<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 7, 1997
REGISTRATION NO. 333-18789
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
AMENDMENT NO. 1 TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------------------
SPINNAKER INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
Delaware 2670 06-0544125
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
--------------------------
SEE TABLE OF ADDITIONAL CO-REGISTRANTS
--------------------------
600 N. Pearl Street, Suite 2160
Dallas, Texas 75201
214-855-0322
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
Ned N. Fleming, III
President
Spinnaker Industries, Inc.
600 N. Pearl Street, Suite 2160
Dallas, Texas 75201
214-855-0322
(Name, address including zip code, and telephone number, including area code, of
agent for service)
--------------------------
COPIES TO:
Timothy R. Vaughan, Esq. Eric Berg, Esq.
Crouch & Hallett, L.L.P. White & Case
717 N. Harwood St., Suite 1400 1155 Avenue of the Americas
Dallas, Texas 75201 New York, New York 10036-2787
214-953-0053 212-819-8200
--------------------------
Approximate date of commencement of proposed sale to the public:
As soon as practicable after the effective date of this Registration Statement.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. / /
--------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
TABLE OF ADDITIONAL CO-REGISTRANTS
<TABLE>
<CAPTION>
EXACT NAME OF REGISTRANT STATE OR OTHER JURISDICTION
AS SPECIFIED IN ITS CHARTER OF INCORPORATION OR ORGANIZATION I.R.S. EMPLOYER IDENTIFICATION NUMBER
<S> <C> <C>
Central Products Company Delaware 39-1831503
Brown-Bridge Industries, Inc. Delaware 31-1481386
Entoleter, Inc. Delaware 06-1114607
</TABLE>
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<PAGE>
SPINNAKER INDUSTRIES, INC.
CROSS-REFERENCE SHEET FOR REGISTRATION STATEMENT ON FORM S-4
<TABLE>
<CAPTION>
ITEM OF FORM S-4 PROSPECTUS CAPTION OR LOCATION
- -------------------------------------------------------------------------------- -------------------------------------
<C> <S> <C>
A. INFORMATION ABOUT THE TRANSACTION
1. Forepart of Registration Statement and Outside Front Cover Page of
Prospectus......................................................... Facing Page; Cross Reference Sheet;
Outside Front Cover Page of
Prospectus
2. Inside Front and Outside Back Cover Pages of Prospectus.............. Inside Front Cover Page of
Prospectus; Additional Information;
Outside Back Cover Page of
Prospectus
3. Risk Factors, Ratio of Earnings to Fixed Charges and Other
Information........................................................ Prospectus Summary; Risk Factors; The
Company; Selected Historical
Financial Data
4. Terms of the Transaction............................................. Prospectus Summary; The Exchange
Offer; Certain United States
Federal Income Tax Consequences;
Description of the Notes
5. Pro Forma Financial Information...................................... Prospectus Summary; Unaudited Pro
Forma Financial Data
6. Material Contacts with the Company Being Acquired.................... Not Applicable
7. Additional Information Required for Reoffering by Persons and Parties
Deemed to be Underwriters.......................................... Not Applicable
8. Interests of Named Experts and Counsel............................... Legal Matters
9. Disclosure of Commission Position on Indemnification for Securities
Act Liabilities.................................................... Not Applicable
B. INFORMATION ABOUT THE REGISTRANT
10. Information with Respect to S-3 Registrants.......................... Not Applicable
11. Incorporation of Certain Information by Reference.................... Not Applicable
12. Information with Respect to S-2 or S-3 Registrants................... Not Applicable
13. Incorporation of Certain Information by Reference.................... Not Applicable
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ITEM OF FORM S-4 PROSPECTUS CAPTION OR LOCATION
- -------------------------------------------------------------------------------- -------------------------------------
<C> <S> <C>
14. Information with Respect to Registrants Other than S-3 or S-2
Registrants........................................................ Prospectus Summary; The Company; Risk
Factors; Capitalization; Selected
Historical Financial Data;
Unaudited Pro Forma Financial Data;
Management's Discussion and
Analysis of Financial Condition and
Results of Operations; Industry;
Business; Management; Security
Ownership of Management; Principal
Stockholders; Description of the
New Credit Facility; Description of
the Notes
C. INFORMATION ABOUT THE COMPANY BEING ACQUIRED
15. Information with Respect to S-3 Companies............................ Not Applicable
16. Information with Respect to S-2 or S-3 Companies..................... Not Applicable
17. Information with Respect to Companies Other than S-3 or S-2
Companies.......................................................... Not Applicable
D. VOTING AND MANAGEMENT INFORMATION
18. Information if Proxies, Consents or Authorizations are to be
Solicited.......................................................... Not Applicable
19. Information if Proxies, Consents or Authorizations are not to be
Solicited or in an Exchange Offer.................................. Management; Certain Transactions
</TABLE>
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY AN
OFFER TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY, NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
PROSPECTUS
SPINNAKER INDUSTRIES, INC.
OFFER TO EXCHANGE $1,000 IN PRINCIPAL AMOUNT OF ITS
[LOGO]
10 3/4% SENIOR SECURED NOTES DUE 2006, SERIES B, WHICH
HAVE BEEN REGISTERED UNDER THE SECURITIES ACT FOR
EACH $1,000 IN PRINCIPAL AMOUNT OF ITS OUTSTANDING
10 3/4% SENIOR SECURED NOTES DUE 2006, SERIES A
------------------------
Spinnaker Industries, Inc., a Delaware corporation ("Spinnaker" or the
"Company"), hereby offers, upon the terms and subject to the conditions set
forth in this Prospectus (the "Prospectus") and the accompanying Letter of
Transmittal (the "Letter of Transmittal," and together with the Prospectus, the
"Exchange Offer"), to exchange up to an aggregate principal amount of
$115,000,000 of its 10 3/4% Senior Secured Notes due 2006 Series B, (the "New
Notes") for up to an aggregate principal amount of $115,000,000 of its
outstanding 10 3/4% Senior Secured Notes due 2006 Series A (the "Old Notes").
The terms of the New Notes are identical in all material respects to those of
the Old Notes, except for certain transfer restrictions, registration rights and
penalty provisions relating to the Old Notes. The New Notes will be issued
pursuant to, and entitled to the benefit of, the Indenture (as defined)
governing the Old Notes. The New Notes and the Old Notes are sometimes referred
to collectively as the "Notes." Interest on the New Notes will accrue from their
date of original issuance and will be payable semiannually in arrears on April
15 and October 15 of each year, commencing April 15, 1997, at the rate of
10 3/4% per annum. The New Notes are redeemable, in whole or in part, at the
option of the Company on or after October 15, 2001, at the redemption prices set
forth herein plus accrued and unpaid interest to the date of redemption. In
addition, at any time or from time to time on or prior to October 15, 1999, the
Company, at its option, may redeem up to 33 1/3% of the aggregate principal
amount of the Notes originally issued with the net cash proceeds of one or more
Public Equity Offerings (as defined), at a redemption price equal to 110.75% of
the principal amount thereof plus accrued and unpaid interest to the date of
redemption; PROVIDED, that at least 66 2/3% of the aggregate principal amount of
the Notes originally issued remains outstanding after any such redemption. Upon
a Change of Control (as defined), each holder of the Notes will have the right
to require the Company to repurchase all or any part of such holder's Notes at a
repurchase price equal to 101% of the principal amount thereof plus accrued and
unpaid interest to the date of repurchase. In addition, under certain
circumstances the Company will be obligated to make an offer to repurchase the
Notes at 100% of the principal amount, plus accrued and unpaid interest to the
date of repurchase, with the net cash proceeds of certain sales or other
dispositions of assets. See "Description of the Notes."
The New Notes will be senior obligations of the Company secured by a first
priority pledge of the capital stock of each of the Company's existing
subsidiaries and any future direct and indirect Restricted Subsidiaries (as
defined), which become guarantors in accordance with the terms of the Indenture
(such existing subsidiaries, and any such additional guarantors, the
"Guarantors") and will rank PARI PASSU in right of payment with all other
existing and future senior indebtedness of the Company and senior in right of
payment to all existing and future subordinated indebtedness of the Company. The
New Notes will be unconditionally guaranteed (the "Guarantees"), jointly and
severally, by each of the Guarantors. The Guarantees will be senior unsecured
obligations of the Guarantors and will rank PARI PASSU in
right of payment with all other existing and future senior indebtedness of the
respective Guarantors and senior in right of payment to all existing and future
subordinated indebtedness of the respective Guarantors and may be released upon
the occurrence of certain events. The New Notes will rank PARI PASSU in right of
payment with all obligations under the New Credit Facility (as defined), except
that the obligations under the New Credit Facility, but not
(CONTINUED ON FOLLOWING PAGE)
------------------------
SEE "RISK FACTORS," BEGINNING ON PAGE 14, FOR A DISCUSSION OF CERTAIN
FACTORS THAT SHOULD BE CONSIDERED IN EVALUATING AN INVESTMENT IN THE NEW NOTES.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION (THE "COMMISSION") OR ANY STATE SECURITIES COMMISSION
NOR HAS THE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A
CRIMINAL OFFENSE.
------------------------
THE DATE OF THIS PROSPECTUS IS FEBRUARY 10, 1997.
<PAGE>
(CONTINUED FROM PREVIOUSE PAGE)
the New Notes or the Guarantees, will be secured by a first priority lien on all
of the Company's and the Guarantors' accounts receivable, inventory and general
intangibles (and certain related assets) and all proceeds thereof. The New Notes
and the Guarantees will be effectively subordinated to the obligations under the
New Credit Facility and to any other secured debt of the Company and the
Guarantors, to the extent of the assets serving as security therefor. On a pro
forma basis as of September 30, 1996, after giving effect to the consummation of
the Recapitalization Plan (as defined), the Company had approximately $116.1
million of senior indebtedness, including $1.1 million in indebtedness to which
the New Notes would have been effectively subordinated.
The Old Notes were originally issued and sold on October 23, 1996 in a
transaction (the "Initial Offering"), which was not registered under the
Securities Act of 1933, as amended (the "Securities Act"), in reliance upon the
exemptions provided in Rule 144A and Regulation D under the Securities Act.
Accordingly, the Old Notes may not be reoffered, resold or otherwise pledged,
hypothecated or transferred in the United States unless so registered or unless
an applicable exemption from the registration requirements of the Securities Act
is available.
The Company will accept for exchange any and all Old Notes which are
properly tendered in the Exchange Offer prior to 5:00 p.m., New York City time,
on March 14, 1997, unless extended by the Company in its sole discretion (the
"Expiration Date"). The Expiration Date will not in any event be extended to a
date later than March 31, 1997. Tenders of Old Notes may be withdrawn at any
time prior to 5:00 p.m., New York City time, on the Expiration Date. In the
event the Company terminates the Exchange Offer and does not accept for exchange
any Old Notes with respect to the Exchange Offer, the Company will promptly
return the Old Notes to the holders thereof. The Exchange Offer is not
conditioned upon any minimum principal amount of Old Notes being tendered for
exchange, but is otherwise subject to certain customary conditions. The Old
Notes may be tendered only in integral multiples of $1,000.
The New Notes are being offered hereunder in order to satisfy certain
obligations of the Company contained in the Registration Rights Agreement dated
October 18, 1996 (the "Registration Rights Agreement") by and among the Company,
the Guarantors and BT Securities Corporation, as the initial purchaser (the
"Initial Purchaser"), with respect to the initial sale of the Old Notes. Based
on interpretations by the staff of the Commission rendered to third parties in
similar transactions, the New Notes issued pursuant to the Exchange Offer in
exchange for Old Notes may be offered for resale, resold and otherwise
transferred by respective holders thereof (other than any such holder which is
an "affiliate" of the Company within the meaning of Rule 405 under the
Securities Act, without compliance with the registration and prospectus delivery
provisions of the Securities Act), provided that the New Notes are acquired in
the ordinary course of such holder's business and such holder has no arrangement
with any person to participate in the distribution of such New Notes and is not
engaged in and does not intend to engage in a distribution of the New Notes.
Each broker-dealer that receives New Notes for its own account pursuant to the
Exchange Offer must acknowledge that it will deliver a prospectus in connection
with any resale of such New Notes. The Letter of Transmittal states that by so
acknowledging and by delivering a prospectus, a broker-dealer will not be deemed
to admit that it is an "underwriter" within the meaning of the Securities Act.
This Prospectus, as it may be amended or supplemented from time to time, may be
used by broker-dealers in connection with resales of the New Notes received in
exchange for Old Notes if such New Notes were acquired by such broker-dealers as
a result of market-making activities or other trading activities. The Company
has agreed that, for a period of 180 days after the Expiration Date, it will
make this Prospectus available to any broker-dealer for use in connection with
any such resale. See "Plan of Distribution."
There has not previously been any public market for the New Notes. The
Company does not intend to list the New Notes on any securities exchange or to
seek approval for quotation through any automated quotation system. There can be
no assurance that an active market for the New Notes will develop. To the extent
that an active market for the New Notes does develop, the market value of the
New Notes will depend on market conditions (such as yields on alternative
investments), general economic conditions, the Company's financial condition,
and other factors. Such conditions might cause the New Notes, to the extent that
they are actively traded, to trade at a significant discount from face value.
