10-Q 1 l88333ae10-q.txt SPINNAKER INDUSTRIES, INC. FORM 10-Q 1 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, 2001 -------------------------------------------------- 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.) 518 East Water Street, Troy, Ohio 45373-0370 -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (937) 332-6667 -------------------------------------------------------------------------------- (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 March 31, 2001 Class A Common Stock, No Par Value 3,566,067 shares ------------------------------------ ------------------------------------ Class Outstanding at March 31, 2001 Page 1 of 14 2 SPINNAKER INDUSTRIES, INC. INDEX -------------------------------------------------------------------------------- PAGE NUMBER ------ PART I FINANCIAL INFORMATION Item 1. Consolidated Financial Statements Condensed Consolidated Balance Sheets as of March 31, 2001 and December 31, 2000 3 Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2001 and 2000 4 Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2001 and 2000 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 Page 2 of 14 3 PART 1. - FINANCIAL INFORMATION Item 1. - CONSOLIDATED FINANCIAL STATEMENTS SPINNAKER INDUSTRIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS

NOTE: The balance sheet at December 31, 2000 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. See accompanying notes to condensed consolidated financial statements, which are an integral part of these financial statements. Page 3 of 14 4 SPINNAKER INDUSTRIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS - UNAUDITED ($ in thousands, except per share data)

See accompanying notes to condensed consolidated financial statements which are an integral part of these financial statements. Page 4 of 14 5 SPINNAKER INDUSTRIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED

See accompanying notes to condensed consolidated financial statements which are an integral part of these financial statements. Page 5 of 14 6 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. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the period ended March 31, 2001 are not necessarily indicative of the results that may be expected for the year ended December 31, 2001. 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, 2000. 2. Acquisitions In October 1996, the Company acquired all of the approximately 25% minority interest in its Spinnaker Coating subsidiary held by such subsidiary's other shareholders. The terms of the acquisition involved a cash payment of approximately $2.3 million and the issuance of 9,613 shares of Common Stock. As additional consideration for the shares of capital stock of Spinnaker Coating, the minority shareholders received the right to a contingent payment ("Contingent Value Rights" or "CVRs"). On May 4, 2000, Spinnaker Electrical acquired all of the CVRs held by the former minority ownership group of Spinnaker Coating for $500,000 in cash. 3. Restructuring Charges As discussed in the Company's Annual Report on Form 10-K for the year ended December 31, 2000, the Company recognized certain restructuring charges, primarily affiliated with its Spinnaker Coating and Spinnaker Coating - Maine business. To better concentrate on Coating's strengths and market niche, a decision was made by management to reorganize and realign the business in the fourth quarter of 2000 and going forward in 2001. For the quarter ended March 31, 2001, the Company incurred additional severance costs of approximately $431,000. These restructuring charges involved the termination of ten employees. The restructuring reserve was composed of the following (in thousands):

Additionally, during the first quarter of 2000, the Company incurred a restructuring charge of $350,000, primarily severance and termination benefits associated with the Dallas office closing, all of which was paid in 2000. Page 6 of 14 7 4. Inventories Substantially all inventory values are valued under the specific identification method with the remaining inventories valued using the first-in, first-out method (FIFO). Inventories consist of the following at March 31, 2001, and December 31, 2000: 2001 2000 ------- ------- (in thousands) Finished goods $17,188 $17,552 Work-in-process 515 439 Raw materials and supplies 7,013 7,424 ------- ------- $24,716 $25,415 ======= ======= 5. Long-term debt and working capital revolver On October 23, 1996, the Company issued $115 million aggregate principal amount of 10 3/4% Senior Secured Notes (the "Senior Notes") due 2006. 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"). Prior to the Industrial Tape Sale, Spinnaker Coating, Central Products and Entoleter ("Guarantors") unconditionally guaranteed the Senior Notes, jointly and severally. During 1999 and 2000, the Company utilized a portion of the proceeds from the sales to Intertape to purchase approximately $63.9 million (par value) of outstanding Senior Notes on the open market at an average price of 82.9%, plus accrued and unpaid interest. For the quarter ended March 31, 2000, the purchase of the Senior Notes resulted in an extraordinary gain of approx. $2.6 million for the difference between par value and the discounted purchase price offset by the write-off of applicable deferred financing fees associated with the issuance of the original Senior Notes. The following is a summary of long term debt of the Company at March 31, 2001, and December 31, 2000:

