-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, M4UiEe6xm56h+GYnb9aWZgLwwnZTDG9yoY7SI8zifPmU7dqgMebaCus57Q9R2zAf ueS1El87fW0r8SsGMif9cQ== 0000912057-99-005691.txt : 19991117 0000912057-99-005691.hdr.sgml : 19991117 ACCESSION NUMBER: 0000912057-99-005691 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991115 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SPINNAKER INDUSTRIES INC CENTRAL INDEX KEY: 0000314865 STANDARD INDUSTRIAL CLASSIFICATION: CONVERTED PAPER & PAPERBOARD PRODS (NO CONTAINERS/BOXES) [2670] IRS NUMBER: 060544125 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-13961 FILM NUMBER: 99752192 BUSINESS ADDRESS: STREET 1: 1700 PACIFIC AVENUE STREET 2: SUITE 1600 CITY: DALLAS STATE: TX ZIP: 75201 BUSINESS PHONE: 2148550322 MAIL ADDRESS: STREET 1: 1700 PACIFIC AVENUE STREET 2: SUITE 1600 CITY: DALLAS STATE: TX ZIP: 75201 FORMER COMPANY: FORMER CONFORMED NAME: SAFETY RAILWAY SERVICE CORP DATE OF NAME CHANGE: 19920703 10-Q 1 10-Q FORM 10Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1999 ------------------------------------------------ Commission file number 2-66564 -------------------------------------------------------- OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to -------- ------------------------------------ Spinnaker Industries, Inc. - ------------------------------------------------------------------------------- (Exact name of Registrant as specified in its charter) Delaware 06-0544125 - ------------------------------- ----------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1700 Pacific Avenue, Suite 1600, Dallas, TX 75201 - ------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (214) 855-0322 - ------------------------------------------------------------------------------- (Registrant's telephone number, including area code) N/A - ------------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report.) Indicate check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate the number of shares outstanding of each of the Registrant's classes of Common Stock, as of the latest practicable date. Common Stock, No Par Value 3,775,680 shares - ------------------------------------ ----------------------------------- Class Outstanding at September 30, 1999 Class A Common Stock, No Par Value 3,566,067 shares - ------------------------------------ ----------------------------------- Class Outstanding at September 30, 1999 SPINNAKER INDUSTRIES, INC. INDEX - -------------------------------------------------------------------------------
PAGE NUMBER ------ PART I FINANCIAL INFORMATION Item 1. Consolidated Financial Statements Condensed Consolidated Balance Sheets as of September 30, 1999 and December 31, 1998 3 Condensed Consolidated Statements of Operations for the Three Month and Nine Month periods ended September 30, 1999 and 1998 4 Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 1999 and 1998 5 Notes to Condensed Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 12 PART II OTHER INFORMATION Item 6. Exhibits 19
Page 2 of 19 PART 1. - FINANCIAL INFORMATION Item 1. - CONSOLIDATED FINANCIAL STATEMENTS SPINNAKER INDUSTRIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, 1999 December 31, 1998 ------------------ ----------------- (Unaudited) (Note) ($ in thousands) ASSETS Current assets: Cash and cash equivalents $ 77,155 $ -- Accounts receivable, net 20,772 21,439 Inventories, net 25,367 24,217 Prepaid expenses and other 1,667 2,225 Net current assets of discontinued operations -- 38,605 --------- --------- Total current 124,961 86,486 Property plant and equipment: Land 573 573 Buildings and improvements 7,994 9,746 Machinery and equipment 44,405 42,497 Accumulated depreciation (13,980) (11,298) --------- --------- 38,992 41,518 Goodwill, net 22,289 21,075 Other assets 8,949 7,201 Net non-current assets of discontinued operations -- 71,651 --------- --------- TOTAL ASSETS $ 195,191 $ 227,931 --------- --------- --------- --------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 15,000 $ 16,782 Accrued liabilities 10,630 3,106 Current portion of long term debt 698 1,691 Working capital revolver 17,931 42,731 Other current liabilities 5,623 2,575 Net current liabilities of discontinued operations -- 18,162 --------- --------- Total current liabilities 49,882 85,047 Long term debt, less current portion 121,011 126,086 Deferred income taxes 466 466 Pension liabilities 1,525 1,540 Net non-current liabilities of discontinued operations -- 6,446 Stockholders' equity: Common stock 3,124 3,124 Additional paid in capital 15,867 15,867 Retained earnings (deficit) 3,428 (10,533) Less: treasury stock (112) (112) --------- --------- Total stockholders' equity 22,307 8,346 --------- --------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 195,191 $ 227,931 --------- --------- --------- ---------
NOTE: The balance sheet at December 31, 1998 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. See accompanying notes to condensed consolidated financial statements, which are an integral part of these financial statements. Page 3 of 19 SPINNAKER INDUSTRIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED RESULTS OF OPERATIONS - UNAUDITED
($ in thousands, except per share data) Three Months Ended Nine Months Ended September 30, September 30, ------------------------ ------------------------ 1999 1998 1999 1998 -------- --------- --------- --------- Net sales $ 41,788 $ 42,976 $ 121,528 $ 116,486 Cost of sales 37,991 37,736 111,022 102,807 -------- --------- --------- --------- Gross margin 3,797 5,240 10,506 13,679 Selling, general and administrative expense 2,728 3,384 8,704 8,792 -------- --------- --------- --------- Operating profit from continuing operations 1,069 1,856 1,802 4,887 Interest expense 3,179 2,037 7,562 5,629 Other income (expense) - net 488 (50) 1,338 (34) -------- --------- --------- --------- Loss from continuing operations before income taxes (1,622) (231) (4,422) (776) Income tax benefit 887 42 1,611 160 -------- --------- --------- --------- Net loss from continuing operations (735) (189) (2,811) (616) Discontinued operations (Note 1): Loss from discontinued operations from industrial tape segment (net of applicable income tax provision) -- (1,072) (1,438) (2,718) Gain on sale of discontinued operations (net of applicable income tax provision) 18,096 -- 18,096 -- -------- --------- --------- --------- Income (loss) before extraordinary gain