See "Risk Factors -- Absence of Public Market."
There are no proceeds to the Company from the exchange of the New Notes for
Old Notes pursuant to the Exchange Offer. The Company has agreed to pay the
expenses incident to the Exchange Offer.
NO PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFERING MADE HEREBY TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THE PROSPECTUS,
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITY
OTHER THAN THE NEW NOTES OFFERED HEREBY, NOR DOES IT CONSTITUTE AN OFFER TO SELL
OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY
PERSON IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH AN OFFER OR
SOLICITATION TO SUCH PERSON.
Until May 19, 1997 (90 days after commencement of the Exchange Offer), all
dealers effecting transactions in the New Notes, whether or not participating in
the Exchange Offer, may be required to deliver a Prospectus.
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN
CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND FINANCIAL DATA, INCLUDING
THE CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO, INCLUDED ELSEWHERE IN
THIS PROSPECTUS. UNLESS OTHERWISE STATED IN THIS PROSPECTUS, REFERENCES TO (I)
"SPINNAKER" OR THE "COMPANY" SHALL MEAN SPINNAKER INDUSTRIES, INC. AND ITS
CONSOLIDATED SUBSIDIARIES, (II) "CENTRAL PRODUCTS" SHALL MEAN CENTRAL PRODUCTS
COMPANY, A WHOLLY-OWNED SUBSIDIARY OF SPINNAKER AND A GUARANTOR AND (III)
"BROWN-BRIDGE" SHALL MEAN BROWN-BRIDGE INDUSTRIES, INC., A WHOLLY-OWNED
SUBSIDIARY OF SPINNAKER, AND A GUARANTOR. MARKET INFORMATION PROVIDED HEREIN
APPLIES TO THE UNITED STATES MARKET EXCEPT WHERE NOTED OTHERWISE.
THE COMPANY
Spinnaker is a leading manufacturer and marketer of adhesive carton sealing
tape and adhesive-backed label stock, primarily for the carton sealing tape and
pressure sensitive label stock markets. The Company's strategy is to focus on
the growing pressure sensitive markets for carton sealing tape and label stock
applications, while pursuing acquisitions within the adhesive-backed materials
industry that complement its existing businesses. The Company's products are
grouped into two principal businesses that accounted for the following
percentages of pro forma 1995 net sales: pressure and water sensitive carton
sealing tape (54%) and adhesive-backed label stock (43%). For the fiscal year
ended December 31, 1995, the Company had net sales of $226.6 million and
Adjusted EBITDA (as defined) of $20.5 million on a pro forma basis after giving
effect to the adjustments described under "Unaudited Pro Forma Financial Data."
Central Products, founded in 1917, is a leading manufacturer of carton
sealing tape and offers the broadest line of such products in the United States.
According to Company estimates, Central Products has a greater than 50% share of
the water sensitive carton sealing tape market, where its revenues are more than
twice those of its next largest competitor. In the pressure sensitive carton
sealing tape market, Central Products is one of the three largest manufacturers
for carton sealing tape applications, and the Company believes that Central
Products is the only manufacturer of all pressure sensitive technologies
(acrylic, hot melt and natural rubber), which provides the Company with a
competitive advantage by allowing it to meet the broadest range of application
requirements of its customers. Its branded and private label products are used
primarily for commercial packaging applications and are sold through its
national sales force to over 1,500 paper and office products distributors
nationwide, including the largest national distributors of paper products, for
resale to over 20,000 end users. In 1995, Central Products entered into a
private label supply agreement with Unisource Worldwide, Inc. ("Unisource"), the
largest United States distributor of office paper products, to supply a complete
line of private label carton sealing tape products, and also became a major
vendor to ResourceNet International ("ResourceNet"), the second largest
distributor of paper products in the United States, to supply a full line of
private label water sensitive and pressure sensitive carton sealing tape
products. The Company believes that these arrangements with key customers
distinguish the Company's leading position as the only one-stop manufacturer of
private label products in the carton sealing tape market.
Brown-Bridge was founded in 1928 and, according to Company estimates, is the
fifth largest manufacturer of adhesive-backed label stock and is the only
manufacturer of all adhesive-backed paper technologies (pressure, water and heat
sensitive), which enables the Company to provide a broad range of standard and
custom adhesive-backed label stock products that meet the design specifications
of its customers. Brown-Bridge offers a full line of more than 1,500 variations
of adhesive-backed label stock and sells its products in roll and sheet form to
over 1,000 printers, paper merchants and industrial users. Customers convert its
label stock into labels used for a broad range of end use applications,
including bar-coding, mailing and shipping, packaging for pharmaceutical, food
and other consumer products, office identification and business forms, postage
stamp stock, decorative labels and other specialty industrial uses. Brown-Bridge
is the largest supplier of pressure sensitive postage stamp stock for use by the
United States Postal Service (the "Postal Service").
1
<PAGE>
The Company expects to benefit from strong growth in the adhesive-backed
materials industry, particularly in pressure sensitive applications in the
Company's principal markets for carton sealing tape and adhesive-backed label
stock. According to independent studies, demand for pressure sensitive tape for
packaging and sealing applications is projected to grow approximately 7% per
year, and demand for pressure sensitive label stock is projected to increase
approximately 8% per year. See "Industry."
Carton sealing tape is manufactured in continuous rolls by combining three
distinct layers: a release agent, a backing material such as paper or film onto
which the release agent is layered and an adhesive layer which forms the
underside of the backing material. Label stock, the most important component of
the label, is manufactured in continuous rolls or sheets by using three
components: an adhesive layer such as rubber or acrylic, a backing material such
as paper or plastic and a silicone coated release liner from which the label is
removed prior to application.
The Company also manufactures and markets industrial process equipment and
air pollution control scrubbers through its Entoleter, Inc. ("Entoleter")
subsidiary.
2
<PAGE>
The following chart illustrates the Company's principal products in the
adhesive-backed materials industry, applications, customers and selected trade
names.
<TABLE>
<S> <C> <C>
SPINNAKER
CENTRAL PRODUCTS BROWN-BRIDGE
</TABLE>
<TABLE>
<S> <C> <C>
NET $121.9 MILLION $97.2 MILLION
SALES: (1)
PRODUCTS: Carton Sealing Tape Adhesive-Backed Label Stock
-Pressure Sensitive -Pressure Sensitive - EASY
-Acrylic- EXCELLENT CLARITY APPLICATION;
-Natural Rubber - TEMPERATURE HIGHLY VERSATILE
RESISTANT -Water Sensitive - FOR BUSINESS FORMS
-Hot Melt - HIGH-SPEED APPLICATION AND
-Water Sensitive POSTAGE STAMPS
-Fiberglass Reinforced - STRONGEST -Heat Sensitive - CLEAN SEAL; FOR
BOND GROCERY
-Paper - BIODEGRADABLE; FOR LIGHT AND PHARMACEUTICAL PRODUCTS
LOADS
-Box - BIODEGRADABLE; FOR BOX
CONSTRUCTION
APPLICATIONS: -Carton sealing and packaging of goods -Electronic data processing labels,
for shipment by manufacturing, retail including bar-coding
and distribution companies -Labeling for pharmaceutical, food and
-General purpose packaging, sealing other consumer products
and repair -Shipping and packaging
-Postage stamp stock
-Mailing and business forms
CUSTOMERS: -Merchants/Distributors -Independent label printers
-National chains -Paper merchants
-Regional chains -End users
-Buying groups
-Independent distributors
SELECTED -Alltac-Registered Trademark- -Brown-Bridge-Registered Trademark-
TRADE NAMES: -Central-Registered Trademark- -Pancake-Registered Trademark-
-Glasseal-Registered Trademark- -Heat Seal-Registered Trademark-
-Green CoreTM -Strip-Tac-Registered Trademark-
-Tru-SealTM -Strip-Tac Plus-Registered Trademark-
</TABLE>
(1) Reflects combined pro forma net sales generated by Central Products and
actual net sales generated by Brown-Bridge for the twelve months ended
December 31, 1995.
3
<PAGE>
COMPETITIVE STRENGTHS
The Company attributes its leading market position and continued
opportunities for growth to the following competitive strengths:
-MARKET LEADER. The Company has a leading position in the carton sealing
tape and adhesive-backed label stock markets. According to Company
estimates, Central Products has a greater than 50% share in the water
sensitive carton sealing tape market, where its revenues are more than
twice those of its next largest competitor. The Company is one of the three
largest manufacturers in the rapidly growing pressure sensitive carton
sealing tape market. In addition, the Company estimates that it is the
fifth largest manufacturer of adhesive-backed label stock. The Company
believes it has achieved its leadership position primarily by manufacturing
the broadest assortment of high quality products in its markets and
providing solutions for customers' specific application requirements.
-BROAD PRODUCT LINE. The Company believes it manufactures the most
extensive line of water sensitive and pressure sensitive carton sealing
tapes. The Company also manufactures a full line of pressure, water and
heat sensitive adhesive-backed label stock. As a result of its broad
product line, the Company has established itself as a one-stop manufacturer
and is well positioned to meet all of its customers' carton sealing tape
and label stock needs.
-LONG-TERM CUSTOMER RELATIONSHIPS. The top ten customers at each of the
Company's primary subsidiaries have conducted business with them for
approximately twelve years on average and collectively accounted for
approximately 30% of such subsidiary's sales during fiscal 1995. During
fiscal 1995, no customer accounted for more than 10% of the Company's
sales. In 1995, Central Products entered into an agreement to supply
Unisource with a complete line of private label carton sealing tape
products until December 31, 1997, and became a major vendor to ResourceNet,
supplying it with a full line of private label carton sealing tape
products. As carton sealing tape customers continue to simplify their
purchasing organizations and consolidate their relationships among selected
national suppliers, the Company believes it will continue to benefit from
this consolidation trend and become an increasingly important strategic
partner to them. Brown-Bridge, with the awarding of two supply agreements
for a total of up to $35 million of pressure sensitive postage stamp stock
and its historical water sensitive postage stamp stock business, expects to
provide the Postal Service with a substantial majority of its postage stamp
stock requirements for the next two years.
-COMMITMENT TO QUALITY. The Company believes that its commitment to
providing consistent high quality products and services at competitive
prices forms the basis for its strong and diversified customer
relationships. For example, Brown-Bridge has implemented its Commitment to
Excellence ("C(2)E") program, which focuses on reducing cycle time in order
to improve operating efficiency, delivery, quality and asset management.
This program has reduced production costs, improved material handling,
reduced machine setup time, increased on-time delivery, decreased order
fulfillment costs and has reduced working capital requirements at
Brown-Bridge. As a result, since the Company's acquisition of Brown-Bridge
in September 1994, the number of inventory turns has increased and the
number of accounts receivable days outstanding has been reduced. Subsequent
to the acquisitions of Brown-Bridge and Central Products, the Company has
also invested in new information technology systems, which it believes will
improve quality at all of its operating subsidiaries.
-STRONG MANUFACTURING CAPABILITIES. The Company's manufacturing
capabilities distinguish it as the only manufacturer of all adhesive
technologies for carton sealing tape and adhesive-backed label stock. The
Company's operations utilize advanced manufacturing methods and
sophisticated equipment to produce carton sealing tape and label stock for
a wide variety of standard and custom applications requiring pressure,
water and heat sensitive technologies. The Company believes its strong and
flexible manufacturing capabilities enable it to maintain high product
quality and low operating costs and respond to customers' needs quickly and
efficiently.
4
<PAGE>
BUSINESS STRATEGY
The Company's strategy is to enhance its market position by focusing on the
following:
-PURSUE ACQUISITIONS. The Company plans to pursue acquisitions which
complement its position in the adhesive-backed materials industry. The
Company has experience identifying and integrating acquisitions with its
existing businesses, as evidenced by its acquisitions of Central Products
and Brown-Bridge. The Company believes that the carton sealing tape and
label stock markets are fragmented, as approximately 45% of the carton
sealing tape market and approximately 30% of the adhesive-backed label
stock market is held by numerous competitors that are smaller than the
Company. The Company intends to use its existing businesses as platforms to
take advantage of consolidation opportunities to acquire complementary
product lines or businesses to increase its market share in the
adhesive-backed materials industry.
-DEVELOP KEY CUSTOMERS. The Company intends to focus on strengthening its
relationships with large distributors for its carton sealing products. As
customers consolidate their purchases among selected national suppliers,
the Company will continue to pursue strategic partnerships, such as those
with Unisource and ResourceNet, to supply a full line of carton sealing
tape products to meet all of their requirements. For its label stock
customers, the Company intends to focus on expanding its customer base in
niche markets by working with customers to develop custom product
applications.
-INTRODUCE NEW PRODUCTS. The Company intends to target new product growth
opportunities to increase market share. For example, the Company worked
closely with a supplier to the Postal Service to develop new pressure
sensitive roll, booklet and sheet stamp products to meet the needs of this
growing market segment. The Company has utilized existing manufacturing
capabilities to create product line extensions such as over-laminating film
for use in labeling applications. The Company believes that the breadth of
its product line, commitment to product quality and reputation for
innovation will continue to enable it to increase its market share through
the introduction of new products.
