<PAGE>
FORM 10Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended MARCH 31, 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.
(Exact name of Registrant as specified in its charter)
DELAWARE 06-0544125
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1700 PACIFIC AVENUE, SUITE 1600, DALLAS, TX 75201
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(Address of principal executive offices) (Zip Code)
(214) 855-0322
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(Registrant's telephone number, including area code)
N/A
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(Former name, former address and former fiscal year,
if changed since last report.)
Indicate check mark whether the Registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes __X__ No _____
Indicate the number of shares outstanding of each of the Registrant's classes of
Common Stock, as of the latest practicable date.
<TABLE>
<CAPTION>
COMMON STOCK, NO PAR VALUE 3,775,680 SHARES
- ------------------------------------ ------------------------------------
<S> <C>
Class Outstanding at March 31, 2000
</TABLE>
<TABLE>
<CAPTION>
CLASS A COMMON STOCK, NO PAR VALUE 3,566,067 SHARES
- ------------------------------------ ------------------------------------
<S> <C>
Class Outstanding at March 31, 2000
</TABLE>
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SPINNAKER INDUSTRIES, INC.
INDEX
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<TABLE>
<CAPTION>
PAGE
NUMBER
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<S> <C>
PART I FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of
March 31, 2000 and December 31, 1999 3
Condensed Consolidated Statements of Operations
for the Three Month Period Ended
March 31, 2000 and 1999 4
Condensed Consolidated Statements of Cash Flows
for the Three Months Ended March 31, 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 13
</TABLE>
Page 2 of 15
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PART 1. - FINANCIAL INFORMATION
ITEM 1. - CONSOLIDATED FINANCIAL STATEMENTS
SPINNAKER INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, 2000 DECEMBER 31, 1999
(Unaudited) (Note)
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ASSETS ($ in thousands)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 17,768 $ 11,318
Accounts receivable, net 21,070 20,036
Inventories, net 25,320 25,920
Prepaid expenses and other 2,589 2,519
----------- -----------
Total current assets 66,747 59,793
Restricted cash 20,907 56,026
Property plant and equipment:
Land 573 573
Buildings and improvements 8,012 7,999
Machinery and equipment 45,565 44,991
Accumulated depreciation (15,995) (14,977)
--------------- ---------------
38,155 38,586
Goodwill, net 21,822 22,020
Other assets 7,134 8,589
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TOTAL ASSETS $ 154,765 $ 185,014
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities:
Accounts payable $ 13,031 $ 12,387
Accrued liabilities 7,711 7,553
Current portion of long term debt 674 686
Working capital revolver 20,846 20,504
Other current liabilities 3,644 2,399
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Total current liabilities 45,906 43,529
Long term debt, less current portion 82,223 115,595
Deferred income taxes 3,890 3,890
Pension liabilities 1,611 1,579
Stockholders' equity:
Common stock 3,124 3,124
Additional paid-in capital 15,867 15,867
Retained earnings 2,256 1,542
Less treasury stock (112) (112)
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Total stockholders' equity 21,135 20,421
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 154,765 $ 185,014
=========== ===========
</TABLE>
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.
See accompanying notes to condensed consolidated financial statements, which are
an integral part of these financial statements.
