<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, 1999
------------------------------------------------
Commission file number 2-66564
--------------------------------------------------------
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
incorporation or organization) Identification No.)
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 September 30, 1999
Class A Common Stock, No Par Value 3,566,067 shares
- ------------------------------------ -----------------------------------
Class Outstanding at September 30, 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
September 30, 1999 and December 31, 1998 3
Condensed Consolidated Statements of Operations
for the Three Month and Nine Month periods
ended September 30, 1999 and 1998 4
Condensed Consolidated Statements of Cash Flows
for the Nine Months Ended September 30, 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 12
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>
September 30, 1999 December 31, 1998
------------------ -----------------
(Unaudited) (Note)
($ in thousands)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 77,155 $ --
Accounts receivable, net 20,772 21,439
Inventories, net 25,367 24,217
Prepaid expenses and other 1,667 2,225
Net current assets of discontinued operations -- 38,605
--------- ---------
Total current 124,961 86,486
Property plant and equipment:
Land 573 573
Buildings and improvements 7,994 9,746
Machinery and equipment 44,405 42,497
Accumulated depreciation (13,980) (11,298)
--------- ---------
38,992 41,518
Goodwill, net 22,289 21,075
Other assets 8,949 7,201
Net non-current assets of discontinued operations -- 71,651
--------- ---------
TOTAL ASSETS $ 195,191 $ 227,931
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 15,000 $ 16,782
Accrued liabilities 10,630 3,106
Current portion of long term debt 698 1,691
Working capital revolver 17,931 42,731
Other current liabilities 5,623 2,575
Net current liabilities of discontinued operations -- 18,162
--------- ---------
Total current liabilities 49,882 85,047
Long term debt, less current portion 121,011 126,086
Deferred income taxes 466 466
Pension liabilities 1,525 1,540
Net non-current liabilities of discontinued operations -- 6,446
Stockholders' equity:
Common stock 3,124 3,124
Additional paid in capital 15,867 15,867
Retained earnings (deficit) 3,428 (10,533)
Less: treasury stock (112) (112)
--------- ---------
Total stockholders' equity 22,307 8,346
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 195,191 $ 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>
($ in thousands, except per share data) Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ ------------------------
1999 1998 1999 1998
-------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net sales $ 41,788 $ 42,976 $ 121,528 $ 116,486
Cost of sales 37,991 37,736 111,022 102,807
-------- --------- --------- ---------
Gross margin 3,797 5,240 10,506 13,679
Selling, general and administrative expense 2,728 3,384 8,704 8,792
-------- --------- --------- ---------
Operating profit from continuing operations 1,069 1,856 1,802 4,887
Interest expense 3,179 2,037 7,562 5,629
Other income (expense) - net 488 (50) 1,338 (34)
-------- --------- --------- ---------
Loss from continuing operations before income taxes (1,622) (231) (4,422) (776)
Income tax benefit 887 42 1,611 160
-------- --------- --------- ---------
Net loss from continuing operations (735) (189) (2,811) (616)
Discontinued operations (Note 1):
Loss from discontinued operations from industrial
tape segment (net of applicable income tax provision) -- (1,072) (1,438) (2,718)
Gain on sale of discontinued operations (net of
applicable income tax provision) 18,096 -- 18,096 --
-------- --------- --------- ---------
Income (loss) before extraordinary gain from
extinguishment of debt 17,361 (1,261) 13,847 (3,334)
Extraordinary gain from early extinguishment of debt
(net of applicable tax provision) 114 -- 114 --
-------- --------- --------- ---------
Net income (loss) $ 17,475 $ (1,261) $ 13,961 $ (3,334)
-------- --------- --------- ---------
-------- --------- --------- ---------
Earnings per common share:
Net loss per common share from continuing operations $ (0.10) $ (0.02) $ (0.38) $ (0.09)
Net income (loss) per common share from discontinued operations 2.46 (0.15) 2.27 (0.38)
Extraordinary gain from early extinguishment of debt 0.02 -- 0.02 --
-------- --------- --------- ---------
Net income (loss) per common share $ 2.38 $ (0.17) $ 1.90 $ (0.47)
-------- --------- --------- ---------
-------- --------- --------- ---------
Earnings per common share:
Net loss per common share from continuing
operations - assuming dilution $ (0.10) $ (0.02) $ (0.38) $ (0.09)
Net income (loss) per common share from discontinued
operations - assuming dilution 2.46 (0.15) 2.27 (0.38)
Extraordinary gain from early extinguishment of debt 0.02 -- 0.02 --
-------- --------- --------- ---------
Net income (loss) per common share - assuming dilution $ 2.38 $ (0.17) $ 1.90 $ (0.47)
