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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A(1)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended December 31, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from to
Commission file number 2-66564
SPINNAKER INDUSTRIES, INC.
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(Exact name of Registrant as specified in its charter)
DELAWARE 06-0544125
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
600 N. PEARL ST. SUITE 2160, DALLAS, TX 75201
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 214-855-0322
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Securities registered pursuant to Section 12(b) of the Act: NONE
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Securities registered pursuant to Section 12(g) of the Act.
COMMON STOCK - NO PAR VALUE
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(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulations S-K is not contained herein, and will not be contained to,
the best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K, or any
amendment to this Form 10-K [ X ]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant (totaling 400,956 shares) was $14,735,133 (based upon the closing
bid of the Registrant's common stock in the NASDAQ on February 29, 1996 of
$36.75 per share). The term affiliates is deemed, for this purpose only, to
refer only to directors, officers and principal stockholders of the
Registrant.
Indicate the number of shares outstanding of each of the Registrant's classes
of common stock, as of the latest practicable date.
The number of outstanding shares of the Registrant's Common Stock was
2,715,694 as of March 1, 1996.
DOCUMENTS INCORPORATED BY REFERENCE
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None
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PART I
ITEM 1. BUSINESS
Spinnaker Industries, Inc. (the "Registrant"), formerly Safety Railway
Service Corporation, was incorporated in Delaware in 1941.
The Registrant is a diversified manufacturing company with three
subsidiaries that operate in two industry segments, adhesive coated materials
and industrial processing equipment. Brown-Bridge Industries,
Inc. ("Brown-Bridge"), an 80.1% owned subsidiary, is in the adhesive coated
paper industry and Central Product Company ("Central") is a manufacturer of
carton sealing tape. Entoleter, Inc. ("Entoleter") is a manufacturer of size
reduction, recycling and pollution control equipment. Additional business
segment information about the Registrant is set forth in Note 11 to the Notes
to Consolidated Financial Statements.
In 1987, Lynch Corporation, an Indiana corporation listed on the
American Stock Exchange, purchased from a group of investors approximately
82% of the Common Stock of the Registrant. In November 1989, Lynch
Corporation transferred all of its holdings of the Registrant to a
wholly-owned subsidiary Lynch Manufacturing Corporation. As of December 31,
1995, Lynch Manufacturing Corporation owned 2,259,063 shares, or 83.2%, of
the Common Stock of the Registrant.
In October 1995, the Registrant through its wholly-owned subsidiary
Central Products Acquisition Corporation (subsequently renamed Central
Products Company), acquired the stock and assets of Alco Standard
Corporation's Central Products operation for a total cost of approximately
$80,000,000. This acquisition has had a significant and material impact on
the size and operations of the Registrant. See Note 2 and Note 4 to the
Notes to Consolidated Financial Statements.
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ADHESIVE COATED MATERIALS SUBSIDIARIES
Brown-Bridge and Central both compete in different segments of the
approximately $4 billion adhesive coated materials industry. This market
includes consumer product labels, adhesive backed labels, and water-activated
and pressure sensitive tapes.
BROWN-BRIDGE INDUSTRIES, INC.
Brown-Bridge develops, manufactures, and markets adhesive coated
products that are converted by printers and industrial users into products
used for marking, identifying, promoting, labeling and decorating
applications. End uses include consumer product labeling, electronic data
processing (EDP) identification, pharmaceutical and food marking, and postage
stamp paper.
MARKETS AND CUSTOMERS
Brown-Bridge competes in the adhesive coated paper and film market,
where it offers a full line of adhesive backed paper products that are
pressure, heat and water sensitive. Although this market is dominated
principally by two suppliers (see "Competition"), Brown-Bridge markets and
sells its products nationally. The Registrant's Brown-Bridge subsidiary
principally sells product to printers, converters and paper merchants.
Brown-Bridge generally markets its products through its own sales
representatives to regional and national printers, converters and merchants.
The majority of sales represent product sold and shipped from Brown-Bridge's
facilities in Troy, Ohio. However, the Registrant's Brown-Bridge subsidiary
also contracts with seven regional processors throughout the United States,
with whom Brown-Bridge stores product until sold. Generally, these
processors perform both slitting and distribution services for Brown-Bridge.
Brown-Bridge's business is not dependent upon a single customer and the
loss of any one customer would not have a material adverse effect on its
business. Although no single customer accounts for more than 10% of the
aggregate revenues, the top 25 customers account for approximately 50% of
Brown-Bridge's total revenues.
PRODUCTS
PRESSURE SENSITIVE. Pressure sensitive products, which are activated by
the application of pressure, are manufactured with a three element
construction consisting of face stock, adhesive coating, and silicone coated
release liner. The adhesive product is sold in roll or sheet form for
further conversion into products used primarily for marking, identification
and promotional labeling. Pressure sensitive products are sold under the
tradenames Strip Tac and Strip Tac Plus. Pressure
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sensitive products accounted for approximately $82,888,000 (61%) of the
Registrant's consolidated net sales during 1995.
ROLLS. Roll pressure sensitive products are generally sold to
label printers that produce products used primarily for
informational labels (shipping labels, price labels,
warning labels, etc.), product identification and postage
stamps. A distinct product segment is EDP end use. These
computer-generated labels are usually produced as part of
a forms set for mailing, shipping, inventory control
labels or other similar applications. The major channel
of distribution is direct selling to printers. Brown-Bridge
also uses regional contract slitters/distributors to service
local markets more effectively. This product line includes a
variety of face stocks, several hot melt and emulsion
adhesives (permanent, removable and specialty), and in-house
coated silicone release liner.
SHEETS. Sheet pressure sensitive products are sold to commercial
sheet printers, who provide information labels and other
products, such as bumper stickers. Sheet pressure
sensitive products are sold primarily through fine paper
merchants who service commercial sheet printers. This
product line consists of a variety of face stocks and
several permanent, removable and specialty emulsion
process adhesives.
HEAT SENSITIVE. Heat sensitive products, which are activated by the
application of heat, are manufactured by coating a face stock with either a
hot melt coating or an emulsion process adhesive. The heat sensitive product
line is sold primarily for labeling end uses. Adhesives are either
instantaneous or delayed action to allow label repositioning. Heat sensitive
uses include labels for pharmaceutical bottles, meat and cheese packages,
supermarket scales, cassettes and bakery packages. The adhesive coated
product is sold in roll or sheet form for further conversion. Brown-Bridge
offers a full line of hot melt, delayed action products and a limited line of
emulsion and wax-based instantaneous products. Brown-Bridge's heat sensitive
products are sold under the trade name Heat Seal.
WATER SENSITIVE. Water sensitive products, which are activated by the
application of water, include a broad range of paper and cloth materials,
coated with a variety of adhesives. There are two distinct water sensitive
adhesives, known as conventional and dry gum, that are produced with
different coating processes. The adhesive coated products are sold in roll
or sheet form for further conversion to postage and promotional stamps,
container labels, inventory control labels, shipping labels and splicing,
binding, and stripping tapes. The water sensitive line is sold under the
tradename Pancake and consists of three product groups: dry process,
conventional gummed and industrial:
DRY PROCESS. Dry process is sold primarily for label and business forms
uses. Dry process is sold in sheet form primarily to
fine paper merchants for resale to commercial printers
who, in turn, resell printed labels for a variety of uses
such as carton labels. Dry process is also sold for use
in roll form to manufacturers of imprinting machines or
to the distributors of machine rolls.
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Brown-Bridge offers dry process stock for both label and
business forms applications, including laser printer
compatible product.
CONVENTIONAL Conventional gum products serve many of the same end uses
GUM. for hand applied labels as dry process stock. A major
portion of these products is sold for government postage
and promotional stamp uses. These large volume pieces of
business are awarded on a bid basis. Brown-Bridge is one
of the largest manufacturers of postage stamp paper.
Products are distributed either through fine paper
merchants or directly to printers. Brown-Bridge products
are available for both stamp and label applications.
INDUSTRIAL. This product line consists of products sold in several
small market niches: acid-free electrical grades, binding
and stripping tapes, cloth and splicing tapes, veneer
tapes, and other kraft and specialty items.
MANUFACTURING
FACILITIES. Brown-Bridge owns two manufacturing facilities in Troy,
Ohio, where it mixes and coats paper stock with adhesives to produce water
sensitive, heat sensitive and pressure sensitive roll and sheet products. In
addition, in order to service roll pressure sensitive regional markets,
Brown-Bridge has contracted with seven slitters/distributors in Los Angeles,
California; Dallas, Texas; Atlanta, Georgia; High Point, North Carolina;
Boston, Massachusetts; and Chicago, Illinois. These locations were selected
based upon customer concentration, geographic diversity and
slitter/distributor's capabilities. These locations typically consists of
warehouse space and one or more slitting machines owned by the regional
slitter/distributor. Brown-Bridge stores product in these regional
locations, until sold or processed by such slitter/distributors, to service
their respective market area. Product can be shipped from any of these
locations or transferred between locations as necessary to service needs
across the United States.
RAW MATERIALS. Brown-Bridge uses a wide array of raw materials to
produce its products, including paper stock, silicone and adhesives. Raw
materials are the most significant cost components for producers of adhesive
backed products: the three most important raw material costs being face stock
(paper substrate), adhesives and silicone. These materials are procured from
numerous suppliers in the United States and Canada and, while temporary
shortages may occur occasionally, these items are currently readily
available.
MANUFACTURING IMPROVEMENTS. Although the Registrant believes that its
adhesive coated materials products have a good reputation for quality within
the marketplace, Brown-Bridge is continuing an intensive company-wide effort
to improve manufacturing and administrative efficiency and product quality.
Brown-Bridge's management has specifically identified the reduction of scrap,
the improvement of product quality and cycletime and the reduction of working
capital requirements as goals to be addressed in this effort.
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COMPETITION
The adhesives coated products industry is highly competitive and
Brown-Bridge competes with both national and regional suppliers. A majority
of the adhesive coated products market is held by two manufacturers, Avery
Dennison and Bemis. Competition for many of Brown-Bridge's products is based
primarily on quality, supplier response time and price.
Industry leaders have historically set general product price levels that
influence prices established by mid-sized suppliers such as Brown-Bridge. As
a result, Brown-Bridge has experienced some flexibility in pricing its
products, consistent with general industry-wide price levels, while
simultaneously allowing it to maintain its product margins.
ENVIRONMENTAL
The Registrant believes that Brown-Bridge operates in compliance with
current applicable federal, state, and local environmental laws, regulations
and ordinances.
AIR. Brown-Bridge operates air contaminant sources at both Troy plants.
These sources consist of coaters and boilers, all of which are permitted or
registered in compliance with Ohio law. Brown-Bridge continues to monitor
anticipated changes in federal and state environmental regulations and
intends to comply with such regulations following their approval. To date,
Brown-Bridge has complied with all preliminary requirements. The nature of
Brown-Bridge's coating operations necessitate the emission of a minimal
number of air pollutants that the Environmental Protection Agency has
targeted for nationwide reduction through voluntary and/or regulatory
programs. Brown-Bridge has voluntarily reduced its use of most of the
chemicals and continues to search for effective substitutes for the others.
WASTEWATER. Brown-Bridge generates sanitary and process wastewater at
both of its plants in Troy, Ohio. Both plants discharge sanitary and process
wastewater to the City of Troy's publicly owned treatment works and are in
compliance with the city's discharge requirements. Additionally, Plant 1
discharges non-contact cooling water and storm water directly to the Great
Miami River pursuant to a National Pollutant Discharge Elimination System
permit.
SOLID AND HAZARDOUS WASTE. Brown-Bridge generates hazardous waste and
nonhazardous solid waste at both plants. Both waste materials are
transported by licensed haulers and properly disposed of at facilities
permitted to manage such waste materials.
SUPERFUND INVOLVEMENT. Liability for Brown-Bridge's past off-site
disposal practices has been retained by Kimberly-Clark Corporation as
provided in the acquisition agreement, pursuant to which the Brown-Bridge
unit was acquired.
ON-SITE REMEDIAL ACTIVITIES. Site investigations conducted in 1993 and
1994 revealed the presence of soil and groundwater contamination at Plant 1
and minor soil contamination at Plant 2. Kimberly-Clark assumed the
responsibility to conduct voluntary remedial measures at Plant 1 to eliminate
(or reduce below regulatory levels) contaminants in the soils and groundwater.
The remedial measures were completed in 1995.
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EMPLOYEES
As of December 31, 1995, Brown-Bridge employed 371 persons. All
employees other than management are paid on an hourly basis. Brown-Bridge's
employees are not covered by a collective bargaining agreement. The
Registrant believes that its relations with its employees are good.
CENTRAL PRODUCTS COMPANY
Central is the second largest U.S. carton sealing tape manufacturer.
Central manufactures water activated tape (also known as "gummed" tape) and
pressure sensitive tape. Central offers three types of gummed tape: paper
tape, reinforced tape and box tape. It also manufactures pressure sensitive
tape with all three primary adhesive technologies: acrylic, hot melt and
natural rubber. Central believes it is the only U.S. supplier to manufacture
both gummed tape and pressure sensitive tape, and is the only company to
produce pressure sensitive tape utilizing all three pressure sensitive
adhesive technologies. Central also offers tape dispensers and tape
application equipment manufactured by unaffiliated companies.
MARKETS AND CUSTOMERS
Carton sealing tape is used in a broad array of industrial and consumer
applications, including the packaging of goods for shipment by manufacturing
or distribution companies. Tape competes with other methods for sealing
cartons, such as staples, metal or plastic strapping, and hot-melt glues and
cold glues. Tape can provide significant advantages to certain end users
over other forms of closure in terms of cost, speed, efficiency and security;
however, certain industry segments lend themselves to competing technologies.
Central's sales strategy emphasizes supplying a full line of both water
activated and pressure sensitive tape products. As it is the only company in
the industry that manufactures both pressure sensitive tape and water
activated tape, Central is capable of providing its customers with "one stop
shopping" for their carton sealing tape requirements. Central sells its
products primarily to paper distributors, who then resell the products to the
end user. Central possesses a widely diversified customer base, with no
single customer accounting for more than 10% of the Company's total sales.
Approximately 5% of total sales are to the international market.
PRODUCTS
WATER ACTIVATED TAPES (ALSO KNOWN AS GUMMED TAPES). Water activated
tape is generally manufactured through the application of a thin layer of
water activated adhesive to gumming kraft paper. It is offered as either
non-reinforced tape or reinforced tape. Non-reinforced tape is made by
applying an adhesive to a single layer of kraft paper. Reinforced tape
contains a layer of fiberglass yarn placed between two layers of kraft paper.
Both non-reinforced tape and reinforced tape are available in light, medium
and heavy grades.
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PAPER TAPE. Paper tape is used for less challenging applications
such as light loads, retail carry-out and unitized
pallets. Paper tape utilizes a consistent and
dependable adhesive applied to high tensile strength
kraft paper.
REINFORCED TAPE. Reinforced tape is the strongest and most widely used
water activated tape. It adds an extra measure of
strength for applications where durability and
reliability are required, such as in two strip
carton sealing and non-unitized loads.
BOX TAPE. Box tape is designed specifically for taping the
manufacturer's joint on corrugated cartons. It is
similar in construction to reinforced tape and is
reliable, bonds quickly and is also recyclable.
Although over the last several years, pressure sensitive tape has grown
rapidly at the expense of non-tape applications, such as glue and staples and
some water activated tape, for sealing cartons, pressure sensitive tape does
not perform as effectively as water activated tape in certain applications,
such as recycled corrugated cartons. The use of recycled corrugated cartons
has been increasing because of environmental concerns. These environmental
issues have benefited the water activated tape segment because of the
perception that paper-backed tape is more environmentally-friendly than
film-backed tape. Additionally, Central is working to develop new and
improved equipment for dispensing and applying water activated tape, which
should make water activated tape more competitive with pressure sensitive
tape.
PRESSURE SENSITIVE TAPES. Pressure sensitive tape is manufactured
primarily through the coating of plastic film with a thin layer of acrylic,
hot melt or natural rubber adhesive. Pressure sensitive carton sealing tape
generally varies from 1.75 to 3 inches in width and from 1.7 to 3.0 mils (one
mil = .001 inches) in thickness.
The adhesive is applied to various grades of high-quality, low-stretch
polypropylene film for use in most applications as well as PVC and polyester
films which are used for certain specialized applications.
ACRYLIC ADHESIVE Acrylic technology is the least complex of those used
PRESSURE SENSITIVE to manufacture pressure sensitive adhesives and
TAPE produces tapes with excellent clarity, non-yellowing
properties, good temperature resistance and low
application cost.
HOT MELT ADHESIVE Hot melt adhesive technology produces tape with an
PRESSURE SENSITIVE aggressive bond that can seal more cartons in less
TAPE time, making it the most widely used pressure
sensitive tape.
NATURAL RUBBER Due to its very strong bonding properties, natural
ADHESIVE PRESSURE rubber is better suited than other pressure sensitive
SENSITIVE TAPE tapes for more challenging carton sealing applications
such as over-filled cartons, cartons exposed to
varying temperatures and dusty cartons. Natural
rubber tape
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possesses a firm unwind characteristic which makes it
excellent for manual applications. Central is the
only manufacturer of natural rubber adhesive tape
in the U.S.
Over the last several years, pressure sensitive tape has grown rapidly
at the expense of non-tape applications, such as glue and staples and some
water activated tape, for sealing cartons. This has occurred primarily due
to improvements in performance, strength and versatility, and decreasing
prices for pressure sensitive products resulting from increased capacity in
the industry.
EQUIPMENT/SPECIALTY AND CONVERTER PRODUCTS. Central supplies tape
dispensing equipment manufactured by other companies. It currently offers
two types of table top dispensers for water activated tape - a manual
dispenser and a more expensive electric dispenser. Central also offers a
broad line of carton sealing equipment for pressure sensitive tape, which
ranges from hand held dispensers to automatic random sizing equipment.
To supplement its product offerings, Central also offers specialty tapes
for other applications including kraftback pressure sensitive tape, filament
tape, masking tape, duct tape and strapping tape, all manufactured by other
companies. The converter group also seeks and offers new non-tape products,
such as an overlaminating film used as a protective barrier over paper
labels, for resale to Central's customers.
In addition, Central offers printed tapes in both its water activated
tape and pressure sensitive tape lines. Customers see printed tape as a
means of inexpensive advertising and an opportunity to put their "seal" of
approval on each carton.
MANUFACTURING
FACILITIES. Central currently manufactures tape products in two
locations. Water activated tape is manufactured in Menasha, Wisconsin and
pressure sensitive tape is manufactured in Brighton, Colorado. Central also
maintains three distribution centers across the U.S. to ensure fast and
reliable service to its customers.
