses incurred by the Agent and the Collateral Agent in
connection with the preparation, execution and delivery of this Amendment and
the documents contemplated hereby, including, without limitation, the reasonable
fees and expenses of counsel to the Agent and (c) the following documents, each
of which shall be in form and substance satisfactory to the Agent and the
Collateral Agent (collectively, the "AGENTS"):
-5-
<PAGE>
(i) Certified copies of the resolutions of
the Board of Directors of each Credit Party approving this
Amendment, the documents delivered and to be delivered in
connection herewith and the matters contemplated hereby.
(ii) A certificate of the Secretary or an
Assistant Secretary of each Credit Party certifying the names
and true signatures of the officers of such Credit Party who
are authorized to sign this Amendment and the documents
delivered and to be delivered in connection herewith to which
such Credit Party is or will be a party.
(iii) A certificate executed by an Authorized
Officer of the Guarantor certifying that (A) the
representations and warranties contained in Section 5 hereof
are true and correct on and as of the date of such certificate
as though made on and as of such date, (B) 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) and (C) no Default or
Event of Default has occurred and is continuing.
(iv) An opinion of Haynes and Boone covering
such matters relating to this Amendment and the transactions
contemplated hereby as the Agent shall reasonably request
(including, without limitation, an opinion that the
transactions contemplated hereby do not conflict with or
constitute a default under the SDW Subordinated Note or the
indenture relating to the Senior Notes).
(v) An amendment to the Security Agreement,
substantially in the form of Exhibit A (as so amended, the
"AMENDED SECURITY AGREEMENT"), duly executed by the Credit
Parties.
(vi) Uniform Commercial Code financing
statements and fixture filings, naming each Credit Party as
debtor and the Agent as secured party, duly executed by the
applicable Credit Party, to be filed in all jurisdictions that
the Agent deems necessary or desirable to perfect the liens
created under the Amended Security Agreement; PROVIDED, that
fixture filings will be recorded solely with respect to the
properties owned by the Credit Parties (other than the
warehouse located at 601 West 50th Avenue, Denver, Colorado).
(vii) An Indenture Borrowing Base Certificate,
substantially in the form of Annex II, duly executed by an
Authorized Officer of the Guarantor.
(viii) A certificate of insurance naming the
Agent as loss payee and additional insured.
(ix) A certificate executed by an Authorized
Officer of each Credit Party to the effect that such Credit
Party is solvent after giving effect to the transactions
contemplated by this Amendment.
(x) Such other documents, agreements,
opinions and instruments as the Agents deem necessary or
desirable in connection with the transactions contemplated
hereby.
-6-
<PAGE>
SECTION 3. CONDITIONS SUBSEQUENT.
(a) Not later than May 31, 1999, the Credit Parties shall
deliver to the Agents a copy of an appraisal conducted in accordance with
sound appraisal standards by independent appraisers acceptable to, and in
form satisfactory to, the Agents of the Credit Parties' Equipment, showing
the auction value of such Equipment (the "Auction Value") as of a recent date.
(b) If the Auction Value is less than $17,500,000, then not
later than July 31, 1999 (or such later date as the Agents may determine),
the Credit Parties shall deliver or cause to be delivered to the Agents the
following:
(i) a mortgage or deed of trust, in form and
substance satisfactory to the Agents (each, a "Mortgage"),
encumbering each MORTGAGED Property (as defined below), duly
executed by the Borrower that owns such Mortgaged Property;
(ii) a mortgagee's title policy for each
Mortgage (A) dated on or about the date of such Mortgage in an
amount satisfactory to the Agents; (B) insuring that such
Mortgage creates a valid first Lien on the Mortgaged Property,
free and clear of all Liens except Liens permitted under the
Credit Agreement; (C) naming the Agents as the insured
thereunder; (D) in the form of ALTA Loan Policy-1992 or such
other form as is acceptable to the Agents; and (E) containing
such endorsements and affirmative coverages as the Agents may
reasonably request, together with evidence that all premiums
in respect of each such policy have been paid by or on behalf
of the Borrowers;
(iii) a survey of each Mortgaged Property, in
form and substance satisfactory to the Agents and certified
within 45 days prior to the date of the related Mortgage by an
independent public surveyor reasonably satisfactory to the
Agents, meeting the minimum standard detail requirements for
ALTA/ACSM surveys, and showing (A) the exact location and
dimensions of such Mortgaged Property and the improvements
thereon, (B) the exact location of all lot and street lines,
required height and setback lines, all means of access to and
all easements relating to such Mortgaged Property, (C) the
names of all streets and alleys abutting such Mortgaged
Property and (D) the absence of any encroachments,
rights-of-way or easements on such Mortgaged Property or any
encroachments by the improvements thereon on adjoining
property, or any other defects except Liens permitted under
the Credit Agreement, together with a surveyor's certificate
reasonably satisfactory to the Agents; and
(iv) a copy of an appraisal of each Mortgaged
Property conducted in accordance with sound appraisal
standards by independent appraisers acceptable to, and in form
and substance satisfactory to, the Agents, showing the fair
market value of such Mortgaged Property as of a recent date.
