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, 2000
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Commission file number 2-66564
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Spinnaker Industries, Inc.
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(Exact name of Registrant as specified in its charter)
Delaware 06-0544125
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
518 East Water Street Troy, OH 45373
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(Address of principal executive offices) (Zip Code)
(937) 332-6667
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(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
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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
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Class Outstanding at September 30, 2000
Class A Common Stock, No Par Value 3,566,067 shares
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Class Outstanding at September 30, 2000
<PAGE>
SPINNAKER INDUSTRIES, INC.
INDEX
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PART I FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of
September 30, 2000 and December 31, 1999 3
Condensed Consolidated Statements of Operations
for the Three Month and Nine Month periods
ended September 30, 2000 and 1999 4
Condensed Consolidated Statements of Cash Flows
for the Nine Months Ended September 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 6. Exhibits 14
<PAGE>
<TABLE>
PART 1. - FINANCIAL INFORMATION
Item 1. - CONSOLIDATED FINANCIAL STATEMENTS
SPINNAKER INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<CAPTION>
September 30, 2000 December 31, 1999
------------------ -----------------
(Unaudited) (Audited)
ASSETS ($ in thousands)
Current assets:
<S> <C> <C>
Cash and cash equivalents ................... $ 15,811 $ 11,318
Accounts receivable, net ......................... 20,349 20,036
Inventories, net ............................ 27,579 25,920
Prepaid expenses and other .................. 2,427 2,519
--------- ---------
Total current assets ........................ 66,166 59,793
Restricted Cash .................................. -- 56,026
Property plant and equipment:
Land ........................................ 573 573
Buildings and improvements .................. 8,027 7,999
Machinery and equipment ..................... 46,307 44,991
Accumulated depreciation ................. (18,260) (14,977)
--------- ---------
36,647 38,586
Goodwill, net .................................... 21,912 22,020
Other assets ..................................... 6,106 8,589
--------- ---------
TOTAL ASSETS ..................................... $ 130,831 $ 185,014
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ............................ $ 14,280 $ 12,387
Accrued liabilities ......................... 6,379 7,553
Current portion of long term debt ........... 653 686
Working capital revolver .................... 23,623 20,504
Other current liabilities ................... 2,428 2,399
--------- ---------
Total current liabilities ........................ 47,363 43,529
Long term debt, less current portion ............. 58,140 115,595
Deferred income taxes ............................ 3,884 3,890
Pension liabilities .............................. 1,671 1,579
Stockholders' equity:
Common stock ................................ 3,124 3,124
Additional paid-in capital .................. 15,867 15,867
Retained earnings ........................... 894 1,542
Less: treasury stock ....................... (112) (112)
--------- ---------
Total stockholders' equity ....................... 19,773 20,421
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ....... $ 130,831 $ 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 accounting principles
generally accepted in the United States 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 Nine Months Ended
September 30, September 30,
------------------------ ------------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net sales ................................................. $ 37,323 $ 41,788 $ 117,624 $ 121,528
Cost of sales ............................................. 35,510 37,991 109,682 111,022
--------- --------- --------- ---------
Gross margin .............................................. 1,813 3,797 7,942 10,506
Selling, general and administrative expense ............... 2,748 2,728 9,079 8,704
--------- --------- --------- ---------
Income (loss) from continuing operations .................. (935) 1,069 (1,137) 1,802
Interest expense .......................................... (2,396) (3,179) (8,183) (7,562)
Interest income and other - net .......................... 232 488 1,131 1,338
--------- --------- --------- ---------
Loss from continuing operations before income taxes,
discontinued operations and extraordinary gain .......... (3,099) (1,622) (8,189) (4,422)
Income tax benefit ...................................... 1,103 887 2,824 1,611
--------- --------- --------- ---------