-IMPROVE OPERATING EFFICIENCIES. The Company intends to improve overall
operating efficiencies through its C(2)E program at Brown-Bridge and other
operating improvement programs at Central Products. These programs will
focus on a variety of efficiency initiatives, such as improving through-
put, reducing working capital needs, and reducing overall costs. For
example, the expansion of silicone coating capacity at Brown-Bridge is
intended to reduce costs connected with outsourcing silicone coated liner,
which management estimates will be approximately $2.2 million during fiscal
1996. Various contingencies could affect the realization of the projected
cost savings. See "Business -- Business Strategy."
-EXPAND PRODUCTION CAPACITY. In order to take advantage of anticipated
growth in its existing markets, the Company intends to expand production
capacity at both Brown-Bridge and Central Products to meet increasing
customer demand. The Company plans to invest approximately $10 million over
the next two years, which includes the silicone coater expansion, to add
capacity to meet anticipated demand for pressure sensitive carton sealing
tape and add pressure sensitive coating capacity for label stock which is
currently outsourced. By adding production capacity, the Company expects to
increase sales volume and market share while improving overall gross
margins.
-FOCUS ON CUSTOMER SERVICE. The Company intends to maintain its reputation
for excellent customer service. The Company has recently completed a new
management information system at Brown-Bridge and is upgrading its computer
system at Central Products in order to provide customer service departments
with on-line information to reduce the time and cost associated with order
fulfillment. The Company's research and development department provides its
customers with custom label stock solutions for unique end user
applications. In addition, the Company conducts frequent product education
and technical support programs for its customers at certain of its carton
sealing tape facilities.
5
<PAGE>
THE EXCHANGE OFFER
<TABLE>
<S> <C>
The New Notes..................... The forms and terms of the New Notes are identical in
all material respects to the terms of the Old Notes for
which they may be exchanged pursuant to the Exchange
Offer, except for certain transfer restrictions,
registration rights and penalty interest provisions
relating to the Old Notes described below under
"Description of the Notes" and "Old Notes Registration
Rights."
The Exchange Offer................ The Company is offering to exchange up to $115,000,000
aggregate principal amount of the New Notes for up to
$115,000,000 aggregate principal amount of the Old
Notes. Old Notes may be exchanged only in integral
multiples of $1,000.
Expiration Date; Withdrawal of
Tender........................... The Exchange Offer will expire at 5:00 p.m., New York
City time, on March 14, 1997, or such later date and
time to which it is extended by the Company (the
"Expiration Date"). The tender of Old Notes pursuant to
the Exchange Offer may be withdrawn at any time prior to
the Expiration Date. The Expiration Date will not in any
event be extended to a date later than March 31, 1997.
Any Old Notes not accepted for exchange for any reason
will be returned without expense to the tendering holder
thereof as promptly as practicable after the expiration
or termination of the Exchange Offer.
Certain Conditions to the
Exchange Offer................... The Exchange Offer is subject to certain customary
conditions, which may be waived by the Company. See "The
Exchange Offer -- Certain Conditions to the Exchange
Offer."
Procedures for Tendering Old
Notes............................ Each holder of Old Notes wishing to accept the Exchange
Offer must complete, sign and date the Letter of
Transmittal, or a facsimile thereof, in accordance with
the instructions contained herein and therein, and mail
or otherwise deliver such Letter of Transmittal, or such
facsimile, together with such Old Notes and any other
required documentation to the Exchange Agent (as
defined) at the address set forth herein. By executing
the Letter of Transmittal, each holder will represent to
the Company that, among other things, (i) any New Notes
to be received by it will be acquired in the ordinary
course of its business, (ii) it has no arrangement with
any person to participate in the distribution of the New
Notes and (iii) it is not an "affiliate," as defined in
Rule 405 of the Securities Act, of the Company or, if it
is an affiliate, it will comply with the registration
and prospectus delivery requirements of the Securities
Act to the extent applicable.
Interest on the New Notes......... Interest on the New Notes will accrue from the date of
issuance (the "Issue Date") at the rate of 10 3/4% per
annum, and will be payable semi-annually in arrears on
each April 15 and October 15, commencing April 15, 1997.
Holders of the New Notes will also on April 15, 1997
receive an amount equal to the accrued interest on the
Old Notes. Interest on the Old Notes accepted for
exchange will cease to accrue upon issuance of the New
Notes.
</TABLE>
6
<PAGE>
<TABLE>
<S> <C>
Special Procedures for Beneficial
Owners........................... Any beneficial owner whose Old Notes are registered in
the name of a broker, dealer, commercial bank, trust
company or other nominee and who wishes to tender such
Old Notes in the Exchange Offer should contact such
registered holder promptly and instruct such registered
holder to tender on such beneficial owner's behalf. If
such beneficial owner wishes to tender on such owner's
own behalf, such owner must, prior to completing and
executing the Letter of Transmittal and delivering his
Old Notes, either make appropriate arrangements to
register ownership of the Old Notes in such owner's name
or obtain properly completed bond power from the
registered holder. The transfer of registered ownership
may take considerable time and may not be able to be
completed prior to the Expiration Date.
Guaranteed Delivery Procedure..... Holders of Old Notes who wish to tender their Old Notes
and whose Old Notes are not immediately available or who
cannot deliver their Old Notes, the Letter of
Transmittal or any other documents required by the
Letter of Transmittal to the Exchange Agent, prior to
the Expiration Date, must tender their Old Notes
according to the guaranteed delivery procedures set
forth in "The Exchange Offer -- Guaranteed Delivery
Procedures."
Registration Requirements......... The Company has agreed to use its best efforts to
consummate by June 5, 1997, the registered Exchange
Offer pursuant to which holders of the Old Notes will be
offered an opportunity to exchange their Old Notes for
the New Notes which will be issued without legends
restricting the transfer thereof. In the event that
applicable interpretations of the staff of the
Commission do not permit the Company to effect the
Exchange Offer or in certain other circumstances, the
Company has agreed to file a Shelf Registration
Statement covering resales of the Old Notes and to use
its best efforts to cause such Shelf Registration
Statement to be declared effective under the Securities
Act and, subject to certain exceptions, keep such Shelf
Registration Statement effective until three years after
the original issuance of the Old Notes. If the Company
fails to consummate the Exchange Offer by June 5, 1997
or if the Company is required to file a Shelf Registra-
tion Statement and such Shelf Registration Statement is
not declared effective or does not remain effective
under the Securities Act as set forth under "Old Notes
Registration Rights," the Company will be subject to
certain interest rate penalties.
Certain United States Federal
Income Tax Consequences.......... For a discussion of certain federal income tax
considerations relating to the exchange of the New Notes
for the Old Notes, see "Certain United States Federal
Income Tax Consequences."
Use of Proceeds................... There will be no proceeds to the Company from the
exchange of the New Notes for Old Notes pursuant to the
Exchange Offer.
Exchange Agent.................... The Chase Manhattan Bank is the Exchange Agent. The
address and telephone number of the Exchange Agent are
set forth in "The Exchange Offer -- Exchange Agent."
</TABLE>
7
<PAGE>
TERMS OF THE NEW NOTES
The form and terms of the New Notes are the same as the form and terms of
the Old Notes except that the issuance of the New Notes has been registered
under the Securities Act and, therefore, will not bear legends restricting the
transfer thereof. See "Description of the Notes."
<TABLE>
<S> <C>
Securities........................ $115,000,000 aggregate principal amount of 10 3/4%
Senior Secured Notes due 2006, Series B.
Issuer............................ Spinnaker Industries, Inc.
Maturity Date..................... October 15, 2006
Interest Payment Dates............ Interest will accrue from the date of original issuance
and will be payable semiannually in arrears on April 15
and October 15 of each year, commencing April 15, 1997.
Ranking........................... The New Notes will be senior secured obligations of the
Company and will rank PARI PASSU in right of payment
with all existing and future senior indebtedness of the
Company and senior in right of payment to all existing
and future subordinated indebtedness of the Company. The
New Notes will rank PARI PASSU in right of payment with
all obligations under the New Credit Facility, except
that the obligations under the New Credit Facility, but
not the New Notes or the Guarantees, will be secured by
a first priority lien on all of the Company's and the
Guarantors' accounts receivable, inventory and general
intangibles (and certain related assets) and all
proceeds thereof. The New Notes and the Guarantees will
be effectively subordinated to the obligations under the
New Credit Facility and to any other secured debt of the
Company and the Guarantors, to the extent of the assets
serving as security therefor. On a pro forma basis, as
of September 30, 1996, after giving effect to the
consummation of the Recapitalization Plan, the Company
would have had approximately $116.1 million of senior
indebtedness, including $1.1 million of indebtedness to
which the New Notes would have been effectively
subordinated.
Optional Redemption............... The Notes are redeemable, in whole or in part, at the
option of the Company on or after October 15, 2001, at
the redemption prices set forth herein plus accrued and
unpaid interest to the date of redemption. In addition,
at any time or from time to time on or prior to October
15, 1999, the Company, at its option, may redeem up to
33 1/3% of the aggregate principal amount of the Notes
originally issued with the net cash proceeds of one or
more Public Equity Offerings at a redemption price equal
to 110.75% of the principal amount thereof plus accrued
and unpaid interest to the date of redemption; PROVIDED,
that at least 66 2/3% of the aggregate principal amount
of the Notes originally issued remains outstanding after
any such redemption. See "Description of the Notes --
Redemption."
Change of Control................. Upon a Change of Control, each holder of the Notes will
have the right to require the Company to repurchase all
or any part of such
</TABLE>
8
<PAGE>
<TABLE>
<S> <C>
holder's Notes at a repurchase price equal to 101% of
the principal amount thereof plus accrued and unpaid
interest to the date of repurchase. See "Description of
the Notes -- Change of Control" and "-- Certain
Definitions."
Security.......................... The New Notes will be senior obligations of the Company
secured by a first priority pledge of the capital stock
of each of the Company's existing subsidiaries and any
future direct and indirect Restricted Subsidiaries which
become Guarantors in accordance with the terms of the
Indenture. See "Description of the Notes -- Security;"
-- "Certain Covenants -- Company to Cause Certain
Subsidiaries to Become Guarantors."
Guarantees........................ The New Notes will be unconditionally guaranteed,
jointly and severally, by each of the Guarantors. The
Guarantees will be senior unsecured obligations of the
Guarantors, and will rank PARI PASSU in right of payment
with all other existing and future senior indebtedness
of the respective Guarantors and senior in right of
payment to all existing and future subordinated
indebtedness of the respective Guarantors and may be
released upon the occurrence of certain events. The
Guarantees will be effectively subordinated to the
obligations under the New Credit Facility and to any
other secured debt of the Guarantors to the extent of
the assets serving as security therefor. See
"Description of the Notes -- Ranking and Guarantees."
Certain Covenants................. The Indenture will impose certain limitations on the
ability of the Company and its Restricted Subsidiaries
to, among other things, incur additional indebtedness,
incur liens, pay dividends or make certain other
restricted payments, consummate certain asset sales,
enter into certain transactions with affiliates, issue
preferred stock, merge or consolidate with any other
person or sell, assign, transfer, lease, convey or
otherwise dispose of all or substantially all of the
assets of the Company and its Restricted Subsidiaries.
</TABLE>
For additional information regarding the Notes, see "Description of the
Notes."
RECAPITALIZATION PLAN
The gross proceeds of $115 million from the Initial Offering were used to
consummate a Recapitalization Plan, which was intended to enhance the Company's
operating and financial flexibility. The Recapitalization Plan extended the
weighted average life to maturity of the Company's indebtedness, simplified the
Company's capital structure and provided the Company with access to additional
borrowings. The elements of the Recapitalization Plan were: (i) the issuance of
the Old Notes in the Offering; (ii) the entry into the New Credit Facility,
which provides a maximum aggregate borrowing availability of $40 million to the
Guarantors; (iii) the repayment of substantially all of the existing
indebtedness of the Company with the proceeds of the Offering; and (iv) the
purchase of all of the common stock of the Company's Brown-Bridge subsidiary
held by the Minority Stockholders (as defined). See "Recapitalization Plan."
BACKGROUND
The Company was incorporated in Delaware in 1941 under the name Safety
Railway Service Corporation and was engaged in industrial manufacturing. In
1987, Lynch Corporation ("Lynch"), an Indiana
9
<PAGE>
corporation listed on the American Stock Exchange, purchased approximately 82%
of the common stock of the Company from a group of investors through its wholly
owned subsidiary, Lynch Manufacturing Corporation ("LMC"). At that time, the
Company was engaged solely in manufacturing industrial processing equipment
through its Entoleter subsidiary. In June 1994, Boyle, Fleming, George & Co.
("BF") entered into a management agreement (the "Management Agreement") with the
Company to provide management services and growth through acquisitions that
would expand the Company's business from its $6.4 million revenue base at
Entoleter in fiscal 1993 (the last full year prior to the Brown-Bridge
Acquisition) into other industrial sectors. On September 19, 1994, the Company,
together with the Minority Stockholders, purchased the label stock business of
Kimberly-Clark Corporation through its newly-formed Brown-Bridge subsidiary (the
"Brown-Bridge Acquisition"). The Company was renamed Spinnaker Industries, Inc.
on October 6, 1994, and on October 4, 1995, the Company acquired the carton
sealing tape division of Alco Standard Corporation ("Alco") through its newly
formed Central Products subsidiary (the "Central Products Acquisition").