(c) If the Auction Value is less than $17,500,000, then not
later than July 31, 1999 (or such later date as the Agents may determine),
the Credit Parties shall, at their own expense, execute and deliver all such
documents, agreements, opinions and instruments, and take all such actions
(including, without limitation, the payment of applicable mortgage recording
taxes), relating to the Mortgages and the Mortgaged Properties as the Agents
may reasonably request.
As used herein, "MORTGAGED PROPERTIES" means the properties selected by the
Agents from the properties listed on Annex III with an aggregate appraised
fair market value approximately equal to $17,500,000 less the Auction Value.
-7-
<PAGE>
SECTION 4. CONDITIONAL RELEASE OF LIENS ON NEW COLLATERAL. Upon
the request, and at the expense, of the Credit Parties, the Agent shall
release its Lien on the Mortgaged Properties (if any) and the Equipment of
each Credit Party other than SCM (the "NEW COLLATERAL ") after June 30, 2000
if (a) no Default or Event of Default has occurred and is continuing, (b)
Unused Availability is equal to or greater than the sum of $12,500,000 and
the amount of accrued and unpaid interest on the Senior Notes, (c) the
accounts payable of the Credit Parties have been paid in accordance with
their terms and (d) the Agent has received evidence reasonably satisfactory
to it that the Consolidated Fixed Charge Coverage Ratio for any period of
four consecutive fiscal quarters, commencing with the period ended June 30,
2000, is equal to or greater than the 1.40:1.00. The Lenders hereby consent
to the release of the Agent's Lien on the New Collateral in accordance with
the terms of this Section 4.
SECTION 5. 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, the Credit Agreement as amended hereby 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
(including, without limitation, the SDW Subordinated Note or the indenture
relating to the Senior Notes), (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 in favor of the Agent.
(b) This Amendment, the Credit Agreement as amended hereby 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 their
respective 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 Credit Agreement as
amended hereby or the documents delivered in connection herewith.
(d) Since December 31, 1998, there has occurred no change,
occurrence, development or event which has had or could be reasonably
expected to have a Material Adverse Effect.
(e) All consents, filings and approvals required in connection
with the execution, delivery and performance by such Credit Party of this
Amendment, the Credit Agreement as amended hereby and the documents delivered
in connection herewith have been obtained or made and are in full force and
effect.
(f) Upon the proper filing of the Uniform Commercial Code
financing statements, the Liens granted pursuant to the Amended Security
Agreement constitute valid and enforceable first priority and perfected Liens
on the Collateral described therein, to the extent such Liens can be
perfected by the filing of such financing statements.
-8-
<PAGE>
(g) Set forth on Annex III is a complete and correct list of
each parcel of real property owned by any of the Borrowers, together with the
current book value of such parcel determined in accordance with GAAP.
SECTION 6. 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. Without limiting the generality of the foregoing, the parties
hereto agree that the failure by the Credit Parties to comply with any of the
provisions of this Amendment shall constitute an Event of Default.
SECTION 7. 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 8. EXPENSES. The Credit Parties 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 transactions
contemplated by this Amendment, including, without limitation, the reasonable
fees and expenses of counsel to the Agent and local counsels to the Agent and
the costs and expenses of the appraisal, the title insurance policies and the
surveys required to be delivered pursuant to Section 3.
SECTION 9. 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).
-9-
<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/ Mark Matteson
-------------------------------------------
Name: Mark Matteson
Title: Vice President
SPINNAKER COATING, INC.,
formerly known as
Brown-Bridge Industries, Inc.