-------- --------- --------- ---------
-------- --------- --------- ---------
</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>
Nine Months Ended
September 30,
-----------------------------
($ in thousands) 1999 1998
--------- ---------
<S> <C> <C>
Operating activities:
Net income (loss) $ 13,961 $ (3,334)
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation 2,936 2,595
Amortization of goodwill and deferred financing costs 1,195 906
Gain on sale of industrial tape segment (18,096) --
Gain on sale of warehouse facility (854) --
Changes in operating assets and liabilities
Accounts receivable 667 (4,422)
Inventories (1,150) 1,216
Prepaid expenses and other assets (14) (561)
Accounts payable, accrued liabilities, and
other current liabilities (742) 7,989
Discontinued operations - non-cash charges and
working capital changes 7,061 7,236
--------- ---------
Net cash provided by operating activities 4,964 11,625
--------- ---------
Investing activities:
Acquisition of Spinnaker Coating - Maine -- (46,907)
Proceeds from sale of industrial tape segment 104,450 --
Purchase of property, plant and equipment (1,986) (1,849)
Investing activities of discontinued operations (1,243) (6,383)
Proceeds from sale of warehouse facility 2,357 --
Other (44) (167)
--------- ---------
Net cash provided by (used in) investing activities 103,534 (55,306)
--------- ---------
Financing activities:
Proceeds (payments) on revolving credit facilities, net (24,800) 40,437
Principal payments on long term debt and leases (6,002) (100)
Issuance of common stock -- 610
Deferred financing costs (468) (741)
Financing activities of discontinued operations (73) --
--------- ---------
Net cash provided by (used in) financing activities (31,343) 40,206
--------- ---------
Increase (decrease) in cash and cash equivalents 77,155 (3,475)
Cash and cash equivalents at beginning of period -- 3,475
--------- ---------
Cash and cash equivalents at end of period $ 77,155 $ --
--------- ---------
--------- ---------
</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 ("CPC"), 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 August 10, 1999 and July 30, 1999, the Company completed the sale of its two
industrial tape units, CPC and Spinnaker Electrical, respectively, which
together comprised its industrial tape segment, to Intertape Polymer Group, Inc.
("Industrial Tape Sale")("Intertape"). 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 September 30, 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 Electronic Data Processing ("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 (excluding substantially all trade payables) 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. A portion of the
revolver borrowings, approximately $6 million, were subsequently refunded
through the growth in trade payables immediately after the acquisition closing.
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 assets of the Electrical Tape Business,
organized as 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 of approximately
$0.8 million. 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
allocated to the assets acquired and the liabilities assumed as follows:
<TABLE>
<S> <C>
Current assets $ 2,100
Property, plant and equipment 8,800
Current liabilities (200)
-----------
$ 10,700
-----------
-----------
</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>
Nine Months Ended
September 30, 1998
------------------
<S> <C>
Net sales $128,600
Net income (loss) from continuing operations (822)
Net income (loss) per common share
from continuing operations (0.11)
Net income (loss) per common share - assuming dilution
from continuing operations (0.11)
</TABLE>
Page 7 of 19
<PAGE>
3. INVENTORIES
Of inventory values at September 30, 1999 and December 31, 1998 for continuing
operations, approximately 97% are valued using a specific identification method
with the remaining inventories are valued using the first-in, first-out method
(FIFO). Inventories consist of the following at September 30, 1999, and December
31, 1998:
<TABLE>
<CAPTION>
1999 1998
-------------- -------------
(in thousands)
<S> <C> <C>
Finished goods $ 16,723 $ 26,633
Work-in-process 580 3,648
Raw materials and supplies 8,064 12,103
-------------- -------------
25,367 42,384
Less: inventory of discontinued operations -- 18,167
-------------- -------------
$ 25,367 $ 24,217
-------------- -------------
-------------- -------------
</TABLE>
4. LONG-TERM DEBT AND WORKING CAPITAL REVOLVER
On October 23, 1996, the Company issued $115,000,000 aggregate principal amount
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. Prior to the Industrial Tape Sale, Spinnaker
Coating, CPC and Entoleter ("Guarantors") unconditionally guaranteed the Senior
Notes, jointly and severally. Any proceeds from the sale of CPC not invested in
any business, capital expenditure or other tangible assets in the Permitted
Businesses, as defined by the Indenture, within 270 days after the closing of
the sale of CPC 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.