Primarily as a result of those two acquisitions, the Company's revenues
increased to $226.6 million on a pro forma basis for the year ended December 31,
1995. Effective August 31, 1996, the Management Agreement with BF was
terminated. Mr. Richard J. Boyle continues to be the Chairman and Chief
Executive Officer and Mr. Ned N. Fleming, III continues to be the President of
the Company. See "Management -- Certain Transactions."
The Company's common stock, no par value (the "Common Stock"), and Class A
Common Stock, no par value (the "Class A Common Stock"), are traded on the
Nasdaq Small Cap Market under the symbols "SPNI" and "SPNI-A," respectively. The
Company's executive offices are located at 600 N. Pearl Street, Suite 2160,
Dallas, Texas, 75201. The Company's telephone number is (214) 855-0322.
RISK FACTORS
See "Risk Factors," which begins at page 14 for a discussion of certain
factors that should be considered in evaluating an investment in the New Notes.
10
<PAGE>
SUMMARY HISTORICAL AND UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA
The following table sets forth summary historical and unaudited pro forma
consolidated financial information of the Company. The summary historical
consolidated financial information of the Company for the three years ended
December 31, 1995 have been derived from the Company's audited financial
statements. The summary historical consolidated financial information as of and
for the nine months ended September 30, 1995 and 1996 are derived from unaudited
financial records but, in the opinion of management, include all adjustments
necessary for a fair presentation of those periods. The results of operations of
interim periods are not necessarily indicative of those for a full year. The pro
forma and other data for the year ended December 31, 1995 and nine months ended
September 30, 1996 give effect to the transactions consummated pursuant to the
Recapitalization Plan and, in the case of the pro forma financial information
for the year ended December 31, 1995, the Central Products Acquisition, as if
such transactions had occurred on January 1, 1995, and the pro forma balance
sheet data gives effect to the transactions consummated pursuant to the
Recapitalization Plan as if such transactions had occurred on September 30,
1996. The following information should be read in conjunction with the
"Unaudited Pro Forma Financial Data," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the financial statements of
Spinnaker and the notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------------------- -------------------------------------
PRO FORMA PRO FORMA
1993 1994 1995 1995 (1) 1995 1996 1996 (1)
--------- --------- --------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
(UNAUDITED) (UNAUDITED)
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales.................................. $ 6,371 $ 33,632 $ 135,289 $ 226,558 $ 77,716 $ 184,358 $ 184,358
Cost of sales.............................. 4,393 28,506 117,737 191,714 67,740 159,163 159,163
--------- --------- --------- ----------- ----------- ----------- -----------
Gross profit............................... 1,978 5,126 17,552 34,844 9,976 25,195 25,195
Selling, general and administrative........ 1,922 4,404 11,763 22,902 7,473 16,643 16,643
--------- --------- --------- ----------- ----------- ----------- -----------
Operating income........................... 56 722 5,789 11,942 2,503 8,552 8,552
Interest expense........................... 104 768 4,468 13,346 1,942 7,020 9,908
Other income (expense)..................... 167 124 (368) 7 13 (427) (52)
Income taxes (benefit)..................... -- 70 112 (573) (43) 453 (577)
Minority interest.......................... -- 98 280 -- 146 299 0
--------- --------- --------- ----------- ----------- ----------- -----------
Net income (loss).......................... $ 119 $ (90) $ 561 $ (824) $ 471 $ 353 $ (831)
--------- --------- --------- ----------- ----------- ----------- -----------
--------- --------- --------- ----------- ----------- ----------- -----------
OTHER DATA:
EBITDA (2)................................. $ 354 $ 1,257 $ 7,572 $ 16,984 $ 3,285 $ 12,492 $ 12,867
Adjusted EBITDA (3)........................ -- -- -- 20,467 -- -- --
Depreciation and amortization.............. 131 411 2,151 5,035 769 4,367 4,367
Capital expenditures....................... 91 450 1,620 2,641 1,038 7,260 7,260
Ratio of earnings to fixed charges (4)..... 2.1x 1.1x 1.2x -- 1.3x 1.2x --
<CAPTION>
AT SEPTEMBER 30, 1996
------------------------
ACTUAL PRO FORMA
----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total assets............................... $ 152,501 $ 156,973
Total indebtedness......................... 106,242 116,064
Stockholders' equity....................... 13,915 12,601
</TABLE>
11
<PAGE>
(1) Gives pro forma effect to the Recapitalization Plan and the Central Products
Acquisition (in the case of the pro forma financial information for the year
ended December 31, 1995). See "Recapitalization Plan."
(2) EBITDA represents the sum of net income (loss) before minority interest,
income taxes, interest expense, depreciation and amortization. EBITDA is
presented because it is a widely accepted financial indicator of a company's
ability to incur or service indebtedness. However, EBITDA should not be
considered as an alternative to net income as a measure of the Company's
operating results or to cash flows as a measure of its liquidity.
(3) Adjusted EBITDA reflects (x) certain pro forma cost reductions (increases)
associated with manufacturing operations at Linden, New Jersey ("Linden"),
which were closed by Alco in June of 1995 (the "Alco Plant Closing") prior
to (and which Linden operations were not acquired pursuant to) the Central
Products Acquisition, (y) the addition back to EBITDA of certain
non-recurring plant closing costs incurred in connection with the Alco Plant
Closing and (z) the addition back to EBITDA of certain unusual reengineering
related consulting charges incurred at Brown-Bridge in connection with
consulting agreements terminated in October 1995.
The Company had sufficient production capacity in Menasha, Wisconsin
("Menasha") to absorb all production needs associated with the Alco Plant
Closing, although certain increased costs were (and will continue to be)
incurred at Menasha as a result of the transfer of Linden's production to
Menasha. Cost savings include the Company's elimination of redundant factory
overhead expenses, such as employee costs (indirect labor, factory
supervision, inspection, quality control and purchasing), and building
operating costs (heat, light and utility), associated with maintaining water
sensitive carton sealing tape production capability at both Menasha and
Linden. The savings are partially offset by increased shipping costs
resulting from the need to ship goods from only one production facility, and
increased manufacturing overhead and direct labor charges at Menasha as a
result of the transfer of production to Menasha. The net number of personnel
reduced after the Alco Plant Closing was 74.
To calculate the pro forma adjustments in arriving at Adjusted EBITDA
related to the Alco Plant Closing, (1) Net Manufacturing Cost Reductions, as
shown in the table below, is an amount equal to (i) the amount by which the
actual aggregate direct labor charges and manufacturing overhead expense of
Central Products (which included both the Linden and Menasha facilities) for
the first six months of 1995 exceeded the actual direct labor charges and
manufacturing overhead expense of Central Products (which included only de
minimus amounts related to the closed Linden facility) for the last six
months of 1995 (which amount represents management's estimate of the direct
labor cost and manufacturing overhead expense reductions which would have
been realized in the first six months of 1995 if the Alco Plant closing had
occurred prior to January 1, 1995), minus (ii) the $577 thousand of rental
and property tax expense savings already added back in determining pro forma
EBITDA as described in footnote 1 in the Notes to Unaudited Pro Forma
Statement of Operations, (2) Increased Shipping costs as shown in the table
below is an amount equal to the amount by which actual freight costs of
Central Products for the last six months of 1995 exceeded the actual freight
costs of Central Products for the first six months of 1995 (which amount
represents management's estimate of the shipping cost increases which would
have been incurred in the first six months of 1995 if the Alco Plant Closing
had occurred prior to January 1, 1995), (3) Research and Development Savings
as shown in the table below is an amount equal to the amount by which actual
research and development expenses of Central Products for the first six
months of 1995 exceeded the actual research and development expenses of
Central Products for the second six months of 1995 (which amount represents
management's estimate of the cost savings which would have been realized
during the first six months of 1995 if the Alco Plant Closing, and reduction
of research and development personnel in connection therewith, had occurred
prior to January 1, 1995) and (4) Accounting and Administration Savings as
shown in the table below is an amount equal to the amount by which actual
accounting and administration costs of Central Products incurred at its
Linden Facility for the first six months of 1995 exceeded the actual
accounting and
12
<PAGE>
administration costs incurred by Central Products at its Linden Facility for
the second six months of 1995 (which amount represents management's estimate
of the cost savings which would have been realized during the first six
months of 1995 if the Alco Plant Closing had occurred prior to January 1,
1995). Physical production of water sensitive carton sealing tape at the
Linden Facility ceased in June 1995. The Company believes that its combined
volume of water sensitive carton sealing tape production (which was the
production shifted from Linden to Menasha) was relatively constant in the
first versus second halves of 1995 and, therefore, that the comparisons of
the first half to the second half of 1995 as described above represent a
reasonable estimate of the cost savings as described above. Alco Plant
Closing Costs as shown below reflect certain actual one-time costs incurred
in connection with the Alco Plant Closing (including severance pay, costs to
move machinery, equipment lease buyout costs and other similar items). The
following table summarizes the above adjustments:
<TABLE>
<CAPTION>
(DOLLARS IN
THOUSANDS)
<S> <C>
EBITDA............................................................................ $ 16,984
Pro Forma Adjustments to EBITDA for the first six months of 1995 Related to Alco
Plant Closing:
Net Manufacturing Cost Reductions............................................... 1,866
Increased Shipping Costs........................................................ (33)
Research and Development Savings................................................ 145
Accounting and Administration Savings........................................... 85
-------
Total Pro Forma Adjustments as Described Above.................................... 2,063
Alco Plant Closing Costs.......................................................... 858
Brown-Bridge Reenginnering Related Consulting Charges............................. 562
-------
Adjusted EBITDA................................................................... $ 20,467
-------
-------
</TABLE>
In determining Adjusted EBITDA, the Linden Plant Closing has not been
treated as a disposition of a business. In particular, revenues associated
with the Linden operations have not been eliminated. The Company believes
that there was no loss of revenues in 1995 because the Linden production was
shifted to Menasha. While presented with numerical specificity, the
adjustments relating to the Alco Plant Closing set forth above and used in
determining Adjusted EBITDA were prepared on the basis described above and
represent management's estimates of certain pro forma savings which would
have been realized if the Alco Plant Closing had occurred prior to January
1, 1995. The pro forma adjustments as described above are not necessarily
indicative of the actual cost savings which would have been realized had the
Alco Plant Closing occurred prior to January 1, 1995.
Adjusted EBITDA is not presented in accordance with Regulation S-X; however,
management believes that it provides useful information to investors. As
with EBITDA, Adjusted EBITDA should not be considered as an alternative to
net income as a measure of the Company's operating results or to cash flows
as a measure of its liquidity.
(4) For purposes of calculating the ratio of earnings to fixed charges, earnings
represent income (loss) before income taxes and fixed charges. Fixed charges
consist of the total (i) interest, whether expensed or capitalized; (ii)
amortization of debt expense and discount or premium relating to any
indebtedness, whether expensed or capitalized; and (iii) that portion of
rental expense considered to represent interest cost (assumed to be
one-third). Earnings for pro forma 1995 and the pro forma nine months ended
September 30, 1996 were insufficient to cover fixed charges by $1,347,000
and $1,408,000, respectively.
13
<PAGE>
RISK FACTORS
Prospective investors should carefully consider the following factors in
addition to the other information set forth in this Prospectus before making an
investment in the Notes offered hereby.
SUBSTANTIAL LEVERAGE AND ABILITY TO SERVICE DEBT
In connection with the acquisitions of its principal businesses, the Company
and its subsidiaries have incurred significant indebtedness. On a pro forma
basis, after giving effect to the Recapitalization Plan as if it had occurred on
September 30, 1996, the Company's aggregate consolidated indebtedness would have
been $116.1 million and its stockholders' equity would have been $12.6 million.
In addition, subject to the restrictions in the New Credit Facility and the
Indenture, the Company may incur additional indebtedness from time to time to
finance acquisitions or capital expenditures or for other purposes. See
"Description of the New Credit Facility." See "Summary Historical and Unaudited
Pro Forma Consolidated Financial Data" elsewhere herein regarding the Company's
ratio of earnings to fixed charges.
The level of the Company's indebtedness could have important consequences to
holders of the Notes, including: (i) a substantial portion of the Company's cash
flow from operations must be dedicated to debt service and will not be available
for other purposes; (ii) the Company's ability to obtain additional debt
financing in the future for working capital, capital expenditures or
acquisitions may be limited; and (iii) the Company's level of indebtedness could
limit its flexibility in reacting to changes in the industry and economic
conditions generally. Certain of the Company's competitors currently operate on
a less leveraged basis, and have significantly greater operating and financing
flexibility than the Company.
The Company's ability to pay interest on the Notes, to repay portions of its
long-term indebtedness (including the Notes and the New Credit Facility) and to
satisfy its other debt obligations will depend upon its future operating
performance and the availability of refinancing indebtedness, which will be
affected by prevailing economic conditions and financial, business and other
factors, certain of which are beyond its control. The Company anticipates that
its operating cash flow, together with borrowings under the New Credit Facility,
will be sufficient to meet its operating expenses and to service its debt
requirements as they become due. However, if the Company is unable to service
its indebtedness it will be forced to adopt an alternative strategy that may
include actions such as reducing or delaying capital expenditures, selling
assets, restructuring or refinancing its indebtedness, or seeking additional
equity capital. There can be no assurance that any of these strategies could be
effected on satisfactory terms, if at all. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources." In addition, the level of the Company's indebtedness could
restrict its flexibility in responding to changing business and economic
conditions. If the Company were unable to pay its debts as they become due, the
Company could be faced with foreclosure or other collection actions commenced by
its creditors and/or could seek to restructure its indebtedness by commencing
reorganization proceedings.