Page 3 of 15
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SPINNAKER INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS - UNAUDITED
<TABLE>
<CAPTION>
($ in thousands, except per share data) Three Months Ended
March 31,
----------------------------
2000 1999
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<S> <C> <C>
Net sales $ 41,845 $ 40,197
Cost of sales 38,787 36,955
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Gross margin 3,058 3,242
Selling, general and administrative expense 3,396 3,028
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Income (loss) from operations (338) 214
Interest expense 3,364 2,157
Interest income 673 5
Other income (expense) - net (10) (12)
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Loss from continuing operations before income taxes,
discontinued operations and extraordinary gain (3,039) (1,950)
Income tax benefit 1,118 702
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Loss from continuing operations before discontinued
operations and extraordinary gain (1,921) (1,248)
Discontinued operations (Note 1):
Loss from discontinued operations, net of income tax
benefit -- (1,082)
----------- -----------
Loss before extraordinary gain from early extinguishment
of debt (1,921) (2,330)
Extraordinary gain from early extinguishment of debt,
net of income tax provision 2,635 --
----------- -----------
Net income (loss) $ 714 $ (2,330)
=========== ===========
Earnings per common share - basic and assuming dilution:
Weighted average shares outstanding $ 7,342 $ 7,342
=========== ===========
Loss per common share from continuing operations $ (0.26) $ (0.17)
Loss per common share from discontinued operations - (0.15)
Extraordinary gain from early extinguishment of debt 0.36 --
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Net income (loss) per common share $ 0.10 $ (0.32)
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</TABLE>
See accompanying notes to condensed consolidated financial statements which are
an integral part of these financial statements.
Page 4 of 15
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SPINNAKER INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------------------------------
($ in thousands) 2000 1999
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<S> <C> <C>
Operating activities:
Net income (loss) $ 714 $ (2,330)
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation 1,018 984
Amortization of goodwill and deferred financing costs 477 403
Extraordinary gain from early extinguishment of debt (2,635) --
Changes in operating assets and liabilities
Accounts receivable (1,034) (14)
Inventories 600 (2,927)
Prepaid expenses and other assets (90) (1)
Accounts payable, accrued liabilities, and
other current liabilities 502 5,732
Discontinued operations - non-cash charges and
working capital changes -- 4,966
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Net cash provided by (used in) operating activities (448) 6,813
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Investing activities:
Purchase of property, plant and equipment (587) (652)
Proceeds from sale of short term investments 35,119 --
Investing activities of discontinued operations -- (671)
Other 12 (39)
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Net cash used in investing activities 34,544 (1,362)
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Financing activities:
Proceeds (payments) on revolving credit facilities, net 342 (5,232)
Principal payments on long term debt and leases (27,919) (23)
Deferred financing costs (69) (123)
Financing activities of discontinued operations -- (73)
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Net cash provided by (used in) financing activities (27,646) (5,451)
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Increase in cash and cash equivalents 6,450 --
Cash and cash equivalents at beginning of period 11,318 --
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Cash and cash equivalents at end of period $ 17,768 $ --
============= =============
</TABLE>
See accompanying notes to condensed consolidated financial statements which are
an integral part of these financial statements.
Page 5 of 15
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SPINNAKER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
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 August 10, 1999 and July 30, 1999, the Company completed the sale of its two
industrial tape units, Central Products Company ("Central Products") and
Spinnaker Electrical, respectively ("Industrial Tape Sale:"), 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 period ended March 31, 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"), which is exercisable at any time during
the period beginning October 1, 1998 and ending September 30, 2000.
On May 4, 2000, Spinnaker Electrical acquired all of the CVRs held by the former
minority ownership group of Spinnaker Coating for $500,000 in cash.
3. INVENTORIES
Of inventory values at March 31, 2000 and December 31, 1999, approximately 98%
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 March 31, 2000, and December 31, 1999:
<TABLE>
<CAPTION>
2000 1999
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(in thousands)
<S> <C> <C>
Finished goods $ 16,375 $ 16,204
Work-in-process 666 860
Raw materials and supplies 8,279 8,856
-------------- -------------
$ 25,320 $ 25,920
============== =============
</TABLE>
Page 6 of 15
<PAGE>
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 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. Any proceeds
from the sale of Central Products ("Restricted Proceeds") that are not invested
in any business, capital expenditure or other tangible assets in the Permitted
Businesses, as defined by the Indenture for the Senior Notes, within 270 days
after the closing of the sale of Central Products or that are not used to
permanently reduce indebtedness (other than subordinated debt) shall be used to
repurchase the Senior Notes on a pro rata basis as required by the Indenture.