from extinguishment of debt 17,361 (1,261) 13,847 (3,334) Extraordinary gain from early extinguishment of debt (net of applicable tax provision) 114 -- 114 -- -------- --------- --------- --------- Net income (loss) $ 17,475 $ (1,261) $ 13,961 $ (3,334) -------- --------- --------- --------- -------- --------- --------- --------- Earnings per common share: Net loss per common share from continuing operations $ (0.10) $ (0.02) $ (0.38) $ (0.09) Net income (loss) per common share from discontinued operations 2.46 (0.15) 2.27 (0.38) Extraordinary gain from early extinguishment of debt 0.02 -- 0.02 -- -------- --------- --------- --------- Net income (loss) per common share $ 2.38 $ (0.17) $ 1.90 $ (0.47) -------- --------- --------- --------- -------- --------- --------- --------- Earnings per common share: Net loss per common share from continuing operations - assuming dilution $ (0.10) $ (0.02) $ (0.38) $ (0.09) Net income (loss) per common share from discontinued operations - assuming dilution 2.46 (0.15) 2.27 (0.38) Extraordinary gain from early extinguishment of debt 0.02 -- 0.02 -- -------- --------- --------- --------- Net income (loss) per common share - assuming dilution $ 2.38 $ (0.17) $ 1.90 $ (0.47) -------- --------- --------- --------- -------- --------- --------- ---------
See accompanying notes to condensed consolidated financial statements which are an integral part of these financial statements. Page 4 of 19 SPINNAKER INDUSTRIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
Nine Months Ended September 30, ----------------------------- ($ in thousands) 1999 1998 --------- --------- Operating activities: Net income (loss) $ 13,961 $ (3,334) Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 2,936 2,595 Amortization of goodwill and deferred financing costs 1,195 906 Gain on sale of industrial tape segment (18,096) -- Gain on sale of warehouse facility (854) -- Changes in operating assets and liabilities Accounts receivable 667 (4,422) Inventories (1,150) 1,216 Prepaid expenses and other assets (14) (561) Accounts payable, accrued liabilities, and other current liabilities (742) 7,989 Discontinued operations - non-cash charges and working capital changes 7,061 7,236 --------- --------- Net cash provided by operating activities 4,964 11,625 --------- --------- Investing activities: Acquisition of Spinnaker Coating - Maine -- (46,907) Proceeds from sale of industrial tape segment 104,450 -- Purchase of property, plant and equipment (1,986) (1,849) Investing activities of discontinued operations (1,243) (6,383) Proceeds from sale of warehouse facility 2,357 -- Other (44) (167) --------- --------- Net cash provided by (used in) investing activities 103,534 (55,306) --------- --------- Financing activities: Proceeds (payments) on revolving credit facilities, net (24,800) 40,437 Principal payments on long term debt and leases (6,002) (100) Issuance of common stock -- 610 Deferred financing costs (468) (741) Financing activities of discontinued operations (73) -- --------- --------- Net cash provided by (used in) financing activities (31,343) 40,206 --------- --------- Increase (decrease) in cash and cash equivalents 77,155 (3,475) Cash and cash equivalents at beginning of period -- 3,475 --------- --------- Cash and cash equivalents at end of period $ 77,155 $ -- --------- --------- --------- ---------
See accompanying notes to condensed consolidated financial statements which are an integral part of these financial statements. Page 5 of 19 SPINNAKER INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements include Spinnaker Industries, Inc. and its wholly owned subsidiaries, Central Products Company ("CPC"), Spinnaker Electrical Tape Company ("Spinnaker Electrical"), Spinnaker Coating, Inc. ("Spinnaker Coating") and Entoleter, Inc. (collectively the "Company"). All significant intercompany accounts and transactions have been eliminated in consolidation. On August 10, 1999 and July 30, 1999, the Company completed the sale of its two industrial tape units, CPC and Spinnaker Electrical, respectively, which together comprised its industrial tape segment, to Intertape Polymer Group, Inc. ("Industrial Tape Sale")("Intertape"). As a result, the Company's industrial tape segment is being reported as a discontinued operation in the accompanying consolidated financial statements. Accordingly, certain prior year amounts have been restated to present the industrial tape segment as discontinued. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the period ended September 30, 1999 are not necessarily indicative of the results that may be expected for the year ended December 31, 1999. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's annual report on Form 10-K for the year ended December 31, 1998. 2. ACQUISITIONS ACQUISITION OF COATING - MAINE Effective March 17, 1998, the Company acquired the assets of the pressure sensitive business ("Pressure Sensitive Business") of S.D. Warren ("Warren"). Warren is a large pulp and paper producer owned by an indirect wholly-owned subsidiary of SAPPI, Ltd., a public South African conglomerate. The Pressure Sensitive Business, which was renamed Spinnaker Coating - Maine, Inc. ("Coating - - Maine") effective with the acquisition, manufactures and markets label stock primarily for the Electronic Data Processing ("EDP") segment of the label stock market. Coating - Maine's EDP products are used in various labeling end uses, including form printing and product marking and identification. The purchase price under the agreement was approximately $51.8 million, plus the assumption of certain liabilities (excluding substantially all trade payables) and related acquisition costs. The purchase price was funded from availability under the Company's amended $60 million revolving credit facility (the "Spinnaker Credit Facility") and the issuance of a subordinated convertible note (the "Warren Note") by the Company to Warren in the amount of $7.0 million. A portion of the revolver borrowings, approximately $6 million, were subsequently refunded through the growth in trade payables immediately after the acquisition closing. The acquisition was accounted for as a purchase with the purchase price allocated to the assets acquired and the liabilities assumed as follows: Current assets $ 13,869 Property, plant and equipment 20,000 Goodwill 23,061 Current liabilities (262) Non-current liabilities (1,440) ----------- $ 55,228 ----------- -----------