The ability of the Company to service its indebtedness will be dependent
upon the future performance of the Company. In addition, the Company believes
that its ability to repay portions of its long-term indebtedness (including the
Notes and the New Credit Facility) will be dependent on the availability of
refinancing indebtedness. The future performance of the Company and the
availability of refinancing indebtedness each will be subject to general
economic and market conditions and to financial, competitive, business and other
factors, including factors beyond the Company's control.
RISK OF EFFECTIVE SUBORDINATION OF NOTES TO SECURED INDEBTEDNESS
The Notes will be senior obligations of the Company and will rank PARI PASSU
in right of payment with all other existing and future senior indebtedness of
the Company and senior in right of payment to all existing and future
subordinated indebtedness of the Company. The Guarantees will be senior
obligations of the Guarantors and will rank PARI PASSU in right of payment with
all other existing and future senior indebtedness of the respective Guarantors
and senior in right of payment to all existing and future subordinated
indebtedness of the respective Guarantors and may be released upon the
occurrence of certain events. The Notes will rank PARI PASSU in right of payment
with all obligations under the New Credit Facility, except that the
14
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obligations under the New Credit Facility, but not the Notes or the Guarantees,
will be secured by a first priority lien on all of the Company's and the
Guarantors' accounts receivable, inventory and general intangibles (and certain
related assets) and all proceeds thereof. The Notes and the Guarantees will be
effectively subordinated to the obligations under the New Credit Facility and to
any other secured debt of the Company and the Guarantors, to the extent of the
assets serving as security therefor. In bankruptcy, the holder of a security
interest with respect to any assets of the Company or the Guarantors will be
entitled to have the proceeds of such assets applied to the payment of such
holder's claim before the remaining proceeds, if any, are applied to the claims
of the holders of the Notes. See "Description of the Notes." On a pro forma
basis as of September 30, 1996, after giving effect to the consummation of the
Recapitalization Plan, the Company would have had approximately $116.1 million
of senior indebtedness, including $1.1 million in indebtedness for which the
Notes would have been effectively subordinated.
RISKS ASSOCIATED WITH CORPORATE STRUCTURE AND GUARANTEES
The Company is a holding company and, accordingly, substantially all of the
Company's operating income will be generated by its operating subsidiaries. As a
result, the Company will rely on distributions or advances from its subsidiaries
and repayments of obligations from the Guarantors to provide the funds necessary
to meet its debt service obligations, including the payment of principal and
interest on the Notes. The inability of one or more of the Company's
subsidiaries to provide funds to the Company could have a material adverse
effect on the Company and its results of operations, and the Company's ability
to make payments on the Notes. Should the Company fail to satisfy any payment
obligation under the Notes, the holders will have a direct claim therefor
against the Guarantors pursuant to their Guarantees. However, the obligations of
the Guarantors under the Guarantees will be structurally subordinated to the
secured obligations of the Guarantors to the extent of the assets serving as
security therefor. In addition, if a court were to void the Guarantees under
fraudulent conveyance laws or other legal principles, or if by the terms of such
Guarantees the obligations thereunder were reduced as necessary to prevent such
voidance or the Guarantees were released, the claims of other creditors of the
Guarantors, including trade creditors, would to such extent have priority as to
the assets of such Guarantors over the claims of the holders of the Notes,
notwithstanding the Company's first priority pledge of the capital stock of the
Guarantors. The Guarantee of the Notes by any Guarantor, and the pledge by the
Company of the capital stock of such Guarantor, will be released upon the sale
of such Guarantor in accordance with the terms of the Indenture. See
"Description of the Notes -- Ranking and Guarantees" and "-- Security."
SECURITY FOR THE NOTES
As of the closing of the Exchange Offer, the capital stock of the Guarantors
will be the only significant assets of the Company and dividends of the
Guarantor's capital stock and the repayment of obligations from the Guarantors,
will be the sole source of funds available to the Company to meet its
obligations under the Notes. See "Description of the Notes -- Ranking and
Guarantees." The Company's obligations under the Notes are secured by a lien on
and security interest in all of the issued and outstanding capital stock of each
of the Guarantors. See "Description of the Notes -- Security." In addition,
there is no existing public market for the Guarantors' capital stock, and even
if such capital stock could be sold, there can be no assurance that the proceeds
from the sale of such capital stock would be sufficient to satisfy the amounts
due on the Notes in the event of a default. In addition, the ability of the
holders of the Notes to realize the collateral may be subject to certain
bankruptcy law limitations in the event of a bankruptcy. See "Description of the
Notes -- Certain Bankruptcy Limitations." Absent an acceleration of the Notes,
the Company will be able to vote, as it sees fit in its sole discretion, the
stock of the Guarantors. Furthermore, in the event of a bankruptcy or
liquidation of the Company, the security interest in the capital stock of the
Guarantors may be of no value to holders of the Notes because holders of the
Guarantors' capital stock would be entitled only to the assets which remained
after all indebtedness of the respective Guarantor (including its respective
Guarantee of the Notes) had been paid in full.
The Notes will rank PARI PASSU in right of payment with all obligations
under the New Credit Facility, except that the obligations under the New Credit
Facility, but not the Notes or the Guarantees, will be
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secured by a first priority lien on all of the Company's and the Guarantors'
accounts receivable, inventory and general intangibles (and certain related
assets) and all proceeds thereof. The Notes and the Guarantees will be
effectively subordinated to the obligations under the New Credit Facility and to
any other secured debt of the Company and the Guarantors to the extent of the
assets serving as security therefor.
Subject to restrictions under the New Credit Facility, and the indebtedness
covenants of the Indenture, the Company may in the future incur additional
indebtedness as a result of pursuing acquisitions or other business
opportunities in the businesses engaged in by Central Products and Brown-Bridge
on the issuance date. If any such additional indebtedness is secured as
permitted by the terms of the New Credit Facility and the Indenture, the Notes
will be effectively subordinated to such indebtedness to the extent of the
collateral securing such indebtedness.
FRAUDULENT CONVEYANCE CONSIDERATIONS; AVOIDANCE OF GUARANTEES
Various fraudulent conveyance laws have been enacted for the protection of
creditors and may be utilized by a court to subordinate or avoid the Notes or
any Guarantee in favor of other existing or future creditors of the Company or a
Guarantor.
The incurrence by the Company and the Guarantors of indebtedness to finance
the Recapitalization Plan and the incurrence by the Company of indebtedness,
such as the Notes, to refinance outstanding indebtedness would be subject to
review under relevant federal and state fraudulent conveyance laws in a
bankruptcy case or a lawsuit by or on behalf of unpaid creditors of the Company
or a representative of such creditors, such as a trustee or the Company as
debtor-in-possession. Under such laws, if a court were to find that, at the time
such indebtedness was incurred or the Notes were issued, either (i) the Company
incurred such indebtedness or issued the Notes with the intent of hindering,
delaying or defrauding creditors, or (ii) the Company received less than a
reasonably equivalent value or fair consideration for incurring such
indebtedness or issuing the Notes and the Company (a) was insolvent or rendered
insolvent by reason of the Recapitalization Plan, including the incurrence of
such indebtedness, including the Notes, (b) was engaged in business or a
transaction, or was about to engage in business or a transaction, for which any
property remaining with the Company after giving effect to the Recapitalization
Plan constituted an unreasonably small amount of capital or (c) intended to
incur, or believed that it would incur, debts beyond its ability to pay as they
matured, such court could avoid the Company's obligations under the Notes and
direct the repayment of any amounts paid thereunder to the Company to a fund for
the benefit of the Company's creditors, or take other action detrimental to the
holders of the Notes. Such other action could include subordinating the Notes to
claims of existing or future creditors of the Company.
Similarly, indebtedness under the Guarantees of the Notes also may be
subject to review under relevant federal and state fraudulent conveyance laws in
a bankruptcy of a Guarantor or in a lawsuit brought by or on behalf of creditors
of a Guarantor under the same standards described above. Pursuant to the terms
of the Guarantees, the liability of each Guarantor is limited to the maximum
amount of indebtedness permitted, at the time of the grant of such Guarantee, to
be incurred in compliance with fraudulent conveyance or similar laws.
To the extent any Guarantee was avoided as a fraudulent conveyance, limited
as described above, or held unenforceable for any other reason, holders of the
Notes would, to such extent, cease to have a claim in respect of such Guarantee
and, to such extent, would be creditors solely of the Company and any Guarantor
whose Guarantee was not avoided, limited, or held unenforceable. In such event,
the claims of the holders of the Notes against the issuer of an avoided, limited
or unenforceable Guarantee would be subject to the prior payment of all
liabilities of such Guarantor. There can be no assurance that, after providing
for all prior claims, there would be sufficient assets to satisfy the claims of
the holders of Notes. See "-- Risks Associated with Corporate Structure and
Guarantees."
RESTRICTIONS IMPOSED BY TERMS OF THE COMPANY'S INDEBTEDNESS
The Indenture will restrict, among other things, the Company's and the
Guarantors' ability to incur additional indebtedness, incur liens, pay dividends
or make certain other restricted payments, consummate
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certain asset sales, enter into certain transactions with affiliates, incur
indebtedness that is subordinate in right of payment to any senior indebtedness
of the Company or senior indebtedness of a Guarantor and senior in right of
payment to the Notes or the Guarantees, as the case may be, impose restrictions
on the ability of a subsidiary to pay dividends or make certain payments to the
Company, merge or consolidate with any other person or sell, assign, transfer,
lease, convey or otherwise dispose of all or substantially all of the assets of
the Company. In addition, the New Credit Facility will contain other and more
restrictive covenants and will prohibit the Company from prepaying its other
indebtedness (including the Notes). See "Description of the Notes -- Certain
Covenants" and "Description of the New Credit Facility." The New Credit Facility
also will require the Company to maintain specified financial ratios and satisfy
certain financial condition tests. The Company's ability to meet those financial
ratios and tests can be affected by events beyond its control, and there can be
no assurance that the Company will meet those tests. A breach of any of these
covenants could result in a default under the New Credit Facility and/or the
Indenture. Upon the occurrence of an event of default under the New Credit
Facility, the lenders could elect to declare all amounts outstanding under the
New Credit Facility, together with accrued interest, to be immediately due and
payable. If the Company were unable to repay those amounts, the lenders could
proceed against the collateral granted to them to secure that indebtedness. If
the lenders under the New Credit Facility accelerate the payment of the
indebtedness, there can be no assurance that the assets of the Company would be
sufficient to repay in full such indebtedness and the other indebtedness of the
Company, including the Notes. The substantial majority of the assets of the
Guarantors (consisting of accounts receivable, inventory and general intangibles
(and certain related assets) and all proceeds thereof) will be pledged as
security under the New Credit Facility. See "Description of the New Credit
Facility."
MANAGEMENT OF GROWTH
As a result of strategic acquisitions and internal growth, the Company's net
sales have grown from $6.4 million in fiscal 1993 to $135.3 million in fiscal
1995; however, there can be no assurance as to the Company's future growth
rates. As the Company's business develops and expands, the Company may need to
implement enhanced operational and financial systems (some of which are already
in the process of being implemented) and may require additional employees and
management, operational and financial resources. There can be no assurance that
the Company will be able to successfully implement and maintain such operational
and financial systems or successfully obtain, integrate and utilize the required
employees and management, operational and financial resources to manage a
developing and expanding business. Failure to implement such systems
successfully and use such resources effectively could have a material adverse
effect on the Company. Furthermore, although the Company's growth strategy
contemplates future acquisitions and other arrangements, there can be no
assurance that such business opportunities will be available, or, if available,
will be consummated. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Historical Results of Operations" and "--
Pro Forma Results of Operations" and "Business -- Business Strategy."
LACK OF COMBINED OPERATING HISTORY
The Company acquired its principal subsidiaries, Central Products and
Brown-Bridge, in October 1995 and September 1994, respectively. Although each of
the Company's principal businesses were established companies with a long
operating history prior to their acquisition by the Company, these businesses
have only been managed on a combined basis by the Company's present management
for a relatively short period of time. There can be no assurance that such
combined operations will be successful.
COMPETITION
The Company competes with other national and regional manufacturers in many
product segments. Certain of the Company's principal competitors are less
highly-leveraged than the Company and have greater financial resources than the
Company. As a result of the competitive environment in the markets in which the
Company operates, the Company faces (and will continue to face) pressure on
sales prices of its
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products. As a result of such pricing pressures, the Company may in the future
experience reductions in the profit margins on its sales, or may be unable to
pass future raw material price increases on to its customers (which would also
reduce profit margins).
Furthermore, the Company's principal competitors will be better able to
withstand changes in conditions within the industries in which the Company
operates and have significantly greater operating and financial flexibility than
the Company. There can be no assurance that the Company will not encounter
increased competition in the future, which could have a material adverse effect
on the Company's business. See "Business -- Competition."