The following is a summary of long term debt of the Company at March 31, 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 $ 75,215 $ 108,585
10% Subordinated Note with PIK interest and principle
payable on August 15, 1999 and March 31, 2000 7,000 7,000
9 1/4% mortgage note from bank, payable on demand,
secured by certain property of Entoleter 668 680
Capital lease obligations 14 16
----------- ------------
82,897 116,281
Less current maturities (674) (686)
----------- ------------
$ 82,223 $ 115,595
=========== ============
</TABLE>
Spinnaker Electrical, an unrestricted subsidiary, is not a guarantor of the
Senior Notes. During the fourth quarter of 1999, Spinnaker Electrical purchased
a total of $6.4 million of the outstanding Senior Notes on the open market at an
average price of 81.5% of par value, resulting in a gain of approximately $1.2
million.
During the first quarter of 2000, the Company, utilizing Restricted Proceeds,
purchased $33.4 million (par value) of the outstanding Senior Notes on the open
market at an average price of 83.6% of par value, resulting in a gain of
approximately $5.5 million. In addition, the Company purchased all of the Senior
Note holdings of Spinnaker Electrical at 81.5% of par value, plus accrued
interest, representing Spinnaker Electrical's cost basis.
Subsequent to March 31, 2000, the Company, utilizing Restricted Proceeds,
purchased an additional $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 gain of approximately $4.2 million. The Senior Note purchases to date and
capital expenditures in the business have fully utilized the Restricted
Proceeds.
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 Company's revolving credit facility (the "Spinnaker Credit Facility") was
refinanced and the aggregate facility was decreased to $40 million from $60
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%. In
conjunction with the Industrial Tape Sale, all
Page 7 of 15
<PAGE>
outstanding borrowings under a separate $5 million revolving credit agreement
for Spinnaker Electrical ("Electrical Credit Facility") were paid and the
agreement was terminated. For the three month period ended March 31, 2000, the
weighted average interest rate for the facility's borrowings was approximately
9%. The Company carries over 76% of the outstanding Spinnaker Credit Facility
borrowings in LIBOR instruments. The Company had cash advances outstanding of
approximately $20.8 million and available borrowings of approximately $10.9
million under the Spinnaker Credit Facility as of March 31, 2000. Cash
collections are swept against the facility's outstanding balance.
In conjunction with the acquisition of Spinnaker Coating-Maine
("Coating-Maine"), the Company issued a convertible subordinated promissory note
(the "Coating Note") to its former owners 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, is
still restricted under the conditions described above. If the Company is
prohibited from paying interest due in cash, the Company will continue to PIK
the interest owed. In any event, the Note and remaining unpaid interest will
mature on January 31, 2002.
In conjunction with the acquisition of the Company's 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 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. The
subordinated note was repaid net of a 10% discount resulting in a gain of
$50,000.
Proceeds from the sale of Central Products satisfied transaction costs and
repaid approximately $18.2 million of the working capital revolver debt.
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 The
Company's Common Stock.
5. EARNINGS PER SHARE
As of March 31, 1999, there were 20,000 directors' options to purchase one share
each of Class A Common Stock and Common Stock at a total price of $40 per option
exercised and 10,000 directors' options to purchase one share of Common Stock at
a price of $27 per option exercised.
Subsequent to March 31, 1999, due to the resignation of a director, 10,000
directors' options to purchase one share of Common Stock at a price of $27
per option exercised expired. As of March 31, 2000, there were 20,000
directors' options to purchase one share each of Class A Common Stock and
Common Stock at a total price of $40 per option exercised. 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 for the periods ended March 31, 2000 or 1999 because the
effect would be antidilutive.
Page 8 of 15
<PAGE>
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
segregated from continuing operations and reported as a separate line item on
the statement of operations.
The sale of Central Products and Spinnaker Electrical assets closed on August
10, 1999 and July 30, 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 carryforwards.