Goodwill arising from the Coating - Maine acquisition is amortized using the straight-line method over a period of 30 years. Page 6 of 19 ACQUISITION OF SPINNAKER ELECTRICAL Effective July 30, 1998, the Company completed its acquisition of tesa tape, inc.'s pressure sensitive electrical tape product line and manufacturing plant ("Electrical Tape Business"). The assets of the Electrical Tape Business, organized as Spinnaker Electrical Tape Company effective with the acquisition, produces electrical tape for insulating motors, coils and transformers for major customers in Europe, Canada and the U.S. The purchase price under the agreement was approximately $10.7 million plus related acquisition costs of approximately $0.8 million. The purchase price was comprised of $3.7 million in shares of the Company's common stock, no par value ("Common Stock"), $4.5 million in term debt, $2.0 million in cash and a $0.5 million subordinated note issued by Spinnaker Electrical to tesa tape, inc. The acquisition was accounted for as a purchase with the purchase price allocated to the assets acquired and the liabilities assumed as follows: Current assets $ 2,100 Property, plant and equipment 8,800 Current liabilities (200) ----------- $ 10,700 ----------- -----------
ACQUISITION OF SPINNAKER COATING MINORITY INTEREST In October 1996, the Company acquired all of the approximately 25% minority interest in its Spinnaker Coating subsidiary held by such subsidiary's other shareholders. The terms of the acquisition involved a cash payment of approximately $2.3 million and the issuance of 9,613 shares of Common Stock. As additional consideration for the shares of capital stock of Spinnaker Coating, the minority shareholders received the right to a contingent payment, which is exercisable at any time during the period beginning October 1, 1998 and ending September 30, 2000. PRO FORMA INFORMATION The operating results of Coating - Maine are included in the consolidated statements of operations from the March 17, 1998 acquisition date. The following pro forma information, which is based on information currently available to the Company, shows the results of the Company's continuing operations presented as though the acquisition occurred at the beginning of 1998.
Nine Months Ended September 30, 1998 ------------------ Net sales $128,600 Net income (loss) from continuing operations (822) Net income (loss) per common share from continuing operations (0.11) Net income (loss) per common share - assuming dilution from continuing operations (0.11)
Page 7 of 19 3. INVENTORIES Of inventory values at September 30, 1999 and December 31, 1998 for continuing operations, approximately 97% are valued using a specific identification method with the remaining inventories are valued using the first-in, first-out method (FIFO). Inventories consist of the following at September 30, 1999, and December 31, 1998:
1999 1998 -------------- ------------- (in thousands) Finished goods $ 16,723 $ 26,633 Work-in-process 580 3,648 Raw materials and supplies 8,064 12,103 -------------- ------------- 25,367 42,384 Less: inventory of discontinued operations -- 18,167 -------------- ------------- $ 25,367 $ 24,217 -------------- ------------- -------------- -------------
4. LONG-TERM DEBT AND WORKING CAPITAL REVOLVER On October 23, 1996, the Company issued $115,000,000 aggregate principal amount of 10 3/4% Senior Secured Notes (the "Senior Notes") due 2006. The Senior Notes are redeemable, in whole or in part, at the option of the Company on or after October 15, 2001, at the redemption prices beginning at 105.375% of the principal amount declining to 100% of the principal amount on October 15, 2005, plus accrued and unpaid interest. Prior to the Industrial Tape Sale, Spinnaker Coating, CPC and Entoleter ("Guarantors") unconditionally guaranteed the Senior Notes, jointly and severally. Any proceeds from the sale of CPC not invested in any business, capital expenditure or other tangible assets in the Permitted Businesses, as defined by the Indenture, within 270 days after the closing of the sale of CPC or not used to permanently reduce indebtedness (other than subordinated debt) shall be used to repurchase the Senior Notes on a pro rata basis as required by the Indenture. Following is a summary of long term debt of the Company at September 30, 1999, and December 31, 1998:
1999 1998 ----------- ------------ (in thousands) 10 3/4% Senior Secured Notes, due 2006 with interest payable semi-annually each April 15 and October 15.................. $ 114,000 $ 115,000 10% Subordinated Note with PIK interest and principle payable on August 15, 1999 and March 31, 2000....................... 7,000 7,000 Term loan with interest at prime plus 0.50% or LIBOR plus 2.5%, interest only for 9 months, 7 year amortization.......... -- 4,500 Subordinated Note with PIK interest at Federal Funds rate, principal and interest due July 30, 1999............................ -- 500 9 1/4% mortgage note from bank, payable on demand, secured by certain property of Entoleter............................ 692 729 Capital lease obligations........................................... 17 48 ----------- ------------ 121,709 127,777 Less current maturities............................................. (698) (1,691) ----------- ------------ $ 121,011 $ 126,086 ----------- ------------ ----------- ------------
Page 8 of 19 Spinnaker Electrical, an unrestricted subsidiary, is not a guarantor of the Senior Notes. On September 8, 1999, Spinnaker Electrical purchased $1 million of the outstanding Senior Notes on the open market at 82% of par value. For consolidated purposes, the Company's financial statements reflect an extraordinary gain net of applicable income taxes for the difference between par value and the discounted purchase price of 82%. The Company also maintains short-term lines of credit with banks for working capital needs at each subsidiary. In conjunction with the Industrial Tape Sale, the Spinnaker Credit Facility was refinanced and the aggregate facility was decreased to $40 million from $60 million ("Refinanced Credit Facility"). Credit availability under the Refinanced Credit Facility is subject to certain variables, such as the amount of inventory and receivables eligible to be included in the borrowing base. The Company is charged an unused line of credit fee every