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 was refinanced and the aggregate facility was decreased to $40 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%. In conjunction with the Industrial Tape sale, all outstanding borrowings under the Refinanced Credit Facility bear interest at the prime interest rate plus 1.00% or LIBOR plus 2.50%. For the three month period ended March 31, 2001, Page 7 of 14 8 the weighted average interest rate for the facility's borrowings was approximately 8%. The Company carries over 86% of the outstanding Spinnaker Credit Facility borrowings in LIBOR instruments. The Company had cash advances outstanding of approximately $27.8 million and available borrowings of approximately $3.4 million under the Refinanced Credit Facility as of March 31, 2001. Cash collections are swept against the facility's outstanding balance. The lines of credit are secured by the operating assets of the Company's subsidiaries. The Company's line of credit agreement expires in July 2002. In connection with the Coating-Maine acquisition, the Company issued a promissory note ("Warren Note") to the seller in the original principal amount of $7 million. Subsequent to December 31, 2000, the Warren Note was amended to have the maturity date extended to January 31, 2003 and interest to accrue at a rate of 14% commencing 2001. Additionally, at the option of the holder, the Warren Note may be converted into the Company's Common Stock on a basis of 40 shares per $1,000 of outstanding principal amount of the Warren Note (or $25 per share). Effective February 1, 2002, the conversion rate changes to 250 shares per $1,000 of outstanding principal amount of the Warren Note (or $4 per share). 6. Earnings per share As of March 31, 2001, all directors' options to purchase shares of Class A Common Stock and Common Stock had expired. In addition, there are 37,000 of employees' and officers' options to purchase one share of Common Stock at prices ranging from $9.0625 to $13.375 per share. Shares related to these options were not included in the computation of diluted earnings per share for the periods ended March 31, 2001 or 2000 because the effect would be antidilutive. 7. Impact Of Recently Issued Accounting Standards In June 1998, the FASB issued Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended in June 2000 by Statement of Financial Accounting Standards No. 138 ("SFAS 138"), "Accounting for Certain Derivative Instruments and Certain Hedging Activities" which requires companies to recognize all derivatives as either assets or liabilities in the balance sheet and measure such instruments at fair value. As amended by Statement of Financial Accounting Standards No. 137 ("SFAS 137"), "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB 133," the provisions of SFAS 133 were adopted by the Company as of January 1, 2001. Adoption of SFAS 133, as amended by SFAS 138, did not have a material impact on the Company's results of operations or financial position during the first quarter of 2001. Page 8 of 14 9 8. Segment Information The Company classifies it businesses into two operating segments: adhesive-backed label stock and industrial processing equipment. The adhesive-backed label stock operating segment develops, manufactures and markets adhesive-backed materials, primarily pressure-sensitive labels. The label stock operation involves a broad line of standard and custom adhesive-backed products for labeling, promoting, decorating and identifying applications. The Company's other segment involves the manufacture and marketing of industrial process equipment and air pollution scrubbers. The Company evaluates performance, in part, on Operating Profit (Loss). Identifiable assets of each Industry segment are the assets used by the segment in its operations, excluding general corporate assets and intercompany balances.