RAW MATERIALS. Raw materials are the most significant cost component
of carton sealing tape products. The material component accounts for 65% to
70% of the total cost, with the most important raw materials being paper
(gumming kraft), polypropylene resin, amorphous polypropylene laminate,
fiberglass, and adhesive materials. While prices of these materials vary,
Central has not experienced any difficulties in obtaining the materials,
because they are available from multiple sources.
COMPETITION
The Company competes with other manufacturers of carton sealing tape
products as well as manufacturers of alternative carton closure products.
Competition in the carton sealing market is based primarily on price and
quality, although other factors may enhance a company's competitive position,
including product performance characteristics, technical support, product
literature and customer support. There are a wide range of participants in
the carton sealing industry, including
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large diversified corporations (principally in pressure sensitive) and small
private companies (principally in water activated tape). Central one of the
leading manufactures of water activated tape. 3M is the largest
manufacturer of pressure sensitive tape in the carton sealing market in the
United States.
ENVIRONMENTAL
The Registrant believes that both its water activated tape (Menasha, WI)
and pressure sensitive tape (Brighton, CO) manufacturing facilities operate
in compliance with current applicable federal, state and local environmental
laws, regulations and ordinances.
WATER ACTIVATED TAPE. Wastewater discharged from the Menasha facility is
a combination of wash-down water from operations, non-contact cooling water
and domestic wastewater. Except for a portion of the sanitary water, all
wastewater is discharged to the Neenah-Menasha Sewerage Commission with no
pretreatment necessary.
The water activated tape plant is currently classified as a small
quantity generator of hazardous waste. Waste materials are transported by
licensed haulers and properly disposed of at facilities permitted to manage
such waste materials.
PRESSURE SENSITIVE TAPE. The Brighton production operation is covered
under a Bubble Construction Permit covering the entire facility. The permit
covers all storage/mix tanks, several coating lines, the film extrusion
process, natural gas fired boilers, and fugitive emissions. During the past
five years, Central Products has voluntarily reduced solvent emissions by
more than 70%. Due to this significant reduction in hazardous air pollutants
(HAPs), the operation has evolved from a major source to a synthetic minor
source. Additional developments have been underway to further reduce or
eliminate HAPs from the operation.
Wastewater in Brighton is generated from the film production process,
several cooling towers and other plant processes. The wastewater is
discharged to the City of Brighton publicly-owned treatment works and no
current compliance issues have been identified.
The pressure sensitive tape plant is currently classified as a large
quantity hazardous waste generator. The various waste materials are
transported by licensed haulers and properly disposed of at facilities
permitted to manage such waste materials. A significant portion of the solid
waste from the operation is sold as by-products and are reclaimed offsite by
other manufacturers.
Liability for Central's past off-site disposal practices and involvement
with any Superfund sites has been retained by Alco Standard as provided in
the acquisition agreement, pursuant to which Central was acquired.
EMPLOYEES
Central employed approximately 680 persons at December 31, 1995. The Company
has a labor agreement expiring in 1998 with the United Paperworkers
International Union AFL-CIO covering
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its hourly employees at the Menasha Plant. The employees at its Brighton
plant are not represented by any union. Central believes it has good
relations with its employees.
INDUSTRIAL PROCESS EQUIPMENT SUBSIDIARY
Entoleter engineers, manufactures and markets a vertically integrated
line of size reduction equipment complemented by a line of air pollution
control equipment. Entoleter's products primarily consist of: (a) Centrimil
Milling Equipment for particle size reduction; (b) Central granulators for
the plastics molding industry and precision cutters for the film and
non-woven industry; and (c) Centrifield Scrubbers for the removal of
impurities from air, gases and liquids, and for heat recovery, gas
absorption, and other mass transfer functions.
PRODUCTS
CENTRIMIL PRODUCT LINE. The Centrimil product line offers centrifugal
impact mills that utilize a wide range of free flowing materials. The
Centrimil can perform a wide range of processing functions. These include
pulverizing, mixing and blending, deagglomeration, fiberizing, dehulling,
grain cleaning and infestation destruction. The Centrimil has the ability to
process slurries and liquids as well as dry flowing materials and can be
employed in certain processes where other types of fine grinding equipment
are not suitable.
ALSTEELE PRODUCT LINE. Entoleter's Alsteele line of granulators is now
complimented by a new precision, rotary knife cutter. The precision film
cutters are designed specifically for reducing film and fiber scrap, while
the granulators are designed to handle injection and blow-molded parts.
CENTRIFIELD PRODUCT LINE. The CentriField Vortex Scrubber is a air
pollution control device that removes particulate and acid gases from exhaust
streams. It provides higher efficiency for particulate and acid gas removal
with reduced energy usage. These characteristics enable Centrifield
scrubbers to perform better than conventional scrubbers on applications that
require both particulate and acid gas removal.
RAW MATERIALS AND PATENTS
Substantially all raw materials, which consist principally of carbon and
stainless steel (in various sizes and shapes), and steel forgings, are
obtained from domestic trade sources. The loss of any single trade supplier
would not have a material adverse effect on the operations of Entoleter
because alternative domestic sources of supply are readily available.
Entoleter has no supply contracts exceeding one year and has generally
experienced no supply shortages, except in specialized electric motors where
delivery sometimes exceeds six months.
Patents are held by the Registrant on certain of its products, but such
patents are not considered important to the operations. The patents expire
over various lengths of time with the last patent expiring in about 10 years.
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CUSTOMERS AND COMPETITION
Entoleter's net sales consist entirely of sales to commercial and
industrial customers. One customer represented 15.3% of net sales in 1995
and no customer exceeded 10% of sales in 1994. The Registrant believes that
the failure of Entoleter to make sales to any particular customer in the
future would not have a material adverse effect on the Registrant.
The Registrant's industrial process equipment subsidiary operates in
highly competitive worldwide markets. Entoleter has many competitors in
these markets, most of which are larger and have greater financial resources
than the Registrant. Competitive factors include price and quality of products.
Entoleter markets its products directly to users primarily through outside
sales representatives.
RESEARCH AND DEVELOPMENT AND OTHER INFORMATION
Research and development has not been material to Entoleter's business.
Product refinement and new application testing are performed and expensed as
part of the cost of operations.
Entoleter has identified possible environmental issues related to
portions of its land in Hamden, Connecticut. The appropriate regulatory
agencies have been notified, but to date no action has been required by any
regulatory agency.
EMPLOYEES
As of December 31, 1995, Entoleter had 40 full-time employees. All
hourly-paid production employees are members of the United Electrical, Radio
and Machine Workers of America Union. The current collective bargaining
agreement expires on April 30, 1996. The Registrant believes that its
relations with its employees are good.
FOREIGN SALES
The Registrant's foreign sales were $10,444,000, $3,913,000 and $806,000
in 1995, 1994 and 1993, respectively.
Brown-Bridge had foreign sales of $6,618,000 (or 4.9% of the
Registrant's consolidated sales) and $1,578,000 (or 4.7%) in 1995 and 1994,
respectively. Approximately 82% of these 1995 foreign sales were to Canadian
customers and, consequently, the Registrant believes that the risks commonly
associated with doing business in foreign countries are minimal.
Central had foreign sales of $567,000 (or 0.4%) of the Registrant's
consolidated net sales in 1995. Entoleter's export sales were $3,259,000 (or
2%), $2,335,000 (or 7%), and $806,000 (or 13%) of the Registrant's consolidated
net sales in 1995, 1994, and 1993, respectively.
The profitability of foreign sales is substantially equivalent to that
of domestic sales. Because foreign sales are transacted in U.S. dollars,
payments in many cases are secured by irrevocable letters of credit, and
sales are spread over a number of customers in several countries, the
Registrant believes that the risk commonly associated with doing business in
foreign countries are minimized.
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BACKLOG
The Registrant's backlog believed to be firm was $10,729,000 and
$6,347,000, at December 31, 1995 and 1994, respectively. Brown-Bridge's
backlog for orders believed to be firm as of December 31, 1995, was
approximately $5,687,000 versus $4,615,000 at December 31, 1994. Central's
backlog for orders was approximately $3,089,000 at December 31, 1995. At
December 31, 1995, Entoleter's backlog of firm orders was $1,953,000.
Entoleter's backlog was $1,732,000 at December 31, 1994. The Registrant's
management believes that all such orders will be shipped in 1996.
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ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
(in thousands of dollars except per share amounts)
1995(1) 1994(2) 1993 1992 1991
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<S> <C> <C> <C> <C> <C>
NET SALES $ 135,289 $ 33,632 $ 6,371 $ 4,533 $ 4,657
OPERATING PROFIT (Loss)(3) 5,789 722 56 (99) (530)
INCOME (Loss) BEFORE INCOME
TAXES AND MINORITY INTEREST 953 78 119 3 (252)
MINORITY INTEREST (280) (98) - - -
NET INCOME (Loss) 561 (90) 119 3 (252)
NET INCOME (Loss) PER
COMMON SHARE (4) 0.17 (0.03) 0.04 0.00 (0.09)
DIVIDENDS PER COMMON SHARE - - - - -
TOTAL ASSETS 137,584 41,329 8,209 8,150 8,031
LONG-TERM OBLIGATIONS
INCLUDING RELATED PARTY
NOTES 71,225 9,149 1,015 1,033 1,050
SHAREHOLDERS' EQUITY 7,062 6,501 6,591 6,472 6,470
WEIGHTED AVERAGE COMMON
AND COMMON EQUIVALENT
SHARES OUTSTANDING(4) 3,351,225 2,812,500 2,715,756 2,715,984 2,716,196
</TABLE>
See Management's Discussion and Analysis of Financial Condition and Results
of Operations for additional information concerning the Registrant's
financial performance.
_______________________
(1) Includes the October 1995 acquisition of Central Products Company - see
note 2 - Notes to Consolidated Financial Statements
(2) Includes the September 1994 acquisition of Brown-Bridge Industries, Inc. -
see Note 2 - Notes to Consolidated Financial Statements
(3) Operating profit (loss) is net sales less operating expenses which exclude
other income-net (investment income and interest expense) and income
taxes and includes restructuring and litigation expense in 1994
(4) Adjusted to reflect a 3-for-2 stock split effective December 29, 1995 and
a 3-for-2 split effective December 30, 1994, and reflects the shares
issuable upon th exercise of warrants held by an affiliate of Richard J.
Boyle and Ned N. Fleming, III, the Chairman of the Board and Chief
Executive Officer and President, respectively.
-14-
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
1995 COMPARED WITH 1994
Effective October 4, 1995, the Registrant, through its wholly-owned
subsidiary, purchased the stock and assets of Alco Standard Corporation's
Central Products operation, which manufactures a variety of carton sealing
tapes. The Registrant's 1995 results include Central's operations from that
date.
SALES. The Registrant's 1995 net sales were $135,289,000, an increase
of $101,657,000, when compared with net sales of $33,632,000 in 1994. The
increase in net sales were largely the result of this acquisition and a full
years results from Brown-Bridge, which was purchased in September 1994.
Central accounted for $30,581,000 of the increase, with the balance coming
from Brown-Bridge ($70,324,000) and Entoleter ($752,000).
COST OF SALES. Total cost of sales increased by $89,231,000 to
$117,737,000 in 1995 when compared to 1994. This increase was attributable
to the inclusion of Brown-Bridge for a full year and the acquisition of
Central. Included in the 1995 cost of sales is $86,394,000 for Brown-Bridge
and $26,187,000 for Central.
SELLING, GENERAL AND ADMINISTRATIVE ("SG&A"). SG&A represents the
expenses of the operating subsidiaries and the Registrant's corporate office.
SG&A expense for 1995 was $11,763,000, an increase of $7,359,000 over 1994.
The increase was attributable primarily to Brown-Bridge ($4,418,000) and the
addition of Central ($2,591,000) with the remainder of the increase
attributable to the Registrant's corporate office. The 1995 SG&A expense at
Brown-Bridge included a charge of $562,000 for fees paid to a consulting firm
assisting Brown-Bridge to improve its operations and manufacturing processes.
This consulting engagement began in 1994 and was completed in 1995.
INTEREST (EXPENSE). Interest expense for 1995 totaled $4,468,000, of
which $2,189,000, $1,326,000 and $143,000 relates to debt at Brown-Bridge,
Central and Entoleter, respectively. The remainder of the interest expense
($810,000) relates to debt at the corporate level incurred in the acquisition
of Brown-Bridge and Central. Total interest expense for 1995 increased by
$3,700,000, verses 1994 and relates to debt incurred in the acquisition of
Central and a full year of interest accrued on the debt incurred to acquire
Brown-Bridge.
GUARANTEE FEES. The Registrant accrued a $375,000 charge for guarantee
fees due to Lynch Corporation in connection with debt incurred in the
acquisition of Central. This fee is .05% of the principal amount of certain
indebtedness ($25,000,000 at December 31, 1995) of the Registrant. See Note 4
of Notes to Consolidated Financial Statements.
-15-
<PAGE>
INCOME TAXES. The 1995 income tax provision provides for federal and
state income taxes at an effective rate of 41%. The 1995 income tax
provision has been reduced by $279,000 due to the reversal of the
Registrant's valuation allowance related to net deferred taxes.
NET INCOME. The Registrant recorded net income of $561,000, or $.17 per
share for 1995, versus a net loss of $90,000, or $(.03) per share in 1994.
The earnings per share have been adjusted to reflect two three for two stock
splits effected on December 29, 1995, and December 30, 1994.
1994 COMPARED WITH 1993
On September 19, 1994, Registrant purchased 80.1% of Brown-Bridge
Industries, Inc., an entity formed to acquire Kimberly Clark's Brown-Bridge
operation, which manufactures adhesive-coated products for labels and related
applications.
SALES. Registrant's 1994 results include Brown-Bridge's operations
from that date. As a result of this acquisition, 1994 net sales were
$33,632,000, an increase of $27,261,000, compared with net sales of
$6,371,000 reported in 1993. Brown-Bridge accounted for $26,849,000 of the
increase, with the remainder coming from Entoleter.
COST OF SALES. Total Cost of sales increased by $24,113,000 in 1994
over 1993. This increase was attributable to the inclusion of Brown-Bridge
($23,641,000) and higher costs at Entoleter ($472,000) because of increased
sales volume in 1994 and the write-off of $200,000 of shredder inventory
reflecting a change in strategy within that product line.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. SG&A expense for 1994 was
$4,404,000, an increase of $2,482,000 over 1993. The increase was
attributable primarily to Brown-Bridge ($1,800,000) and higher commission
and selling expenses at the industrial process equipment subsidiary resulting
from increased sales volume. The SG&A expense at Brown-Bridge includes a
charge of $387,000 for fees paid to a consulting firm assisting Brown-Bridge
to improve its operations and manufacturing processes. SG&A expense for 1994
also includes non-recurring charges of $282,000 related to the implementation
of the management agreement with Messrs. Boyle and Fleming, and $125,000
related to the settlement of litigation and related matters at Entoleter.
INTEREST (EXPENSE). Interest expense for 1994 totaled $768,000, of
which $605,000 relates to additional debt incurred in the acquisition of
Brown-Bridge (see Note 2 to the Notes to Consolidated Financial Statements).
OTHER INCOME - NET. Other income-net for 1994 was $124,000, a decrease
of $43,000 when compared to 1993. The decrease is related primarily to lower
interest income due to lower average cash balances maintained because of cash
utilized in the Brown-Bridge acquisition.
INCOME TAXES. A state income tax provision of $70,000 in 1994 relates
to Brown-Bridge. Federal income taxes for 1994 and 1993 were offset by
utilizing all of the remaining net operating loss carry-forwards of the
Registrant.
-16-
<PAGE>
NET INCOME. The Registrant recorded a net loss of $90,000, or $(.03)
per share for 1994, versus net income of $119,000, or $.04 per share in
1993. The earnings per share have been adjusted to reflect two three for two
stock splits effected on December 29, 1995, and December 30, 1994.
LIQUIDITY AND CAPITAL RESOURCES
The Registrant's cash provided by operating activities for 1995 was
$9,192,000, an increase of $6,689,000 when compared to 1994. This increase
was attributable to including Brown-Bridge's operations for an entire year
and the acquisition of Central. Net cash used in investing activities
increased by $52,290,000, while cash provided by financing activities
increased by $50,426,000, almost all of which relates to the acquisition of
Central. Cash and short-term investments increased during 1995 by
$2,564,000, primarily as a result of excess cash maintained by Central
immediately before such cash was applied to reduce Central's working capital
line balances.
The 1995 increases in other components of working capital, such as
inventories, accounts payable, and accrued liabilities are primarily
attributable to the acquisition of Central. Net working capital at the end
of 1995 was $7,988,000 versus $4,647,000 at the end of 1994.
-17-
<PAGE>
Net capital expenditures for 1995 were $1,620,000, primarily for the
purchase of machinery and building improvements. The Registrant has
preliminary plans to make approximately $4.5 million of capital expenditures
in 1996.
At December 31, 1995, total debt was $102,040,000 versus $24,546,000 at
the end of 1994. The increase is related to the debt incurred in connection
with the acquisition of Central. The Registrant's subsidiaries have unused
credit facilities available for future use, including revolving credit
agreements with a maximum aggregate availability of $45,500,000. Borrowings
under these credit lines totaled $27,149,000 at December 31, 1995.
Agreements with each subsidiaries' lender impose restrictions on the ability
of the subsidiary to pay dividends or make other cash transfers to the
Registrant. See Note 4 to the Notes to the Consolidated Financial Statements.
In connection with the acquisition of Central, the Registrant and
Central issued subordinated notes to the seller in the amounts of $25 million
and $5 million, respectively. See Note 4 to Notes to Consolidated Financial
Statements. On April 5, 1996, the Registrant refinanced these notes and in
connection with this transaction borrowed $8,500,000 from a bank. The
outstanding principal of this loan bears interest at an adjustable rate
(approximately 10.4% at April 5, 1996) and converts into a
five-year term loan if it is not paid in full on the December 1996 due date.
See Note 4 to Notes to Consolidated Financial Statements.
During 1996, the Registrant intends to pursue actively various
alternatives to refinance the indebtedness of the Registrant and its
subsidiaries in order to pay-off the $8,500,000 loan before it converts into
a term loan, to simplify the Registrant's capital structure, to remove
restrictions imposed by various lenders and to reduce the administrative
burdens resulting from having multiple lenders.
The backlog of the Registrant totaled $10,729,000 at December 31, 1995,
an increase of $4,382,000 when compared to December 31, 1994. The December
31, 1995 backlog includes $5,687,000 from Brown-Bridge, $3,089,000 at Central
and $1,953,000 at Entoleter.
The Registrant has identified possible environmental issues related to
portions of its land in Hamden, Connecticut. The appropriate regulatory
agencies have been notified, but to date no action has been required by any
regulatory agency.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Item 14(a).