By: /s/ Mark Matteson
-------------------------------------------
Name: Mark Matteson
Title: Vice President
ENTOLETER, INC.
By: /s/ Mark Matteson
-------------------------------------------
Name: Mark Matteson
Title: Vice President
SPINNAKER COATING-MAINE, INC.
By: /s/ Mark Matteson
-------------------------------------------
Name: Mark Matteson
Title: Vice President
GUARANTOR
SPINNAKER INDUSTRIES, INC.
By: /s/ Mark Matteson
-------------------------------------------
Name: Mark Matteson
Title: Vice President, Corporate Development
<PAGE>
AGENT
BT COMMERCIAL CORPORATION, as Agent
By: /s/ Frank A. Chiovari
-------------------------------------------
Name: Frank A. Chiovari
Title: Vice President
COLLATERAL AGENT
TRANSAMERICA BUSINESS CREDIT CORPORATION, as
Collateral Agent
By: /s/ Robert L. Heinz
-------------------------------------------
Name: Robert L. Heinz
Title: Senior Vice President
ISSUING BANK
BANKERS TRUST COMPANY, as Issuing Bank
By: /s/ Frank A. Chiovari
-------------------------------------------
Name: Frank A. Chiovari
Title: Vice President
LENDERS
BT COMMERCIAL CORPORATION
By: /s/ Frank A. Chiovari
-------------------------------------------
Name: Frank A. Chiovari
Title: Vice President
TRANSAMERICA BUSINESS CREDIT CORPORATION
By: /s/ Robert L. Heinz
-------------------------------------------
Name: Robert L. Heinz
Title: Senior Vice President
<PAGE>
FIRST AMENDMENT TO CREDIT AGREEMENT
THIS FIRST AMENDMENT (this "Amendment") to the Credit Agreement dated
as of July 30, 1998 (as amended, supplemented or otherwise modified from time to
time, the "Credit Agreement"; capitalized terms used herein and not otherwise
defined herein shall have the meanings assigned to such terms in the Credit
Agreement) among SPINNAKER ELECTRICAL TAPE COMPANY, a Delaware corporation (the
"Borrower"), EACH OF THE FINANCIAL INSTITUTIONS FROM TIME TO TIME PARTIES
THERETO (each, a "Lender" and collectively, the "Lenders"), and TRANSAMERICA
BUSINESS CREDIT CORPORATION, as agent (in such capacity, the "Agent") for the
Lenders, is made as of March 31, 1999 between the Borrower and the Lenders.
W I T N E S S E T H :
WHEREAS, the Borrower has requested that the Lenders amend certain
provision of the Credit Agreement as set forth herein; and
WHEREAS, the Lenders are willing to agree to the requested amendments,
but only on the terms and subject to the conditions set forth herein.
NOW THEREFORE, the Borrower and the Lenders hereby agree as follows:
SECTION 1. AMENDMENTS TO THE CREDIT AGREEMENT. Effective as of the
date hereof, and subject to the satisfaction of the conditions to effectiveness
set forth in Section 2, the Credit Agreement is hereby amended as follows:
(a) Section 7.2(t) is amended by deleting "450,000" and
substituting therefor "200,000".
(b) Section 7.2(u) is amended and restated as follows:
<PAGE>
"(u) MINIMUM CONSOLIDATED FIXED CHARGE COVERAGE RATIO. The
Borrower will not permit Consolidated Fixed Charge Coverage Ratio to
be less than (i) 1.0:1.0 with respect to the month of December 1998;
(ii) 1.0:1.0 with respect to each year to date period commencing
January 1, 1999 and ending on the last day of each month (excluding
the months of April and May) through December 31, 1999; (iii) .65:1.0
with respect to the period commencing January 1, 1999 and ending on
April 30, 1999; (iv) .10:1.00 with respect to the period commencing
January 1, 1999 and ending on May 31, 1999; and (v) 1.0:1.0 with
respect to each consecutive four-quarter period commencing with the
fiscal quarter ending March 31, 2000."
SECTION 2. CONDITIONS TO EFFECTIVENESS. This Amendment shall become
effective when the Agent shall have received a counterpart of this Amendment,
duly executed by the Borrower and the Majority Lenders.