month based on an annual rate of 0.375%. All outstanding borrowings under the Refinanced Credit Facility bear interest at the prime interest rate plus 1.00% or LIBOR plus 2.50%. In conjunction with the Industrial Tape Sale, all outstanding borrowings under a separate $5 million revolving credit agreement for Spinnaker Electrical ("Electrical Credit Facility") were paid and the agreement was terminated. At September 30, 1999, the effective interest rate for the facility's borrowings was approximately 8%. The Company carries over 92% of the outstanding Refinanced Credit Facility borrowings in LIBOR instruments. The Company had cash advances outstanding of approximately $17.9 million and available borrowings of approximately $12.2 million under the Refinanced Credit Facility as of September 30, 1999. Cash collections are swept against the facility's outstanding balance. Proceeds from the sale of Central Products Company ("Restricted Proceeds") used to satisfy Senior Notes interest obligations due October 15, 1999 and April 15, 2000 are required to be replenished by operating activities or availability under the Refinanced Credit Facility at such time when the Restricted Proceeds are utilized to invest in a Permitted Business, as defined in the Indenture or used in the repurchase of Senior Notes. In conjunction with the acquisition of Coating - Maine, the Company issued a convertible subordinated Note to Warren with an original principal amount of $7.0 million, bearing payment-in-kind ("PIK") interest at 10% per annum. The Note is convertible for shares of Common Stock on the basis of 40 shares per $1,000 of the outstanding principal amount of the Note (or $25 per share), subject to adjustment as set forth below. The Note's PIK feature allowed the Company to pay the first year's interest payment by issuing an additional subordinated convertible note having similar terms; in the future, interest is payable in cash provided the Company is not in default, after giving effect for the payment, of covenants under the Spinnaker Credit Facility. If the Company is prohibited from paying interest due in cash, the Company will continue to PIK the interest owed. Prepayments of the original principal amount are due in two installments: 30% on March 31, 1999 and 70% on March 31, 2000, provided the Company is not in default of covenants under the Spinnaker Credit Facility and has availability in excess of $15 million under the Spinnaker Credit Facility after giving effect for the payment. The Company was prohibited from satisfying the March 31, 1999 principal payment due to insufficient pro forma availability. The unpaid payment or portions of future payments will be deferred until the next August 15 or March 15 as the Company could make such payment, subject to the same conditions described above. Any unpaid principal outstanding after March 31, 2000 will be considered due on demand, however, the payment of such amount will still remain restricted under the conditions described above. In any event, the Note and remaining unpaid interest will mature on January 31, 2002. In conjunction with the acquisition of the Electrical Tape Business, Spinnaker Electrical issued $4.5 million in term debt which bears interest at the lower of prime plus 0.50% or LIBOR (London Interbank Offered Rate) plus 2.50% per annum. In addition, the Company issued a twelve month subordinated seller note to tesa tape, inc. ("tesa Note") with an original principal amount of $0.5 million, bearing PIK interest at the federal funds rate. Principal and unpaid interest under these obligations were paid with the proceeds from the sale of Spinnaker Electrical. Proceeds from the sale of Central Products Company satisfied transaction costs and repaid approximately $18.2 million of the working capital revolver debt. Page 9 of 19 Proceeds from the sale of Spinnaker Electrical, an unrestricted subsidiary, repaid approximately $6.9 million of term debt and working capital revolver debt collateralized by the assets of Spinnaker Electrical. The remaining net proceeds are available for general purposes, which may include purchasing additional Senior Notes in the open market. Other options include acquisitions, capital expenditures to support remaining subsidiaries, and/or repurchase shares of Spinnaker Common Stock. 5. RELATED PARTY TRANSACTIONS On January 8, 1998, Boyle Fleming & Company ("BF") was issued 228,499 shares of Common Stock and 228,499 shares of Class A Common Stock upon the exercise of the remaining warrants at a price of $2.67 per warrant exercise. Richard J. Boyle and Ned N. Fleming, III, the Company's Chairman and Chief Executive Officer, and President and Chief Operating Officer, respectively, are shareholders, directors and officers of BF. 6. EARNINGS PER SHARE The following table sets forth only the computation of the basic earnings per share, as there are no dilutive securities for the three month and nine month periods ended September 30 (in thousands, except per share data):
Three Months Ended Nine Months Ended 1999 1998 1999 1998 -------- -------- -------- --------- Numerator - Net loss from continuing operations $ (735) $ (189) $ (2,811) $ (616) Net income (loss) from discontinued operations, net of applicable income taxes 18,096 (1,072) 16,658 (2,718) Extraordinary gain from early extinguishment of debt, net of applicable income taxes 114 -- 114 -- -------- -------- -------- --------- Net income (loss) $ 17,475 $ (1,261) $ 13,961 $ (3,334) -------- -------- -------- --------- -------- -------- -------- --------- Denominator - denominator for earnings per common share - weighted average shares 7,342 7,292 7,342 7,156 Net loss per common share from continuing operations $ (0.10) $ (0.02) $ (0.38) $ (0.09) Net income (loss) per common share from discontinued operations, net of applicable income taxes 2.46 (0.15) 2.27 $ (0.38) Extraordinary gain from early extinguishment of debt 0.02 -- 0.02 -- -------- -------- -------- --------- Net income (loss) per common share $ 2.38 $ (0.17) $ (1.90) $ (0.47) -------- -------- -------- --------- -------- -------- -------- ---------