9. Subsequent Events On May 15, 2001, the Company announced that it intends to close its Spinnaker Coating -- Maine, Inc. ("Coating - Maine") facility in Westbrook, Maine. The Company's decision to close this facility was made after reviewing the first quarter 2001 operating losses at Maine and assessing the probability of returning the Maine operations to profitability in light of the substantial new capacity being added to the industry. As a result of the decision, the Company will focus its entire efforts on the Spinnaker Coating operations in Troy, Ohio where it principally manufactures specialty coated products. In connection with the closing, the Company has recorded as of March 31, 2001, non-cash writedowns of $36 million to reflect the significantly reduced value of the related long-lived assets. Separately, the Company announced it has sold selected assets from its Maine facility to Fasson Roll North America, a division of Avery Dennison Corporation. The asset impairments resulted from the writedown to estimated fair market value of fixed assets to be taken out of service and held for sale or disposal. The majority of this charge related to the impairment of goodwill associated with the acquisition of Coating -- Maine in 1998. As of March 31, 2001, the impairment amount caused a reduction to the carrying value of goodwill and fixed assets by approximately $20.8 and $15.2, respectively. In conjunction with the closing, the Company expects to incur severance and related costs in subsequent quarters. Also, on May 15, 2001, the Company amended its Refinanced Credit Facility and the aggregate amount of credit available under the facility was decreased from $40 million to $35 million. Page 9 of 14 10 ITEM-2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Continuing Operations THREE MONTHS ENDED MARCH 31, 2001, COMPARED TO THREE MONTHS ENDED MARCH 31, 2000 Net sales The Company's net sales for the quarter ended March 31, 2001 were $38.0 million, compared to $41.8 million in the corresponding 2000 period. The decrease in net sales for 2001 is attributed to lower sales volumes in most pressure-sensitive products. Also, as a part of the Company's restructuring program, the elimination of non-pressure sensitive product lines in 2000, as expected, caused volumes to be lower. For the quarter ended March 31, 2000, sales for these non-pressure sensitive products totaled nearly $1 million. These declines were partially offset by a sales volume increase in pressure sensitive postage products. Gross margin Gross margin as a percentage of net sales for the three months ended March 31, 2001 was approximately 1.2% compared to 7.3% in the corresponding 2000 period. The 2001 gross margins were lower due to continued competitive pricing in the adhesive-backed materials industry, lower product volumes and an increase in cost of materials. Additionally, the Company incurred higher distribution costs for the quarter ended March 31, 2001 as it implements the new distribution strategy. Income (loss) from operations Loss from operations for the three months ended March 31, 2001 was approximately $38.5 million compared to approximately $0.3 million in the corresponding 2000 period. The 2001 operating results included an impairment charge of approximately $36 million related to certain long-lived assets associated with closing of the Coating - Maine facility (see discussion at Note 7 to the condensed consolidated financial statements). Additionally, the 2001 operating results primarily reflect lower operating margins, offset by a reduction in selling and administrative costs primarily the result of closing the Dallas corporate office. Additionally, the first quarter 2000 selling and administrative amounts included a one-time charge of $350,000, primarily severance and termination benefits associated with the Dallas office closing. As discussed in the Company's Annual Report on Form 10-K for the year ended December 31, 2000, the Company recognized certain restructuring charges, primarily affiliated with its Spinnaker Coating and Spinnaker Coating - Maine business. To better concentrate on Coating's strengths and market niche, a decision was made by management to reorganize and realign the business in the fourth quarter of 2000 and going forward in 2001. For the quarter ended March 31, 2001, the Company incurred additional severance costs of approximately $431,000. These restructuring charges involved the elimination of ten employees. The restructuring reserve was composed of the following (in thousands):