Following is a summary of long term debt of the Company at September 30, 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.................. $ 114,000 $ 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
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............................ 692 729
Capital lease obligations........................................... 17 48
----------- ------------
121,709 127,777
Less current maturities............................................. (698) (1,691)
----------- ------------
$ 121,011 $ 126,086
----------- ------------
----------- ------------
</TABLE>
Page 8 of 19
<PAGE>
Spinnaker Electrical, an unrestricted subsidiary, is not a guarantor of the
Senior Notes. On September 8, 1999, Spinnaker Electrical purchased $1 million of
the outstanding Senior Notes on the open market at 82% of par value. For
consolidated purposes, the Company's financial statements reflect an
extraordinary gain net of applicable income taxes for the difference between par
value and the discounted purchase price of 82%.
The Company also maintains short-term lines of credit with banks for working
capital needs at each subsidiary. In conjunction with the Industrial Tape Sale,
the Spinnaker Credit Facility was refinanced and the aggregate facility was
decreased to $40 million from $60 million ("Refinanced Credit Facility"). Credit
availability under the Refinanced 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 based on an annual rate of 0.375%. All outstanding borrowings
under the Refinanced Credit Facility bear interest at the prime interest rate
plus 1.00% or LIBOR plus 2.50%. In conjunction with the Industrial Tape Sale,
all outstanding borrowings under a separate $5 million revolving credit
agreement for Spinnaker Electrical ("Electrical Credit Facility") were paid and
the agreement was terminated. At September 30, 1999, the effective interest rate
for the facility's borrowings was approximately 8%. The Company carries over 92%
of the outstanding Refinanced Credit Facility borrowings in LIBOR instruments.
The Company had cash advances outstanding of approximately $17.9 million and
available borrowings of approximately $12.2 million under the Refinanced Credit
Facility as of September 30, 1999. Cash collections are swept against the
facility's outstanding balance.
Proceeds from the sale of Central Products Company ("Restricted Proceeds") used
to satisfy Senior Notes interest obligations due October 15, 1999 and April 15,
2000 are required to be replenished by operating activities or availability
under the Refinanced Credit Facility at such time when the Restricted Proceeds
are utilized to invest in a Permitted Business, as defined in the Indenture or
used in the repurchase of Senior Notes.
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.
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 unpaid interest
under these obligations were paid with the proceeds from the sale of Spinnaker
Electrical.
Proceeds from the sale of Central Products Company satisfied transaction costs
and repaid approximately $18.2 million of the working capital revolver debt.
Page 9 of 19
<PAGE>
Proceeds from the sale of Spinnaker Electrical, an unrestricted subsidiary,
repaid approximately $6.9 million of term debt and working capital revolver debt
collateralized by the assets of Spinnaker Electrical. The remaining net proceeds
are available for general purposes, which may include purchasing additional
Senior Notes in the open market. Other options include acquisitions, capital
expenditures to support remaining subsidiaries, and/or repurchase shares of
Spinnaker Common Stock.
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.