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item 10 is included under the caption
"Election of Directors", which information is incorporated herein by
reference from Exhibit 99.1.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item 11 is included under the captions
"Executive Compensation", "Operation of Board of Directors and Committees -
Compensation Committee Interlocks and Insider Participation", "Compensation
of Directors", and "Certain Transactions", which information is incorporated
herein by reference from Exhibit 99.1.
-18-
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information required by this Item 12 is included under the captions
"Security Ownership of Certain Beneficial Owners" and "Security Ownership of
Management," which information is incorporated herein by reference from
Exhibit 99.1.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item 13 is included under the caption
"Operation of Board of Directors and Committees - Compensation Committee
Interlocks and Insider Participation", "Certain Transactions", which
information is incorporated herein by reference from Exhibit 99.1.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES AND REPORTS ON
FORM 8-K
(a) The following documents are filed as part of this Form 10-K Annual Report:
(1) Financial Statements:
The Report of Independent Auditors and the following consolidated
Financial Statements of the Registrant are included herein:
Consolidated Balance Sheets--December 31, 1995 and 1994
Consolidated Statements of Operations--Years ended December 31, 1995,
1994, and 1993.
Consolidated Statements of Shareholders' Equity--Years ended December
31, 1995, 1994 and 1993.
Consolidated Statements of Cash Flows--Years ended December 31, 1995,
1994 and 1993
Notes to Consolidated Financial Statements
(2) Financial Statement Schedules:
Schedule I - Condensed Financial Information of Registrant
Schedule II - Valuation and Qualifying Accounts
-19-
<PAGE>
All other schedules to the Consolidated Financial Statements are omitted
because the required information is inapplicable or has been presented in the
Financial Statements or Related Notes thereto.
(b) Reports of Form 8-K.
The Registrant filed a Current Report on Form 8-K, dated October 18,
1995, as amended by a Current Report on Form 8-K/A(1), dated December 15,
1995, which disclosed the consummation of the acquisition of Central.
The Form 8-K/A(1) included the following financial statements of Central
and certain pro forma unaudited financial statements:
FINANCIAL STATEMENTS OF BUSINESSES ACQUIRED:
1. Independent Auditor's Report
2. Combined Balance Sheets as of September 30, 1995, and 1994.
3. Combined Statements of Operations and Business Unit Equity for the
year ended September 30, 1995, 1994 and 1993.
4. Combined Statements of Cash Flows for the years ended September 30,
1995, 1994 and 1993.
5. Notes to the Combined Financial Statements.
PRO FORMA UNAUDITED FINANCIAL INFORMATION
1. Pro Forma Combined Condensed Balance Sheet as of September 30, 1995.
2. Notes to Pro Forma Combined Condensed Balance Sheet.
3. Pro Forma Combined Condensed Statements of Operations for the Nine
Months Ended September 30, 1995, and for the Year Ended December
31, 1994.
4. Notes to Pro Forma Combined Condensed Statements of Income.
(c) Exhibits.
3(i) - Certificate of Incorporation of the Registrant, as amended
(filed as Exhibit 3(i) to the Registrant's Annual Report on Form
10-K for the fiscal year ended December 31, 1994).
3(ii) - Bylaws of the Registrant (filed as Exhibit 3(ii) to the
Registrant's Annual Report on Form 10-K for the fiscal year ended
December 31, 1994).
-20-
<PAGE>
4 - A Warrant, dated as of June 10, 1994, executed by Safety
Railway Service Corporation (filed as Exhibit 7.4 to the
Registrant's Current Report on Form 8-K dated June 13, 1994).
10.1 - Commercial Loan Open End Mortgage Deed and Security Agreement
and Commercial Mortgage Note dated July 1, 1988 in the amount
of $1,100,000 to Centerbank (formerly Connecticut Savings
Bank)(filed as Exhibit 10.1 to the Registrant's Annual Report
on Form 10-K for the fiscal year ended December 31, 1994).
10.2 - Loan Agreement dated as of September 16, 1994, between
Transamerica Business Credit Corporation and Brown-Bridge
Industries, Inc. (filed as Exhibit 10.(A) to the Registrant's
Quarterly Report on Form 10-Q for the fiscal quarter ended
September 30, 1994).
*10.3 - Management Agreement, dated June 10, 1994, by and among Boyle,
Fleming George & Co., Inc. and Safety Railway Service
Corporation (filed as Exhibit 7.1 to the Registrant's
Current Report on Form 8-K dated June 13, 1994).
10.4 - Voting Agreement, dated as of June 10, 1994, by and among
Safety Railway Service Corporation, Lynch Manufacturing
Corporation, and Boyle, Fleming, George & Co., Inc. (filed as
Exhibit 7.2 to the Registrant's Current Report on Form 8-K
dated June 13, 1994).
10.5 - Warrant Purchase Agreement, dated as of June 10, 1994, by and
among Boyle, Fleming, George & Co., Inc. and Safety Railway
Service Corporation (filed as Exhibit 7.3 to the Registrant's
Current Report on Form 8-K dated June 13, 1994).
10.6 - Assets Purchase Agreement, dated June 15, 1994, between
Brown-Bridge Acquisition Corporation and Kimberly-Clark
Corporation as amended (filed as Exhibit 10(B) to the
Registrant's Quarterly Report on Form 10-Q/A(1) for the fiscal
quarter ended June 30, 1994).
10.7 - Amendment No. 1, dated August 31, 1994, Amendment No. 2, dated
September 13, 1994, and Amendment No. 3, dated September 16,
1994, to the Assets Purchase Agreement (filed as Exhibits 7.1,
7.2 and 7.3, respectively, to the Registrant's Current Report
on Form 8-K dated September 19, 1994).
10.8 - Subordinated Promissory Notes, dated September 16, 1994, of
Safety Railway Service Corporation (filed as Exhibit 10.8 to
the Registrant's Annual Report on Form 10-K for the fiscal
year ended December 31, 1994).
10.9 - Shareholders' and Voting Agreement, dated September 16, 1994,
among Safety Railway Service Corporation, Brown-Bridge
Industries, Inc. and the
-21-
<PAGE>
other stockholders of Brown-Bridge (filed as Exhibit 10.9 to
the Registrant's Annual Report on Form 10-K for the fiscal year
ended December 31, 1994).
10.10 - Agreement for the Allocation of Income Tax Liability between
Lynch Corporation and its Consolidated Subsidiaries,
dated December 18, 1988, between Lynch Corporation and
Safety Railway Service Corporation (filed as Exhibit
10.10 to the Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1994).
*10.11 - Management Agreement, dated June 10, 1994, between Lynch
Corporation and Safety Railway Service Corporation (filed as
Exhibit 10.11 to the Registrant's Annual Report on Form 10-K
for the fiscal year ended December 31, 1994).
10.12 - Put Option Agreement, dated September 16, 1994, by and among
Brown-Bridge Industries, Inc., Safety Railway Service
Corporation, and Management Group Shareholders (filed as
Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q
for the fiscal quarter ended March 31, 1995).
10.13 - Put Option Agreement, dated September 16, 1994, by and among
Brown-Bridge Industries, Inc., Safety Railway Service
Corporation, and Investor Group Shareholders (filed as Exhibit
10.2 to the Registrant's Quarterly Report on Form 10-Q for the
fiscal quarter ended March 31, 1995).
10.14 - Stock and Asset Purchase Agreement, dated as of September 27,
1995, by and among Central Products Acquisition Corp.,
Unisource Worldwide, Inc. and Alco Standard Corporation (filed
as Exhibit 7.1 to the Registrant's Current Report on Form 8-K
dated October 18, 1995).
10.15 - Credit Agreement, dated as of September 29, 1995, by and among
Central Products Acquisition Corp., as Borrower, Spinnaker
Industries, Inc., as Pledgor, and Heller Financial, Inc., as
Agent and a Lender (filed as Exhibit 7.2 to the Registrant's
Current Report on Form 8-K dated October 18, 1995).
10.16 - Term Note A, dated October 4, 1995, from Central Products
Acquisition Corp. payable to the order of Heller Financial,
Inc. in the original principal amount of $20 million (filed as
Exhibit 7.3 to the Registrant's Current Report on Form 8-K
dated October 18, 1995).
10.17 - Term Note B, dated October 4, 1995, from Central Products
Acquisition Corp. payable to the order of Heller Financial,
Inc. in the original principal amount of $16 million (filed as
Exhibit 7.4 to the Registrant's Current Report on Form 8-K
dated October 18, 1995).
10.18 - Revolving Note, dated September 29, 1995, from Central
Products Acquisition Corp. payable to the order of Heller
Financial, Inc. in the
-22-
<PAGE>
maximum principal amount of $24 million (filed as Exhibit 7.5
to the Registrant's Current Report on Form 8-K dated October 18,
1995).
10.19 - Subordinated Promissory Note, dated September 29, 1995, from
Spinnaker Industries, Inc. payable to Alco Standard
Corporation in the original principal amount of $25 million
(filed as Exhibit 7.6 to the Registrant's Current Report on
Form 8-K dated October 18, 1995).
10.20 - Subordinated Promissory Note, dated September 29, 1995, from
Central Products Acquisition Corp. payable to Alco Standard
Corporation in the original principal amount of $5 million
(filed as Exhibit 7.7 to the Registrant's Current Report on
Form 8-K dated October 18, 1995).
10.21 - Agreement, dated October 3, 1995, between Spinnaker
Industries, Inc. and Lynch Corporation (filed as Exhibit 7.8
to the Registrant's Current Report on Form 8-K dated October
18, 1995).
10.22 - Subordinated Convertible Promissory Note, date April 5, 1996,
in the aggregate principal amount of $20,250,000, of Spinnaker
Industries, Inc. (filed as Exhibit 7.1 to the Registrant's
Current Report on Form 8-K dated April 19, 1996).
10.23 - Senior Credit Agreement, dated as of April 5, 1996, among
Spinnaker Industries, Inc. and Bankers Trust Company (filed as
Exhibit 7.2 to the Registrant's Current Report on Form 8-K
dated April 19, 1996).
10.24 - Warrant Exercise Agreement, dated April 5, 1996, among Boyle,
Fleming, George & Co., Inc, Richard J. Boyle, Ned N. Fleming,
III, Spinnaker Industries, Inc. and Bankers Trust Company
(filed as Exhibit 7.3 to the Registrant's Current Report on
Form 8-K dated April 19, 1996).
10.25 - Pledge Agreement, dated April 5, 1996, by each of the named
pledgors in favor of Banker's Trust Company (filed as Exhibit
7.4 to the Registrant's Current Report on Form 8-K dated
April 19, 1996).
11 - Statement of Computation of Per Share Earnings
21 - Subsidiaries of the Registrant.
23 - Consent of Deloitte & Touche LLP.
99.1 - Information to be Incorporated by Reference into Part III.
______________
* Management contract or compensatory plan.
The Registrant will furnish copies of these Exhibits upon request and
the payment of $.20 per page. Requests should be addressed to James Toman,
c/o Spinnaker Industries, Inc., 600 N. Pearl Street, Suite 2160, Dallas,
Texas 75201.
-23-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
By: /s/ Richard J. Boyle
-------------------------------------
Richard J. Boyle
Title: Chairman of the Board and Chief Executive Officer
Date: April 29, 1996
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Richard J. Boyle
- -------------------------- Chief Executive Officer April 29, 1996
Richard J. Boyle and Chairman of the Board
/s/ Ned N. Fleming, III
- -------------------------- President and Director April 29, 1996
Ned N. Fleming, III
/s/ James W. Toman
- -------------------------- Controller April 29, 1996
James W. Toman (chief financial and
accounting officer)
/s/ Anthonie C. van Ekris
- -------------------------- Director April 29, 1996
Anthonie C. van Ekris
/s/ Joseph P. Rhein
- -------------------------- Director April 29, 1996
Joseph P. Rhein
</TABLE>
-24-
<PAGE>
<TABLE>
<S> <C> <C>
/s/ Robert E. Dolan
- -------------------------- Director April 29, 1996
Robert E. Dolan
- -------------------------- Director April __, 1996
Mario J. Gabelli
/s/ Philip W. Colburn
- -------------------------- Director April 29, 1996
Philip W. Colburn
</TABLE>
-25-
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Spinnaker Industries, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of Spinnaker
Industries, Inc. and subsidiaries (formerly Safety Railway Service
Corporation) as of December 31, 1995 and 1994, and the related consolidated
statements of operations, shareholders' equity, and cash flows for each of
the three years in the period ended December 31, 1995. Our audits also
included the financial statement schedules listed in the Index at Item 14(a).
These financial statements and schedules are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and schedules based on our audits. We did not audit the
financial statements of Central Products Company, a wholly-owned subsidiary,
which statements reflect total assets of $94,492,000 as of December 31, 1995
and total revenues of $30,581,000 for the three month period ended December
31, 1995. Those statements were audited by other auditors whose report
has been furnished to us, and our opinion, insofar as it relates
to data included for Central Products Company, is based solely on the
report of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits and the report
of other auditors provide a reasonable basis for our opinion.
Since the date of completion of our audit of the accompanying financial
statements and initial issuance of our report thereon dated February 29, 1996,
which report contained an explanatory paragraph regarding the Company's
ability to continue as a going concern, the Company, as discussed in Note 4,
has completed a debt financing arrangement to refinance the $25 million
subordinated notes on a long-term basis. Therefore, the conditions that
raised substantial doubt about whether the Company will continue as a going
concern no longer exist.
In our opinion, based on our audits and the report of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Spinnaker
Industries, Inc. and subsidiaries at December 31, 1995 and December 31, 1994,
and the consolidated results of their operations and their cash flows for
each of the three years in the period ended December 31, 1995, in conformity
with generally accepted accounting principles. Also, in our opinion, the
related financial statement schedules, when considered in relation to the
basic financial statements taken as a whole, present fairly in all material
respects the information set forth therein.
As discussed in Note 1 to the consolidated financial statements, in 1994 the
Company changed its method of accounting for short-term investments.
Dallas, Texas
February 29, 1996,
except for Note 4, as to which the date is
April 8, 1996
/s/ Ernst & Young LLP
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
Spinnaker Industries, Inc.:
We have audited the accompanying balance sheet of the Central Products
Company (a wholly-owned subsidiary of Spinnaker Industries, Inc.) as of
December 31, 1995 and the related statements of operations and shareholder's
equity and cash flows for the three months ended December 31, 1995. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Central Products Company as of
December 31, 1995 and the results of its operations and its cash flows for
the three months ended December 31, 1995 in conformity with generally
accepted accounting principles.
/s/ DELOITTE & TOUCHE LLP
Milwaukee, Wisconsin
February 26, 1996
F-2
<PAGE>
SPINNAKER INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31
-------------------
1995 1994
-------- -------
(in thousands)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 3,048 $ 484
Short-term investments - 4
Accounts receivable, less allowance
for doubtful accounts and cash discounts
of $1,234,000 in 1995 and $378,000 in 1994 24,789 12,510
Inventories 27,041 14,572
Income taxes due from Parent - 70
Prepaid expenses and other 2,318 97
Deferred income taxes 1,234 589
-------- -------
Total current assets 58,430 28,326
Property, plant and equipment:
Land 583 420
Buildings and improvements 9,632 4,943
Machinery and equipment 44,485 10,059
Accumulated depreciation (4,639) (2,927)
-------- -------
50,061 12,495
Goodwill, net 25,793 -
Other assets 3,300 508
-------- -------
Total assets $137,584 $41,329
-------- -------
-------- -------
</TABLE>
F-3
<PAGE>
SPINNAKER INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31
-------------------
1995 1994
-------- -------
(in thousands)
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 12,699 $ 5,003
Accrued liabilities 6,534 2,857
Current portion of long-term debt 3,666 2,217
Working capital revolver 27,149 13,180
Other current liabilities 394 422
-------- -------
Total current liabilities 50,442 23,679
Long-term debt, less current portion 69,642 7,797
Notes payable to related parties 1,583 1,352
Deferred income taxes 7,164 589
Minority interest 1,691 1,411
Shareholders' equity:
Common Stock, no par or stated value,
authorized 3,000,000 shares; issued
2,811,026 shares in 1995 and 1994 (at
designated value) 3,124 3,124
Additional paid-in capital 3,709 3,709
Retained earnings (accumulated deficit) 341 (220)
Less cost of common stock in treasury,
95,332 shares in 1995 and 1994 (112) (112)
-------- -------
Total shareholders' equity 7,062 6,501
-------- -------
Total liabilities and shareholders' equity $137,584 $41,329
-------- -------
-------- -------
</TABLE>
See accompanying notes, which are an integral
part of these financial statements.
F-4
<PAGE>
SPINNAKER INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------
1995 1994 1993
--------- -------- -------
(in thousands, except
per share amounts)
<S> <C> <C> <C>
Net sales $ 135,289 $ 33,632 $ 6,371
Cost of sales (117,737) (28,506) (4,393)
--------- -------- -------
Gross profit 17,552 5,126 1,978
Selling, general and administrative
expenses (11,763) (4,404) (1,922)
--------- -------- -------
Operating profit 5,789 722 56
Interest expense (4,468) (768) (104)
Guarantee fee to parent (375) - -
Other income-net 7 124 167
--------- -------- -------
Income before income taxes and
minority interest 953 78 119
Income taxes (112) (70) -
Minority interest (280) (98) -
--------- -------- -------
Net income (loss) $ 561 $ (90) $ 119
--------- -------- -------
--------- -------- -------
Weighted average common and common
equivalent shares outstanding 3,351 2,813 2,716
Income (loss) per share $ 0.17 $ (0.03) $ 0.04
</TABLE>
See accompanying notes, which are an integral
part of these financial statements.
F-5
<PAGE>
SPINNAKER INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Retained
Common Additional Earnings
Stock Common Paid-in (Accumulated Treasury
Outstanding Stock Capital Deficit) Stock Total
----------- ------ ---------- ------------ -------- ------
(dollars amounts in thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1993 2,715,694 $3,124 $3,709 $(249) $(112) $6,472
Net income - - - 119 - 119
--------- ------ ------ ----- ----- ------
Balance at December 31, 1993 2,715,694 3,124 3,709 (130) (112) 6,591
Net loss - - - (90) - (90)
--------- ------ ------ ----- ----- ------
Balance at December 31, 1994 2,715,694 3,124 3,709 (220) (112) 6,501
Net income - - - 561 - 561
--------- ------ ------ ----- ----- ------
Balance at December 31, 1995 2,715,694 $3,124 $3,709 $ 341 $(112) $7,062
--------- ------ ------ ----- ----- ------
--------- ------ ------ ----- ----- ------
</TABLE>
See accompanying notes, which are an integral
part of these financial statements.