The net proceeds from the sale of Central Products, a restricted subsidiary,
were used to repurchase a total of approximately $63.9 million of Senior Notes.
The Company has restated its prior period 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 for the three month
period ended March 31, 1999, 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. Historical expenses
allocated back to continuing operations totaled $0.4 million three month period
ended March 31, 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 in the three month period ended March 31, 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
the 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 month period ended
March 31, 1999.
Page 9 of 15
<PAGE>
ITEM-2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF CONTINUING OPERATIONS
THREE MONTHS ENDED MARCH 31, 2000, COMPARED TO THREE MONTHS ENDED MARCH 31, 1999
NET SALES
The Company's net sales for the quarter ended March 31, 2000 were $41.8 million,
compared to $40.2 million in the corresponding 1999 period. The increase in net
sales for 2000 is attributed to recent product releases and new business with
the Bureau of Printing and Engraving ("BEP"), partially offset by lower average
unit pricing resulting from increased capacity in the domestic market. The
release of new products to serve a changing technology market and higher unit
sales of pressure sensitive postage paper stock increased sales. Unit sales of
pressure sensitive postage paper stock were impacted by orders for certain
cartoon theme stamps previously sourced by a competitor.
GROSS MARGIN
Gross margin as a percentage of net sales in 2000 was approximately 7.7%
compared to 8.9% in the corresponding 1999, net of charges impacting
comparability of periods. The 2000 gross margins were lower due to competitive
pricing in the adhesive-backed materials industry, changes in sales mix, and the
timing and new pricing of the current postage contract.
Charges impacting comparability between periods relate to severance and
termination benefits associated with the termination of indirect manufacturing
personnel at Spinnaker Coating in both 2000 and 1999. The 2000 first quarter
charge totaled approximately $0.2 million, all of which was reflected in
manufacturing burden. The 1999 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.
New manufacturing capacity continues to increase domestic market competition,
and the product technology transition has resulted in changes in sales mix which
contributed to lower average selling prices in pressure sensitive labels,
leading to product substitution. The current postage contract, a five-year $75
million agreement, was awarded late in the first quarter of 1999 and contained
new pricing and product mix, which became effective immediately.
INCOME (LOSS) FROM OPERATIONS
Income from operations in 2000 was approximately $0.2 million compared to
approximately $0.7 million in 1999, net of charges impacting comparability of
periods. The 2000 operating results reflect lower gross margins, increased
depreciation and amortization associated with capital expenditures, and one-time
charges associated with the transition of corporate office responsibilities to
Spinnaker Coating.
In addition to the charges recorded against gross margin (see GROSS MARGIN), the
Company recorded a one-time charge of $350,000, primarily severance and
termination benefits, associated with the transition of corporate office
responsibilities to Spinnaker Coating and the closing of the Dallas office.
INTEREST EXPENSE
Interest expense for 2000 was approximately $3.4 million, an increase of
approximately $1.2 million from the corresponding 1999 period. The increase is
attributed to certain Senior Note interest expense, included in continuing
operations, historically allocated to the Industrial Tape segment. Subsequent to
the Industrial Tape Sale, Senior Note interest expense in continuing operations
increased as the Company continues to evaluate all its alternatives and options
related to the Restricted Proceeds.
Page 10 of 15
<PAGE>
INCOME TAXES
The Company's first quarter 2000 income tax rate for federal and state income
taxes reflects an annual effective tax rate of approximately 37% 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 has approximately $2.2 million of net operating loss carryforwards
available to offset future taxable income in 2000. These net operating loss
carryforwards 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. The Company has approximately $17 million of unrestricted cash and
net availability of approximately $6 million under the revolving credit
facility as of May 5, 2000. The Company's $40 million revolving credit
facility, which was decreased from $60 million in connection with the
Industrial Tape Sale ("Spinnaker Credit Facility"), expires December 31, 2001.