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 month and nine month
periods ended September 30 (in thousands, except per share data):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
1999 1998 1999 1998
-------- -------- -------- ---------
<S> <C> <C> <C> <C>
Numerator -
Net loss from continuing operations $ (735) $ (189) $ (2,811) $ (616)
Net income (loss) from discontinued operations,
net of applicable income taxes 18,096 (1,072) 16,658 (2,718)
Extraordinary gain from early extinguishment of
debt, net of applicable income taxes 114 -- 114 --
-------- -------- -------- ---------
Net income (loss) $ 17,475 $ (1,261) $ 13,961 $ (3,334)
-------- -------- -------- ---------
-------- -------- -------- ---------
Denominator - denominator for earnings per common
share - weighted average shares 7,342 7,292 7,342 7,156
Net loss per common share from continuing operations $ (0.10) $ (0.02) $ (0.38) $ (0.09)
Net income (loss) per common share from discontinued operations,
net of applicable income taxes 2.46 (0.15) 2.27 $ (0.38)
Extraordinary gain from early extinguishment of debt 0.02 -- 0.02 --
-------- -------- -------- ---------
Net income (loss) per common share $ 2.38 $ (0.17) $ (1.90) $ (0.47)
-------- -------- -------- ---------
-------- -------- -------- ---------
</TABLE>
As of September 30, 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. In
addition, there are 50,000 of employees' and officers' options to purchase one
share of Common Stock at a total price of $13.375 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 9, 1999, the Company entered into a definitive agreement to sell its
Industrial Tape Business to Intertape for approximately $105 million and
five-year warrants to purchase 300,000 shares of Intertape common stock (New
York Stock Exchange Symbol "ITP") at an exercise price of $29.50 per share.
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.
Page 10 of 19
<PAGE>
The sale of CPC and Spinnaker Electrical assets closed on August 10, 1999 and
July 30, 1999, respectively. The Company recorded gains totaling $18.1 million,
net of applicable income taxes of approximately $5.9 million. The Company offset
a substantial portion of the cash tax liability by utilizing net operating loss
carryforwards.
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 $10.7 million and $31.5 million for the
three month periods ended September 30, 1999 and 1998, respectively, $69.5
million and $89.3 million for the nine month periods ended September 30, 1999,
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. Historical expenses
allocated back to continuing operations totaled $0.2 million and $1.0 million in
the three and nine month periods ended September 30, 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 $0.9
million and $5.2 million in the three and nine month periods ended September 30,
1999 and 1998.
Interest expense from continuing operations is subject to certain matters
associated with the use of the net proceeds from the sales of CPC 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 December 31, 1998 consisted of the following
(in thousands):
<TABLE>
<CAPTION>
December 31, 1998
-----------------
<S> <C>
Accounts receivable, net $ 14,815
Inventories, net 18,167
Prepaids and other 5,643
-----------
Current assets of discontinued operations $ 38,625
Property, plant and equipment $ 48,312
Goodwill and other assets 23,339
-----------
Noncurrent assets of discontinued operations $ 71,651
Accounts payable $ 13,720
Accrued liabilities 4,442
-----------
Current liabilities of discontinued operations $ 18,162
Noncurrent liabilities of discontinued operations $ 6,280
</TABLE>
Page 11 of 19
<PAGE>
ITEM-2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF CONTINUING OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1999, COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1998
NET SALES
The Company's net sales for the quarter ended September 30, 1999 were $41.8
million, compared to $43.0 million in the corresponding 1998 period. The
decrease in net sales for 1999 is attributed to a product technology transition
in pressure sensitive label stock and changes in the ordering pattern of
pressure sensitive postage, partially offset by higher sales at Entoleter. The
market's rapid transition from EDP to thermal transfer paper stock technologies
has exceeded management's expectations and as a result caused the Company to
experience lower volumes and average selling prices at Coating-Maine, as the
market balances quality and performance against lower priced solutions. 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 third quarter of 1999 slowed from
earlier 1999 periods and the corresponding three month period of 1998, however
on an annual basis is still anticipated to approximate prior year volumes.
Entoleter sales benefited from a new labor contract ratified on August 11, 1999,
which settled a labor dispute which began May 3, 1999.
GROSS MARGIN
Gross margin as a percentage of net sales for the quarter ended September 30,
1999 was approximately 9.1%, compared to approximately 12.2% in the
corresponding 1998 period. The 1999 gross margins were lower due to competitive
pricing in the adhesive-backed materials industry, development costs associated
with a new "multi-ply" pressure sensitive postage product offering, and
unabsorbed overhead costs at Entoleter attributed to the labor dispute.
The impact of Asian imports, increased domestic market competition and a product
technology transition to thermal transfer from EDP resulted in changes in sales
mix which contributed to lower average selling prices in pressure sensitive
labels, 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, updated material procurement policies and procedures, reductions
in manufacturing and administrative personnel, and product substitution that
parallel the market's balance of quality and performance versus lower pricing.
