FORM 10Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
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
incorporation or organization) (I.R.S. Employer
Identification No.)
518 East Water Street, Troy, OH 45373
(Address of principal executive offices) (Zip Code)
(937) 332-6667
(Registrant's telephone number, including area code)
1700 Pacific Avenue, Suite 1600, Dallas, TX 75201
(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 June 30, 2000
Class A Common Stock, No Par Value 3,566,067 shares
Class Outstanding at June 30, 2000
<PAGE>
SPINNAKER INDUSTRIES, INC.
INDEX
PAGE
NUMBER
PART I FINANCIAL INFORMATION
Item 1 Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of
June 30, 2000 and December 31, 1999 3
Condensed Consolidated Statements of Operations
for the Three Month and Six Month periods
ended June 30, 2000 and 1999 4
Condensed Consolidated Statements of Cash Flows
for the Six Months Ended June 30, 2000 and 1999 5
Notes to Condensed Consolidated Financial Statements 6
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
PART II OTHER INFORMATION
Item 4 Submission of Matters to a Vote of Security Holders 14
Item 6. Exhibits 14
<PAGE>
PART 1. - FINANCIAL INFORMATION
Item 1. - CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
SPINNAKER INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<CAPTION>
June 30, 2000 December 31, 1999
------------- -----------------
(Unaudited) (Audited)
ASSETS ($ in thousands)
Current assets:
<S> <C> <C>
Cash and cash equivalents ........... $ 15,537 $ 11,318
Accounts receivable, net ............ 20,990 20,036
Inventories, net .................... 27,191 25,920
Prepaid expenses and other .......... 2,465 2,519
--------- ---------
Total current assets ..................... 66,183 59,793
Restricted cash .......................... -- 56,026
Property plant and equipment:
Land ................................ 573 573
Buildings and improvements .......... 8,017 7,999
Machinery and equipment ............. 45,865 44,991
Accumulated depreciation ......... (17,083) (14,977)
--------- ---------
37,372 38,586
Goodwill, net ............................ 22,118 22,020
Other assets ............................. 6,146
--------- ---------
8,589
TOTAL ASSETS ............................. $ 131,819 $ 185,014
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable .................... $ 13,477 $ 12,387
Accrued liabilities ................. 7,806 7,553
Current portion of long term debt ... 660 686
Working capital revolver ............ 23,379 20,504
Other current liabilities ........... 1,053 2,399
--------- ---------
Total current liabilities ................ 46,375 43,529
Long term debt, less current portion ..... 58,141 115,595
Deferred income taxes .................... 3,884 3,890
Pension liabilities ...................... 1,650 1,579
Stockholders' equity:
Common stock ........................ 3,124 3,124
Additional paid in capital .......... 15,867 15,867
Retained earnings ................... 2,890 1,542
Treasury stock ...................... (112) (112)
--------- ---------
Total stockholders' equity ............... 21,769 20,421
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 131,819 $ 185,014
========= =========
<FN>
NOTE: The balance sheet at December 31, 1999 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.
</FN>
See accompanying notes to condensed consolidated financial statements, which are
an integral part of these financial statements.