EXPOSURE TO FLUCTUATIONS IN RAW MATERIAL COSTS; PRESSURE ON MARGINS
Raw materials are the most significant cost component in the Company's
production process. Future increases in raw material pricing present a potential
risk to the Company's gross profit margins to the extent that the Company is
unable to pass along price increases to its customers on a timely basis. See "--
Competition" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- General."
SUPPLY AGREEMENTS
The Company has entered into, and in the future expects to enter into,
supply agreements with various of its customers (including without limitation
the supply agreements with respect to pressure sensitive postage stamp stock).
Pursuant to these agreements, the Company may agree to supply certain
requirements of its customers. However, these agreements may not obligate the
customer to purchase any given amount of product from the Company. Accordingly,
notwithstanding the existence of certain supply agreements, the Company faces
the risk that customers do not purchase the amounts expected by the Company
pursuant to such supply agreements.
ENVIRONMENTAL REGULATIONS
The Company is subject to environmental laws and regulations governing
emissions to the air, discharges to waterways, and generation, handling,
storage, transportation, treatment and disposal of waste materials. The Company
is also subject to other federal and state laws and regulations regarding health
and safety matters. Environmental laws and regulations are constantly evolving
and it is impossible to predict the effect that these laws and regulations will
have on the Company in the future. While the Company believes it is currently in
substantial compliance with all such environmental laws and regulations, there
can be no assurance that it will at all times be in complete compliance with all
such requirements. In addition, although the Company believes that any
noncompliance is unlikely to have a material adverse effect on the Company, it
is possible that such noncompliance could have a material adverse effect on the
Company. The Company has made and will continue to make capital expenditures to
comply with environmental requirements. As is the case with manufacturers in
general, if a release of hazardous substances occurs on or from the Company's
properties or any associated offsite disposal location, or if contamination from
prior activities is discovered at any of the Company's properties, the Company
may be held liable and the amount of such liability could be material. See
"Business -- Environmental Regulations."
CONTROLLING STOCKHOLDER
At November 30, 1996 (after giving effect to the Recapitalization Plan) LMC
beneficially owned approximately 62.8% of both the outstanding Class A Common
Stock and the outstanding Common Stock (each on a fully diluted basis). By
virtue of such stock ownership, LMC and its affiliates, including Lynch, have
the power to control all matters submitted to stockholders of the Company and to
elect all directors of the Company and its subsidiaries. See "Principal
Stockholders." The interests of LMC and its affiliates may differ from the
interests of holders of the Notes. On August 16, 1996, the Company effected a
two-for-one stock split (the "Stock Split") on its then outstanding common
stock, no par value (the "Old Stock"), whereby the outstanding shares of Old
Stock were reclassified as shares of "Class A Common Stock" and each of the
Company's stockholders of record on August 5, 1996, received, for each share of
Old Stock held by such stockholder as of that date, one share of the newly
authorized Common Stock. Each share of
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Common Stock has 1/10 the voting rights of a share of the Class A Common Stock.
As a result of the Stock Split, Lynch has the ability to liquidate a substantial
portion of its equity position in the Company without enduring a corresponding
decrease in its voting power or control over the Company.
DEPENDENCE ON KEY PERSONNEL
The Company's success will continue to depend to a significant extent on its
executives and other key management personnel. In addition, the success of
certain of the Company's acquisitions may depend, in part, on the Company's
ability to retain management personnel of the acquired companies. There can be
no assurance that the Company will be able to retain its executive officers and
key personnel or attract additional qualified management in the future. The loss
of Richard J. Boyle or Ned N. Fleming, III, the Chairman and Chief Executive
Officer and President, respectively, of the Company, or other key personnel,
could have a material adverse effect on the Company's business, prospects,
financial condition or results of operations.
EFFECT OF CHANGE OF CONTROL
The Indenture will provide that promptly upon the occurrence of a Change of
Control, the holders of the Notes will have the right to require the Company to
repurchase any and all of the Notes at a purchase price equal to 101% of the
principal amount, plus accrued and unpaid interest to the date of purchase. See
"Description of the Notes -- Change of Control." The New Credit Facility
prohibits certain events that would constitute a Change of Control. The
Company's ability to meet its obligations under the Indenture to pay cash to the
holders of the Notes upon a repurchase may be limited by the Company's then
existing resources.
POTENTIAL LABOR DISPUTES
Approximately 200 of the Company's hourly employees are covered by
collective bargaining agreements which expire in 1998, and approximately 20
additional hourly employees are covered by a collective bargaining agreement
which expires in April 1999. Although the Company believes that its relations
with its employees are good and the Company has not experienced organized work
stoppages or slowdowns, there can be no assurance that the Company will not
experience work stoppages or slowdowns in the future. In addition, there can be
no assurance that the Company's non-union facilities will not become subject to
labor union organizational efforts.
ABSENCE OF PUBLIC MARKET FOR THE NOTES; RESTRICTIONS ON TRANSFER
Prior to this Prospectus, there has been no public market for the New Notes,
and the Company does not expect that an active trading market in the New Notes
will develop. There can be no assurance as to the liquidity of any markets that
may develop for the Notes, the ability of holders of the Notes to sell their
Notes or the price at which holders would be able to sell their Notes. Future
trading prices of the Notes will depend on many factors, including, among other
things, prevailing interest rates, the Company's operating results and the
market for similar securities. The Company does not intend to apply for listing
of the Notes on any securities exchange.
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RECAPITALIZATION PLAN
In connection with the Initial Offering, the Company effected a
recapitalization plan (the "Recapitalization Plan") to enhance the Company's
operating and financial flexibility. The Recapitalization Plan extended the
weighted average life to maturity of the Company's indebtedness, simplified the
Company's capital structure and provided the Company access to additional
borrowings. The following are the main elements of the Recapitalization Plan.
OLD NOTES. The gross proceeds from the Initial Offering were $115 million.
NEW CREDIT FACILITY. The Company and the Guarantors entered into a new
credit facility (the "New Credit Facility"), which provides for an aggregate
borrowing availability to the Company's subsidiaries (which will be guaranteed
by the Company and its existing subsidiaries) of up to $40 million in the form
of revolving credit lines. It is estimated that at September 30, 1996, there
would have been $40 million of availability under the New Credit Facility had
the Recapitalization Plan been effected on that date. See "Description of the
New Credit Facility."
EXISTING CREDIT FACILITIES. Prior to the Initial Offering, the Company
maintained short-term credit facilities with banks for working capital needs at
its subsidiaries that aggregated $45.5 million at September 30, 1996, of which
approximately $36.0 million was outstanding on that date (the "Existing
Revolving Facilities"). All outstanding borrowings under the Existing Revolving
Facilities bore interest at variable rates related to the prime interest rate or
the lender's base rate. At September 30, 1996, the interest rates in effect
ranged from 9.00% to 10.75%. The Company also had outstanding long-term
indebtedness that aggregated $68.4 million at September 30, 1996 ($68.5 million
including accrued and unpaid interest) (the "Existing Term Debt," and together
with the Existing Revolving Facilities, the "Existing Credit Facilities"). The
interest rates then in effect under the Existing Term Debt ranged from 7.0% to
10.5% and the maturity dates ranged from 1996 to 2002.
In connection with the Central Products Acquisition, the Company incurred
approximately $30 million of indebtedness (the "Alco Debt"). On April 5, 1996,
the Company refinanced approximately $25 million principal amount of the Alco
Debt with (i) $19.5 million of the proceeds from the issuance to Alco by the
Company of a series of new subordinated convertible promissory notes (the
"Convertible Alco Notes") and (ii) $5.5 million from a portion of the proceeds
of the issuance of the Alco Refinancing Debt (as defined). In May 1996,
approximately $6 million principal amount of the Convertible Alco Notes was
converted into 171,428 shares of common stock of the Company (the "Initial
Conversion Shares"). Furthermore, approximately $1.75 million was incurred by
Spinnaker for the purchase from Alco of a distribution facility in Denver,
Colorado, approximately $1 million of which was repaid with a portion of the
proceeds from the Alco Refinancing Debt and approximately $0.75 million of which
was refinanced with a portion of the proceeds from the issuance of the
Convertible Alco Notes (which, when added to the $19.5 million of Convertible
Alco Notes, issued as described above, resulted in the aggregate outstanding
principal amount of the Convertible Alco Notes of $20.3 million).
The portion of the Existing Term Debt at September 30, 1996 that was
refinanced as part of the Recapitalization Plan totaled $67.4 million and
consisted of: (i) $5.1 million principal amount of term indebtedness at
Brown-Bridge incurred in connection with the Brown-Bridge Acquisition; (ii)
$14.3 million principal amount of Convertible Alco Notes which indebtedness
refinanced a portion of the Alco Debt incurred in connection with the Central
Products Acquisition; (iii) $5 million principal amount of promissory note due
to Alco, which note represents a portion of the Alco Debt; (iv) $8.5 million
principal amount of Alco Refinancing Debt; and (v) $34.5 million principal
amount of term loans incurred by Central Products in connection with the Central
Products Acquisition. The remaining outstanding aggregate amount of long-term
indebtedness at September 30, 1996 consisted of a $1 million mortgage note at
Entoleter.
In connection with the Brown-Bridge Acquisition, the Company issued $1.3
million of subordinated notes due 1997 (the "Affiliate Notes") to Lynch, BF and
certain affiliates of BF. As of September 30, 1996,
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the amount outstanding on these Affiliate Notes was $1.7 million including
principal and accrued interest. See "Management -- Certain Transactions." The
Affiliate Notes were refinanced as part of the Recapitalization Plan.
ALCO REFINANCING DEBT. As part of the refinancing of the Alco Debt on April
5, 1996, the Company entered into a Senior Credit Agreement with Bankers Trust
Company, pursuant to which the Company incurred indebtedness from Bankers Trust
Company in the principal amount of approximately $8.5 million (the "Alco
Refinancing Debt"). A portion of the net cash proceeds of the Alco Refinancing
Debt was used to pay $6.5 million of outstanding principal and accrued interest
of the Alco Debt. See "Management -- Certain Transactions." The remainder of the
proceeds of the Alco Refinancing Debt was used for the purchase from Alco of a
distribution facility in Denver, Colorado, which is utilized in Central
Products' operations, and for working capital purposes. Repayment of the Alco
Refinancing Debt was secured by (i) the A Warrant (as defined), which is owned
by BF, and the shares of capital stock of the Company into which the A Warrant
is convertible, (ii) 187,476 shares of both Class A Common Stock and Common
Stock that are owned by BF that were issued pursuant to the partial exercise of
the A Warrant in April 1996 and (iii) the capital stock of the Company owned by
LMC. Thus, the payment of such debt resulted in a benefit to the Company's
affiliates. See Note 4 to Consolidated Financial Statements. See "Management --
Certain Transactions."
PURCHASE OF BROWN-BRIDGE MINORITY INTEREST. Between the time of the
Brown-Bridge Acquisition and the Initial Offering, Brown-Bridge was operated as
an approximately 80% owned subsidiary of the Company, with the remainder of
Brown-Bridge's capital stock being owned by a group of minority stockholders of
Brown-Bridge (the "Minority Stockholders"), who provided capital to enable the
Company to consummate the Brown-Bridge Acquisition. The Minority Stockholders
included LMC (the Company's largest stockholder), Richard J. Boyle and Ned N.
Fleming, III and certain of their affiliates and certain officers and employees
of Brown-Bridge, all of whom acquired their respective interests on the same
terms and conditions as the Company. Certain of the Minority Stockholders also
loaned the Company capital in exchange for the Affiliate Notes because the
Company did not have sufficient funds to consummate the Brown-Bridge
Acquisition. As part of the Recapitalization Plan, the Minority Stockholders'
shares of capital stock of Brown-Bridge were converted into an aggregate of
approximately $2.3 million and approximately 9,606 shares of Common Stock (the
"Initial Payment Shares") pursuant to the merger of the former Brown-Bridge
entity into a newly formed wholly owned subsidiary of the Company (the
"Brown-Bridge Merger"). In addition, the Company may be required to pay certain
contingent payments to the Minority Stockholders as part of the consideration
for their shares of common stock of Brown-Bridge exchanged in the Brown-Bridge
Merger. See "Management -- Certain Transactions."
USE OF PROCEEDS FROM THE INITIAL OFFERING
The gross proceeds of $115 million from the Initial Offering were used,
together with cash on hand, to refinance the Existing Term Debt, cover costs of
the Brown-Bridge Merger, pay fees and expenses relating to the Recapitalization
Plan and pay certain accrued management fees and other funds owed to Lynch.
USE OF PROCEEDS OF THE NEW NOTES
This Exchange Offer is intended to satisfy certain obligations of the
Company under the Registration Rights Agreement. The Company will not receive
any proceeds from the issuance of the New Notes offered hereby. In consideration
for issuing the New Notes as contemplated in this Prospectus, the Company will
receive, in exchange, Old Notes in like principal amount. The form and terms of
the New Notes are identical in all material respects to the form and terms of
the Old Notes, except as otherwise described herein under "The Exchange Offer --
Terms of the Exchange Offer." The Old Notes surrendered in exchange for the New
Notes will be retired and canceled and cannot be reissued. Accordingly, the
issuance of the New Notes in exchange for Old Notes will not result in any
increase in the outstanding debt of the Company.