Loss from continuing operations before discontinued
operations and extraordinary gain ................. (1,996) (735) (5,365) (2,811)
Discontinued operations (Note 6):
Loss from discontinued operations, net of tax benefit -- -- -- (1,438)
Gain on sale of discontinued operations, net of taxes -- 18,096 -- 18,096
--------- --------- --------- --------
Income (loss) before extraordinary gain from
extinguishment of debt ............................... (1,996) 17,361 (5,365) 13,847
Extraordinary gain from early extinguishment of debt,
net of taxes ......................................... -- 114 4,717 114
--------- --------- --------- --------
Net income (loss) .................................... $ (1,996) $ 17,475 $ (648) $ 13,961
========= ========= ========= =========
Earnings per common share - basic and assuming dilution :
Weighted average shares outstanding ....................... 7,342 7,342 7,342 7,342
========= ========= ========= =========
Net loss per common share from continuing operations ... $ (0.27) $ (0.10) $ (0.73) $ (0.38)
Net income per common share from discontinued operations -- 2.46 -- 2.27
Extraordinary gain from early extinguishment of debt ... -- 0.01 0.64 0.01
Net income (loss) per common share ..................... $ (0.27) $ 2.37 $ (0.09) $ 1.90
========= ========= ========= =========
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>
Nine Months Ended
September 30,
----------------------
($ in thousands) 2000 1999
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Operating activities:
<S> <C> <C>
Net income (loss) ........................................ $ (648) $ 13,961
Adjustments to reconcile net income (loss)
to net cash (used in)provided by operating activities:
Depreciation ........................................ 3,415 2,936
Amortization of goodwill and deferred financing costs 1,276 1,195
Extraordinary gain from early extinguishment of debt (4,717) (114)
Gain on sale of industrial tape segment ............ -- (18,096)
Gain on sale of warehouse facility ................. -- (854)
Changes in operating assets and liabilities :
Accounts receivable ............................... (313) 667
Inventories ....................................... (1,659) (1,150)
Prepaid expenses and other assets ................. 126 (14)
Accounts payable .................................. 1,893 (1,782)
Accrued liabilities and other current liabilities . (3,664) 1,154
Discontinued operations - non-cash charges and
working capital changes ......................... -- 7,061
--------- ---------
Net cash (used in)provided by operating activities ....... (4,291) 4,964
--------- ---------
Investing activities:
Proceeds from sale of industrial tape segment ......... -- 104,450
Purchase of property, plant and equipment ............. (1,531) (1,986)
Reduction in restricted cash .......................... 56,026 --
Acquisition of Contingent Value Rights ................ (500) --
Investing activities of discontinued operations ....... -- (1,243)
Proceeds from sale of warehouse facility .............. -- 2,357
Other ................................................. (494) (44)
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Net cash provided by investing activities ................ 53,501 103,534
--------- ---------
Financing activities:
Proceeds (payments) on revolving credit facilities, net 3,119 (24,800)
Principal payments on long term debt and leases ....... (47,767) (6,002)
Deferred financing costs .............................. (69) (468)
Financing activities of discontinued operations ....... -- (73)
--------- ---------
Net cash used in financing activities .................... (44,717) (31,343)
--------- ---------
Increase in cash and cash equivalents .................... 4,493 77,155
Cash and cash equivalents at beginning of period ......... 11,318 --
--------- ---------
Cash and cash equivalents at end of period ............... $ 15,811 $ 77,155
========= =========
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 (the
"Industrial Tape Sale") of its two industrial tape units, Spinnaker Electrical
("Spinnaker Electrical") 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 accounting principles generally accepted in the
United States 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 accounting principles generally
accepted in the United States 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 September 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.
3. Inventories
Substantially all inventory values are valued using a specific identification
method with the remaining inventories valued using the first-in, first-out
method (FIFO). Inventories consist of the following at September 30, 2000, and
December 31, 1999:
2000 1999
------- -------
(in thousands)
Finished goods ........... $17,955 $16,204
Work-in-process .......... 954 860
Raw materials and supplies 8,670 8,856
------- -------
$27,579 $25,920
======= =======
<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 its remaining
businesses.