As of September 30, 1999 and 1998, there were 20,000 and 30,000 respectively, of directors' options to purchase one share each of Class A Common Stock and Common Stock at a total price of $40 per option exercised and 10,000 directors' options to purchase one share of Common Stock at a price of $27 per option exercised. In addition, there are 50,000 of employees' and officers' options to purchase one share of Common Stock at a total price of $13.375 per option exercised. Shares related to these options were not included in the computation of diluted earnings per share in periods which resulted in a net loss because the effect would be antidilutive. 7. DISCONTINUED OPERATIONS On April 9, 1999, the Company entered into a definitive agreement to sell its Industrial Tape Business to Intertape for approximately $105 million and five-year warrants to purchase 300,000 shares of Intertape common stock (New York Stock Exchange Symbol "ITP") at an exercise price of $29.50 per share. Accordingly, operating results of the industrial tape segment have been segregated from continuing operations and reported as a separate line item on the statement of operations. Page 10 of 19 The sale of CPC and Spinnaker Electrical assets closed on August 10, 1999 and July 30, 1999, respectively. The Company recorded gains totaling $18.1 million, net of applicable income taxes of approximately $5.9 million. The Company offset a substantial portion of the cash tax liability by utilizing net operating loss carryforwards. The Company has restated its prior financial statements to present the operating results of the industrial tape segment as a discontinued operation. The industrial tape segment net sales were $10.7 million and $31.5 million for the three month periods ended September 30, 1999 and 1998, respectively, $69.5 million and $89.3 million for the nine month periods ended September 30, 1999, respectively, and $121.8 million, $119.7 million and $124.1 million for fiscal years ended December 31, 1998, 1997 and 1996, respectively. General corporate office expenses related to finance and administrative functions including public company compliance reporting, bank and investor relations, taxes other than income taxes and holding company payroll, historically allocated and charged to the industrial tape segment were reversed and allocated back to continuing operations. These expenses were not considered to be directly attributed to discontinued operations. Historical expenses allocated back to continuing operations totaled $0.2 million and $1.0 million in the three and nine month periods ended September 30, 1999 and 1998. Interest expense attributed to the Senior Notes and related deferred financing has historically been allocated based on the pro rata share of subsidiary debt obligations retired with the proceeds from the issuance of the Senior Notes, to total debt obligations retired. The Senior Note proceeds were used to extinguish certain outstanding term and revolver obligations in October 1996. Interest expenses charged to the discontinued industrial tape segment totaled $0.9 million and $5.2 million in the three and nine month periods ended September 30, 1999 and 1998. Interest expense from continuing operations is subject to certain matters associated with the use of the net proceeds from the sales of CPC and Spinnaker Electrical, including retirement of senior debt or "permitted investments" as defined under the Indenture. As a result, interest expense, as presented on a historical basis, may not necessarily be indicative of interest expense of continuing operations for the year ended December 31, 1999. The net assets of the industrial tape businesses included in the accompanying consolidated balance sheets as of December 31, 1998 consisted of the following (in thousands):
December 31, 1998 ----------------- Accounts receivable, net $ 14,815 Inventories, net 18,167 Prepaids and other 5,643 ----------- Current assets of discontinued operations $ 38,625 Property, plant and equipment $ 48,312 Goodwill and other assets 23,339 ----------- Noncurrent assets of discontinued operations $ 71,651 Accounts payable $ 13,720 Accrued liabilities 4,442 ----------- Current liabilities of discontinued operations $ 18,162 Noncurrent liabilities of discontinued operations $ 6,280
Page 11 of 19 ITEM-2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF CONTINUING OPERATIONS THREE MONTHS ENDED SEPTEMBER 30, 1999, COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 1998 NET SALES The Company's net sales for the quarter ended September 30, 1999 were $41.8 million, compared to $43.0 million in the corresponding 1998 period. The decrease in net sales for 1999 is attributed to a product technology transition in pressure sensitive label stock and changes in the ordering pattern of pressure sensitive postage, partially offset by higher sales at Entoleter. The market's rapid transition from EDP to thermal transfer paper stock technologies has exceeded management's expectations and as a result caused the Company to experience lower volumes and average selling prices at Coating-Maine, as the market balances quality and performance against lower priced solutions. Unit sales of pressure sensitive postage paper stock continue to be impacted by the uneven ordering pattern of the Bureau of Printing and Engraving. Unit sales of pressure sensitive postage paper stock for the third quarter of 1999 slowed from earlier 1999 periods and the corresponding three month period of 1998, however on an annual basis is still anticipated to approximate prior year volumes. Entoleter sales benefited from a new labor contract ratified on August 11, 1999, which settled a labor dispute which began May 3, 1999. GROSS MARGIN Gross margin as a percentage of net sales for the quarter ended September 30, 1999 was approximately 9.1%, compared to approximately 12.2% in the corresponding 1998 period. The 1999 gross margins were lower due to competitive pricing in the adhesive-backed materials industry, development costs associated with a new "multi-ply" pressure sensitive postage product offering, and unabsorbed overhead costs at Entoleter attributed to the labor dispute. The impact of Asian imports, increased domestic market competition and a product technology transition to thermal transfer from EDP resulted in changes in sales mix which contributed to lower average selling prices in pressure sensitive labels, leading to product substitution. The Company has offset a portion of these margin pressures by continuing to lower average unit manufacturing costs through manufacturing efficiency improvements, updated material procurement policies and procedures, reductions in manufacturing and