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THE EXCHANGE OFFER
PURPOSE AND EFFECT OF THE EXCHANGE OFFER
Pursuant to the Registration Rights Agreement by and among the Company, the
Guarantors and the Initial Purchaser, the Company has agreed (i) to file a
registration statement with respect to an offer to exchange the Old Notes for
senior debt securities of the Company with terms substantially identical to the
Old Notes (except that the New Notes will not contain certain terms with respect
to transfer restrictions) within 90 days after the date of original issuance of
the Old Notes and (ii) to use its best efforts to cause such registration
statement to become effective under the Securities Act within 180 days after
such issue date. In the event that applicable law or interpretations of the
staff of the Commission do not permit the Company to file the registration
statement containing this Prospectus or to effect the Exchange Offer, or if
certain holders of the Old Notes notify the Company that they are not permitted
to participate in, or would not receive freely tradeable New Notes pursuant to,
the Exchange Offer, the Company will use its best efforts to cause to become
effective the Shelf Registration Statement with respect to the resale of the Old
Notes and to keep the Shelf Registration Statement effective until three years
after the original issuance of the Old Notes. The interest rate on the Old Notes
is subject to increase under certain circumstances if the Company is not in
compliance with its obligations under the Registration Rights Agreement. See
"Old Notes Registration Rights."
Each holder of the Old Notes who wishes to exchange such Old Notes for New
Notes in the Exchange Offer will be required to make certain representations,
including representations that (i) any New Notes to be received by it will be
acquired in the ordinary course of its business, (ii) it has no arrangement with
any person to participate in the distribution of the New Notes and (iii) it is
not an "affiliate," as defined in Rule 405 of the Securities Act, of the Company
or, if it is an affiliate, it will comply with the registration and prospectus
delivery requirements of the Securities Act to the extent applicable. See "Old
Notes Registration Rights."
RESALE OF NEW NOTES
Based on interpretations by the staff of the Commission set forth in
no-action letters issued to third parties, the Company believes that, except as
described below, New Notes issued pursuant to the Exchange Offer in exchange for
Old Notes may be offered for resale, resold and otherwise transferred by any
holder thereof (other than a holder which is an "affiliate" of the Company
within the meaning of Rule 405 under the Securities Act) without compliance with
the registration and prospectus delivery provisions of the Securities Act,
provided that such New Notes are acquired in the ordinary course of such
holder's business and such holder does not intend to participate and has no
arrangement or understanding with any person to participate in the distribution
of such New Notes. Any holder who tenders in the Exchange Offer with the
intention or for the purpose of participating in a distribution of the New Notes
cannot rely on such interpretation by the staff of the Commission and must
comply with the registration and prospectus delivery requirements of the
Securities Act in connection with a secondary resale transaction. Unless an
exemption from registration is otherwise available, any such resale transaction
should be covered by an effective registration statement containing the selling
security holders information required by Item 507 of Regulation S-K under the
Securities Act. This Prospectus may be used for an offer to resell, resale or
other retransfer of New Notes only as specifically set forth herein. Each
broker-dealer that receives New Notes for its own account in exchange for Old
Notes, where such Old Notes were acquired by such broker-dealer as a result of
market making activities or other trading activities, must acknowledge that it
will deliver a prospectus in connection with any resale of such New Notes. See
"Plan of Distribution."
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this Prospectus
and in the Letter of Transmittal, the Company will accept for exchange any and
all Old Notes properly tendered and not withdrawn prior to 5:00 p.m., New York
City time, on the Expiration Date. The Company will issue $1,000
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principal amount of New Notes in exchange for each $1,000 principal amount of
outstanding Old Notes surrendered pursuant to the Exchange Offer. Old Notes may
be tendered only in integral multiples of $1,000.
The form and terms of the New Notes will be the same as the form and terms
of the Old Notes except the issuance of the New Notes has been registered under
the Securities Act and hence will not bear legends restricting the transfer
thereof. The New Notes will evidence the same debt as the Old Notes. The New
Notes will be issued under and entitled to the benefits of the Indenture, which
also authorized the issuance of the Old Notes, such that both series will be
treated as a single class of debt securities under the Indenture.
The Exchange Offer is not conditioned upon any minimum aggregate principal
amount of Old Notes being tendered for exchange.
As of the date of this Prospectus, $115 million aggregate principal amount
of the Old Notes are outstanding. This Prospectus, together with the Letter of
Transmittal, is being sent to all registered holders of Old Notes. There will be
no fixed record date for determining registered holders of Old Notes entitled to
participate in the Exchange Offer.
The Company intends to conduct the Exchange Offer in accordance with the
provisions of the Registration Rights Agreement and the applicable requirements
of the Exchange Act, and the rules and regulations of the Commission thereunder.
Old Notes which are not tendered for exchange in the Exchange Offer will remain
outstanding and continue to accrue interest and will be entitled to the rights
and benefits such holders have under the Indenture and the Registration Rights
Agreement.
The Company shall be deemed to have accepted for exchange properly tendered
Old Notes when, as and if the Company shall have given oral or written notice
thereof to the Exchange Agent and complied with the provisions of Section 2 of
the Registration Rights Agreement. The Exchange Agent will act as agent for the
tendering holders for the purposes of receiving the New Notes from the Company.
The Company expressly reserves the right to amend or terminate the Exchange
Offer, and not to accept for exchange any Old Notes not theretofore accepted for
exchange, upon the occurrence of any of the conditions specified below under "--
Certain Conditions to the Exchange Offer."
Holders who tender Old Notes in the Exchange Offer will not be required to
pay brokerage commissions or fees or, subject to the instructions in the Letter
of Transmittal, transfer taxes with respect to the exchange of Old Notes
pursuant to the Exchange Offer. The Company will pay all charges and expenses,
other than certain applicable taxes described below, in connection with the
Exchange Offer. "See -- Fees and Expenses."
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The term "Expiration Date," shall mean 5:00 p.m., New York City time on
March 14, 1997, unless the Company, in its sole discretion, extends the Exchange
Offer, in which case the term "Expiration Date" shall mean the latest date and
time to which the Exchange Offer is extended.
In order to extend the Exchange Offer, the Company will notify the Exchange
Agent of any extension by oral or written notice and will mail to the registered
holders of Old Notes an announcement thereof, each prior to 9:00 a.m., New York
City time, on the next business day after the then Expiration Date.
The Company reserves the right, in its sole discretion, (i) to delay
accepting for exchange any Old Notes, to extend the Exchange Offer or to
terminate the Exchange Offer if any of the conditions set forth below under "The
Exchange Offer -- Conditions" shall not have been satisfied, by giving oral or
written notice of such delay, extension or termination to the Exchange Agent or
(ii) to amend the terms of the Exchange Offer in any manner. Any such delay in
acceptance, extension, termination or amendment will be followed as promptly as
practicable by oral or written notice thereof to the registered holders of Old
Notes. If the Exchange Offer is amended in a manner determined by the Company to
constitute a material change, the Company will promptly disclose such amendment
by means of a prospectus supplement that will be
23
<PAGE>
distributed to the registered holders, and the Company will extend the Exchange
Offer, depending upon the significance of the amendment and the manner of
disclosure to the registered holders, if the Exchange Offer would otherwise
expire during such period.
INTEREST ON THE NEW NOTES
The New Notes will bear interest at a rate of 10 3/4% per annum, payable
semi-annually, on each April 15 and October 15, commencing April 15, 1997.
Holders of New Notes will receive interest on April 15, 1997 from the date of
initial issuance of the New Notes, plus an amount equal to the accrued interest
on the Old Notes. Interest on the Old Notes accepted for exchange will cease to
accrue upon issuance of the New Notes.
CERTAIN CONDITIONS TO THE EXCHANGE OFFER
Notwithstanding any other term of the Exchange Offer, the Company will not
be required to accept for exchange, or exchange any New Notes for, any Old
Notes, and may terminate the Exchange Offer as provided herein before the
acceptance of any Old Notes for exchange, if:
(a) any action or proceeding is instituted or threatened in any court or
by or before any governmental agency with respect to the Exchange Offer
which, in the Company's reasonable judgment, might materially impair the
ability of the Company to proceed with the Exchange Offer; or
(b) any law, statute, rule or regulation is proposed, adopted or
enacted, or any existing law, statute, rule or regulation is interpreted by
the staff of the Commission, which, in the Company's reasonable judgment,
might materially impair the ability of the Company to proceed with the
Exchange Offer; or
(c) any governmental approval has not been obtained, which approval the
Company shall, in its reasonable discretion, deem necessary for the
consummation of the Exchange Offer as contemplated hereby.
The Company expressly reserves the right, at any time or from time to time,
to extend the period of time during which the Exchange Offer is open, and
thereby delay acceptance for exchange of any Old Notes, by giving oral or
written notice of such extension to the holders thereof. During any such
extensions, all Old Notes previously tendered will remain subject to the
Exchange Offer and may be accepted for exchange by the Company. Any Old Notes
not accepted for exchange for any reason will be returned without expense to the
tendering holder thereof as promptly as practicable after the expiration or
termination of the Exchange Offer.
The Company expressly reserves the right to amend or terminate the Exchange
Offer, and not to accept for exchange any Old Notes not theretofore accepted for
exchange, upon the occurrence of any of the conditions of the Exchange Offer
specified above under "-- Certain Conditions to the Exchange Offer." The Company
will give oral or written notice of any extension, amendment, non-acceptance or
termination to the holders of the Old Notes as promptly as practicable, such
notice in the case of any extension to be issued no later than 9:00 a.m., New
York City time, on the next business day after the previously scheduled
Expiration Date.
The foregoing conditions are for the sole benefit of the Company and may be
asserted by the Company regardless of the circumstances giving rise to any such
condition or may be waived by the Company in whole or in part at any time and
from time to time in its sole discretion. The failure by the Company at any time
to exercise any of the foregoing rights shall not be deemed a waiver of any such
right and each such right shall be deemed an ongoing right which may be asserted
at any time and from time to time.
In addition, the Company will not accept for exchange any Old Notes
tendered, and no New Notes will be issued in exchange for any such Old Notes, if
at such time any stop order shall be threatened or in effect with respect to the
Registration Statement of which this Prospectus constitutes a part or the
qualification of the Indenture under the Trust Indenture Act of 1939, as
amended.
24
<PAGE>
PROCEDURES FOR TENDERING
Only a holder of Old Notes may tender such Old Notes in the Exchange Offer.
To tender in the Exchange Offer, a holder must complete, sign and date the
Letter of Transmittal, or facsimile thereof, have the signature thereon
guaranteed if required by the Letter of Transmittal, and mail or otherwise
deliver such Letter of Transmittal or such facsimile to the Exchange Agent prior
to 5:00 p.m., New York City time, on the Expiration Date. In addition, either
(i) Old Notes must be received by the Exchange Agent along with the Letter of
Transmittal, or (ii) a timely confirmation of book-entry transfer (a "Book-Entry
Confirmation") of such Old Notes, if such procedure is available, into the
Exchange Agent's account at the Depository Trust Company (the "Book-Entry
Transfer Facility") pursuant to the procedure for book-entry transfer described
below must be received by the Exchange Agent prior to the Expiration Date, or
(iii) the holder must comply with the guaranteed delivery procedures described
below. To be tendered effectively, the Letter of Transmit-tal and other required
documents must be received by the Exchange Agent at the address set forth below
under "The Exchange Offer -- Exchange Agent" prior to 5:00 p.m., New York City
time, on the Expiration Date.
The tender by a holder which is not withdrawn prior to the Expiration Date
will constitute an agreement between such holder and the Company in accordance
with the terms and subject to the conditions set forth herein and in the Letter
of Transmittal.
THE METHOD OF DELIVERY OF OLD NOTES, THE LETTER OF TRANSMITTAL AND ALL OTHER
REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND RISK OF THE
HOLDER. INSTEAD OF DELIVERY BY MAIL, IT IS RECOMMENDED THAT HOLDERS USE AN
OVERNIGHT OR HAND DELIVERY SERVICE. IN ALL CASES, SUFFICIENT TIME SHOULD BE
ALLOWED TO ASSURE DELIVERY TO THE EXCHANGE AGENT BEFORE THE EXPIRATION DATE. NO
LETTER OF TRANSMITTAL OR OLD NOTES SHOULD BE SENT TO THE COMPANY. HOLDERS MAY
REQUEST THEIR RESPECTIVE BROKERS, DEALERS, COMMERCIAL BANKS, TRUST COMPANIES OR
OTHER NOMINEES TO EFFECT THE ABOVE TRANSACTIONS FOR SUCH HOLDERS.
Any beneficial owner whose Old Notes are registered in the name of a broker,
dealer, commercial bank, trust company or other nominee and who wishes to tender
should contact the registered holder promptly and instruct such registered
holder of Old Notes to tender on such beneficial owner's behalf. If such
beneficial owner wishes to tender on such owner's own behalf, such owner must,
prior to completing and executing the Letter of Transmittal and delivering such
owner's Old Notes, either make appropriate arrangements to register ownership of
the Old Notes in such owner's name or obtain a properly completed bond power
from the registered holder of Old Notes. The transfer of registered ownership
may take considerable time and may not be able to be completed prior to the
Expiration Date.