The Company's cash used in operating activities for the first quarter of 2000
was approximately $0.5 million, compared to approximately $6.8 million of cash
provided by operations in the corresponding 1999 period. The 1999 cash
generation is primarily attributed to the implementation of improved cash
management procedures, including the standardization of payment policies.
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 March 31, 2000, the combined effective interest rate in effect was
approximately 9%.
Net proceeds from the sale of Central Products are 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 December 31, 1999, the Company
has 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 83.9%, plus accrued and unpaid interest. The Senior Note purchases to date
and capital expenditures in the business have fully utilized the Restricted
Proceeds.
The Senior Note purchases have reduced the Senior Note outstanding borrowing's
to approximately $51.1 million, which lowers the semi-annual interest payment to
approximately $2.75 million. The Company anticipates having sufficient
availability under the Spinnaker Credit Facility based on its current operations
to meet its interest obligation.
Remaining net proceeds of approximately $15 million from the sale of assets of
Spinnaker Electrical, which are not restricted under the Indenture, 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.
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 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
Page 11 of 15
<PAGE>
Facility and Senior Notes. The Warren Note matures on January 31, 2002, however,
it can be prepaid earlier if certain conditions or events occur.
CAPITAL RESOURCES. The Company budgeted capital expenditures of approximately
$2.5 to $3.0 million for 2000, however, at March 31, 2000 the Company had
commitments for a minor portion of such capital expenditures. Capital
expenditures for continuing operations during the three months ended March 31,
2000 were $0.6 million. The Company anticipates that it will have sufficient
cash flow from continuing operations and availability under the Spinnaker Credit
Facility to fund its commitments for such capital expenditures at March 31,
2000, as well as the additional capital expenditures budgeted for 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"). The contingent payment is based on the fair market value of
the capital stock of Spinnaker Coating, less the consideration received at
closing. The CVRs expire September 30, 2000.
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.
The Company has approximately $82.2 million of Senior Notes with a fixed
interest rate and approximately $20.8 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
$104,000.
YEAR 2000
The Company is not aware of any material problems resulting from Year 2000
issues, either with its internal systems or with the products and services of
third parties. The Company will continue to monitor its mission critical IT and
non-IT system and the impact of the Year 2000 on its suppliers and vendors
throughout the Year 2000 to insure that any latent Year 2000 matters that may
arise are addressed promptly.
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 12 of 15
<PAGE>
Item 6 - EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
10.1 Fourth Amendment, dated April 17, 2000, to the Spinnaker Credit
Agreement 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. (1)
27. Financial Data Schedule (1)
(B) REPORTS ON FORM 8-K
None
Page 13 of 15
<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: May 15, 2000
Page 14 of 15
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT PAGE NO. SEQUENTIAL
- ------- --------
<S> <C>
10.1 Fourth Amendment, dated April 17, 2000, to the Spinnaker Credit
Agreement 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. (1)
27. Financial Data Schedule
</TABLE>
Page 15 of 15
<PAGE>
FOURTH AMENDMENT TO CREDIT AGREEMENT
THIS FOURTH AMENDMENT (this "AMENDMENT") to CREDIT AGREEMENT among
SPINNAKER COATING, INC., a Delaware corporation, formerly known as Brown-Bridge
Industries, Inc. ("COATING"), ENTOLETER, INC., a Delaware corporation
("Entoleter"), SPINNAKER COATING-MAINE, INC., a Delaware corporation ("SCM" and,
together with Coating and Entoleter, the "BORROWERS"), SPINNAKER INDUSTRIES,
INC., a Delaware corporation (the "GUARANTOR" and, together with the Borrowers,
the "CREDIT PARTIES"), the financial institutions from time to time party
thereto as lenders (the "LENDERS"), and TRANSAMERICA BUSINESS CREDIT
CORPORATION, as agent (in such capacity the "AGENT") for the Lenders, is made as
of April 17, 2000 among the Credit Parties and the undersigned Lenders.
