<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A(3)
[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.
-----------------------------------------------------
(Exact name of Registrant as specified in its charter)
DELAWARE 06-0544125
- -------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
600 N. PEARL ST. SUITE 2160, DALLAS, TX 75201
- ---------------------------------------- ---------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 214-855-0322
------------------------
Securities registered pursuant to Section 12(b) of the Act: NONE
----
Securities registered pursuant to Section 12(g) of the Act.
COMMON STOCK - NO PAR VALUE
------------------------------------------------------------
(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
--- ---
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
-----------------------------------
None
<PAGE>
Item 8. Financial Statements and Supplementary Data
Financial Statements and Supplementary Data as amended August 12, 1996
to revise Note 2 (Pro Forma Information).
SIGNATURE
---------
Pursuant to the requirements of the Securities Exchange Act of 1934 the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Spinnaker Industries, Inc.
/s/ JAMES W. TOMAN
--------------------------
James W. Toman
Controller
DATE: AUGUST 12, 1996
---------------
<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 512 (28)
Net income per share .15 (.01)
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