</TABLE>
<PAGE>
<TABLE>
SPINNAKER INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS - UNAUDITED
(in thousands, except per share data)
<CAPTION> Three Months Ended Six Months Ended
June 30, June 30,
-------------------- -------------------
2000 1999 2000 1999
-------- -------- -------- ---------
<S> <C> <C> <C> <C>
Net sales ............................................... $ 38,456 $ 39,543 $ 80,301 $ 79,740
Cost of sales ........................................... 35,385 36,076 74,172 73,031
-------- -------- -------- --------
Gross margin ............................................ 3,071 3,467 6,129 6,709
Selling, general and administrative expense ............. 2,935 2,948 6,331 5,976
-------- -------- -------- --------
Income (loss) from operations ........................... 136 519 (202) 733
Interest expense ........................................ 2,423 2,226 5,787 4,383
Interest income ......................................... 276 -- 949 --
Other (expense) income - net ............................ (40) 857 (50) 850 --
Loss from continuing operations before income taxes
discontinued operations and extraordinary gain ....... (2,051) (850) (5,090) (2,800)
Income tax benefit ...................................... 603 22 1,721 724
--------- -------- --------- --------
Loss from continuing operations before discontinued
operations and extraordinary gain .................... (1,448) (828) (3,369) (2,076)
Discontinued operations (Note 6):
Loss from discontinued operations, net of income tax
benefit ............................................. -- (356) -- (1,438) --
Loss before extraordinary gain from early extinguishment
of debt ............................................. (1,448) (1,184) (3,369) (3,514)
Extraordinary gain from early extinguishment of debt,
net of income tax provision ......................... 2,082 -- 4,717 --
--------- --------- --------- ---------
Net income (loss) .............................. 634 (1,184) $ 1,348 $ (3,514)
========= ========= ========= =========
Earnings per common share - basic and assuming dilution:
Weighted average shares outstanding ..................... 7,342 7,342 7,342 7,342
========= ========= ========= =========
Loss per common share from continuing operations ........ $ (.20) $ (.11) $ (.46) $ (.28)
Loss per common share from discontinued operations ...... -- (.05) -- (.20)
Extraordinary gain from early extinguishment of debt .... .28 -- .64 --
--------- ---------- --------- ---------
Net income (loss) per common share ...................... $ .08 $ (.16) $ .18 $ (.48)
========= ========== ========= =========
See accompanying notes to condensed consolidated financial statements, which are
an integral part of these financial statements.
</TABLE>
<PAGE>
<TABLE>
SPINNAKER INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
<CAPTION>
Six Months Ended
June 30,
---------------------
($ in thousands) 2000 1999
--------- ---------
Operating activities:
<S> <C> <C>
Net income (loss) ............................................. $ 1,348 $ (3,514)
Adjustments to reconcile net income (loss)
to net cash (used in) provided by operating activities:
Depreciation ............................................. 2,238 1,965
Amortization of goodwill and deferred financing costs .... 856 809
Extraordinary gain from early extinguishment of debt ..... (4,717) --
Net gain on sale of warehouse facility ................... -- (854)
Changes in operating assets and liabilities
Accounts receivable .................................... (954) 2,011
Inventories ............................................ (1,271) (1,980)
Prepaid expenses and other assets ...................... 87 (456)
Accounts payable, accrued liabilities, and
other current liabilities ............................ (2,544) (113)
Discontinued operations - non-cash charges and
working capital change ................................. -- 7,070
-------- --------
Net cash (used in) provided by operating activities ........... (4,957) 4,938
-------- --------
Investing activities:
Purchase of property, plant and equipment .................. (1,079) (1,481)
Reduction in restricted cash ............................... 56,026 --
Acquisition of Contingent Value Rights (Note 2) ............ (500) --
Investing activities of discontinued operations ............ -- (1,022)
Proceeds from sale of warehouse facility ................... -- 2,377
Other ...................................................... (310) (42)
-------- --------
Net cash provided by (used in) investing activities ........... 54,137 (168)
-------- --------
Financing activities:
Proceeds from (payments on) revolving credit facilities, net 2,875 (4,399)
Principal payments on long term debt and leases ............ (47,767) (153)
Deferred financing costs ................................... (69) (145)
Financing activities of discontinued operations ............ -- (73)
-------- --------
Net cash used in financing activities ......................... (44,961) (4,770)
-------- --------
Increase in cash and cash equivalents ......................... 4,219 --
Cash and cash equivalents at beginning of period .............. 11,318 --
-------- --------
Cash and cash equivalents at end of period .................... $ 15,537 $ --
======== ========
See accompanying notes to condensed consolidated financial statements which are
an integral part of these financial statements.
</TABLE>
<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, Spinnaker Coating,
Inc. ("Spinnaker Coating"), Entoleter, Inc. and Spinnaker Electrical Tape
Company ("Spinnaker Electrical") (collectively the "Company"). All significant
intercompany accounts and transactions have been eliminated in consolidation.
On July 30, 1999 and August 10, 1999, the Company completed the sale of its two
industrial tape units, Spinnaker Electrical ("Industrial Tape Sale") and Central
Products Company ("Central Products"), respectively, and which together
comprised its industrial tape segment, to Intertape Polymer Group, Inc.