Page 10 of 14 11 Interest expense Interest expense for the three months ended March 31, 2001 was approximately $2.6 million, a decrease of approximately $.8 million from the corresponding 2000 period. The decrease is a result of the early retirement of Senior Notes with proceeds from the Industrial Tape Sale. Income taxes Because of the Company's losses, a valuation allowance of about $14 million was established to offset the income tax benefit for the quarter ended March 31, 2001. For financial reporting purposes, the valuation allowance has been recognized to offset the deferred tax assets generated during the quarter ended March 31, 2001. The Company has approximately $56 million of net operating loss carryforwards available to offset future taxable income, which expires in years 2008 through 2020. FINANCIAL CONDITION Liquidity and capital resources LIQUIDITY. As of May 8, 2001, the Company had net availability of approximately $2.8 million under its revolving credit facility ("Refinanced Credit Facility"). Additionally, the Company has approximately $7.3 million of cash, all of which is unrestricted and available for general purposes that may include the repurchase of additional Senior Notes in the open market, acquisitions and capital expenditures to support continuing operations. As a result of acquisitions, the Company has a relatively high debt to equity ratio. In addition, the Company's financial position has also been adversely affected by the continuation of difficult business conditions in the coating business. The Company's cash used in operating activities for the first quarter of 2001 was approximately $3.0 million, compared to approximately $.5 million of cash used in operations in the corresponding 2000 period. Under the Refinanced Credit Facility and during April 2001, the Company infused $4.5 million of restricted cash for paydown of the working capital revolver. The Refinanced Credit Facility is available to support periodic fluctuations in working capital. Credit availability under the Refinanced Credit Facility is subject to certain variables, such as inventory and receivables eligible to be included in the borrowing base. The Company is charged an unused credit fee every month of 0.375% per annum. Outstanding borrowings bear interest at variable rates primarily related to LIBOR. At March 31, 2001, the effective interest rate was approximately 8%. The Company anticipates having sufficient availability under the Refinanced Credit Facility along with cash balances to meet its obligations for 2001. This facility expires on July 31, 2002. The Company amended its Refinanced Credit Facility as of March 31, 2001 and was in compliance with all covenants. As part of this most recent amendment, the aggregate amount of credit available under the facility was decreased from $40 million to $35 million. This change is not expected to reduce the Company's credit availability. The Company anticipates it will require additional covenant relief during 2001. Net proceeds from the sale of Central Products in 1999 was available to prepay indebtedness (other than subordinated debt) of the Company, invest in any business, capital expenditure or other tangible asset in the Permitted Businesses, as defined in the Indenture. Since the fourth quarter of 1999, the Company utilized the Restricted Proceeds to purchase approximately $63.9 million (par value) of outstanding Senior Notes on the open market at an average price of 82.9%, plus accrued and unpaid interest. The Restricted Proceeds were fully utilized for the Senior Note purchases and capital expenditures. The purchase of Senior Notes has reduced the Senior Note outstanding borrowings to approximately $51.1 million, which reduces the semi-annual interest payment to approximately $2.8. In connection with the Coating-Maine acquisition, the Company issued a promissory note ("Warren Note") to the seller in the original principal amount of $7 million. Subsequent to December 31, 2000, the Warren Note was amended to have the maturity date extended to January 31, 2003 and interest to accrue at a rate of 14% commencing 2001. Additionally, at the option of the holder, the Warren Note may be converted into the Company's Common Stock on a basis of 40 shares per $1,000 of outstanding principal amount of the Warren Note (or $25 per share). Effective February 1, 2002, the conversion rate changes to 250 shares per $1,000 of outstanding principal amount of the Warren Note (or $4 per share). The Warren Note matures on January 31, 2003. Page 11 of 14 12 CAPITAL RESOURCES. Capital expenditures during the three months ended March 31, 2001 were approximately $200,000. The Company anticipates that it will have sufficient availability under the Refinanced Credit Facility, along with cash balances, to fund its commitments for such capital expenditures at March 31, 2001, as well as the additional capital expenditures planned for the remaining quarters of 2001. Other In October 1996, the Company acquired all of the approximately 25% minority interest in its Spinnaker Coating subsidiary held by such subsidiary's other shareholders. The terms of the acquisition involved a cash payment, issuance of Spinnaker common stock and a right to a contingent payment ("Contingent Value Rights" or "CVRs"). On May 4, 2000, the Company, through Spinnaker Electrical, acquired all the Contingent Value Rights held by the former minority ownership group of Spinnaker Coating for $500,000 in cash. Accordingly, the contingent payment was recorded as an addition to goodwill. Market Risk There has been no significant changes in market risk since December 31, 2000. Impact Of Recently Issued Accounting Standards In June 1998, the FASB issued Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended in June 2000 by Statement of Financial Accounting Standards No. 138 ("SFAS 138"), "Accounting for Certain Derivative Instruments and Certain Hedging Activities" which requires companies to recognize all derivatives as either assets or liabilities in the balance sheet and measure such instruments at fair value. As amended by Statement of Financial Accounting Standards No. 137 ("SFAS 137"), "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB 133," the provisions of SFAS 133 were adopted by the Company as of January 1, 2001. Adoption of SFAS 133, as amended by SFAS 138, did not have a material impact on the Company's results of operations or financial position during the first quarter of 2001. 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" and matters relating to a strategic alternatives. It should be recognized that such information represents estimates or forecasts based upon various assumptions, including the matters referred to therein, as well as meeting the Company's internal performance assumptions regarding expected operating performance and the expected performance of the economy as it impacts Company's businesses. As a result, such information is subject to various uncertainties, inaccuracies and risks, which could be material. Page 12 of 14 13 Item 6 - EXHIBITS AND REPORTS ON FORM 8-K (A) Exhibits Consent and seventh amendment, dated May 15, 2001 to the Spinnaker Credit Facility among Spinnaker Coating, Inc., Spinnaker Coating - Maine, Inc., and Entoleter, Inc. as Borrowers, the Registrant, as Guarantor, each of the financial institutions listed on Schedule I thereto, and Transamerica Business Credit Corporation, as Agent, dated August 9, 1999 (as amended, restated or otherwise modified from time to time). (B) Reports on Form 8-K None Page 13 of 14 14 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/ George E. Fuehrer ---------------------------- George E. Fuehrer Vice President and Chief Financial Officer Date: May 21, 2001 Page 14 of 14

SPINNAKER INDUSTRIES INC 10-Q