F-6
<PAGE>
SPINNAKER INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------
1995 1994 1993
--------- -------- -------
(in thousands)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ 561 $ (90) $ 119
Adjustments to reconcile net income
(loss) to net cash used in operating
activities:
Depreciation 1,745 395 131
Amortization of goodwill 279 - -
Provision for losses on accounts
receivable 627 317 1
Realized investment security gains - - (11)
Sales of short term investments, net 4 1,988 -
Amortization of deferred financing
costs 127 16 -
Minority interest 280 98 -
Deferred income taxes (312) - -
Accrued interest on notes payable
to related parties 231 67 -
Changes in operating assets and
liabilities:
Accounts receivable (386) (1,392) 99
Inventories 2,959 178 (3)
Income taxes due from Parent 70 - (8)
Prepaid expenses and other assets (989) 102 (19)
Accounts payable and accrued
liabilities 4,024 402 (44)
Other current liabilities (28) 422 -
-------- -------- -------
Net cash provided by operating
activities 9,192 2,503 265
INVESTING ACTIVITIES
Acquisition of Brown-Bridge - (29,073) -
Acquisition of Central Products
Company, net of cash acquired (79,550) - -
Purchases of property, plant,
and equipment (1,620) (450) (91)
Net purchases of short-term
investments - - (1,446)
Additions to other assets (643) - -
-------- -------- -------
Net cash used in investing activities (81,813) (29,523) (1,537)
FINANCING ACTIVITIES
Proceeds (payments) from working
capital revolvers, net (2,015) 13,180 -
Proceeds from long-term debt 81,984 9,000 -
Principal payments on long-term debt (2,706) (19) (16)
Deferred financing costs (2,078) - -
Proceeds from notes payable to
related parties - 1,285 -
Sale of minority interest - 1,313 -
-------- -------- -------
Net cash provided by (used in)
financing activities 75,185 24,759 (16)
Increase (decrease) in cash and
cash equivalents 2,564 (2,261) (1,288)
-------- -------- -------
Cash and cash equivalents at beginning
of year 484 2,745 4,033
-------- -------- -------
Cash and cash equivalents at end
of year $ 3,048 $ 484 $ 2,745
-------- -------- -------
-------- -------- -------
</TABLE>
See accompanying notes, which are an integral
part of these financial statements.
F-7
<PAGE>
SPINNAKER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
OWNERSHIP
Spinnaker Industries, Inc., (formerly Safety Railway Service Corporation)
("Spinnaker") is an 83% owned subsidiary of Lynch Manufacturing Corporation,
which is a wholly-owned subsidiary of Lynch Corporation ("Parent").
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Spinnaker,
its wholly-owned subsidiary, Entoleter, Inc. ("Entoleter"), its wholly-owned
subsidiary, Central Products Company ("CPC"), and its majority-owned (80.1%)
subsidiary, Brown-Bridge Industries, Inc. ("Brown-Bridge") (collectively
referred to hereinafter as the "Company"). All significant intercompany
accounts and transactions have been eliminated in consolidation.
NATURE OF OPERATIONS
Spinnaker's operations consist of the following: CPC manufactures and sells
water-activated and pressure-sensitive carton sealing tapes; Brown-Bridge
develops, manufactures, and markets a broad line of adhesive coated
materials, which are further converted by printers and industrial users into
a variety of products for marking, labeling, promoting, decorating, and
identifying applications; and Entoleter designs, manufactures, and sells
industrial processing, and air pollution equipment. The Company's operations
are primarily in the U.S., however, $10.4 million, $3.9 million, and $806,000
of the Company's sales were export sales for the years ended December 31,
1995, 1994, and 1993, respectively.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the amounts reported in the financial statements and accompanying
notes. Actual results could differ from those estimates.
EARNINGS PER SHARE
Earnings per share is based on the weighted average number of common and
dilutive common equivalent shares outstanding during each year, after giving
effect to the three-for-two stock splits. Common equivalent shares are
comprised of options and warrants to acquire common stock. Fully diluted
earnings per share did not differ significantly from primary earnings per
share in any year presented.
CASH EQUIVALENTS
Cash equivalents consist of highly liquid investments with a maturity of less
than three months when purchased.
F-8
<PAGE>
SPINNAKER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SHORT-TERM INVESTMENTS
On January 1, 1994, the Company adopted Statement of Financial Accounting
Standards No. 115, "Accounting for Certain Investments in Debt and Equity
Securities." Under Statement 115, the accounting for investments depends on
the classification of such securities as either held-to-maturity,
available-for-sale, or trading. Marketable equity securities which are held
for resale in anticipation of short-term market movements are classified as
trading securities and unrealized gains and losses are included in the
results of operations. All of the Company's short-term investments are
classified as trading. The effect of this adoption was not significant to
1994 earnings.
At December 31, 1994, short-term investments were invested in United States
Treasury money market funds for which an affiliate of the Parent served as
investment manager to the respective funds.
Proceeds from sales of marketable securities were $359,000 for the year ended
December 31, 1993. The cost of marketable securities sold is determined on
the specific identification method.
ACCOUNTS RECEIVABLE
Accounts receivable of Brown-Bridge consist principally of amounts due from
companies who convert the adhesive coated materials into end products and
comprise 46% of total accounts receivable. Accounts receivable of CPC
comprise the remaining 49% of total accounts receivable and consist
principally of amounts due from paper distributors. Accounts receivable of
Entoleter, which comprise 5% of total accounts receivable consist principally
of amounts due from foreign and domestic food processing companies. Credit is
extended based on an evaluation of the customer's financial condition and
collateral is not generally required. The Company considers
concentrations of credit risk to be minimal due to the Company's diverse
customer base. In relation to export sales, the Company requires letters of
credit supporting a significant portion of the sales price prior to
production to limit exposure to credit risk. The Company maintains an
allowance for doubtful accounts at a level that management believes is
sufficient to cover potential credit losses.
INVENTORIES
All inventory is stated at the lower of cost or market. Brown-Bridge's
inventory, which comprises 47% of total inventory is valued using the
specific identification method. CPC's inventory, which comprises 48% of total
inventory is valued using the last-in, first-out (LIFO) method. Entoleter's
inventory, which comprises 5% of total inventory is valued using the
first-in, first-out (FIFO) method. The FIFO cost and LIFO cost of CPC's
inventory were the same at December 31, 1995.
During the fourth quarter of 1994, Entoleter wrote off $200,000 of inventory
in response to management's change in product focus. The write-off is
included in cost of sales in the consolidated statement of operations.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is stated on the basis of cost. Depreciation is
computed on the straight-line or declining balance method over the estimated
service lives of the related assets, which range from five to thirty-five
years for buildings and improvements and three to twenty years for machinery
and equipment.
F-9
<PAGE>
SPINNAKER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
GOODWILL
Goodwill represents the excess of cost over the fair value of the net assets
acquired and is amortized on a straight-line basis over 25 years.
Accumulated amortization at December 31, 1995 totaled $279,000. The carrying
value of goodwill is reviewed if the facts and circumstances suggest it may
be impaired. If this review indicates that goodwill may not be recoverable,
as determined based on the estimated future undiscounted cash flows of the
entity acquired, the Company's carrying value of the goodwill is reduced.
REVENUE RECOGNITION
The Company recognizes revenues at the time of shipment.
INCOME TAXES
The accounts of the Company are included in the consolidated federal and
certain state income tax returns filed by its Parent. Under the terms of an
agreement for the allocation of tax liabilities among the Parent and its
operating units, the Company provides amounts in lieu of income taxes for
financial reporting purposes on a separate return basis. Amounts in lieu of
income taxes currently payable or receivable are due to or from the Parent.
The Company utilizes the liability method to account for income taxes as
required by Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes." The income tax provision differs from amounts currently
payable or receivable because certain items of income and expense are
reported for income tax purposes in periods different from those in which
they are reported in the financial statements. The tax effects of these
temporary differences are recorded as deferred income taxes.
RESEARCH AND DEVELOPMENT
Research and development expenses were $603,000, $259,000, and $90,000
in 1995, 1994, and 1993, respectively.
SHAREHOLDERS' EQUITY
On February 1, 1996, the Company's board of directors adopted a resolution to
amend the articles of incorporation to increase the authorized number of
common shares to 10,000,000.
On November 14, 1995, the Directors of the Company declared a three-for-two
stock split of the Company's common shares, paid on December 29, 1995 to
shareholders of record as of the close of business on December 15, 1995. All
presentations of shares outstanding and amounts per share have been restated
to reflect the stock split.
On November 17, 1994, the Directors of the Company declared a three-for-two
stock split of the Company's common shares, paid on December 30, 1994 to
shareholders of record as of the close of business on December 16, 1994. All
presentations of shares outstanding and amounts per share have been restated
to reflect the stock split.
F-10
<PAGE>
SPINNAKER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS
Cash and cash equivalents, accounts receivable, accounts payable, accrued
liabilities, and short-term borrowings are carried at cost which approximates
fair value due to the short-term maturity of these instruments. The fair
value of the Company's long-term debt is estimated based on the quoted market
prices for the same or similar issues or on the current rates offered to the
Company for similar debt of the same maturities. The carrying value of the
Company's long-term debt approximates its fair value at December 31, 1995 and
1994.
STOCK BASED COMPENSATION
The Company accounts for its stock compensation arrangements under the
provisions of APB Opinion No. 25, "Accounting for Stock Issued to Employees."
Statement of Financial Accounting Standards No. 123, "Accounting for Stock
Based Compensation," was issued in October 1995 and is effective for years
beginning after December 15, 1995. The Statement establishes financial
accounting and reporting standards for stock based compensation plans.
Companies may elect to account for such plans under the fair value method or
to continue previous accounting and disclose pro forma net earnings and
earnings per share as if the fair value method was applied. The Company has
not yet determined the potential financial statement impact of this
Statement, nor has it decided how it will initially adopt this Statement.
LONG-LIVED ASSETS
In March 1995, the Financial Accounting Standards Board issued Statement
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of," which requires impairment losses to be recorded on
long-lived assets used in operations when indicators of impairment are
present and the undiscounted cash flows estimated to be generated by those
assets are less than the assets' carrying amount. Statement 121 also
addresses the accounting for long-lived assets that are expected to be
disposed of. The Company will adopt Statement 121 in the first quarter of
1996 and, based on current circumstances, does not believe the effect of
adoption will be material.
RECLASSIFICATIONS
Certain reclassifications have been made to the prior year financial
statements to conform with the current year's presentation.
FOURTH QUARTER ADJUSTMENTS
Certain adjustments were recorded at Brown-Bridge in the fourth quarter. The
adjustments related to the capitalization of certain costs previously
expensed, recognition of additional depreciation, and a reduction in the
estimated performance plan accrual. The net effect of these adjustments was a
$390,000 increase in fourth quarter income before income taxes and minority
interest.
F-11
<PAGE>
SPINNAKER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. ACQUISITIONS
ACQUISITION OF BROWN-BRIDGE
On September 19, 1994, Spinnaker purchased 80.1% of Brown-Bridge Industries,
Inc., an entity formed to acquire Kimberly Clark's Brown-Bridge operation
("Brown-Bridge"), which manufacturers adhesive-coated products for labels and
related applications. The total cost of the transaction was approximately
$36 million, which included the assumption of approximately $7 million of
liabilities.
The acquisition was accounted for as a purchase with the purchase price
allocated to the assets acquired and the liabilities assumed as follows (in
thousands):
<TABLE>
<S> <C>
Current assets $24,016
Property, plant and equipment 11,655
Other assets 275
Current liabilities (6,873)
-------
$29,073
-------
-------
</TABLE>
In 1995 Brown-Bridge increased the inventory reserve and allowance for
doubtful accounts by $479,000 to properly reflect the value of inventory and
receivables acquired in September 1994. These adjustments were accounted
for as a reallocation of the purchase price, resulting in a corresponding
increase to the acquired value of property, plant, and equipment.
At December 31, 1995, Brown-Bridge had a receivable from the seller totaling
$459,000 representing amounts paid by Brown-Bridge during 1995 for product
warranty liabilities that were in excess of the liability recorded on the
balance sheet on the acquisition date. Such amount is recoverable from the
seller pursuant to the purchase agreement and has been collected subsequent
to December 31, 1995.
Pursuant to the terms of the purchase and sales agreement, the Seller
retained substantially all corporate obligations, including employee-related
expenses (such as pension, health and other benefit plans), and substantially
all environmental and other contingent liabilities of Brown-Bridge relating
to periods prior to the acquisition date.
ACQUISITION OF CENTRAL PRODUCTS
Effective October 4, 1995, Central Products Acquisition Corporation entered
into a Stock and Asset Purchase Agreement with Unisource Worldwide, Inc. and
Alco Standard Corporation ("Alco"), which is Unisource's parent. Central
Products Acquisition Corporation is a wholly-owned subsidiary of Spinnaker
Industries, Inc. and was formed to acquire Central Products Company ("CPC"),
which manufactures and sells water-activated and pressure-sensitive carton
sealing tapes. The purchase price under the agreement was approximately $80
million.
F-12
<PAGE>
SPINNAKER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. ACQUISITIONS (CONTINUED)
The acquisition was accounted for as a purchase with the purchase
price (subject to adjustment upon finalization of certain acquisition
costs) allocated to the assets acquired and the liabilities assumed as
follows (in thousands):
<TABLE>
<S> <C>
Current assets $ 30,109
Property, plant and equipment 37,212
Goodwill 26,072
Other assets 2,182
Current liabilities (15,575)
--------
$ 80,000
--------
--------
</TABLE>
Goodwill arising from the CPC acquisition is amortized using the straight
line method over a period of 25 years.
PRO FORMA INFORMATION
Brown Bridge's and CPC's results are included in the consolidated statements
of operations from their respective acquisition dates. The following
unaudited combined pro forma information shows the results of the Company's
operations as though both acquisitions had occurred at the beginning of 1994.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-----------------------
1995 1994
-----------------------
(in thousands,
except per share data)
<S> <C> <C>
Net sales $226,558 $206,944
Net income 2,344 1,406
Net income per share .70 .50
Number of shares used
in per share computation 3,351 2,813
</TABLE>
3. INVENTORIES
Inventories are comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31
----------------------
1995 1994
----------------------
(in thousands)
<S> <C> <C>
Finished goods $ 9,291 $ 1,920
Work-in-process 9,459 7,208
Raw materials and supplies 8,291 5,444
------- -------
$27,041 $14,572
------- -------
------- -------
</TABLE>
At December 31, 1995 and 1994, work-in-process includes $7.4 and $6.7
million, respectively, relating to Brown-Bridge, which is generally completed
and shipped within two to four weeks of going into production.
F-13
<PAGE>
SPINNAKER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. LONG-TERM DEBT AND WORKING CAPITAL REVOLVERS
In conjunction with the acquisition of CPC, on September 29, 1995, CPC
entered into a Loan and Security Agreement (the "Loan Agreement"), which
provides for two term loans designated as Term Loan A ($20 million) and Term
Loan B ($16 million). In addition, the Loan Agreement provides for a
revolving line of credit of up to $24 million of which $14.1 million was
outstanding at an interest rate of 9.5% at December 31, 1995. CPC has pledged
all of its capital stock to secure CPC's obligations under the agreement as
well as granted a security interest and lien on substantially all of CPC's
assets and granted mortgages on certain of its properties. The term loans
bear interest at a variable rate that is related to the Federal Reserve's
"Bank Prime Loan" rate and CPC's ratio of debt to cash flow. Interest on both
loans is payable quarterly beginning January 1996. At December 31, 1995, the
variable interest rate was 9.5% for Term Loan A and 10.5% for Term Loan B.
Principal payments on Term Loan A in amounts ranging from $375,000 to $1.5
million are due quarterly, beginning December 31, 1995 through September 29,
2002. Principal payments on Term Loan B in the amount of $2 million each are
due quarterly, beginning December 31, 2000 through September 29, 2002. CPC
is required to comply with various covenants, including interest and fixed
charge coverage, minimum earnings before interest, taxes, depreciation and
amortization, and restrictions on capital expenditures and incurrence of
additional indebtedness.
As part of the Spinnaker acquisition of CPC from Alco Standard Corporation on
October 4, 1995 (see note 2) Spinnaker and CPC issued subordinated notes to
Alco in the amounts of $25 million and $5 million, respectively. The $25
million subordinated note is comprised of a $15 million subordinated
convertible note and a $10 million subordinated note. Alco also received the
right to sell the $25 million subordinated notes to Spinnaker and demand
payment (the "Put Agreements"). Lynch Corporation agreed to guarantee the
notes and provide funds for the Put Agreements. Lynch charged the Company a
guarantee fee of .05% per month of the $25 million principal amount of the
subordinated notes ($375,000 in 1995).
The $15 million subordinated convertible note issued by Spinnaker bears
interest at the rate of 8%. Interest on the note is payable semi-annually on
each March 31 and September 30. The entire principal amount and all accrued
and unpaid interest is due on March 31, 2003. The note is convertible into
Spinnaker common stock at a price equal to the weighted average of all sales
prices for Spinnaker common stock on NASDAQ for the period from September 18,
1995 through September 29, 1995 plus 10%; provided, that the conversion price
is not less than $33 per share or greater than $40 per share.
The $10 million subordinated note issued by Spinnaker bears interest at the
rate of 11% and is payable quarterly. The note requires principal payments
of $2.5 million each on September 30, 2002, 2003, 2004, and 2005.
The $5 million subordinated note is interest free through September 30, 1996
and thereafter interest is charged at a rate of 8%. Interest is payable
semi-annually, beginning March 31, 1997. The first principal payment of $1
million is due on December 31, 1998 with the balance due December 31, 1999 or
on December 31, 2000 if any debt that is senior to this note remains unpaid
at December 31, 1999.
F-14
<PAGE>
SPINNAKER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. LONG-TERM DEBT AND WORKING CAPITAL REVOLVERS (CONTINUED)
As of January 2, 1996, Alco exercised its rights under the Put Agreements to
sell the subordinated notes back to Spinnaker and in connection therewith, as
described below, the Company entered into a new financing agreement with the
seller and a third party to make a partial principal payment on the note and
replace the balance with a new financing arrangement. In addition, the new
financing agreement includes funds for the purchase of a warehouse facility
in Denver, Colorado from the seller in the amount of $1.75 million.
On April 5, 1996, Spinnaker entered into an agreement with a third party for
an $8.5 million bridge loan. The bridge loan is due on December 30, 1996 and
if not paid will convert to a 5 year term loan. The Company has agreed, if
the bridge loan is converted into a term loan, each quarter the term loan is
outstanding, the lender will be entitled to receive a warrant to purchase
2.5% of the common equity of Spinnaker up to 20% of its common equity on a
fully diluted basis. The bridge loan bears interest at the greater of the
LIBOR reference rate plus 5% or the Treasury rate plus 5% for the first 90
days, then incrementally increasing by .25% for every subsequent 90 day
period. On April 5, 1996 the rate in effect was 10.4%. Spinnaker may also
fix the rate at 18% if the floating rate increases to or above that rate.