("Intertape"). As a result, the Company's industrial tape segment is being
reported as a discontinued operation in the accompanying consolidated financial
statements.
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 periods ended June 30, 2000 are not
necessarily indicative of the results that may be expected for the year ended
December 31, 2000. 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, 1999.
2. Acquisitions
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
("Contingent Value Rights" or "CVRs").
On May 4, 2000, the Company through its subsidiary, Spinnaker Electrical,
acquired all of the CVRs held by the former minority ownership group of
Spinnaker Coating for $500,000 in cash. Accordingly, the contingent payment was
recorded as an addition to goodwill during the second quarter of 2000.
3. Inventories
Concerning inventory values at June 30, 2000 and December 31, 1999,
substantially all are valued using a specific identification method with the
remaining inventories valued using the first-in, first-out method (FIFO).
Inventories consist of the following at June 30, 2000, and December 31, 1999:
<TABLE>
<CAPTION>
2000 1999
-------- -------
(in thousands)
<S> <C> <C>
Finished goods ........... $17,048 $16,204
Work-in-process .......... 436 860
Raw materials and supplies 9,707 8,856
------- -------
$27,191 $25,920
======= =======
</TABLE>
<PAGE>
4. Long-term debt and working capital revolver
On October 23, 1996, the Company issued $115 million 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 redemption prices beginning at 105.375% of the principal
amount and declining each year thereafter to 100% of the principal amount on
October 15, 2005, plus accrued and unpaid interest. Prior to the Industrial Tape
Sale, Spinnaker Coating, Central Products and Entoleter ("Guarantors")
unconditionally guaranteed the Senior Notes, jointly and severally. Terms of the
indenture obligated the Company to use the proceeds from the sale of Central
Products to permanently reduce indebtedness or invest in the Spinnaker Coating's
business.
During the second quarter of 2000, the Company, utilizing Restricted Proceeds,
purchased $24.1 million (par value) of the outstanding Senior Notes on the open
market at an average price of 82.3% of par value, resulting in a pre-tax gain of
approximately $3.3 million. For the six months ended June 30, 2000, the Company
purchased $57.5 million (par value) of the outstanding Senior Notes on the open
market at an average price of 83.1%, resulting in a total pre-tax gain of $7.5
million. The Restricted Proceeds were fully utilized for the Senior Note
purchases and capital expenditures, and all obligations under the Indenture were
satisfied relating to the use of sale proceeds.
The following is a summary of long term debt of the Company at June 30, 2000,
and December 31, 1999:
<TABLE>
<CAPTION>
2000 1999
--------- ---------
(in thousands)
<S> <C> <C>
10 3/4% Senior Secured Notes, due 2006 with interest
payable semi-annually each April 15 and October 15 .. $ 51,135 $ 108,585
10% Subordinated Note with PIK interest and principal
payable on January 31, 2002 ......................... 7,000 7,000
9 1/4% mortgage note from bank, payable on demand,
secured by certain property of Entoleter ............ 654 680
Capital lease obligations ........................... 12 16
--------- ---------
58,801 116,281
Current maturities .................................. (660) (686)
--------- ---------
$ 58,141 $ 115,595
========= =========
</TABLE>
<PAGE>
4. Long-term debt and working capital revolver (con't)
The Company also maintains short-term lines of credit with banks for working
capital needs at each subsidiary. In connection with the Industrial Tape Sale,
the Company's revolving credit facility (the "Spinnaker Credit Facility") was
refinanced and the aggregate facility was decreased from $60 million to $40
million. Credit availability under the Spinnaker 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 Spinnaker Credit Facility bear interest at the prime
interest rate plus 1.00% or LIBOR (London Interbank Offered Rate) plus 2.50%.
For the three-month and six-month periods ended June 30, 2000, the weighted
average interest rate for the facility's borrowings was approximately 9%. As of
June 30, 2000, the Company carried approximately 85% of the outstanding
Spinnaker Credit Facility borrowings in LIBOR instruments. As of June 30, 2000,
the Company had outstanding cash advances totaling $23.4 million and available
borrowings of $9.1 million under the Spinnaker Credit Facility.