OPERATING PROFIT FROM CONTINUING OPERATIONS
Operating profit from continuing operations for the quarter ended September 30,
1999 was approximately $1.1 million, compared to approximately $1.9 million in
the corresponding 1998 period. The 1999 operating results reflect lower sales
and margins, offset by lower general and administrative costs. The Company has
continued to rationalize general and administrative overhead and has leveraged
the knowledge within and between operating units.
INTEREST EXPENSE
Interest expense, which includes interest expense allocated to the discontinued
industrial tape segment, for the quarter ended September 30, 1999 was
approximately $4.2 million compared to $4.5 million in the corresponding 1998
period. Interest expense decreased as a result of the repayment of working
capital revolver and term debt obligations with proceeds from the Industrial
Tape Sale.
Page 12 of 19
<PAGE>
INCOME TAXES
The Company's third 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 on estimated
annual earnings before tax.
The Company had net operating loss carryforwards of approximately $25 million
available to offset future taxable income immediately before the sale, which
resulted in a gross pre-tax gain from the Industrial Tape Sale of approximately
$27 million.
NINE MONTHS ENDED SEPTEMBER 30, 1999, COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1998
NET SALES
The Company's net sales for the nine months ended September 30, 1999 were $121.5
million, compared to $116.5 million in the corresponding 1998 period. The
increase in net sales for 1999 is attributed to approximately $8.8 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 and the impact of a labor
dispute at Entoleter. 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 nine months of 1999 represent an increase of approximately 20% from the
corresponding 1998 period, however on an annual basis is 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 first nine months ended
September 30, 1999, net of a charge impacting comparability, was approximately
9.0% compared to approximately 11.7% 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,
development costs associated with a new "multi-ply" pressure sensitive postage
product offering, and unabsorbed overhead costs at Entoleter attributed to the
labor dispute. The charge impacting comparability relates to a restructuring
charge for severance and termination benefits associated with the termination of
20 indirect manufacturing personnel at Spinnaker Coating. The 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, increased domestic market competition, and a
product technology transition 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, reductions in manufacturing and
administrative personnel, and product substitution that parallel the market's
balance of quality and performance versus lower pricing.
OPERATING PROFIT FROM CONTINUING OPERATIONS
Operating profit from continuing operations for the first nine months ended
September 30, 1999, net of a charge impacting comparability, was approximately
$2.3 million compared to approximately $4.9 million in the corresponding 1998
period. The 1999 operating results reflect lower sales and margins, offset by
lower general and administrative costs.
Page 13 of 19
<PAGE>
The Company has continued to rationalize general and 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, which includes interest expense allocated to the discontinued
industrial tape segment, for the nine months ended September 30, 1999 was
approximately $13.1 million, an increase of approximately $0.8 million from the
comparable 1998 period. The increase is primarily due to the financing
associated with the Company's acquisition of Coating-Maine and the Electrical
Tape Business, offset by the repayment of working capital revolver and term debt
with proceeds from the Industrial Tape Sale.
INCOME TAXES
The Company's estimated annual effective income tax rate for federal and state
income taxes is approximately 36% for continuing operations compared to 21% in
1998. 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.
The Company had net operating loss carry-forwards of approximately $25 million
available to offset future taxable income immediately before the sale, which
resulted in a gross pre-tax gain from the Industrial Tape Sale of approximately
$27 million.
FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY. The principal sources of liquidity for the Company and its
subsidiaries 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 nine months ended
September 30, 1999 was $5.0 million compared to $11.6 million in the
corresponding 1998 period. The change is attributed to the 1998 results
reflecting the exclusion of substantially all trade payables in the
Coating-Maine acquisition and the implementation of improved cash management
policies at all subsidiaries in mid-1998.
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 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 September 30, 1999, the combined effective interest rate in effect was
approximately 8%. 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.
Proceeds from the sale of CPC were used to satisfy transaction costs and repay
approximately $18.2 million of the working capital revolver debt. The balance of
proceeds from the sale of CPC, approximately $60 million, are 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 Industrial Tape Sale or not used to
permanently reduce or prepay indebtedness (other than subordinated debt) shall
be used to repurchase the Senior Notes on a pro rata basis as required by the
Indenture.