Interest is payable on the bridge loan in arrears on July 15, 1996, October
15, 1996, January 15, 1997, and upon any prepayment of the bridge loan.
Interest is payable on the term loan (if the bridge loan is converted) in
arrears on April 15, July 15, October 15, and January 15 of each year. The
bridge loan and term loan include a payment in kind ("PIK") feature that
allows the Company to pay any interest in excess of 16% (the maximum cash
interest) by issuing additional bridge notes. Also on April 5, 1996, an
entity affiliated with Richard J. Boyle and Ned N. Fleming III ("BF"), the
Company's Chairman and Chief Executive Officer and President, respectively,
exercised warrants to purchase 187,476 shares of Spinnaker's comon stock
resulting in proceeds of $500,000 which will be used by the Company to make
scheduled interest payments on the bridge and term loans. The loan agreement
requires BF to continue to exercise its warrants to provide funds to satisfy
the outstanding interest that will be due on the bridge and term loans. All
funds that the Company receives from BF for the exercise of the warrants is
required to be immediately deposited into an escrow account. The escrow
agent will withdraw funds on deposit in the escrow account on each date on
which a payment of interest is required to be made on the bridge or term
loans.
Concurrently with the closing of the bridge loan, the Company paid Alco $7.5
million of which $5.5 million was a principal payment on the $25 million
subordinated notes, approximately $1 million related to accrued interest, and
$1 million was applied toward the purchase price of the warehouse facility.
The unpaid balance of the $25 million subordinated notes, together with the
balance due on the warehouse facility was restructured into a series of new
convertible subordinated notes consisting of the following:
A 7%, $6 million convertible subordinated note that automatically
converts including accrued interest, into Spinnaker common stock 30 days
after the execution of the note at a conversion price per share of $35,
unless Alco reasonably objects. After conversion, Alco is entitled to
sell the shares and Spinnaker has agreed to bear the cost of engaging
an investment banking firm to assist Alco in the sale. If a sale
cannot be effected on or before June 30, 1996, Spinnaker is obligated
to register the shares to enable Alco to sell the shares in the public
market. If the proceeds of this sale are less than $6 million, the
Company is required to pay the difference between $6 million and the
sales proceeds to Alco either in cash or an equivalent number of
common shares.
A 7%, $7 million convertible subordinated note due the earlier of April
5, 1997 or if the bridge loan is converted into a term loan, then six
months after the maturity date of the term loan. Interest is due in
arrears on each September 30 and March 31 during the term of the note
beginning September 30, 1996. The note contains a PIK feature that
allows the Company, at its option, to satisfy the interest payments by
increasing the principal amount of the note. However, if the Company
elects the PIK option, the interest rate on the note is 9%. All or any
part of this note can be converted at Alco's option into shares of the
Company's stock after April 1, 1997 at the then market price.
A 7%, $7.25 million convertible subordinated note due the earlier of
April 5, 1998 or the first anniversary after the payment date of the $7
million subordinated note discussed in the preceding paragraph.
Interest is due in arrears on each September 30 and March 31 during the
term of the debt beginning September 30, 1996. The note contains a PIK
feature that allows the Company, at its option, to satisfy the interest
payments by increasing the principal amount of the note. However, if
the Company elects the PIK option, the interest rate on the note is 9%.
All or any part of this note can be converted at Alco's option into
shares of the Company's stock after April 1, 1998 at the then market
price.
The Company's Parent has pledged its shares of Spinnaker stock to secure the
new convertible subordinated notes and bridge loan. Richard J. Boyle and Ned
N. Fleming III agreed to guarantee personally the obligations of BF to the
holder of the bridge loan. BF has pledged its warrant, all of the shares of
common stock owned by it, and any shares of common stock subsequently
acquired by it, to secure the bridge loan.
Based on the terms of the bridge loan and the restructured subordinated notes
with Alco, the Company has classified the $25 million subordinated notes to
Alco as long-term.
On September 19, 1994, Brown-Bridge entered into a Loan and Security
Agreement (the "Loan Agreement"), which provides for a term loan of $9
million. The loan is due in various installments over a five year period,
including monthly payments beginning in July 1995 and certain mandatory
prepayments. Interest is payable monthly at 1.25% over the lender's base
rate, as defined. At December 31, 1995 the lender's base rate was 8.5%.
Brown-Bridge is required to comply with various covenants, including interest
and fixed charge coverage and minimum levels of operating earnings, as well
as restrictions on the payment of dividends to Spinnaker. All assets of
Brown-Bridge have been pledged as security under the Loan Agreement.
In 1988, Entoleter borrowed $1.1 million from a bank, under the terms of a
mortgage agreement. Terms of the mortgage note required monthly payments of
$10,000, which included interest at 10%, through July 1994. In July 1994,
the interest rate was adjusted to 9 1/4%. The entire outstanding balance at
July 1, 1997 becomes due and payable on demand.
The terms of the mortgage include covenants that provide, among other things,
a limitation on the amount of annual dividends payable by Entoleter. At
December 31, 1995, under the most restrictive covenant, there were no
retained earnings available for the payment of dividends from Entoleter to
Spinnaker. At December 31, 1995, certain real property of Entoleter (net
carrying value of $420,000) is pledged as collateral to secure the mortgage.
The following is a summary of the Company's long-term debt at December 31,
1995 and 1994:
<TABLE>
<CAPTION>
1995 1994
----------------------
(in thousands)
<S> <C> <C>
Spinnaker Subordinated notes $25,000 $ -
CPC Term loan A 19,625 -
CPC Term loan B 16,000 -
CPC Subordinated note 5,000 -
Brown-Bridge term loan 6,691 9,000
Entoleter mortgage note payable 992 1,014
------- -------
73,308 10,014
Current maturities (3,666) (2,217)
------- -------
$69,642 $ 7,797
------- -------
------- -------
</TABLE>
F-15
<PAGE>
SPINNAKER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. LONG-TERM DEBT AND WORKING CAPITAL REVOLVERS (CONTINUED)
Scheduled principal payments on the term loans and long-term debt over the
next five years are as follows (in thousands):
<TABLE>
<S> <C>
1996 $ 3,666
1997 12,255
1998 13,536
1999 11,851
2000 6,500
Thereafter 25,500
-------
$73,308
-------
-------
</TABLE>
The Company also maintains short-term lines of credit with banks for working
capital needs at each subsidiary that aggregate $45.5 million. The Company
had cash advances of approximately $27 million outstanding under the lines of
credit as of December 31, 1995. Interest on all outstanding borrowings bear
interest at variable rates related to the prime interest rate or the lender's
base rate. At December 31, 1995, the interest rates in effect ranged from
8.5% to 11%. At December 31, 1994, the interest rate in effect on the
Company's short-term lines of credit was 8.5%. Credit availability under the
lines of credit are subject to certain variables, such as the amount of
inventory and receivables eligible to be included in the borrowing base.
These lines are secured by the operating assets of the Company's
subsidiaries.
The Company is required to comply with various covenants including a
limitation on capital expenditures, interest and fixed charge coverage, and
minimum levels of operating earnings, as well as various other financial
covenants. Certain of the lines of credit allow for the issuance of letters
of credit and require the payment of a fee based upon the face amount of each
letter of credit issued. The line of credit agreements expire in 1997 for
Entoleter, 2000 for CPC, and 1999 for Brown-Bridge.
Certain agreements with its lenders impose restrictions on the ability of the
Company or the Company's subsidiaries to pay dividends. At December 31, 1995
and 1994, there were no amounts available for the payment of dividends to
Spinnaker or Spinnaker's shareholders. On April 5, 1996, the Brown-Bridge and
CPC loan agreements were amended to allow for the payment of dividends to
Spinnaker if certain conditions were met.
Financing costs were incurred by Brown-Bridge and CPC in conjunction with
their respective acquisitions and the related debt that was incurred. These
financing costs are deferred and amortized over the term of the related debt.
Unamortized financing costs of $2,200,000 and $259,000 at December 31, 1995
and 1994, respectively, are included in other assets.
Interest paid in 1995, 1994, and 1993 on all outstanding borrowings amounted
to approximately $3.6 million, $520,000, and $100,000, respectively.
5. NOTES PAYABLE TO RELATED PARTIES
Notes payable to related parties comprise two promissory notes, the first in
the amount of $964,950 is payable to the Parent and the second in the amount
of $321,650 is payable to an entity affiliated with Richard J. Boyle and Ned
N. Fleming III ("BF"), the Company's Chairman and Chief Executive Officer and
President, respectively. The notes payable to the Parent and BF bear interest
computed at 18% per annum. The amount of accrued interest for both notes at
December 31, 1995 and 1994 amounted to $231,000 and $67,000, respectively.
These notes, including interest, are due and payable on September 16, 1997.
F-16
<PAGE>
SPINNAKER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. ACCRUED EXPENSES
Accrued expenses consist of the following at December 31:
<TABLE>
<CAPTION>
1995 1994
---------------
(in thousands)
<S> <C> <C>
Vacation $1,651 $ 783
Salaries, wages, and bonus 192 219
Accrued interest on subordinated note
payable 575 -
Commissions 532 123
Worker's compensation and health
insurance 591 -
Guarantee fee payable to parent 375 -
Real estate, property, and state
income taxes payable 697 70
Other 1,921 1,662
------ ------
$6,534 $2,857
------ ------
------ ------
</TABLE>
7. EMPLOYEE BENEFIT PLANS
ENTOLETER
Entoleter has two defined-benefit pension plans, one for all salaried
employees and one for all full-time hourly employees. The benefits for both
the salaried plan and the hourly plan are based on compensation and years of
service with Entoleter. Entoleter's funding policy for both plans is to
contribute funds necessary to meet future benefit obligations.
The following table sets forth the salaried and hourly plans' funded
status as of December 31, 1995 and 1994:
<TABLE>
<CAPTION>
DECEMBER 31
----------------------------------------
1995 1994
------------------ ------------------
Salaried Hourly Salaried Hourly
-------- ------ -------- ------
(in thousands)
<S> <C> <C> <C> <C>
Actuarial present value of accumulated
benefit obligation, including vested
benefits of $842 and $98 in 1995 and
$804 and $67 in 1994 $ (845) $(128) $ (806) $ (80)
------ ----- ------ -----
------ ----- ------ -----
Projected benefit obligation for service
rendered to date (876) (146) (893) (120)
Plan assets at fair value 1,116 61 1,039 61
------ ----- ------ -----
Plan assets in excess of (less than)
projected benefit obligation 240 (85) 146 (59)
Unrecognized net actuarial (gain) loss (40) 28 43 26
Unrecognized net (asset) obligation (49) - (189) 33
Unrecognized prior service cost - - - -
Adjustment to recognize minimum
liability - (10) - -
------ ----- ------ -----
Net pension asset (liability) included
in other assets $ 151 $ (67) $ - $ -
------ ----- ------ -----
------ ----- ------ -----
</TABLE>
At December 31, 1995 and 1994, assets for both the salaried and hourly plans
consist primarily of bank money market funds, guaranteed investment
contracts, and government securities.
F-17
<PAGE>
SPINNAKER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. EMPLOYEE BENEFIT PLANS (CONTINUED)
Net pension cost included the following components:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------
1995 1994 1993
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Service cost--benefits earned during
the period $ 40 $ 32 $ 23
Interest cost on projected benefit
obligation 70 67 63
Actual return on plan assets (112) 11 (58)
Net amortization and deferral 17 (110) (28)
----- ----- ----
Net periodic pension cost $ 15 $ - $ -
----- ----- ----
----- ----- ----
</TABLE>
The weighted average discount rate and rate of increase in future
compensation levels used in determining the actuarial present value of the
projected benefit obligation for the salaried plan were 7.25% and 4.0%, at
December 31, 1995 and 7.25% and 5.5% at December 31, 1994. The weighted
average discount rate and rate of increase in future compensation levels used
in determining the actuarial present value of the projected benefit
obligation for the hourly plan were 7.25% and 4.0% at December 31, 1995 and
7.25% and 5.0% at December 31, 1994. The expected long-term rate of return on
plan assets for both plans was 8% in 1995, 1994, and 1993.
CENTRAL PRODUCTS COMPANY
Pursuant to the CPC acquisition agreement, CPC assumed sponsorship of a
defined benefit pension plan for union employees per their collective
bargaining agreement and also agreed to establish a new defined benefit plan
for non-union employees hired by CPC. The seller retained the defined benefit
pension obligation for non-union retirees as of September 30, 1995 and any
non-union employees not hired by CPC.
The acquisition agreement requires the seller to transfer assets to the CPC
plans equal to the present value of accrued benefits as of September 30, 1995
as defined in the agreement plus a defined rate of interest to the transfer
date. Accordingly, CPC has not recorded the unfunded projected benefit
obligation as a liability when recording the purchase accounting entries.
CPC had not established a plan for the non-union employees as of December 31,
1995. CPC intends to establish a plan early in 1996 with the same benefits
provided by the seller's plan. Pursuant to the acquisition agreement, CPC
will grant credit to the employees for all service with the seller through
September 30, 1995, plus the benefits they accrue under the new plan from
October 1, 1995 through their retirement or termination. The benefit
obligation and the net periodic pension cost information as of and for the
three months ended December 31, 1995 have been calculated assuming the new
plan had been established on October 1, 1995.
F-18
<PAGE>
SPINNAKER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. EMPLOYEE BENEFIT PLANS (CONTINUED)
The following table sets forth the salaried and hourly plans' funded status
as of December 31, 1995:
<TABLE>
<CAPTION>
UNION NON-UNION TOTAL
----- --------- -----
(in thousands)
<S> <C> <C> <C>
Actuarial present value of projected
benefit obligation, including vested
benefits of $3,974 and $1,835 $4,479 $3,185 $7,664
Plan assets at fair value 4,498 2,705 7,203
------ ------ ------
Plan assets less than projected benefit
obligation (19) 480 461
Unrecognized net loss (52) (15) (67)
------ ------ ------
Unrecorded pension liability $ (71) $ 465 $ 394
------ ------ ------
------ ------ ------
</TABLE>
The fair value of assets for the union plan is based on the actual plan
assets as of December 31, 1995. The fair value of the plan assets for the
non-union plan as of December 31, 1995 is based on a calculation of assets to
be transferred per the acquisition agreement.
The net periodic pension cost for the three months ended December 31, 1995
included the following components:
<TABLE>
<CAPTION>
UNION NON-UNION TOTAL
----- --------- -----
(in thousands)
<S> <C> <C> <C>
Service cost--benefits earned during
the period $ 35 $ 93 $128
Interest cost on projected benefit
obligation 85 59 144
Actual return on plan assets (34) (35) (69)
Net amortization and deferral (55) (19) (74)
---- ---- ----
Net periodic pension cost $ 31 $ 98 $129
---- ---- ----
---- ---- ----
</TABLE>
The weighted average discount rate and rate of increase in future
compensation levels for both plans were 7.75% and 4%, respectively, at
December 31, 1995. The expected long-term rate of return on plan assets for
both plans was 8% in 1995.
CPC assumed sponsorship of a 401(k) plan for union employees. This plan does
not require any contributions from CPC. CPC intends to establish a defined
contribution plan for non-union employees in 1996.
BROWN-BRIDGE
Brown-Bridge has a defined contribution plan that covers substantially all of
its employees. Under the plan, Brown-Bridge can match, at its discretion, a
portion of employee contributions not exceeding 8% of the employee's
compensation. Amounts contributed to the plan by Brown-Bridge are 20% vested
each year for five years. On the acquisition date, employees of Brown-Bridge
who were previously employed by Kimberly-Clark Corporation received vesting
rights based on the years of credited service with Kimberly-Clark
Corporation. Brown-Bridge recorded expense for its contributions under the
plan of $417,000 and $111,000, in 1995 and 1994, respectively.
F-19
<PAGE>
SPINNAKER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. INCOME TAXES
The Company is included in the consolidated income tax return filed by its
Parent. The Company has a payable to the Parent for federal income taxes of
$277,000 at December 31, 1995 and a receivable from the Parent for federal
income taxes of $70,000 at December 31, 1994. Under the terms of a tax
sharing agreement with its Parent, Spinnaker can only utilize its net
operating loss carryforwards to the extent it has taxable income.
Accordingly, a valuation allowance was recorded in conjunction with the
adoption of Statement 109 as of January 1, 1993 to offset the deferred tax
asset. In 1995, the Company eliminated the $279,000 valuation allowance
related to the deferred tax asset because it generated sufficient taxable
income to utilize the deductible temporary differences. During 1994 the
Company utilized approximately $257,000 of tax operating loss carryforwards.
Deferred income taxes are provided for the temporary differences between the
financial statement and tax basis of the Company's assets and liabilities.
Temporary differences consist primarily of differences in tax and book
depreciation methods and lives and the timing of the deductibility of
certain expenses. Cumulative differences at December 31, 1995 and 1994 are
as follows:
<TABLE>
<CAPTION>
DEFERRED TAX DEFERRED TAX
------------------- ------------------
ASSET LIABILITY ASSET LIABILITY
----- --------- ----- ---------
1995 1994
-------------------- ------------------
(in thousands)
<S> <C> <C> <C> <C>
Inventory reserve $ 195 $ - $101 $ -
Tax over book depreciation - 7,164 - 589
Compensation accruals 579 - 309 -
Liabilities not deducted for
tax purposes 174 - 200 -
Other reserves and accruals 286 - 258 -
1,234 7,164 868 589
Valuation allowance - - (279) -
------ ------ ---- ----
Total deferred income taxes $1,234 $7,164 $589 $589
------ ------ ---- ----
------ ------ ---- ----
</TABLE>
Significant components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
---------------------------
1995 1994 1993
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Current:
Federal $ 347 $ - -
State 77 70 -
----- --- --
Total current 424 70 -
----- --- --
Deferred:
Federal (312) - -
----- --- --
$ 112 $70 -
----- --- --
----- --- --
</TABLE>
F-20
<PAGE>
SPINNAKER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. INCOME TAXES (CONTINUED)
Reconciliation of the statutory federal income tax rate to the effective
income tax rate follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Statutory federal rate 34.0% 34.0% 34.0%
Increase (decrease) resulting from:
Change in valuation allowance (29.3) - (34.0)
State income taxes (net of federal
tax benefit) 5.3 59.2 -
Other 1.7 (3.5) -
----- ---- -----
Effective income tax rate 11.7% 89.7% -%
----- ---- -----
----- ---- -----
</TABLE>
Cash paid for income taxes was $703,000 and $23,000 in 1995 and 1994,
respectively. No income taxes were paid in 1993.
9. RELATED PARTY TRANSACTIONS
Lynch Corporation provides the Company with certain management services,
which include executive, financial and accounting, planning, budgeting, tax,
legal, and insurance services. In connection therewith, the Company
incurred management service costs of $100,000 per year for 1995, 1994, and
1993.