In conjunction with the acquisition of the Spinnaker Coating-Maine business
("Coating-Maine"), the Company issued a convertible subordinated promissory note
(the "Coating Note") to the seller 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 pro forma 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. Principal payments were due on March 31, 1999 and 2000 if the
Company was not in default of covenants under the Spinnaker Credit Facility and
had availability in excess of $15 million under the Spinnaker Credit Facility
after giving effect for the payment. The Company was prohibited from making
those principal payments due to insufficient pro forma availability. The
outstanding principal is considered due on demand, however, it is still
restricted under the conditions described above. In any event, the Note and
remaining unpaid interest will mature on January 31, 2002.
Proceeds from the sale of Central Products were used to satisfy transaction
costs and repay approximately $18.2 million of the working capital revolver
debt.
Proceeds from the sale of Spinnaker Electrical, an unrestricted subsidiary, were
used to repay approximately $6.9 million of term debt and working capital
revolver debt collateralized by the assets of Spinnaker Electrical. The
remaining net proceeds of approximately $15 million 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 the Company's Common Stock.
<PAGE>
5. Earnings per share
As of June 30, 2000, there were outstanding options to purchase 20,000 shares of
Class A Common Stock and Common Stock for $40 per share, and outstanding options
to purchase 20,000 shares of Common Stock for $27 per share. In addition, as of
June 30, 2000, there were outstanding options to purchase 55,000 shares of
Common Stock at prices ranging between $9.0625 to $13.375 per share, 5,000 of
which were issued during the quarter of 2000 at a price of $9.0625 per option.
Shares related to these options were not included in the computation of diluted
earnings per share for the periods ended June 30, 2000 or 1999 because the
effect would be antidilutive.
6. 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
reclassified as discontinued operations in the accompanying statements of
consolidated operations.
The sale of the Spinnaker Electrical and Central Products assets closed on July
30, 1999 and August 10, 1999, respectively. The Company recorded pre-tax gains
from the sales of approximately $27 million. The Company offset a substantial
portion of the cash tax liability by utilizing net operating loss carry
forwards. The net proceeds from the sale of Central Products, a restricted
subsidiary, were used to repurchase a total of approximately $63.9 million (par
value) of outstanding Senior Notes.
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 $58.8 million for the
three months and six months ended June 30, 1999, respectively, and $69.5
million, $121.8 million and $119.7 million for fiscal years ended December 31,
1999, 1998 and 1997, 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 and $0.8 million in the three and
six-month periods ended June 30, 1999.
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 and $4.2 million in the three and six-month periods ended June 30, 1999.
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 investments in Permitted
Businesses 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 three and six-month periods ended June
30, 1999.
<PAGE>
ITEM-2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Continuing Operations
Three months ended June 30, 2000, compared to three months ended June 30, 1999
Net sales
The Company's net sales for the quarter ended June 30, 2000 were $38.5
million, compared to $39.5 million in the corresponding 1999 period. The slight
decrease in net sales for 2000 is primarily the result of lower volumes in dot
matrix and other general purpose products, the effects of outsourcing the
manufacturing and sales of dry gum and other conventional product lines in the
fourth quarter of 1999, and the timing of sales of pressure sensitive postage
material. This sales decline was partially offset by growth in sales of pressure
sensitive sheet products, which increased by approximately $1.0 million from the
corresponding 1999 period.
Additionally, Entoleter sales declined by $.3 million from the corresponding
1999 period primarily the result of a decline in orders for industrial
processing equipment. The Company continues to explore strategic alternatives
with respect to Entoleter to improve shareholder value, including a possible
spin-off. There can be no assurance, however, that any transaction involving
Entoleter will occur.
Gross margin
Gross margin as a percentage of net sales for the quarter ended June 30, 2000
was 7.9%, compared to 8.8% in the corresponding 1999 period. In terms of dollars
and rate, the decline in the gross margin for the 2000 period was primarily due
to increased depreciation and amortization associated with capital expenditures
used in the manufacturing process, lower product pricing and volumes, and an
increase in product development costs.