W I T N E S S E T H :
WHEREAS, the Credit Parties, the Lenders and the Agent are parties to the
Credit Agreement, dated as of August 9, 1999 (as amended, restated or otherwise
modified from time to time prior to the date of effectiveness of this Amendment,
the "CREDIT AGREEMENT"; capitalized terms used herein shall have the meanings
assigned to such terms in the Credit Agreement unless otherwise defined herein);
WHEREAS, the Credit Parties have requested that the Lenders amend the
Credit Agreement as described herein; and
WHEREAS, the Lenders are agreeable to such request, but only on the terms
and subject to the conditions set forth herein.
NOW, THEREFORE, in consideration of the foregoing and for other good and
valuable consideration, the parties hereto hereby agree as follows:
1. AMENDMENT TO CREDIT AGREEMENT. Upon satisfaction of the conditions to
effectiveness set forth in Section 2 hereof, the Credit Parties and the Lenders
agree that the Credit Agreement shall be deemed amended by amending and
restating Section 2.1(a)(i) in its entirety as follows:
"(i) TO COATING: an aggregate amount equal to the lesser of (x) the Coating
Line of Credit and (y) the Coating Borrowing Base, minus in each case, the
then outstanding Coating Letter of Credit Obligations and the pending
Borrowings of Coating; provided that if the sum of the outstanding
Revolving Loans extended by the Lenders to Coating and Coating Letter of
Credit Obligations exceed $3,000,000, then no additional Revolving Loan or
Letter of Credit may be incurred by Coating if after giving effect thereto
an amount equal to fifty percent (50%) of the sum of such Revolving Loans
and Coating Letter of Credit Obligations in excess of $3,000,000 exceeds
the Coating Accounts Borrowing Base;"
<PAGE>
2. CONDITIONS TO EFFECTIVENESS. This Amendment shall become effective as of
December 31, upon satisfaction of the following conditions:
(a) the Agent shall have received this Amendment, duly executed by the
Credit Parties and the Required Lenders;
(b) each of the representations and warranties set forth in Section 3
hereof shall be true and correct in all respects; and
3. REPRESENTATIONS AND WARRANTIES OF CREDIT PARTIES. Each Credit Party
represents and warrants that:
(a) the execution, delivery and performance by such Credit Party of
this Amendment have been duly authorized by all necessary corporate action and
this Amendment is a legal, valid and binding obligation of such Credit Party
enforceable against such Credit Party in accordance with its terms, except as
the enforcement thereof may be subject to (i) the effect of any applicable
bankruptcy, insolvency, reorganization, moratorium or similar law affecting
creditors' rights generally and (ii) general principles of equity (regardless of
whether such enforcement is sought in a proceeding in equity or at law);
(b) each of the representations and warranties contained in the Credit
Agreement is true and correct in all material respects on and as of the date
hereof as if made on the date hereof, except to the extent that such
representations and warranties expressly relate to an earlier date; and
(c) no Event of Default has occurred or remains outstanding as of the
date hereof.
4. EXPENSES. The Credit Parties shall pay for all of the reasonable costs
and expenses incurred by the Agent in connection with the transactions
contemplated by this Amendment, including, without limitation, the reasonable
fees and expenses of counsel to the Agent.
5. MISCELLANEOUS.
(a) Except as expressly amended herein, all of the terms and
provisions of the Credit Agreement and the other Credit Documents are ratified
and confirmed in all respects and shall remain in full force and effect. Each
Credit Party hereby acknowledges and agrees that there is no defense, setoff or
counterclaim of any kind, nature or description to the Obligations or the
payment thereof when due.
(b) Upon the effectiveness of this Amendment, all references in the
Credit Documents to the Credit Agreement shall mean the Credit Agreement as
amended by this Amendment and all references in the Credit Agreement to "this
Agreement," "hereof," "herein," or similar terms, shall mean and refer to the
Credit Agreement as amended by this Amendment.