administrative personnel, and product substitution that parallel the market's balance of quality and performance versus lower pricing. OPERATING PROFIT FROM CONTINUING OPERATIONS Operating profit from continuing operations for the quarter ended September 30, 1999 was approximately $1.1 million, compared to approximately $1.9 million in the corresponding 1998 period. The 1999 operating results reflect lower sales and margins, offset by lower general and administrative costs. The Company has continued to rationalize general and administrative overhead and has leveraged the knowledge within and between operating units. INTEREST EXPENSE Interest expense, which includes interest expense allocated to the discontinued industrial tape segment, for the quarter ended September 30, 1999 was approximately $4.2 million compared to $4.5 million in the corresponding 1998 period. Interest expense decreased as a result of the repayment of working capital revolver and term debt obligations with proceeds from the Industrial Tape Sale. Page 12 of 19 INCOME TAXES The Company's third quarter 1999 income tax rate for federal and state income taxes reflects an annual effective tax rate of approximately 36% for continuing operations. The estimated annual effective tax rate varies from statutory rates due to the impact of non-deductible permanent tax differences on estimated annual earnings before tax. The Company had net operating loss carryforwards of approximately $25 million available to offset future taxable income immediately before the sale, which resulted in a gross pre-tax gain from the Industrial Tape Sale of approximately $27 million. NINE MONTHS ENDED SEPTEMBER 30, 1999, COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 1998 NET SALES The Company's net sales for the nine months ended September 30, 1999 were $121.5 million, compared to $116.5 million in the corresponding 1998 period. The increase in net sales for 1999 is attributed to approximately $8.8 million in sales from the acquisition of Coating - Maine and sales of pressure sensitive postage, partially offset by lower unit sales of prime and variable information adhesive-backed paper label stock from 1998 levels and the impact of a labor dispute at Entoleter. Unit sales of pressure sensitive postage paper stock continue to be impacted by the uneven ordering pattern of the Bureau of Printing and Engraving. Unit sales of pressure sensitive postage paper stock for the first nine months of 1999 represent an increase of approximately 20% from the corresponding 1998 period, however on an annual basis is still anticipated to approximate prior year volumes. The adhesive-backed paper stock industry continues to be impacted by increased domestic capacity and Asian imports. GROSS MARGIN Gross margin as a percentage of net sales for the first nine months ended September 30, 1999, net of a charge impacting comparability, was approximately 9.0% compared to approximately 11.7% in the corresponding 1998 period. The 1999 gross margins were lower due to competitive pricing in the adhesive-backed materials industry, the timing and new pricing of the current postage contract, development costs associated with a new "multi-ply" pressure sensitive postage product offering, and unabsorbed overhead costs at Entoleter attributed to the labor dispute. The charge impacting comparability relates to a restructuring charge for severance and termination benefits associated with the termination of 20 indirect manufacturing personnel at Spinnaker Coating. The first quarter charge totaled approximately $0.5 million, of which approximately $0.4 million was reflected in manufacturing burden and the balance in selling, general and administrative expense. The impact of Asian imports, increased domestic market competition, and a product technology transition resulted in changes in sales mix which contributed to lower average selling prices in pressure sensitive label, leading to product substitution. The current postage contract, a five year $75 million agreement, was awarded late in the first quarter of 1998 and contained new pricing and product mix, which became effective immediately. The Company has offset a portion of these margin pressures by continuing to lower average unit manufacturing costs through manufacturing efficiency improvements, resulting from recent capital investments, updated material procurement policies and procedures, reductions in manufacturing and administrative personnel, and product substitution that parallel the market's balance of quality and performance versus lower pricing. OPERATING PROFIT FROM CONTINUING OPERATIONS Operating profit from continuing operations for the first nine months ended September 30, 1999, net of a charge impacting comparability, was approximately $2.3 million compared to approximately $4.9 million in the corresponding 1998 period. The 1999 operating results reflect lower sales and margins, offset by lower general and administrative costs. Page 13 of 19 The Company has continued to rationalize general and administrative overhead and has leveraged the knowledge within and between operating units. In addition, operating results reflect approximately $0.5 million of increased depreciation and amortization expense primarily associated with the acquisition of Coating - Maine. INTEREST EXPENSE Interest expense, which includes interest expense allocated to the discontinued industrial tape segment, for the nine months ended September 30, 1999 was approximately $13.1 million, an increase of approximately $0.8 million from the comparable 1998 period. The increase is primarily due to the financing associated with the Company's acquisition of Coating-Maine and the Electrical Tape Business, offset by the repayment of working capital revolver and term debt with proceeds from the Industrial Tape Sale. INCOME TAXES The Company's estimated annual effective income tax rate for federal and state income taxes is approximately 36% for continuing operations compared to 21% in 1998. The estimated annual effective tax rate varies from statutory rates due to the impact of non-deductible permanent tax differences on estimated annual earnings before tax. The Company had net operating loss carry-forwards of approximately $25 million available to offset future taxable income immediately before the sale, which resulted in a gross pre-tax gain from the Industrial Tape Sale of approximately $27 million. FINANCIAL CONDITION LIQUIDITY AND CAPITAL RESOURCES LIQUIDITY. The principal sources of liquidity for the Company and its subsidiaries have historically been cash flow from operations, proceeds from the 1996 issuance of the Company's Senior Notes and availability under the Spinnaker Credit Facility. The Company's cash provided by operating activities for the nine months ended September 30, 1999 was $5.0 million compared to $11.6 million in the corresponding 1998 period. The change is attributed to the 1998 results reflecting the exclusion of substantially all trade payables in the Coating-Maine acquisition and the implementation of improved cash management policies at all subsidiaries in mid-1998. The Spinnaker Credit Facility is available to fund acquisitions and support periodic fluctuations in working capital. Credit availability under the Spinnaker Credit Facility is subject to certain variables, such as inventory and receivables eligible to be included in the borrowing base. The Company is charged an unused credit fee every month of 0.375% per annum. Outstanding borrowings bear interest at variable rates related to the prime interest rate or LIBOR. At September 30, 1999, the combined effective interest rate in effect was approximately 8%. The funding for the Coating-Maine Acquisition was the Company's initial borrowing under the Spinnaker Credit Facility with the exception of periodic working capital borrowings by Entoleter. Proceeds from the sale of CPC were used to satisfy transaction costs and repay approximately $18.2 million of the working capital revolver debt. The balance of proceeds from the sale of CPC, approximately $60 million, are available to invest in any business, capital expenditure or other tangible asset in the Permitted Businesses, as defined in the Indenture. Any proceeds not so invested within 270 days after the closing of the Industrial Tape Sale or not used to permanently reduce or prepay indebtedness (other than subordinated debt) shall be used to repurchase the Senior Notes on a pro rata basis as required by the Indenture. Spinnaker Electrical, an unrestricted subsidiary, is not a guarantor of the Senior Notes. On September 2, 1999, Spinnaker Electrical purchased $1 million of the Senior Notes on the open market at 82% of par value. In October 1999, Spinnaker Electrical purchased an additional $0.1 million at approximately the same price. Page 14 of 19 Remaining net proceeds of approximately $15 million are available for general purposes, which may include purchasing additional Senior Notes in the open market. Other alternatives include acquisitions, capital expenditures to support remaining subsidiaries, and/or repurchase of Spinnaker common stock. In conjunction with the disposition of Central Products Company, the Spinnaker Credit Facility was refinanced and the aggregate facility was decreased from $60 million to $40 million. The Refinanced Credit Facility will expire December 31, 2001. As of November 5, 1999, aggregate availability under the Refinanced Credit Facility was approximately $29.3 million, of which approximately $18.7 million was outstanding. In connection with the Coating-Maine acquisition, the Company issued the Warren Note to Warren in the original principal amount of $7.0 million. The Warren Note bears interest at the rate of 10%, and includes a PIK feature that allows the Company to pay the first year's interest payment by issuing an additional subordinated note under similar terms as the Warren Note. The Company may also issue such a PIK note if at a future interest payment date a default or event of default exists, or would be caused by the payment of such interest in cash, under the Spinnaker Credit Facility. Payments of principal and interest are subject to restrictions contained in, and in any event are junior and subordinate in right of payment to, the payment of indebtedness outstanding under the Spinnaker Credit Facility and Senior Notes. The Warren Note matures on January 31, 2002, however, it can be prepaid earlier if certain conditions or events occur. Prepayments of principal of 30% and 70% of the original principal amount are due on March 31, 1999 and March 31, 2000, respectively, subject to there being sufficient unused availability and no existing default or event of default under the Spinnaker Credit Facility. The Company did not have sufficient unused availability under the terms of the Spinnaker Credit Facility to allow a prepayment on March 31, 1999, nor does it anticipate having sufficient availability in the near term and as a result has classified the debt as non-current in the Company's financial statements. CAPITAL RESOURCES. The Company originally budgeted capital expenditures of approximately $4 to $4.5 million for 1999, however with the sale of the industrial tape businesses, the 1999 budgeted capital expenditures have been reduced to approximately $3.0 million with only a minor portion of such expenditures under commitment. Capital expenditures for continuing operations during the nine months ended September 30, 1999 were $2.0 million. The Company anticipates that it will have sufficient cash flow from continuing operations and availability under the Refinanced Credit Facility to fund its commitments for such capital expenditures at September 30, 1999, as well as the additional capital expenditures budgeted for 1999. OTHER On May 21, 1999, Spinnaker (parent) closed the sale of its Denver, Colorado, warehouse facility for approximately $2.4 million, resulting in a pre-tax gain of approximately $0.8 million. The warehouse was leased from Spinnaker and utilized by CPC. Under the terms of the Spinnaker Credit Facility, the net proceeds from the asset sale represent a temporary reduction in the Spinnaker Credit Facility and are available to fund anticipated capital expenditures. YEAR 2000 The Year 2000 issue is the result of computer programs being written using two digits (rather than four) to define the applicable year. When the year 2000 begins, this issue may cause some hardware and software to interpret "00" as the year 1900 and either stop processing date-related computations or process them incorrectly. All computer hardware and software, building facilities and equipment utilized by the Company require assessment to determine that they will continue to operate accurately when they encounter a Year 2000 date before and after January 