Income from operations
Income from operations in 2000 was approximately $.1 million compared to $.5
million in 1999. Compared to the corresponding 1999 period, the Company's
operating results reflect lower overall sales, increased depreciation and
amortization, slightly offset by lower selling and administrative costs. Also,
during the quarter ended June 30, 2000, the Company completed the closing of its
Dallas corporate office and consolidated the related responsibilities with its
Spinnaker Coating Ohio operations; the termination costs were recorded in the
first quarter of 2000.
Interest expense
Interest expense, net of interest income, for the quarter ended June 30, 2000
was approximately $2.2 million, which approximated the 1999 amount. Interest
expense is primarily attributed to the Company's 10-3/4% Senior Notes and
borrowings associated with the Spinnaker Credit Facility.
Income taxes
The Company's second quarter 2000 income tax rate for federal and state income
taxes reflects an annual effective tax rate of approximately 35% 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 and state income tax return adjustments. The Company
has approximately $2.2 million of net operating loss carry forwards available to
offset future taxable income in 2000. These net operating loss carry forwards
and net operating losses generated in the current year are anticipated to offset
a significant portion of the extraordinary gains realized in 2000 on the early
extinguishment of debt.
<PAGE>
Six months ended June 30, 2000, compared to six months ended June 30, 1999
Net sales
The Company's net sales for the six months ended June 30, 2000 were $80.3
million, exceeding the corresponding 1999 period by approximately $.6 million.
The increase in net sales for 2000 is attributed to strong sales in pressure
sensitive sheet products, in which volumes increased approximately 65% over the
comparable 1999 period, and increased sales volume of specialty and
general-purpose roll products. These increases were substantially offset by the
effects of outsourcing the manufacturing and sales of dry gum and other
conventional product lines in the fourth quarter of 1999. Although volumes of
pressure sensitive postage material for the first six months of 2000 declined
compared to the corresponding 1999 period, it was substantially offset by an
increased average selling price.
Gross margin
On a comparable basis, gross margin as a percentage of net sales for the six
months ended June 30, 2000 was 7.8%, compared to 8.9% in the corresponding 1999
period. Changes in sales mix and increased depreciation and amortization
associated with capital expenditures caused the 2000 gross margin to be lower.
In addition, industry-wide manufacturing capacity continues to drive strong
competition in North America resulting in price erosion on general-purpose
products as compared to the comparable 1999 period.
Severance and termination benefits associated with the elimination of indirect
manufacturing positions at Spinnaker Coating totaled $.2 million in the first
half of 2000, all of which was included in manufacturing burden. In 1999, such
charges totaled $0.5 million, of which $0.4 million were reflected in
manufacturing burden and the balance in selling, general and administrative
expense.
Income (loss) from operations
Loss from continuing operations for the six months ended June 30, 2000 was
approximately $.2 million, compared to income of $.7 million in the
corresponding 1999 period, primarily for the reasons discussed above.
In addition to the charges recorded against gross margin (see Gross Margin), the
Company recorded a one-time charge of $350,000 in the first quarter of 2000 for
severance and termination benefits that were associated with the transition of
corporate office responsibilities to Spinnaker Coating and the closing of the
Dallas office.
Interest expense
Interest expense, net of interest income, for the six months ended June 30, 2000
increased approximately $.5 million compared to the corresponding period in
1999. The increase is attributed to certain Senior Note interest expense,
included in continuing operations, which was historically allocated to the
Industrial Tape segment. Subsequent to the Industrial Tape Sale, Senior Note
interest expense in continuing operations increased prior to the Company using
the Restricted Proceeds to repurchase the Senior Notes.
<PAGE>
Income taxes
The Company's estimated annual effective income tax rate for federal and state
income taxes is approximately 35% for continuing operations compared to 26% in
1999. 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 has about $2.2 million of net operating loss carry forwards
available to offset future taxable income in 2000. These net operating loss
carry forwards and net operating losses generated in the current year are
anticipated to offset a significant portion of the extraordinary gains realized
in 2000 on the early extinguishment of debt.