On June 13, 1994, the Company and BF entered into a Management Agreement (the
Management Agreement) pursuant to which BF agreed to provide management
services to the Company. The Management Agreement has an initial term of one
year, and is automatically renewable for a term of one additional year unless
either party gives notice of termination. The Management Agreement is
terminable on 90 days notice by either party. BF received management fees of
$200,000 and $112,000 in 1995 and 1994, respectively, plus reimbursement of
expenses. Effective January 1, 1996, the management fee has been increased to
$400,000 per year. The Company and BF also entered into a Warrant Purchase
Agreement in 1994, pursuant to which BF received warrants to purchase 678,945
shares of Common Stock at any time on or before June 10, 1999, subject to
certain restrictions and the continuation of the Management Agreement, at
$2.67 per share (adjusted for the 3 for 2 stock splits effective December 29,
1995 and December 30, 1994). In connection therewith, the Company received
the right to 25% of any future fee income earned by BF and the right to
participate in 25% of any future transaction entered into by BF. The Company
also has the right to repurchase the warrants if certain events occur. BF may
also, on the occurrence of an equity offering by the Company, receive warrants
to acquire additional shares of the Company.
During 1994, Brown-Bridge granted certain of its key executives options to
purchase up to 71,065 shares of Brown-Bridge's common stock at various prices
between $7.16 and $14.69 per share. Brown-Bridge currently has 1 million
shares of common stock outstanding. The options become exercisable (i) in
cumulative installments of one-fifth each year if certain levels of
profitability, as defined in the plan, are met, or (ii) 7 years from the date
of grant. The options were issued at not less than 100% of the fair market
value of the common stock at the date of grant. At December 31, 1995 14,213
options were exercisable. None of the options were exercisable at
December 31, 1994.
F-21
<PAGE>
SPINNAKER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. RELATED PARTY TRANSACTIONS (CONTINUED)
The minority shareholders of Brown-Bridge which consist of Parent, officers
and employees of Brown-Bridge, officers of Spinnaker and individuals
affiliated with the officers of Spinnaker, other than the Parent, are parties
to agreements whereby they can require Brown-Bridge or Spinnaker to
repurchase their Brown-Bridge stock or, at the Company's option, exchange
their shares for Spinnaker shares at any time between September 1998 and
September 2000. The per share price to be paid or exchange value shall be an
amount equal to 75% of the then fair market value of the shares, as mutually
agreed by the shareholder and Brown-Bridge plus a $.10 per share received
premium if the shares are exchanged.
Certain employee/shareholders of Brown-Bridge also are parties to an
agreement whereby, under certain circumstances, they can require Brown-Bridge
to repurchase their stock, or Brown-Bridge can require that their stock be
sold to Brown-Bridge, at various times through September 1997. The per share
price to be paid by Brown-Bridge is equal to a range from $6.60 to $8.50 per
share plus an amount equal to simple interest on the shareholder's cost basis
at the prime rate from the date the shares were acquired by the shareholder
to the date of repurchase.
Brown-Bridge has retained the services of a consulting firm to assist in
improving its operations and manufacturing processes. The fees for such
services totaled $872,000 and $387,000 in 1995 and 1994. The consulting firm
is owned by a 1% shareholder of Brown-Bridge.
10. OTHER INCOME--NET
Other income-net consists of:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------
1995 1994 1993
-------------------------
(in thousands)
<S> <C> <C> <C>
Interest income $ 16 $114 $142
Dividends 1 29 14
Realized gains (losses)-net 30 (19) 11
Other-net (40) - -
---- ---- ----
Total other income, net $ 7 $124 $167
---- ---- ----
---- ---- ----
</TABLE>
11. SEGMENT INFORMATION
The Company competes in two business segments, adhesive coated materials and
industrial processing equipment. In 1995, 1994, and 1993, no customer
exceeded 10% of the Company's net sales.
F-22
<PAGE>
SPINNAKER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. SEGMENT INFORMATION (CONTINUED)
Operating profit (loss) is revenues less operating expenses, excluding
unallocated general corporate expenses, interest and income taxes.
Identifiable assets of each industry segment are the assets used by the
segment in its operations, excluding general corporate assets. General
corporate assets are principally cash and cash equivalents and land held for
investment.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------
1995 1994 1993
---- ---- ----
(in thousands)
<S> <C> <C> <C>
REVENUES
Adhesive coated materials $127,754 $26,849 $ -
Industrial processing equipment 7,535 6,783 6,371
-------- ------- ------
$135,289 $33,632 $6,371
-------- ------- ------
-------- ------- ------
OPERATING PROFIT (LOSSES)
Adhesive coated materials $ 6,364 $ 1,408 $ -
Industrial processing equipment 509 (13) 258
Unallocated corporate expenses (1,084) (673) (202)
-------- ------- ------
$ 5,789 $ 722 $ 56
-------- ------- ------
-------- ------- ------
CAPITAL EXPENDITURES
Adhesive coated materials $ 1,411 $ 264 $ -
Industrial processing equipment 143 186 91
General corporate 66 - -
-------- ------- ------
$ 1,620 $ 450 $ 91
-------- ------- ------
-------- ------- ------
DEPRECIATION/AMORTIZATION
Adhesive coated materials $ 1,993 $ 250 $ -
Industrial processing equipment 151 161 131
General corporate 7 - -
-------- ------- ------
$ 2,151 $ 411 $ 131
-------- ------- ------
-------- ------- ------
ASSETS
Adhesive coated materials $132,026 $37,496 $ -
Industrial processing equipment 3,676 3,264 4,723
General corporate 1,882 569 3,486
-------- ------- ------
$137,584 $41,329 $8,209
-------- ------- ------
-------- ------- ------
</TABLE>
12. LEASES
Future minimum rental payments under long-term noncancelable operating
leases are as follows at December 31, 1995 (in thousands):
<TABLE>
<S> <C>
1996 $ 967
1997 974
1998 862
1999 595
2000 595
Thereafter 4,710
------
$8,703
------
------
</TABLE>
F-23
<PAGE>
SPINNAKER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. LEASES (CONTINUED)
Rental payments under operating leases were $419,000, $31,000, and $0 for the
years ended December 31, 1995, 1994, and 1993.
13. CONTINGENCIES
During 1994, Entoleter settled a class action suit, brought by a group of
former employees, relating to post-employment benefits. The settlement
resulted in a $125,000 charge in 1994.
Entoleter has identified possible environmental issues related to portions
of its land in Hamden, Connecticut. The appropriate regulatory agencies have
been notified, but to date no action has been required by any regulatory
agency.
The Company is involved in various claims, including those related to
environmental matters and litigation arising in the normal course of
business. In the opinion of management, the resolution of these claims will
not have a material adverse effect on the liquidity, financial position, or
results of operations of the Company.
F-24
<PAGE>
SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
SPINNAKER INDUSTRIES, INC.
(PARENT COMPANY)
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31
-------------------
1995 1994
------- ------
(in thousands)
ASSETS
<S> <C> <C>
CURRENT ASSETS
Cash and Cash Equivalents $ 722 $ 3
Accounts Receivable 11 -
Short Term Investments - 4
Note Receivable from Related Party 920 -
Other Current Assets 309 310
------- ------
Total Current Assets 1,962 317
OFFICE EQUIPMENT (Net of Depreciation) 62 3
LAND HELD FOR INVESTMENT 249 249
OTHER ASSETS (Principally Investments in and
Advances to Subsidiaries 33,927 7,312
------- ------
TOTAL ASSETS $36,200 $7,881
------- ------
------- ------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES $ 2,555 $ 28
NOTES PAYABLE 25,000 -
NOTES PAYABLE TO RELATED PARTIES 1,583 1,352
TOTAL SHAREHOLDERS' EQUITY 7,062 6,501
------- ------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $36,200 $7,881
------- ------
------- ------
</TABLE>
<PAGE>
SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
SPINNAKER INDUSTRIES, INC.
(PARENT COMPANY)
CONDENSED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
---------------------------
1995 1994 1993
------- ----- ----
(in thousands)
<S> <C> <C> <C>
Interest, Dividends & Gain on Sales of
Marketable Securities $ 47 $ 90 $120
Net Interest, Dividend & Other Income
from Subsidiaries 101 227 190
------- ---- ----
TOTAL INCOME 148 317 310
Cost and Expenses:
Guarantee fee to parent 375
Unallocated Corporate Administrative 1,100 673 202
Expense
Interest Expense 810 64 -
------- ---- ----
TOTAL COST AND EXPENSES 2,285 737 202
------- ---- ----
INCOME (LOSS) BEFORE INCOME TAXES, AND
EQUITY IN NET INCOME OF SUBSIDIARIES (2,137) (420) 108
Income Tax Benefit 1,083 291 -
Equity in net income of subsidiaries 1,615 39 11
------- ---- ----
NET (LOSS) INCOME $ 561 $(90) $119
------- ---- ----
------- ---- ----
</TABLE>
<PAGE>
SCHEDULE I-- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
SPINNAKER INDUSTRIES, INC.
(PARENT COMPANY)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-----------------------------
1995 1994 1993
-------- ------- -------
(in thousands)
<S> <C> <C> <C>
Cash provided from (used in) operating
activities $ 778 $ 2,134 $ (98)
-------- ------- -------
INVESTING ACTIVITIES:
Investment in Central Products Company (25,000) - -
Investment in Brown-Bridge
Industries, Inc. - (5,287) -
Purchases of Office Equipment (59) - -
Purchases of marketable securities-net - - (1,020)
-------- ------- -------
NET CASH USED IN INVESTING ACTIVITIES (25,059) (5,287) (1,020)
-------- ------- -------
FINANCING ACTIVITIES:
Proceeds from notes payable to
related parties - 1,352 -
Proceeds from notes payable 25,000 - -
-------- ------- -------
NET CASH PROVIDED BY FINANCING ACTIVITIES 25,000 1,352 -
-------- ------- -------
TOTAL INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 719 (1,801) (1,118)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR 3 1,804 2,922
-------- ------- -------
CASH AND CASH EQUIVALENTS AT
END OF YEAR $ 722 $ 3 $ 1,804
-------- ------- -------
-------- ------- -------
</TABLE>
<PAGE>
SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
SPINNAKER INDUSTRIES, INC.
(PARENT COMPANY)
NOTES TO CONDENSED FINANCIAL STATEMENTS
NOTE A- BASIS OF PRESENTATION
In the parent company-only financial statements, the Company's investment in
subsidiaries is stated at cost plus equity in undistributed earnings of
subsidiaries since the date of acquisition. The Company's share of net income
of its unconsolidated subsidiaries is included in consolidated income using
the equity method. The parent company-only financial statements should be
read in conjunction with the Company's consolidated financial statements.
<PAGE>
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
SPINNAKER INDUSTRIES, INC. and SUBSIDIARIES
(PARENT COMPANY)
December 31, 1995
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-----------------------------
1995 1994 1993
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Allowance for doubtful
accounts/cash discounts:
Balance at beginning of period $ 378 $ 61 $ 60
Additions charged to expense 627 385 23
Additions due to acquisitions (a) 1,187 197 -
Deductions, net of recoveries (b) (958) (265) (22)
------ ----- ----
Balance at end of period $1,234 $ 378 $ 61
------ ----- ----
------ ----- ----
</TABLE>
_______________
(a) Includes Brown-Bridge beginning balance (9-19-94) of $197,000 and the
Central Products beginning balance (10-1-95) of $1,160,000. Also
includes a $27,000 purchase price adjustment relating to Brown Bridge
in 1995.
(b) Accounts written-off
<PAGE>
INDEX TO EXHIBITS
3(i) - Certificate of Incorporation of the Registrant, as amended
(filed as Exhibit 3(i) to the Registrant's Annual Report on Form
10-K for the fiscal year ended December 31, 1994).
3(ii) - Bylaws of the Registrant (filed as Exhibit 3(ii) to the
Registrant's Annual Report on Form 10-K for the fiscal year ended
December 31, 1994) .
4 - A Warrant, dated as of June 10, 1994, executed by Safety
Railway Service Corporation (filed as Exhibit 7.4 to the
Registrant's Current Report on Form 8-K dated June 13, 1994).
10.1 - Commercial Loan Open End Mortgage Deed and Security Agreement
and Commercial Mortgage Note dated July 1, 1988 in the amount
of $1,100,000 to Centerbank (formerly Connecticut Savings
Bank)(filed as Exhibit 10.1 to the Registrant's Annual Report
on Form 10-K for the fiscal year ended December 31, 1994).
10.2 - Loan Agreement dated as of September 16, 1994, between
Transamerica Business Credit Corporation and Brown-Bridge
Industries, Inc. (filed as Exhibit 10.(A) to the Registrant's
Quarterly Report on Form 10-Q for the fiscal quarter ended
September 30, 1994).
*10.3 - Management Agreement, dated June 10, 1994, by and among Boyle,
Fleming George & Co., Inc. and Safety Railway Service
Corporation (filed as Exhibit 7.1 to the Registrant's
Current Report on Form 8-K dated June 13, 1994).
10.4 - Voting Agreement, dated as of June 10, 1994, by and among
Safety Railway Service Corporation, Lynch Manufacturing
Corporation, and Boyle, Fleming, George & Co., Inc. (filed as
Exhibit 7.2 to the Registrant's Current Report on Form 8-K
dated June 13, 1994).
10.5 - Warrant Purchase Agreement, dated as of June 10, 1994, by and
among Boyle, Fleming, George & Co., Inc. and Safety Railway
Service Corporation (filed as Exhibit 7.3 to the Registrant's
Current Report on Form 8-K dated June 13, 1994).
10.6 - Assets Purchase Agreement, dated June 15, 1994, between
Brown-Bridge Acquisition Corporation and Kimberly-Clark
Corporation as amended (filed as Exhibit 10(B) to the
Registrant's Quarterly Report on Form 10-Q/A(1) for the fiscal
quarter ended June 30, 1994).
10.7 - Amendment No. 1, dated August 31, 1994, Amendment No. 2, dated
September 13, 1994, and Amendment No. 3, dated September 16,
1994, to the Assets Purchase Agreement (filed as Exhibits 7.1,
7.2 and 7.3, respectively, to the Registrant's Current Report
on Form 8-K dated September 19, 1994).
10.8 - Subordinated Promissory Notes, dated September 16, 1994, of
Safety Railway Service Corporation (filed as Exhibit 10.8 to
the Registrant's Annual Report on Form 10-K for the fiscal
year ended December 31, 1994).
10.9 - Shareholders' and Voting Agreement, dated September 16, 1994,
among Safety Railway Service Corporation, Brown-Bridge
Industries, Inc. and the
<PAGE>
other stockholders of Brown-Bridge (filed as Exhibit 10.9 to
the Registrant's Annual Report on Form 10-K for the fiscal year
ended December 31, 1994).
10.10 - Agreement for the Allocation of Income Tax Liability between
Lynch Corporation and its Consolidated Subsidiaries,
dated December 18, 1988, between Lynch Corporation and
Safety Railway Service Corporation (filed as Exhibit
10.10 to the Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1994).
*10.11 - Management Agreement, dated June 10, 1994, between Lynch
Corporation and Safety Railway Service Corporation (filed as
Exhibit 10.11 to the Registrant's Annual Report on Form 10-K
for the fiscal year ended December 31, 1994).
10.12 - Put Option Agreement, dated September 16, 1994, by and among
Brown-Bridge Industries, Inc., Safety Railway Service
Corporation, and Management Group Shareholders (filed as
Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q
for the fiscal quarter ended March 31, 1995).
10.13 - Put Option Agreement, dated September 16, 1994, by and among
Brown-Bridge Industries, Inc., Safety Railway Service
Corporation, and Investor Group Shareholders (filed as Exhibit
10.2 to the Registrant's Quarterly Report on Form 10-Q for the
fiscal quarter ended March 31, 1995).
10.14 - Stock and Asset Purchase Agreement, dated as of September 27,
1995, by and among Central Products Acquisition Corp.,
Unisource Worldwide, Inc. and Alco Standard Corporation (filed
as Exhibit 7.1 to the Registrant's Current Report on Form 8-K
dated October 18, 1995).
10.15 - Credit Agreement, dated as of September 29, 1995, by and among
Central Products Acquisition Corp., as Borrower, Spinnaker
Industries, Inc., as Pledgor, and Heller Financial, Inc., as
Agent and a Lender (filed as Exhibit 7.2 to the Registrant's
Current Report on Form 8-K dated October 18, 1995).
10.16 - Term Note A, dated October 4, 1995, from Central Products
Acquisition Corp. payable to the order of Heller Financial,
Inc. in the original principal amount of $20 million (filed as
Exhibit 7.3 to the Registrant's Current Report on Form 8-K
dated October 18, 1995).
10.17 - Term Note B, dated October 4, 1995, from Central Products
Acquisition Corp. payable to the order of Heller Financial,
Inc. in the original principal amount of $16 million (filed as
Exhibit 7.4 to the Registrant's Current Report on Form 8-K
dated October 18, 1995).
10.18 - Revolving Note, dated September 29, 1995, from Central
Products Acquisition Corp. payable to the order of Heller
Financial, Inc. in the
<PAGE>
maximum principal amount of $24 million (filed as Exhibit 7.5
to the Registrant's Current Report on Form 8-K dated October 18,
1995).
10.19 - Subordinated Promissory Note, dated September 29, 1995, from
Spinnaker Industries, Inc. payable to Alco Standard
Corporation in the original principal amount of $25 million
(filed as Exhibit 7.6 to the Registrant's Current Report on
Form 8-K dated October 18, 1995).
10.20 - Subordinated Promissory Note, dated September 29, 1995, from
Central Products Acquisition Corp. payable to Alco Standard
Corporation in the original principal amount of $5 million
(filed as Exhibit 7.7 to the Registrant's Current Report on
Form 8-K dated October 18, 1995).
10.21 - Agreement, dated October 3, 1995, between Spinnaker
Industries, Inc. and Lynch Corporation (filed as Exhibit 7.8
to the Registrant's Current Report on Form 8-K dated October
18, 1995).
10.22 - Subordinated Convertible Promissory Note, date April 5, 1996,
in the aggregate principal amount of $20,250,000, of Spinnaker
Industries, Inc. (filed as Exhibit 7.1 to the Registrant's
Current Report on Form 8-K dated April 19, 1996).
10.23 - Senior Credit Agreement, dated as of April 5, 1996, among
Spinnaker Industries, Inc. and Bankers Trust Company (filed as
Exhibit 7.2 to the Registrant's Current Report on Form 8-K
dated April 19, 1996).
10.24 - Warrant Exercise Agreement, dated April 5, 1996, among Boyle,
Fleming, George & Co., Inc, Richard J. Boyle, Ned N. Fleming,
III, Spinnaker Industries, Inc. and Bankers Trust Company
(filed as Exhibit 7.3 to the Registrant's Current Report on
Form 8-K dated April 19, 1996).