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, 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 September 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 ............ 647 680
Capital lease obligations ........................... 11 16
--------- ---------
58,793 116,281
Current maturities .................................. (653) (686)
--------- ---------
$ 58,140 $ 115,595
========= =========
</TABLE>
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 nine-month periods ended September 30, 2000, the
weighted average interest rate for the facility's borrowings was approximately
9%. As of September 30, 2000, the Company carried approximately 85% of the
outstanding Spinnaker Credit Facility borrowings in LIBOR instruments. As of
September 30, 2000, the Company had outstanding cash advances totaling $23.6
million and available borrowings of $5.8 million under the Spinnaker Credit
Facility.
<PAGE>
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.
5. Earnings per share
As of September 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 September 30, 2000, there were outstanding options to
purchase 52,000 shares of Common Stock at prices ranging between $9.0625 to
$13.375 per share, 3,000 of which were cancelled during September 2000 at a
price of $13.375 per option.
Shares related to these options were not included in the computation of diluted
earnings per share for the periods ended September 30, 2000 or 1999 because the
effect would be antidilutive.
<PAGE>
6. Discontinued operations
On April 9, 1999, the Company entered into a definitive agreement to sell its
industrial tape businesses 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 $10.7 million and $69.5 million for the
three months and nine months ended September 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 $0.2 million and $1.0 million in the three and
nine-month periods ended September 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 $900,000
and $5.2 million in the three and nine-month periods ended September 30, 1999.
Interest expense from continuing operations is subject to certain matters
associated with the use of the net proceeds from the sales of Central Products
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 nine-month
periods ended September 30, 1999.
<PAGE>
ITEM-2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Continuing Operations
Three months ended September 30, 2000, compared to three months ended September
30, 1999
Net sales
The Company's net sales for the quarter ended September 30, 2000 were $37.3
million, compared to $41.8 million in the corresponding 1999 period. The
decrease is primarily attributable to an extremely competitive pricing
environment resulting in lower average selling prices and volumes in the
Company's general purpose pressure-sensitive products. Additionally, as compared
to the same period in 1999, lower sales are the result of a joint venture
entered into to outsource the manufacturing and sales of non-pressure sensitive
product lines in the fourth quarter of 1999. Offsetting these declines is the
continued growth in sales of pressure sensitive sheet products, which increased
by approximately $1.1 million from the corresponding 1999 period.
Gross margin
Gross margin as a percentage of net sales for the quarter ended September 30,
2000 was approximately 4.9%, compared to approximately 9.1% in the corresponding
1999 period. In terms of dollars and rate, the decline in the gross margin for
the 2000 period reflects the decline in average selling prices along with
unabsorbed manufacturing costs from the reduction in sales volumes.
Income (loss) from continuing operations
Loss from continuing operations for the quarter ended September 30, 2000 was
approximately $900,000, compared to income from continuing operations of
approximately $1.1 million in the corresponding 1999 period. The 2000 operating
results reflect the lower operating margins discussed above while general and
administrative costs were held constant.
Interest expense
Interest expense, for the quarter ended September 30, 2000 was approximately
$2.4 million compared to $3.2 million in the corresponding 1999 period. Interest
expense decreased as a result of the early retirement of Senior Notes with
proceeds from the Industrial Tape Sale.
Income taxes
The Company's third quarter 2000 income tax rate for federal and state income
taxes reflects an annual effective tax rate of approximately 35% for continuing
operations.
<PAGE>
Nine months ended September 30, 2000, compared to nine months ended September
30, 1999
Net sales
The Company's net sales for the nine months ended September 30, 2000 were $117.6
million, compared to $121.5 million in the corresponding 1999 period. The
decrease in net sales for 2000 is attributed to entering into a joint venture to
outsource the manufacturing and sales of non-pressure sensitive product lines in
the fourth quarter of 1999 and lower sales volumes of general purpose
pressure-sensitive products. Net sales were also impacted by lower prices from
intense price competition in the general purpose and other pressure-sensitive
products lines. Offsetting these declines were strong sales of pressure
sensitive sheet products, in which volumes increased approximately 62% over the
comparable 1999 period
Additionally, sales in the Company's Entoleter business declined by $1.1 million
due to continued lower unit pricing, primarily in the Centrimal product line.