SECTION 3. REPRESENTATIONS AND WARRANTIES OF THE BORROWER. The
Borrower represents and warrants as follows:
(a) The Borrower is a corporation duly organized, validly
existing and in good standing under the laws of the State of Delaware and such
other jurisdictions where it presently is, or proposes to be, engaged in
business except for such other jurisdictions in which the failure to be in good
standing could not be reasonably expected to have a Material Adverse Effect.
(b) The execution, delivery and performance by the Borrower of
this Amendment (i) are within the Borrower's corporate powers, have been duly
authorized by all necessary corporate action and do not contravene, violate or
constitute a default under (A) the Governing Documents of the Borrower or
(B) any other Requirement of Law binding on or affecting the Borrower or its
property, and (ii) will not result in or require the creation or imposition of
any Lien of any nature upon or with respect to any property now owned or
hereafter acquired by the Borrower.
(c) No authorization, approval or other action by, and no notice
to or filing with, any Governmental Authority is required for the due
execution, delivery and performance by the Borrower of this Amendment.
(d) This Amendment constitutes the legal, valid and binding
obligation of the Borrower enforceable against the Borrower in accordance with
its terms, except as enforceability may be limited by (i) bankruptcy, insolvency
or similar laws affecting creditors' rights generally and (ii) general
principles
-2-
<PAGE>
of equity.
(e) All consents, filings and approvals required in connection
with the execution, delivery and performance by the Borrower of this Amendment
have been obtained or made and are in full force and effect.
(f) There is no pending or, to the best of the Borrower's
knowledge, threatened action or proceeding affecting the Borrower before any
court, arbitrator or Governmental Authority which (i) purports to affect the
legality, validity of enforceability of this Amendment or (ii) could
individually or in the aggregate be reasonably expected to have a Material
Adverse Effect.
(g) After giving effect to this Amendment, no Event of Default
has occurred and is continuing.
SECTION 4. 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 "this Agreement,"
"hereunder," "hereof," "herein" and words of like import, and each reference in
the other Credit Documents to the Credit Agreement shall mean and be a reference
to the Credit Agreement as amended hereby.
(b) Except as specifically amended herein, the Credit Agreement
and the other Credit Documents 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 a waiver or amendment
of any right, power or remedy of the Agent or Lenders under any of the Credit
Documents, or constitute a waiver or amendment of any provision of any of the
Credit Documents.
(d) This Amendment shall constitute a Credit Document.
SECTION 5. COSTS, EXPENSES AND TAXES. The Borrower agrees to pay
the Agent on demand, for all of the costs and expenses incurred by the Agent in
connection with this Amendment, including, without limitation, the reasonable
fees and expenses of counsel to the Agent.
-3-
<PAGE>
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 both of which taken together shall constitute one
and the same instrument. This Amendment may be executed and delivered by
telecopier with the same force and effect as if the same were a fully executed
and delivered manual counterpart.
SECTION 7. GOVERNING LAW. This Amendment shall be governed by, and
construed in accordance with, the laws of the State of New York without giving
effect to the conflicts of law principles thereof.
-4-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to
be executed by their respective duly authorized officers as of the date first
above written.
TRANSAMERICA BUSINESS CREDIT
CORPORATION
By: /s/ Robert L. Heinz
-------------------------------------
Name: Robert L. Heinz
Title: Senior Vice President
SPINNAKER ELECTRICAL TAPE COMPANY
By: /s/ Mark Matteson
-------------------------------------
Name: Mark Matteson
Title: Vice President
-5-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 21,718
<ALLOWANCES> 265
<INVENTORY> 27,144
<CURRENT-ASSETS> 84,010
<PP&E> 53,468
<DEPRECIATION> 12,282
<TOTAL-ASSETS> 224,489
<CURRENT-LIABILITIES> 83,966
<BONDS> 125,925
0
0
<COMMON> 3,124
<OTHER-SE> 2,892
<TOTAL-LIABILITY-AND-EQUITY> 224,489
<SALES> 40,197
<TOTAL-REVENUES> 40,197
<CGS> 36,955
<TOTAL-COSTS> 39,983
<OTHER-EXPENSES> 7
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,157
<INCOME-PRETAX> (1,950)
<INCOME-TAX> (702)
<INCOME-CONTINUING> (1,248)
<DISCONTINUED> (1,082)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,330)
<EPS-PRIMARY> (0.32)
<EPS-DILUTED> (0.32)
</TABLE>