FINANCIAL CONDITION
Liquidity and capital resources
LIQUIDITY. As of July 21, 2000, the Company has net availability of
approximately $7 million under its revolving credit facility ("Spinnaker Credit
Facility"). Additionally, the Company has approximately $15 million of cash from
the sale of the assets of Spinnaker Electrical, all of which is unrestricted
under the Indenture and available for general purposes that may include the
repurchase of additional Senior Notes in the open market, acquisitions, capital
expenditures to support continuing operations, and the repurchase of shares of
Spinnaker Common Stock.
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 primarily related to LIBOR. At June
30, 2000, the effective interest rate was approximately 9%. The Company
anticipates having sufficient availability under the Spinnaker Credit Facility
based on its current operations to meet its interest obligations. This facility
expires December 31, 2001.
Cash used in operating activities for the six months ended June 30, 2000 was
$5.0 million, compared to cash provided by operating activities of $4.9 million
in the corresponding 1999 period.
Net proceeds from the sale of Central Products was available to prepay
indebtedness (other than subordinated debt) of the Company, invest in any
business, capital expenditure or other tangible asset in the Permitted
Businesses, as defined in the Indenture. Since the fourth quarter of 1999, the
Company utilized the Restricted Proceeds to purchase approximately $63.9 million
(par value) of outstanding Senior Notes on the open market at an average price
of 82.9%, plus accrued and unpaid interest. The Restricted Proceeds were fully
utilized for the Senior Note purchases and capital expenditures.
The Senior Note purchases have reduced the Senior Note outstanding borrowings to
approximately $51.1 million, which lowers the semi-annual interest payment to
approximately $2.75 million.
In connection with the Coating-Maine acquisition, the Company issued a
promissory note ("Warren Note") to Warren in the original principal amount of
$7.0 million. The Warren Note bears interest at the rate of 10%, and included 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.
<PAGE>
CAPITAL RESOURCES. The Company budgeted capital expenditures of approximately $2
to $2.5 million for 2000. Capital expenditures during the six months ended June
30, 2000 totaled $1.1 million. The Company anticipates that it will have
sufficient cash flow from operations and availability under the Spinnaker Credit
Facility to fund its commitments for such capital expenditures in 2000.
Other
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, issuance of
Spinnaker common stock and a right to a contingent payment ("Contingent Value
Rights" or "CVRs").
On May 4, 2000, the Company, through Spinnaker Electrical, acquired all the
Contingent Value Rights held by the former minority ownership group of Spinnaker
Coating for $500,000 in cash. Accordingly, the contingent payment was recorded
as an addition to goodwill during the second quarter of 2000.
The Company has approximately $51.1 million of Senior Notes with a fixed
interest rate and approximately $23.4 million of revolving credit debt with an
interest rate that fluctuates with the market. An increase or decrease of 0.5%
in the revolver interest rate would impact interest expense approximately
$117,000 annually.
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>
PART II - OTHER INFORMATION
Item 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Registrant held its Annual Meeting of Stockholders (the "Annual Meeting") on
June 6, 2000, in Rye, New York. At the Annual Meeting, the Registrant's
stockholders considered (i) the election of eight directors to serve until the
next Annual Meeting of Stockholders, all of whom were currently serving as
directors of the Registrant.
At the Annual Meeting, each of the nominees for the Board of Directors was
elected by the stockholders. The results of the vote of the stockholders of the
Registrant upon the election of the nominees for the Board of Directors of the
Registrant was as follows:
<TABLE>
<CAPTION>
Votes Cast Votes Withheld
For Nominee From Nominee
<S> <C> <C>
Richard J. Boyle ..... 3,046,794 631
Ned N. Fleming, III .. 3,046,794 631
E. Val Cerutti ....... 3,046,910 515
Mario J. Gabelli ..... 3,046,794 631
Louis A. Guzzetti, Jr 3,046,794 631
Ralph R. Papitto ..... 3,046,889 535
Joseph P. Rhein ...... 3,046,889 535
Anthonie C. van Ekris 3,046,910 515
</TABLE>
Item 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule (1)
(b) Reports on Form 8-K
A Form 8-K dated June 13, 2000, was filed, which stated that Registrant
had changed its principal place of business and telephone number.
--------------
(1) Filed herewith.
<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/ Perry J. Schiller
----------------------------------------
Perry J. Schiller
Vice President, Finance and Controller
Date: August 9, 2000