10.25 - Pledge Agreement, dated April 5, 1996, by each of the named
pledgors in favor of Banker's Trust Company (filed as Exhibit
7.4 to the Registrant's Current Report on Form 8-K dated
April 19, 1996).
11 - Statement of Computation of Per Share Earnings
21 - Subsidiaries of the Registrant.
23 - Consent of Deloitte & Touche LLP.
27 - Financial Data Schedule
99.1 - Information to be Incorporated by Reference into Part III.
______________
* Management contract or compensatory plan.
<PAGE>
Exhibit 11 -- Computation of Per share Earnings
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------
1995 1994 1993
------ ------ ------
(in thousands, except
per share data)
<S> <C> <C> <C>
Primary
Average shares outstanding 2,716 2,716 2,716
Net effect of dilutive stock options --
based on the treasury stock method
using average market price 635 97 --
------ ------ ------
Total 3,351 2,813 2,716
------ ------ ------
------ ------ ------
Net Income $ 561 $ (90) $ 119
------ ------ ------
------ ------ ------
Per share amount $ 0.17 $(0.03) $ 0.04
------ ------ ------
------ ------ ------
Fully diluted
Average shares outstanding 2,716 2,716 2,716
Net effect of dilutive stock options --
based on the treasury stock method
using the year-end market price, if
higher than average market price 645 196 --
------ ------ ------
Total 3,361 2,912 2,716
------ ------ ------
------ ------ ------
Net income $ 561 $ (90) $ 119
------ ------ ------
------ ------ ------
Per share amount $ 0.17 $(0.03) $ 0.04
------ ------ ------
------ ------ ------
</TABLE>
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
NAME STATE OF INCORPORATION
- ---- ----------------------
Brown-Bridge Industries, Inc. Delaware
Central Products Company Delaware
Entoleter, Inc. Delaware
<PAGE>
INDEPENDENT AUDITORS' CONSENT
We consent to the use of our report dated February 26, 1996 relating to the
financial statements of Central Products Company (not presented separately
herein), in the annual report on Form 10-K/A(1) of Spinnaker Industries, Inc.
/s/ DELOITTE & TOUCHE LLP
Milwaukee, Wisconsin
April 29, 1996
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 3,048
<SECURITIES> 0
<RECEIVABLES> 26,023
<ALLOWANCES> 1,234
<INVENTORY> 27,041
<CURRENT-ASSETS> 58,430
<PP&E> 54,700
<DEPRECIATION> (4,639)
<TOTAL-ASSETS> 137,584
<CURRENT-LIABILITIES> 50,442
<BONDS> 0
0
0
<COMMON> 3,124
<OTHER-SE> 3,938
<TOTAL-LIABILITY-AND-EQUITY> 137,584
<SALES> 135,289
<TOTAL-REVENUES> 135,289
<CGS> 117,737
<TOTAL-COSTS> 129,500
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,468
<INCOME-PRETAX> 953
<INCOME-TAX> 112
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 561
<EPS-PRIMARY> 0.17
<EPS-DILUTED> 0.00
</TABLE>
<PAGE>
PRELIMINARY
SPINNAKER INDUSTRIES, INC.
600 N. PEARL STREET, SUITE 2160
DALLAS, TEXAS 75201
------------------------
PROXY STATEMENT
---------------------
This Proxy Statement is furnished by the Board of Directors of Spinnaker
Industries, Inc., a Delaware corporation (the "Corporation"), in connection with
the solicitation of proxies for use at the Annual Meeting of Stockholders to be
held in the Somerset Room, Plaza of the Americas Hotel, 650 North Pearl Street,
Dallas, Texas 75201 on Thursday, June 6, 1996, at 1:00 p.m. Dallas time and at
any adjournments thereof (the "Annual Meeting"). This Proxy Statement with the
accompanying Proxy are first being mailed to stockholders on or about May 13,
1996.
The purpose and business of the meeting is:
(1) to elect seven (7) directors to serve until the next Annual Meeting; and
(2) to transact such other business as may properly come before the Annual
Meeting and any adjournments thereof.
Only stockholders of record at the close of business on April 15, 1996, will
be entitled to vote at the Annual Meeting. As of the close of business on such
date, there were outstanding and entitled to vote 2,903,170 shares of Common
Stock. Each share of Common Stock is entitled to one vote. Where a specific
designation is given in the Proxy with respect to the vote on the directors, the
Proxy will be voted in accordance with such designation. If no such designation
is made, the Proxy will be voted FOR the nominees for directors named in this
Proxy Statement. Any stockholder giving a Proxy may revoke it at any time before
it is voted at the Annual Meeting by delivering to the Secretary of the
Corporation a written notice of revocation or duly executed Proxy bearing a
later date or by appearing at the Annual Meeting and revoking his or her Proxy
and voting in person.
ELECTION OF DIRECTORS
Seven directors are to be elected at the Annual Meeting to serve until the
next Annual Meeting of Stockholders and until their respective successors are
elected. Except where authority to vote for directors has been withheld, it is
intended that the proxies received pursuant to this solicitation will be voted
FOR the nominees named. If for any reason any such nominee is not available for
election, such proxies will be voted in favor of the remaining named nominees
and may be voted for substitute nominees in place of those who are not
candidates. Management, however, has no reason to expect that any of the
nominees will be unavailable for election.
The Bylaws of the Corporation provide that the Board of Directors shall
consist of not less than three and no more than nine members and that vacancies
on the Board of Directors and newly-created directorships may be filled by the
Board of Directors at any meeting. Messrs. Boyle, Fleming and Rhein have served
as directors since the last annual meeting held on May 16, 1996. Mr. Michael J.
Small resigned from the Board in September 1995, and Mario J. Gabelli was
elected to the Board during the same month. Robert E. Dolan, Anthonie C. van
Ekris and Philip Wm. Colburn were elected to the Board in November 1995,
December 1995 and March 1996, respectively.
1
<PAGE>
The election of directors shall be determined by the affirmative vote of a
plurality of the shares of Common Stock present in person or by proxy at the
meeting and entitled to vote. An automated system administered by the
Corporation's transfer agent tabulates the votes. Pursuant to the Delaware
General Corporation Law and the Bylaws of the Corporation, shares held by
persons who abstain from voting on a proposal will be counted in determining
whether a quorum is present, but will not be counted as voting either for or
against such proposal. If a broker indicates on the proxy that it does not have
discretionary authority as to certain shares to vote on a particular matter,
those shares will not be considered as present and entitled to vote with respect
to that matter. Lynch Manufacturing Corporation ("LMC"), a wholly-owned
subsidiary of Lynch Corporation, is the holder of 77.8% of the Common Stock and
is obligated to vote its shares in favor of the nominees set forth below.
Nominations to the Board are subject to the terms of a voting agreement among
the Corporation, LMC and Boyle, Fleming, George & Co., Inc. ("BFI"), an
affiliate of Richard J. Boyle and Ned N. Fleming, III, the Chairman and Chief
Executive Officers and President of the Corporation, respectively, pursuant to
which BFI nominates one director and LMC nominates the rest of the Board.
Messrs. Boyle, Colburn, Dolan, Gabelli, Rhein and van Ekris are the persons
nominated by LMC and Mr. Fleming is the person nominated by BFI. See "Certain
Transactions".
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE FOR EACH OF THE NOMINEES
NAMED IN THIS PROXY STATEMENT.
The following information has been furnished to the Corporation by the
nominees for director and by the non-director executive officers:
RICHARD J. BOYLE
Mr. Boyle, age 61, has been a director and Chairman and Chief Executive
Officer of the Corporation since June 1994. He also has served as a Managing
Director of Boyle, Fleming, George & Co., Inc., an investment and management
firm, since 1993. From 1990 to 1992, he was President and Chief Executive
Officer of LTV Aerospace and Defense Company, a manufacturer of aircraft,
missiles and specialty vehicles. He was Corporate Vice President, Marketing and
Business Development of Honeywell Inc., a provider of products and systems for
the industrial, building, space and marine markets from 1987 to 1990. Mr. Boyle
is a director of Key Bank of Washington and several privately-held companies.
NED N. FLEMING, III
Mr. Fleming, age 35, became a member of the Board of Directors and President
of the Corporation in June 1994. In addition, Mr. Fleming is a Managing Director
of Boyle, Fleming, George & Co., Inc., a position he has held since 1993. From
1988 to 1993, he was an Associate at Cardinal Investment Company, Inc., an
investment concern. Mr. Fleming serves on the board of directors of several
privately-held corporations.
ROBERT E. DOLAN
Mr. Dolan, age 44, became a director of the Corporation in November 1995.
Since February 1992, he has been the Chief Financial Officer of Lynch
Corporation, and its Controller since May 1990. From 1984 until 1989, Mr. Dolan
was the Corporate Controller of Plessy North America Corporation, formerly the
United States subsidiary of a United Kingdom defense
electronics/telecommunications company.
PHILIP WM. COLBURN
Mr. Colburn, age 67, elected to the Board in March 1996, has been the
Chairman of The Allen Group, Inc., an investment concern, since 1992. From 1988
through 1992, he was also the Chief Executive Officer of The Allen Group, Inc.
Mr. Colburn is on the boards of directors of The Allen Group, Inc., Superior
Industries, Inc., Earl Scheib, Inc., and TransPro, Inc.
2
<PAGE>
MARIO J. GABELLI
Mr. Gabelli, age 53, is the Chairman and Chief Executive Officer of Lynch
Corporation and the Chairman and Chief Executive Officer of Gabelli Funds, Inc,
successor to The Gabelli Group, Inc., an investment advisor and holding company
for subsidiaries engaged in various aspects of the securities business,
positions he has held for more than the past five years. Mr. Gabelli also is
Chairman, President and Chief Investment Officer of Gabelli Capital Series
Funds, Inc.(since 1994), The Gabelli Global Multimedia Trust, Inc. (since 1994),
Gabelli Gold Fund, Inc. (since 1994), Gabelli Global Series Funds, Inc. (since
1993), Gabelli Investor Funds, Inc. (since 1993), Gabelli Equity Series Funds,
Inc. (since 1991), The Gabelli Value Fund, Inc. (since 1989), The Gabelli Series
Funds, Inc. (since 1989), and The Gabelli Equity Trust Inc. (since 1986). He is
the Chairman of Gabelli International Growth Fund, Inc. (since 1994) and trustee
of The Gabelli Money Market Funds (since 1992), The Gabelli Growth Fund (since
1987) and The Gabelli Asset Fund (since 1986). He was elected as a director of
the Corporation in September 1995. Mr. Gabelli is a director of The Morgan
Group, a transportation services concern and a subsidiary of Lynch Corporation.
JOSEPH P. RHEIN
Mr. Rhein, age 69, and a director of the Corporation since 1992, has been a
business consultant since 1989. From 1969 to 1989, he was Vice President of
Finance of SPS Technologies, Inc., a diversified world-wide manufacturing
company.
ANTHONIE C. VAN EKRIS
Mr. van Ekris, age 61, was elected to the Board in December 1995. He is the
Chairman and Chief Executive Officer of Balmac International, Inc., a New York
based importer of coffee and cocoa and exporters of refrigeration equipment, a
position he has held since 1991. Mr. van Ekris also serves as a director of
Stahel (America), Inc. and Gabelli Funds, Inc.
OTHER EXECUTIVE OFFICERS OF THE CORPORATION
K.C. CALDABAUGH
Mr. Caldabaugh, age 49, has been the President of Brown-Bridge Industries,
Inc., the Corporations's 80.1% owned subsidiary, since September 1994. From 1987
to 1993, he served in various capacities (most recently as Senior Vice President
and Chief Financial Officer) of LTV Corporation, a diversified manufacturing
firm. From 1979 to 1987, he served as Senior Vice President and then Executive
Vice President and Chief Financial Officer of The Charter Company, a diversified
concern.
JOHN R. POWERS
Mr. Powers, age 69, joined Central Products Company, a wholly-owned
subsidiary of the Corporation acquired in October 1995, in 1979 and has been its
President since 1981. Mr. Powers currently serves on the Board of Directors of
Wisconsin Paper Group and the First National Bank of Menasha.
MARK R. MATTESON
Mr. Matteson, age 32, became Vice President, Corporate Development of the
Corporation in January 1995. During 1994, he was an Associate at Boyle, Fleming,
George & Co., Inc. From 1992 to 1994, Mr. Matteson was a Managing Associate at
George Group, Incorporated, a corporate re-engineering consulting firm. From
1990 to 1992, Mr. Matteson attended graduate business school at Georgetown
University.
JAMES W. TOMAN
Mr. Toman, age 44, has been Controller of the Corporation since January
1995. From 1991 to 1994, he was Chief Financial Officer of Entoleter, Inc., a
wholly-owned subsidiary of the Corporation. Mr. Toman was Controller of Oxford
Health Plans, Inc. from 1988 until 1991; and, from 1986 to 1988, Assistant
Treasurer at Moore McCormack Resources, Inc.
OPERATION OF BOARD OF DIRECTORS AND COMMITTEES
There were seven meetings of the Board of Directors during 1995.
3
<PAGE>
The Board of Directors has established one standing committee, the Audit
Committee, the principal duties of which are as follows: Recommends to the Board
of Directors the appointment of independent auditors; reviews annual financial
reports to stockholders prior to their publication; reviews the report by the
independent auditors concerning management procedures and policies; and
determines whether the independent auditors have received satisfactory access to
the Corporation's financial records and full cooperation of corporate personnel
in connection with their audit of the Corporation's records. The Audit Committee
met once during 1995. During 1995, all of the members of the Board served on the
audit committee, with Mr. Rhein serving as its Chairman. Mr. Rhein and Mr. Dolan
were appointed as the audit committee in February 1996.
The Corporation does not have a nominating committee, compensation committee
or executive committee. Nominations for directors and officers are considered by
the entire Board of Directors.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The entire Board of Directors considers matters relating to compensation.
Mr. Robert E. Dolan and Mr. Mario J. Gabelli are executive officers of Lynch
Corporation, which through LMC owns 77.8% of the Common Stock of the
Corporation. Messrs. Boyle and Fleming are executive officers of the
Corporation, and Mr. Boyle served as a director of Lynch Corporation, and from
August 1995 as a member of its executive compensation and benefits committee,
until he resigned in January 1996.
In June 1994, before Messrs. Boyle and Fleming became directors and
executive officers of the Corporation, the Corporation entered into a management
agreement with BFI, an entity affiliated with Richard J. Boyle, and Ned N.
Fleming, III, whereby BFI and Messrs. Boyle and Fleming agreed to provide the
Corporation with operations management, strategic planning, acquisition analysis
and implementation, investment banking and financial advisory services and the
supervision of the Corporation's financial reporting and regulatory obligations.
Pursuant to the management agreement, Mr. Boyle became the Chairman of the Board
and Chief Executive Officer and Mr. Fleming became the President of the
Corporation and both were elected to the Board of Directors.
The management agreement has an initial term of one year, and is
automatically renewable for a term of one additional year unless either party
gives notice of termination not less than 90 days before the end of the first
anniversary of the agreement. Thereafter, the agreement is terminable on
90-day's notice by either party. Under the management agreement, BFI received an
initial management fee of $200,000 per year, plus reimbursement of overhead and
other expenses. In January 1996, the management fee was increased to $400,000.
The Corporation has agreed to indemnify BFI and its affiliates against certain
claims. During the term of the management agreement, BFI and Lynch have entered
into a voting agreement whereby BFI nominates one director and Lynch nominates
the rest of the Board. Messrs. Boyle, Dolan, Gabelli, Colburn, Rhein and van
Ekris are the persons nominated by Lynch and Mr. Fleming is the nominee of BFI.
See "Certain Transactions".
COMPENSATION OF DIRECTORS
The Corporation maintains, through Lynch Corporation, an insurance policy
which provides for indemnification of each Director (and officer) against
certain liabilities that each may incur in his capacity as such. Each Director,
who is not also an officer of the Corporation or Lynch Corporation (owner
through LMC of 77.8% of the Common Stock of the Corporation), receives a
director's fee of $850 for each Board or committee meeting the Director attends.
Joseph P. Rhein, Philip W. Colburn and Anthonie C. van Ekris are the only
directors eligible to be paid director's fees.
4
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth on an accrual basis for the two fiscal years
ended December 31, 1995, the compensation paid to the Chief Executive Officer of
the Corporation and the three other most highly compensated executive officers
who earned more than $100,000.
SUMMARY COMPENSATION TABLE (1)(2)
<TABLE>
<CAPTION>
OTHER ANNUAL ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) COMPENSATION ($)(4) COMPENSATION ($)
- ----------------------------------- --------- -------------- --------------- ------------------- ----------------
<S> <C> <C> <C> <C> <C>
Richard J. Boyle................... 1995 -- (3) -- (3) -- --
Chairman and Chief 1994 -- (3) -- (3) -- --
Executive Officer (3)
Ned N. Fleming, III................ 1995 -- (3) -- (3) -- --
President (3) 1994 -- (3) -- (3) -- --
K. C. Caldabaugh, 1995 $ 250,000 -- $ 3,000 $ 169,572(5)
President of Brown-Bridge 1994 -0-(6) -- -- --
Industries, Inc. subsidiary (6)
John R. Powers..................... 1995 $ 194,300(7) $ 194,300(7)(8) $ 11,500(7) $ 3,000(7)(9)
President of Central Products
Company subsidiary(7)
</TABLE>
- ------------------------
(1) Neither the Chief Executive Officer nor any of the other three most highly
compensated executive officer was employed by the Corporation before 1994.
(2) Except as noted, the Corporation does yet not maintain (1) any stock option
or other similar compensation plan involving the issuance of Common Stock,
or (2) any other long-term or incentive compensation arrangements.
(3) Mr. Boyle and Mr. Fleming were elected Chairman of the Board and Chief
Executive officer, and President, respectively, in 1994, pursuant to the
terms of a management agreement and other related agreements. They receive
no salary from the Corporation, but under the management agreement BFI
receives a management fee of $200,000 per year, plus the reimbursement of
expenses. Effective January 1996, the management fee was increased to
$400,000. See "Operations of the Board of Directors and
Committees--Compensation Committee Interlocks and Insider Participation" and
"Certain Transactions".
(4) Includes automobile allowances and club membership dues.
(5) Contribution to the Brown-Bridge Industries, Inc. 401(k) plan ($4,572) and
expenses directly related to his relocation from Dallas, Texas to Troy, Ohio
that were paid pursuant to an employment agreement ($165,000).
(6) Mr. Caldabaugh became President of this subsidiary upon its acquisition by
the Corporation in September 1994. Pursuant to an oral understanding, Mr.
Caldabaugh did not commence to earn any salary until January 1995.