1, 2000. For this purpose, the term "computer hardware and software" includes systems that are commonly thought of as information technology ("IT") systems, including accounting, data processing, telephone/PBX systems, computerized manufacturing equipment and other miscellaneous systems. Both IT and non-IT systems may contain imbedded technology, which complicates the Company's Year 2000 identification, assessment, remediation and testing efforts. Page 15 of 19 The Company has undertaken various initiatives intended to ensure that its IT and non-IT systems will function properly with respect to dates in the Year 2000 and thereafter. The Company's Year 2000 initiatives are being performed primarily by internal staff, and in certain operations, are supplemented by outside consultants. No independent verification consultants have been hired by the Company. The Company's external agent assurance initiative is approximately 95% complete. Within each of the principal continuing business segments, there is a concentration of critical suppliers. Identifying, querying and processing responses from critical groups has been the main thrust of the Company's assurance initiative. However, responses received from mailings to substantially all vendors, suppliers and subcontractors that do not share information systems with the Company are being processed and additional inquiries are being made as necessary. To date, the Company is not aware of any external agent with a Year 2000 issue that would materially impact the Company's results of continuing operations, liquidity, or capital resources. However, the Company has no means of ensuring that external agents will be Year 2000 ready. The inability of external agents to complete their Year 2000 resolution process in a timely manner could materially impact the Company. The Company's assessment initiative is 100% complete. Based upon its identification and assessment efforts to date, the Company believes that certain of the computer equipment and software it currently uses will require replacement or modification. Beginning in 1994, with the replacement of manufacturing and accounting systems at Spinnaker Coating, the Company has obtained replacements in the ordinary course of improving manufacturing and reporting performance that are Year 2000 compliant. The Company's testing and remediation initiatives are approximately 90% complete and are expected to be 100% complete in November of 1999. The remaining 10% relates primarily to the completion of system conversions. No capital projects have been deferred or delayed due to Year 2000 efforts. Most Year 2000 issues have been or will be eliminated by the normal upgrading process of computer systems and manufacturing equipment. Therefore, the incremental cost of addressing Year 2000 issues has been and will continue to be funded from operating cash flows. Beginning with the major system conversion projects in 1994, the Company has spent $5.5 million on IT system replacements and upgrades to improve manufacturing and reporting performance to date. The total incremental cost of addressing Year 2000 issues on IT and non-IT systems is estimated to be less than $100,000. The estimated costs and projected dates of completion for the Company's Year 2000 program are based on management's estimates and were developed using numerous assumptions of future events, some of which are beyond the Company's control. The effect of non-compliance by external agents is not determinable. The Company presently believes that with modifications to existing systems and converting to new systems, the Year 2000 issue will not pose significant operational problems for the Company as a whole. Due to the general uncertainty inherent in the Year 2000 process, resulting in part from the incertitude surrounding the state of readiness of third party suppliers and vendors, the Company is unable to determine a reasonable worst case scenario at this time. However, the Company is currently assessing the impact of a worst case scenario in conjunction with the development of contingency plans, which were near completion by the end of the third quarter. If such modifications and conversions are not completed timely or are ineffective, the Year 2000 issue may materially and adversely impact the Company's financial condition, results of operations and cash flows. FORWARD LOOKING INFORMATION This Form 10-Q contains certain forward looking information and other information, including without limitation, certain of the statements in "Management's Discussion and Analysis of Financial Condition and Results of Operation," matters relating to a strategic alternatives and "Year 2000". It should be recognized that such information represents estimates or forecasts based upon various assumptions, including the matters referred to therein, as well as meeting the Company's internal performance assumptions regarding expected operating performance and the expected performance of the economy as it impacts Company's businesses. As a result, such information is subject to various uncertainties, inaccuracies and risks, which could be material. Page 16 of 19 ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K (A) EXHIBITS 27. Financial Data Schedule (1) (B) REPORTS ON FORM 8-K On July 30, 1999, the Registrant filed a Current Report on Form 8-K which reported the Registrant's disposition of the Industrial Tape Businesses. The Form 8-K was filed with the unaudited pro forma financial statements of the Registrant and the Industrial Tape Businesses as of June 30, 1999 and the six month period then ended and an unaudited pro forma statement of operation for the year ended December 31, 1998. Page 17 of 19 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. SPINNAKER INDUSTRIES, INC. -------------------------------------- (Registrant) /s/ Craig J. Jennings -------------------------------------- Craig J. Jennings Vice President, Finance and Treasurer Date: November 15, 1999 Page 18 of 19 EXHIBIT INDEX
Exhibit Page No. Sequential - ---------------- ---------- 27. Financial Data Schedule
Page 19 of 19 EX-27 2 EXHIBIT 27
5 1,000 3-MOS DEC-31-1999 JAN-01-1999 SEP-30-1999 77,155 0 20,997 225 25,367 124,961 52,972 13,980 195,191 49,882 121,011 0 0 3,124 19,183 195,191 41,788 41,788 37,991 40,719 (488) 0 3,179 (1,622) (887) (735) 18,096 114 0 17,475 2.38 2.38
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