Gross margin
Gross margin as a percentage of net sales for the first nine months ended
September 30, 2000, was approximately 6.8% compared to approximately 8.6% in the
corresponding 1999 period. The decline in the gross margin for the 2000 period
was primarily due to lower product volumes and prices, increased depreciation
and amortization associated with capital expenditures used in the manufacturing
process and an increase in product development costs related to several new
pressure-sensitive paper and film products that were introduced in the second
and third quarters of 2000.
Income (loss) from continuing operations
Operating loss from continuing operations for the first nine months ended
September 30, 2000 was approximately $1.1 million compared to income from
continuing operations of approximately $1.8 million in the corresponding 1999
period. The 2000 operating results primarily reflect lower operating margins,
increased depreciation and amortization associated with capital expenditures
used in the manufacturing process, lower product volumes, and an increase in
product development costs. The 2000 operating loss from operations was less due
to lower administrative costs attributed to restructuring efforts, including the
closing of the Dallas corporate office during May 2000.
Interest expense
Interest expense, for the nine months ended September 30, 2000 was approximately
$8.2 million, an increase of approximately $.6 million from the comparable 1999
period. The increase is attributed to certain Senior Note interest expense,
included in continuing operations, which was historically allocated to the
industrial tape businesses.
Income taxes
The Company's estimated annual effective income tax rate for federal and state
income taxes is approximately 34% for continuing operations in 2000. 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.
<PAGE>
FINANCIAL CONDITION
Liquidity and capital resources
LIQUIDITY. As of November 1, 2000, the Company had net availability of
approximately $4.6 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
September 30, 2000, the effective interest rate was approximately 9%. The
Company anticipates having sufficient availability under the Spinnaker Credit
Facility along with cash balances to meet its interest obligations. This
facility expires December 31, 2001.
Cash used in operating activities for the nine months ended September 30, 2000
was $4.3 million, compared to cash provided by operating activities of $5.0
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 purchase of Senior Notes has reduced the Senior Note outstanding borrowings
to approximately $51.1 million, which reduces 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 nine months ended
September 30, 2000 totaled $1.5 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.
The Company has approximately $51.1 million of Senior Notes with a fixed
interest rate and approximately $23.6 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
$118,000 annually.
<PAGE>
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. 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.
Item 6 - EXHIBITS AND REPORTS ON FORM 8-K
(A) Exhibits
10.1 Fifth Amendment, dated September 30, 2000, to the Spinnaker Credit Facility
among Spinnaker Coating, Inc., Spinnaker Coating - Maine, Inc., and
Entoleter, Inc. as Borrowers, the Registrant, as Guarantor, each of the
financial institutions listed on Schedule I thereto, and Transamerica
Business Credit Corporation, as Agent, dated August 9, 1999 (as amended,
restated or otherwise modified from time to time). (1)
27. Financial Data Schedule (1)
(B) Reports on Form 8-K
None
(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: November 13, 2000
<PAGE>
EXHIBIT INDEX
Exhibit Page No.
Sequential
10.1 Fifth amendment, dated September 30, 2000, to the Spinnaker Credit Facility
among Spinnaker Coating, Inc., Spinnaker Coating - Maine, Inc., and
Entoleter, Inc. as Borrowers, the Registrant, as Guarantor, each of the
financial institutions listed on Schedule I thereto, and Transamerica
Business Credit Corporation, as Agent, dated August 9, 1999 (as amended,
restated or otherwise modified from time to time). (1)
27. Financial Data Schedule (1)