2
<PAGE>
(c) The execution, delivery and effectiveness of this Amendment shall
not, except as expressly provided herein, operate as an amendment to or waiver
of any right, power or remedy of the Agent or any Lender under any of the Credit
Documents, or constitute an amendment or waiver of any provision of any of the
Credit Documents.
(d) This Amendment may be executed by the parties hereto individually
or in combination, in one or more counterparts, each of which shall be an
original and all of which shall constitute one and the same agreement. This
Amendment may be executed and delivered by telecopier with the same force and
effect as if the same were a fully executed and delivered original manual
counterpart.
(e) This Amendment shall constitute a Credit Document.
6. GOVERNING LAW. THE VALIDITY, INTERPRETATION AND ENFORCEMENT OF THIS
AMENDMENT SHALL BE GOVERNED BY THE LAWS OF THE STATE OF NEW YORK WITHOUT GIVING
EFFECT TO THE CONFLICTS OF LAW PRINCIPLES THEREOF (OTHER THAN SECTION 5-1401 OF
THE NEW YORK GENERAL OBLIGATIONS LAW).
[SIGNATURE PAGE FOLLOWS]
3
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
duly executed and delivered by their respective duly authorized officers.
BORROWERS:
SPINNAKER COATING, INC.,
formerly known as Brown-Bridge Industries, Inc.
By: /S/ Richard T. Ray
------------------------------------------
Name: Richard T. Ray
-------------------------------------
Title: Executive Vice President, Chief
------------------------------------
Financial Officer and Coo
------------------------------------------
SPINNAKER COATING-MAINE, INC.
By: /S/ Richard T. Ray
------------------------------------------
Name: Richard T. Ray
-------------------------------------
Title: Vice President, Assistant Secretary
------------------------------------
and Treasurer
------------------------------------------
ENTOLETER, INC.
By: /S/ Robert P. Wentzel
------------------------------------------
Name: Robert P. Wentzel
-------------------------------------
Title: President
------------------------------------
GUARANTOR:
SPINNAKER INDUSTRIES, INC.
By: /s/ Craig J. Jennings
------------------------------------------
Name: Craig J. Jennings
-------------------------------------
Title: Vice President Finance & Treasurer
------------------------------------
S-1
<PAGE>
LENDERS:
TRANSAMERICA BUSINESS CREDIT
CORPORATION
By: /s/ Robert L. Heinz
------------------------------------------
Name: Robert L. Heinz
-------------------------------------
Title: Senior Vice President
------------------------------------
THE CIT GROUP/BUSINESS CREDIT, INC.
By: /s/ Eric Maloy
------------------------------------------
Name: Eric Maloy
-------------------------------------
Title: Assistant Vice President
------------------------------------
S-2
<TABLE> <S> <C>
<PAGE>
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<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
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<SECURITIES> 0
<RECEIVABLES> 21,344
<ALLOWANCES> 274
<INVENTORY> 25,320
<CURRENT-ASSETS> 66,747
<PP&E> 54,150
<DEPRECIATION> 15,995
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<CURRENT-LIABILITIES> 45,906
<BONDS> 82,223
0
0
<COMMON> 3,124
<OTHER-SE> 18,011
<TOTAL-LIABILITY-AND-EQUITY> 154,765
<SALES> 41,845
<TOTAL-REVENUES> 41,845
<CGS> 38,787
<TOTAL-COSTS> 42,183
<OTHER-EXPENSES> (663)
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<INTEREST-EXPENSE> 3,364
<INCOME-PRETAX> (3,039)
<INCOME-TAX> (1,118)
<INCOME-CONTINUING> (1,921)
<DISCONTINUED> 0
<EXTRAORDINARY> 2,635
<CHANGES> 0
<NET-INCOME> 714
<EPS-BASIC> 0.10
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