Spinnaker Electrical, an unrestricted subsidiary, is not a guarantor of the
Senior Notes. On September 2, 1999, Spinnaker Electrical purchased $1 million of
the Senior Notes on the open market at 82% of par value. In October 1999,
Spinnaker Electrical purchased an additional $0.1 million at approximately the
same price.
Page 14 of 19
<PAGE>
Remaining net proceeds of approximately $15 million are available for general
purposes, which may include purchasing additional Senior Notes in the open
market. Other alternatives include acquisitions, capital expenditures to support
remaining subsidiaries, and/or repurchase of Spinnaker common stock.
In conjunction with the disposition of Central Products Company, the Spinnaker
Credit Facility was refinanced and the aggregate facility was decreased from $60
million to $40 million. The Refinanced Credit Facility will expire December 31,
2001. As of November 5, 1999, aggregate availability under the Refinanced Credit
Facility was approximately $29.3 million, of which approximately $18.7 million
was outstanding.
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.
CAPITAL RESOURCES. The Company originally budgeted capital expenditures of
approximately $4 to $4.5 million for 1999, however with the sale of the
industrial tape businesses, the 1999 budgeted capital expenditures have been
reduced to approximately $3.0 million with only a minor portion of such
expenditures under commitment. Capital expenditures for continuing operations
during the nine months ended September 30, 1999 were $2.0 million. The Company
anticipates that it will have sufficient cash flow from continuing operations
and availability under the Refinanced Credit Facility to fund its commitments
for such capital expenditures at September 30, 1999, as well as the additional
capital expenditures budgeted for 1999.
OTHER
On May 21, 1999, Spinnaker (parent) closed the sale of its Denver, Colorado,
warehouse facility for approximately $2.4 million, resulting in a pre-tax gain
of approximately $0.8 million. The warehouse was leased from Spinnaker and
utilized by CPC. Under the terms of the Spinnaker Credit Facility, the net
proceeds from the asset sale represent a temporary reduction in the Spinnaker
Credit Facility and are available to fund anticipated capital expenditures.
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.
Page 15 of 19
<PAGE>
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 95% 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 100% 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. 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 90% complete and are expected to be
100% complete in November of 1999. The remaining 10% relates primarily to the
completion of system conversions. No capital projects have been deferred or
delayed due to Year 2000 efforts.
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 were near
completion by the end of the third quarter. 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, which could be material.
Page 16 of 19
<PAGE>
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
27. Financial Data Schedule (1)
(B) REPORTS ON FORM 8-K
On July 30, 1999, the Registrant filed a Current Report on Form 8-K which
reported the Registrant's disposition of the Industrial Tape Businesses. The
Form 8-K was filed with the unaudited pro forma financial statements of the
Registrant and the Industrial Tape Businesses as of June 30, 1999 and the six
month period then ended and an unaudited pro forma statement of operation for
the year ended December 31, 1998.
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
--------------------------------------
Craig J. Jennings
Vice President, Finance and Treasurer
Date: November 15, 1999
Page 18 of 19
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Page No. Sequential
- ---------------- ----------
<S> <C>
27. Financial Data Schedule
</TABLE>
Page 19 of 19
<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> SEP-30-1999
<CASH> 77,155
<SECURITIES> 0
<RECEIVABLES> 20,997
<ALLOWANCES> 225
<INVENTORY> 25,367
<CURRENT-ASSETS> 124,961
<PP&E> 52,972
<DEPRECIATION> 13,980
<TOTAL-ASSETS> 195,191
<CURRENT-LIABILITIES> 49,882
<BONDS> 121,011
0
0
<COMMON> 3,124
<OTHER-SE> 19,183
<TOTAL-LIABILITY-AND-EQUITY> 195,191
<SALES> 41,788
<TOTAL-REVENUES> 41,788
<CGS> 37,991
<TOTAL-COSTS> 40,719
<OTHER-EXPENSES> (488)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,179
<INCOME-PRETAX> (1,622)
<INCOME-TAX> (887)
<INCOME-CONTINUING> (735)
<DISCONTINUED> 18,096
<EXTRAORDINARY> 114
<CHANGES> 0
<NET-INCOME> 17,475
<EPS-BASIC> 2.38
<EPS-DILUTED> 2.38
</TABLE>