(7) Central Products Company, formerly a division of Alco Standard Corporation,
was acquired in October 1995. Mr. Powers, who ran the division for the
seller, continued as the President of Central Products Company following the
acquisition. Includes $145,725 of Salary, the $194,300 Bonus, $9,625 in
Other Annual Compensation and $3,000 in All Other Compensation that was paid
by Alco Standard Corporation; thus 87% of the 1995 compensation was paid by
the seller. From date of the purchase through year-end, the Corporation paid
Mr. Powers $50,450 or 13% of his total 1995 compensation.
(8) Reflects a bonus paid to him by Alco Standard Corporation for services
rendered during 1995. Pursuant to the acquisition agreement, the seller
assumed and paid this bonus obligation.
(9) Contribution to the Central Products Company 401(k) plan.
5
<PAGE>
EMPLOYMENT AGREEMENT AND OTHER COMPENSATION ARRANGEMENTS
Mr. Caldabaugh has an employment agreement with the Corporation's 80.1%
owned Brown-Bridge Industries, Inc. ("Brown-Bridge") subsidiary that expires in
September 1999. The agreement provides for an annual salary of $250,000, and
severance pay equal to the average annual cash compensation received by him
during the three fiscal years immediately preceding termination for any reason
other than "just cause", or his death, disability or resignation. The agreement
also granted to Mr. Caldabaugh options to purchase up to 55,000 shares of
Brown-Bridge's common stock at various prices ranging between $7.16 and $14.69
per share. The options become exercisable (1) in cumulative installments of
11,000 shares each year if certain levels of profitability, as defined in the
agreement, are met, or (2) seven years from the date of grant. The vesting of
these options will be accelerated if (i) Mr. Caldabaugh's employment is
terminated for any reason other than "just cause", or his death, disability or
resignation, (ii) Brown-Bridge is sold and he ceases to be its chief executive
officer or (iii) there is a change in control of Brown-Bridge. At April 15,
1996, 11,000 shares were vested. None of these options have been exercised.
Brown-Bridge currently has one million shares outstanding. See "Certain
Transactions".
REPORT ON EXECUTIVE COMPENSATION
The entire Board of Directors is responsible for developing the
Corporation's executive compensation policies and administrating compensation
plans. In addition, the Board determines on an annual basis the compensation to
be paid to the executive officers of the Corporation, subject to certain
employment and other agreements.
The objectives of the Corporation's executive compensation program are:
- Support the achievement of desired Corporation performance.
- Provide compensation that will attract and retain superior talent and
reward performance.
- Ensure that there is appropriate linkage between executive compensation
and the enhancement of stockholder value.
The executive compensation program is designed to provide an overall level of
compensation opportunity that is competitive with companies of comparable size,
capitalization and complexity. Actual compensation levels, however, may be
greater or less than average competitive levels based upon annual and long-term
Corporation performance and specific issues peculiar to the Corporation, as well
as individual performance. Executive compensation is not necessarily determined
by specific relationship to objective criteria or benchmarks of corporate
performance. The Board uses its discretion to set executive compensation at
levels warranted in its judgment by corporate and individual performance.
Messrs. Boyle and Fleming, the Chairman and Chief Executive Officer and
President, respectively, of the Corporation are not paid any salary by the
Corporation, although the Corporation has entered into a management agreement
with an entity affiliated with them. The amounts paid under the management
agreement are not tied to any specific criteria or factors related to corporate
performance, but was negotiated in an arms length transaction between the
affiliate and representatives of the Corporation. Effective January 1, 1996, the
Board of Directors approved an increase in the annual amount paid under this
management agreement from $200,000 to $400,000 because of the increase in the
scope, size and complexity of the operations of the Corporation. See "Certain
Transactions".
Members of the Board of Directors
Richard F Boyle, Chairman
Ned N. Fleming, III
Robert E. Dolan
Mario J. Gabelli
Philip Wm. Colburn
Joseph P. Rhein
Anthonie van Ekris
6
<PAGE>
CORPORATE PERFORMANCE
The following Performance Graph compares the Corporation's cumulative total
stockholder return on its Common Stock for a five-year period (December 31, 1991
to December 31, 1995) with the cumulative total return of the NASDAQ market
index (which includes the Corporation) and a peer group of companies described
more fully below.
COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURN *
AMONG SPINNAKER, NASDAQ MARKET INDEX AND PEER GROUP * *
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
SPINNAKER IND INDUSTRY INDEX BROAD MARKET
<S> <C> <C> <C>
1990 100.00 100.00 100.00
1991 100.00 122.09 128.38
1992 92.86 135.39 129.64
1993 89.29 144.77 155.50
1994 375.00 146.98 163.26
1995 2270.31 179.36 211.77
</TABLE>
* Assumes $100 invested on December 31, 1991 in the Corporation's Common
Stock, NASDAQ Market Index and the Peer Group. Total return assumes
re-investment of dividends.
** The Peer Group index represents SIC Code 267 - Converted Paper and
Paperboard Products (which includes Brown-Bridge, its 80.1% owned
subsidiary, and Central Products Company, its wholly-owned subsidiary). This
Peer Group consists of thirty-one companies which trade on the NASDAQ,
American Stock Exchange or New York Stock Exchange.
7
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
As of the close of business on April 15, 1996, the Corporation had 2,903,170
shares of Common Stock, no par value, issued and outstanding. The following
table sets forth the number of shares of the Corporation's Common Stock (which
is the only class of outstanding voting stock of the Corporation) held by
persons known to the Corporation to own beneficially more than 5% of such Common
Stock as of April 15, 1996. (For the purposes of reporting beneficial ownership
herein, a person is considered the beneficial owner of the shares over which
such person holds or shares voting or investment power, including the power to
direct the disposition of such shares, or over which such a person can acquire
such power within 60 days by, for example, the exercise of stock options or
conversion of securities). The following information is reflected in Schedule
13Ds, as amended, that have been filed with the Securities and Exchange
Commission or which has otherwise been furnished to the Corporation.
<TABLE>
<CAPTION>
AMOUNT OF
BENEFICIAL PERCENT OF
NAME AND ADDRESS OF BENEFICIAL OWNER OWNERSHIP CLASS
- ------------------------------------------------------------------------ ------------------- ------------
<S> <C> <C>
Lynch Manufacturing Corporation (1)..................................... 2,259,063(1) 77.8%
(a wholly-owned subsidiary of Lynch Corporation)
100 Douglas Street
Yankton, S.D. 57078
Boyle, Fleming, George & Co. Inc. (2)................................... 678,945(2) 20.0(4)
600 N. Pearl Street, Suite 2160
Dallas, Texas 75201
Alco Standard Corporation............................................... 172,430(3) 5.6(4)
825 Duportail Road
Chesterbrook, Wayne, Pennsylvania 19087
</TABLE>
- ------------------------
(1) Mario J. Gabelli, of Corporate Center at Rye, Rye, New York, 10580, Chairman
of the Board and Chief Executive Officer of Lynch Corporation, and certain
family trusts own 52,200 shares (1.8%) of the Corporation's Common Stock. He
may also be deemed to be a beneficial owner of the Corporation's Common
Stock owned by Lynch Corporation, through LMC, by virtue of his and certain
affiliated parties beneficial ownership of 24.9% of the shares of Common
Stock of Lynch Corporation. Mr. Gabelli, however, specifically disclaims
beneficial ownership of all shares of the Common Stock of the Corporation
held by Lynch Corporation and LMC. All of these shares have been pledged by
LMC to secure certain indebtedness of the Corporation. See "Certain
Transactions".
(2) Includes 491,469 shares of Common Stock issuable upon the exercise of a
warrant granted to BFI in June 1994, as adjusted for two 3 for 2 stock
splits that occurred in December 1994 and December 1995. BFI, an investment
and management firm, is an affiliate of Richard J. Boyle and Ned N. Fleming,
III, the Chairman and Chief Executive Officer, and President, respectively,
of the Corporation. Messrs. Boyle and Fleming may be deemed to share voting
and dispositive power over these shares. All of these shares, all shares
issuable upon exercise of the warrant and the warrant have been pledged to
secure certain indebtedness of the Corporation. See "Certain Transactions".
(3) Shares of Common Stock issuable upon conversion of a portion of the
principal of a subordinated convertible note, including accrued interest,
scheduled to occur in May 1996. See "Certain Transactions".
(4) Determined in accordance with Rule 13d-3(d)(1)(i).
8
<PAGE>
SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth information concerning the beneficial
ownership of the Common Stock of the Corporation and Lynch Corporation ("Lynch")
by each director of the Corporation, as well as by all directors and executive
officers of the Corporation as a group, as of April 15, 1996.
<TABLE>
<CAPTION>
AMOUNT OF CORPORATION
AMOUNT OF LYNCH SHARES SHARES BENEFICIALLY
BENEFICIALLY OWNED (1)(2) OWNED (1)(2)
--------------------------- --------------------------
NUMBER OF NUMBER OF
NAME SHARES PERCENT SHARES PERCENT
- ---------------------------------------------------- ------------- ------------ ------------- -----------
<S> <C> <C> <C> <C>
Richard J. Boyle.................................... 1,400 * 678,945(3) 20.0%
Ned N. Fleming, III................................. -- -- 678,945(3) 20.0
Philip Wm. Colburn.................................. -- -- -- --
Robert E. Dolan..................................... 235 * 1,225 *
Mario J. Gabelli.................................... 346,905(4) 24.9(4) 52,200(5) 1.8
Anthonie C. van Ekris............................... -- -- -- --
Joseph P. Rhein..................................... -- -- 1,500 *
All Directors and Officers of the Corporation as a
Group (eleven persons, including those named
above)............................................. 348,540 25.1% 733,870(3) 21.6%
</TABLE>
- ------------------------
* Less than one percent.
(1) A person is considered to "beneficially own" the shares over which such
person holds or shares voting power or investment power or over which such
person can acquire such power within 60 days (for example, through the
exercise of stock options or conversion of securities).
(2) Except as otherwise noted, each director and officer has sole voting and
investment power with respect to the shares of Common Stock of the
Corporation and Lynch.
(3) Includes 491,469 shares of Common Stock issuable upon the exercise of a
warrant granted to BFI in June 1994, as adjusted for two 3 for 2 stock
splits that occurred in December 1994 and December 1995. BFI, an investment
and management firm, is an affiliate of Richard J. Boyle and Ned N. Fleming,
III, the Chairman and Chief Executive Officer, and President, respectively,
of the Corporation. Messrs. Boyle and Fleming may be deemed to share voting
and dispositive power over these shares. All of the shares owned by BFI, all
shares issuable upon exercise of the warrant and the warrant have been
pledged to secure certain indebtedness of the Corporation. See "Security
Ownership of Certain Beneficial Owners" and "Certain Transactions".
(4) Includes 256,905 shares owned directly by Mr. Gabelli (including 2,991 held
for the benefit of Mr. Gabelli under the Corporation's 401(k) savings plan;
70,000 shares owned by a limited partnership in which Mr. Gabelli is the
general partner and has a 20% interest; and 20,000 shares owned by certain
family trusts. Mr. Gabelli disclaims beneficial ownership of the shares
owned by the family trusts.
(5) Includes 15,300 shares held by certain family trusts. Mr. Gabelli disclaims
beneficial ownership of such share.
CERTAIN TRANSACTIONS
In June 1994, the Corporation and BFI also entered into a warrant purchase
agreement, under which BFI received a warrant to purchase 678,945 shares of
Common Stock of the Corporation for a price of $2.67 per share (as adjusted for
the 3 for 2 stock splits that occurred in December 1994 and December 1995) at
any time on or before June 10, 1999, in exchange for the Corporation's right to
receive certain future fees and co-investment rights. As part of the warrant
purchase agreement, BFI may also, on the occurrence of an equity offering by the
Corporation, receive warrants to purchase
9
<PAGE>
additional shares of Common Stock of the Corporation. The agreement also grants
certain registration rights to BFI and certain repurchase rights to the
Corporation with respect to the warrants. In April 1996, BFI purchased 187,476
shares of Common Stock by a partial exercise of the warrant in connection with a
financing transaction of the Corporation with one of its lenders. An agreement
with the lender requires BFI to make further purchases of Common Stock under the
Warrant if necessary to enable the Corporation to make its interest payments due
to the lender. BFI has pledged its warrant, all of the shares of Common Stock
owned by it, and any shares of Common Stock subsequently acquired by it, to
secure the loans made by the lender to the Corporation.
When the Corporation acquired, in September 1994, its 80.1% interest in
Brown-Bridge Industries, Inc., an acquisition opportunity developed by BFI
before entering into the management agreement, certain affiliates of BFI
(including Messrs. Boyle and Fleming) and Lynch loaned the Corporation
approximately $322,000 and $965,000, respectively, at an interest rate of 18% to
help the Corporation fund its portion of the acquisition. These notes are due
and payable on September 16, 1997.
The minority stockholders of Brown-Bridge Industries, Inc., the
Corporation's majority (80.1%) owned subsidiary, consist of Lynch, certain
officers and employees of Brown-Bridge (including Mr. Caldabaugh), and certain
affiliates of BFI (including Messrs. Boyle and Fleming), all of whom acquired
their respective interests on the same terms and conditions as the Corporation.
Certain of these minority stockholders (other than Lynch), including Messrs.
Boyle, Fleming and Caldabaugh, are parties to agreements whereby those persons
can require Brown-Bridge or the Corporation to repurchase their stock, or at the
Corporation's option, exchange their shares for shares of the Corporation at any
time between September 1998 and September 2000 at 75% of the then fair market
value of such Brown-Bridge shares.
Brown-Bridge has retained the services of George Group, Incorporated, a
consulting firm owned by Michael L. George, an affiliate of BFI and a 1%
stockholder of Brown-Bridge, to assist in improving its operations and
manufacturing processes. The fees for these services totaled $872,000 in 1995.
Since 1989, the Corporation has had an agreement with Lynch, pursuant to
which Lynch provides certain management, financial and other services to the
Corporation for an annual fee of $100,000.
The Corporation and Lynch were parties to a tax-sharing agreement that
provided for the Corporation to pay to Lynch the Corporation's share of Lynch's
federal income tax liability. For 1995, the Corporation will pay Lynch
approximately $350,000 under this agreement. The agreement was terminated in
April 1996.
In connection with the Corporation's acquisition of Central Products
Company, Lynch guaranteed $25,000,000 of indebtedness of the Corporation and
undertook certain other obligations. Under the terms of an agreement dated
October 3, 1995, the Corporation agreed to pay Lynch a monthly fee equal to .5%
of the principal amount guaranteed by Lynch. The Corporation accrued $750,000 in
fees payable to Lynch under the agreement. The Lynch guarantee and this
arrangement was terminated in April 1996. In connection with the refinancing
transaction that terminated the guarantee, LCM has pledged all of its shares of
Common Stock to secure the loans made to the Corporation by one of its lenders.
In connection with the Corporation's acquisition of Central Products Company
from Alco Standard Corporation ("Alco"), the seller provided two subordinated
notes to the Company totaling $25,000,000 and the seller received the right to
sell these notes back to the Corporation. In April 1996, the Company completed
the refinancing of the two subordinated notes held by Alco. As part of the
refinancing, the Corporation paid Alco $7,500,000 of which $5,500,000 was a
principal payment, approximately $1,000,000 was related to accrued interest and
$1,000,000 was applied toward the purchase price of a warehouse facility which
the Corporation had a right to acquire as part of the original acquisition. The
unpaid balance of the $25,000,000 notes were refinanced by the issuance of a new
subordinated convertible promissory note in the aggregate principal amount of
$20,250,000 to
10
<PAGE>
Alco (the "Alco Note"). The first $6,000,000 of principal (and the interest
accrued on that principal) of the Alco Note will be converted automatically into
approximately 172,430 shares (the "Initial Conversion Shares") of Common Stock
in May 1996, unless Alco reasonably objects. The Corporation has agreed to
engage an investment banker to assist Alco with a private sale of the Initial
Conversion Shares. If a private sale cannot be effected on or before the end of
June 1996, the Corporation is obligated to register the Initial Conversion
Shares to enable Alco to sell the Initial Conversion Shares in the public
market. The Corporation has agreed to pay Alco the difference between the net
proceeds received by it upon the sale of the Initial Conversion Shares and
$6,000,000. At Alco's option, the remaining principal amount of the Alco Note
becomes convertible into Common Stock, at the then prevailing market price,
commencing with an installment of $7,000,000 in April 1997 and the remaining
balance in April 1998.
Interest on the Alco Note is payable semiannually at an annual rate of 7%,
or 9% if the Corporation elects to add the interest back into principal. The
unconverted principal of the Alco Note will be due in two installments. The
first installment of $7,000,000 will be due six months after the maturity date
of certain indebtedness of the Corporation to one of its lenders (but not before
April 5, 1997) and the balance will be due on the first anniversary of the
payment date of the $7,000,000 installment. Alco has the right to demand
immediate prepayment of the Alco Note if the Corporation successfully
consummates certain subsequent financing transactions.
RELATIONSHIP WITH INDEPENDENT AUDITORS
Representatives of Ernst & Young LLP, the independent accounting firm that
audited the consolidated financial statements of the Corporation for the fiscal
year ended December 31, 1995, are expected to be available at the Annual Meeting
with the opportunity to make a statement if they desire to do so and to answer
questions. Ernst & Young LLP has been re-selected as the Corporation's auditor
for 1996.
STOCKHOLDER PROPOSALS
Any stockholder proposal to be presented for action at the next meeting of
stockholders pursuant to the provisions of Rule 14a-8, under the Securities
Exchange Act of 1934, must be received at the Corporation's principal executive
offices no later than January 15, 1997, for inclusion in the proxy statement and
form of proxy relating to the 1997 Annual Meeting.
MISCELLANEOUS
The Board of Directors knows of no other matters which are likely to come
before the Annual Meeting. If any other matters should properly come before the
Annual Meeting, it is the intention of the persons named in the accompanying
form of Proxy to vote on such matters in accordance with their best judgment.
The solicitation of proxies is made on behalf of the Board of Directors of
the Corporation, and the cost thereof will be borne by the Corporation. The
Corporation will also reimburse brokerage firms and nominees for their expenses
in forwarding proxy material to beneficial owners of the Common Stock of the
Corporation. In addition, officers and employees of the Corporation (none of
whom will receive any compensation therefore in addition to their regular
compensation) may solicit proxies. The solicitation will be made by mail and, in
addition, may be made by telegrams, personal interviews, or telephone.
11
<PAGE>
ANNUAL REPORT
The Corporation's Annual Report to Stockholders for the fiscal year ended
December 31, 1995, is being sent to each stockholder. The Annual Report,
however, is not to be regarded as part of the proxy soliciting material.
By Order of the Board of Directors
JAMES W. TOMAN
ASSISTANT SECRETARY
DATED: May 13, 1996
12