Signatures on a Letter of Transmittal or a notice of withdrawal described
below, as the case be, must be guaranteed by an Eligible Institution (as defined
below) unless the Old Notes tendered pursuant thereto are tendered (i) by a
registered holder who has not completed the box entitled "Special Issuance
Instructions" or "Special Delivery Instructions" on the Letter of Transmittal or
(ii) for the account of an Eligible Institution. In the event that signatures on
a Letter Transmittal or a notice of withdrawal, as the case may be, are required
to be guaranteed, such guarantor must be a member firm of a registered national
securities exchange or of the National Association of Securities Dealers, Inc.,
a commercial bank or trust company having an office or correspondent in the
United States or an "eligible guarantor institution" within the meaning of Rule
17Ad-15 under the Exchange Act which is a member of one of the recognized
signature guarantee programs identified in the Letter of Transmittal (an
"Eligible Institution").
If the Letter of Transmittal is signed by a person other than the registered
holder of any Old Notes listed therein, such Old Notes must be endorsed or
accompanied by a properly completed bond power, signed by such registered holder
as such registered holder's name appears on such Old Notes with the signature
thereon guaranteed by an Eligible Institution.
25
<PAGE>
If the Letter of Transmittal or any Old Notes or bond powers are signed by
trustees, executors, administrators, guardians, attorneys-in-fact, officers of
corporations or others acting in a fiduciary or representative capacity, such
persons should so indicate when signing, and unless waived by the Company,
evidence satisfactory to the Company of their authority to so act must be
submitted with the Letter of Transmittal.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance of tendered Old Notes and withdrawal of tendered Old Notes
will be determined by the Company in its sole discretion, which determination
will be final and binding. The Company reserves the absolute right to reject any
and all Old Notes not properly tendered or any Old Notes the Company's
acceptance of which would, in the opinion of counsel for the Company, be
unlawful. The Company also reserves the right to waive any defects,
irregularities or conditions of tender as to particular Old Notes. The Company's
interpretation of the terms and conditions of the Exchange Offer (including the
instructions in the Letter of Transmittal) will be final and binding on all
parties. Unless waived, any defects or irregularities in connection with tenders
of Old Notes must be cured within such time as the Company shall determine.
Although the Company intends to notify holders of defects or irregularities with
respect to tenders of Old Notes, neither the Company, the Exchange Agent nor any
other person shall incur any liability for failure to give such notification.
Tenders of Old Notes will not be deemed to have been made until such defects or
irregularities have been cured or waived. Any Old Notes received by the Exchange
Agent that are not properly tendered and as to which the defects or
irregularities have not been cured or waived will be returned by the Exchange
Agent to the tendering holder, unless otherwise provided in the Letter of
Transmittal, as soon as practicable following the Expiration Date.
In all cases, issuance of New Notes for Old Notes that are accepted for
exchange pursuant to the Exchange Offer will be made only after timely receipt
by the Exchange Agent of Old Notes or a timely Book-Entry Confirmation of such
Old Notes into the Exchange Agent's account at the Book-Entry Transfer Facility,
a properly completed and duly executed Letter of Transmittal and all other
required documents. If any tendered Old Notes are not accepted for exchange for
any reason set forth in the terms and conditions of the Exchange Offer or if Old
Notes are submitted for a greater principal amount than the holder desires to
exchange, such unaccepted or non-exchanged Old Notes will be returned without
expense to the tendering holder thereof (or, in the case of Old Notes tendered
by book-entry transfer into the Exchange Agent's account at the Book-Entry
Transfer Facility pursuant to the book-entry transfer procedures described
below, such non-exchanged Notes will be credited to an account maintained with
such Book-Entry Transfer Facility) as promptly as practicable after the
expiration or termination of the Exchange Offer.
BOOK-ENTRY TRANSFER
The Exchange Agent will make a request to establish an account with respect
to the Old Notes at the Book-Entry Transfer Facility for purposes of the
Exchange Offer within two business days after the date of this Prospectus, and
any financial institution that is a participant in the Book-Entry Transfer
Facility's system may make book-entry delivery of Old Notes by causing the
Book-Entry Transfer Facility to transfer such Old Notes into the Exchange
Agent's account at the Book-Entry Transfer Facility in accordance with such
Book-Entry Transfer Facility's procedures for transfer. However, although
delivery of Notes may be effected through book-entry transfer at the Book-Entry
Transfer Facility, the Letter of Transmittal or facsimile thereof, with any
required signature guarantees and any other required documents, must, in any
case, be transmitted to and received by the Exchange Agent at the address set
forth below under "-- Exchange Agent" on or prior to the Expiration Date or, if
the guaranteed delivery procedures described below are to be complied with,
within the time period provided under such procedures. Delivery of documents to
the Book-Entry Transfer Facility does not constitute delivery to the Exchange
Agent.
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their Old Notes and (i) whose Old Notes are not
immediately available or (ii) who cannot deliver their Old Notes, the Letter of
Transmittal or any other required documents to the Exchange Agent prior to the
Expiration Dates, may effect a tender if:
26
<PAGE>
(a) The tender is made through an Eligible Institution;
(b) Prior to the Expiration Date, the Exchange Agent receives from such
Eligible Institution a properly completed and duly executed Notice of
Guaranteed Delivery (by facsimile transmission, mail or hand delivery)
setting forth the name and address of the holder, the registered number(s)
of such Old Notes and the principal amount of Old Notes tendered, stating
that the tender is being made thereby and guaranteeing that, within three
(3) New York Stock Exchange trading days after the Expiration Date, the
Letter of Transmittal (or facsimile thereof together with the Old Notes or a
Book-Entry Confirmation, as the case may be, and any other documents
required by the Letter of Transmittal will be deposited by the Eligible
Institution with the Exchange Agent; and
(c) Such properly completed and executed Letter of Transmittal (or
facsimile thereof), as well as all tendered Notes in proper form for
transfer or a Book-Entry Confirmation, as the case may be, and all other
documents required by the Letter of Transmittal, are received by the
Exchange Agent within three (3) New York Stock Exchange trading days after
the Expiration Date.
Upon request to the Exchange Agent, a Notice of Guaranteed Delivery will be
sent to holders who wish to tender their Old Notes according to the guaranteed
delivery procedures set forth above.
WITHDRAWAL OF TENDERS
Except as otherwise provided herein, tenders of Old Notes may be withdrawn
at any time prior to 5:00 p.m., New York City time, on the Expiration Date.
For a withdrawal to be effective, a written notice of withdrawal must be
received by the Exchange Agent at one of the addresses set forth below under "--
Exchange Agent." Any such notice of withdrawal must specify the name of the
person having tendered the Old Notes to be withdrawn, identify the Old Notes to
be withdrawn (including the principal amount of such Old Notes), and (where
certificates for Old Notes have been transmitted) specify the name in which such
Old Notes were registered, if different from that of the withdrawing holder. If
certificates for Old Notes have been delivered or otherwise identified to the
Exchange Agent, then, prior to the release of such certificates the withdrawing
holder must also submit the serial numbers of the particular certificates to be
withdrawn and a signed notice of withdrawal with signatures guaranteed by an
Eligible Institution unless such holder is an Eligible Institution. If Old Notes
have been tendered pursuant to the procedure for book-entry transfer described
above, any notice of withdrawal must specify the name and number of the account
at the Book-Entry Transfer Facility to be credited with the withdrawn Old Notes
and otherwise comply with the procedures of such facility. All questions as to
the validity, form and eligibility (including time of receipt) of such notices
will be determined by the Company, whose determination shall be final and
binding on all parties. Any Old Notes so withdrawn will be deemed not to have
been validly tendered for exchange for purposes of the Exchange Offer. Any Old
Notes which have been tendered for exchange but which are not exchanged for any
reason will be returned to the holder thereof without cost to such holder (or,
in the case of Old Notes tendered by book-entry transfer into the Exchange
Agent's account at the Book-Entry Transfer Facility pursuant to the book-entry
transfer procedures described above, such Old Notes will be credited to an
account maintained with such Book-Entry Transfer Facility for the Old Notes) as
soon as practicable after withdrawal, rejection of tender or termination of the
Exchange Offer. Properly withdrawn Old Notes may be retendered by following one
of the procedures described under "-- Procedures for Tendering Old Notes" above
at any time on or prior to the Expiration Date.
27
<PAGE>
EXCHANGE AGENT
The Chase Manhattan Bank has been appointed as Exchange Agent of the
Exchange Offer. Questions and request for assistance, request for additional
copies of this Prospectus or of the Letter of Transmittal and requests for
Notice of Guaranteed Delivery should be directed to the Exchange Agent addressed
as follows:
BY MAIL, HAND OR OVERNIGHT COURIER:
The Chase Manhattan Bank
55 Water Street
Room 234
North Building
New York, New York 10041
Attention: Sharon Lewis
BY FACSIMILE TRANSMISSION:
(for eligible institutions only)
(212) 638-7380
(212) 638-7381
CONFIRM BY TELEPHONE:
Sharon Lewis: (212) 638-0454
FEES AND EXPENSES
The expenses of soliciting tenders will be borne by the Company. The
principal solicitation is being made by mail; however, additional solicitation
may be made by telegraph, telephone or in person by officers and regular
employees of the Company and its affiliates.
The Company has not retained any dealer-manager in connection with the
Exchange Offer and will not make any payments to broker-dealers or others
soliciting acceptances of the Exchange Offer. The Company, however, will pay the
Exchange Agent reasonable and customary fees for its services and will reimburse
it for its reasonable out-of-pocket expenses in connection therewith.
The cash expenses to be incurred in connection with the Exchange Offer will
be paid by the Company and are estimated in the aggregate to be approximately
$100,000. Such expenses include registration fees, fees and expenses of the
Exchange Agent and Trustee, accounting and legal fees and printing costs, and
related fees and expenses.
The Company will pay all transfer taxes, if any, applicable to the exchange
of Notes pursuant to the Exchange Offer. If, however, certificates representing
Old Notes for principal amounts not tendered or accepted for exchange are to be
delivered to, or are to be issued in the name of, any person other than the
registered holder of Notes tendered, or if tendered Notes are registered in the
name of any person other than the person signing the Letter of Transmittal, or
if a transfer tax is imposed for any reason other than the exchange of the New
Notes for Old Notes pursuant to the Exchange Offer, then the amount of any such
transfer taxes (whether imposed on the registered holder or any other persons)
will be payable by the tendering holder. If satisfactory evidence of payment of
such taxes or exemption therefrom is not submitted with the Letter of
Transmittal, the amount of such transfer taxes will be billed directly to such
tendering holder.
TRANSFER TAXES
Holders who tender their Old Notes for exchange will not be obligated to pay
any transfer taxes in connection therewith, except that holders who instruct the
Company to register New Notes in the name of, or request that Old Notes not
tendered or not accepted in the Exchange Offer be returned to, a person other
than the registered tendering holder will be responsible for the payment of any
applicable transfer tax thereon.
28
<PAGE>
CONSEQUENCES OF FAILURE TO EXCHANGE
Holders of Old Notes who do not exchange their Old Notes for New Notes
pursuant to the Exchange Offer will continue to be subject to the restrictions
on transfer of such Old Notes, as set forth (i) in the legend thereon as a
consequence of the issuance of the Old Notes pursuant to the exemptions from, or
in transactions not subject to, the registration requirements of the Securities
Act and applicable state securities laws and (ii) otherwise set forth under
"Transfer Restrictions" in the Offering Memorandum dated October 18, 1996
distributed in connection with the Initial Offering. In general, the Old Notes
may not be offered or sold, unless registered under the Securities Act, except
pursuant to an exemption from, or in a transaction not subject to, the
Securities Act and applicable state securities laws. The Company does not
currently anticipate that it will register the Old Notes under the Securities
Act. Based on interpretations by the staff of the Commission, New Notes issued
pursuant to the Exchange Offer may be offered for resale, resold or otherwise
transferred by holders thereof (other than any such holder which is an
"affiliate" of the Company within the meaning of Rule 405 under the Securities
Act) without compliance with the registration and prospectus delivery provisions
of the Securities Act, provided that such New Notes are acquired in the ordinary
course of such holders' business and such holders have no arrangement or
understanding with respect to the distribution of the New Notes to be acquired
pursuant to the Exchange Offer. Any holder who tenders in the Exchange Offer for
the purpose of participating in a distribution of the New Notes (i) could not
rely on the applicable interpretations of the staff of the Commission and (ii)
must comply with the registration and prospectus delivery requirements of the
Securities Act in connection with a secondary resale transaction. In addition,
to comply with the securities laws of certain jurisdictions, if applicable, the
New Notes may not be offered or sold unless they have been registered or such
securities laws have been complied with. The Company has agreed, pursuant to the
Registration Rights Agreement and subject to certain specified limitations
therein, to register or qualify the New Notes for offer or sale under the
securities or blue sky laws of such jurisdictions as any holder of the New Notes
reasonably requests in writing.
CAPITALIZATION
The following table sets forth the consolidated capitalization and
short-term indebtedness of the Company and its subsidiaries at September 30,
1996 and as adjusted to give pro forma effect to the Recapitalization Plan as
described under "Recapitalization Plan." The information in the table below is
qualified in its entirety by, and should be read in conjunction with, the
financial statements and notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
----------------------------
HISTORICAL PRO FORMA
------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Debt:
Notes.................................................................. $ -- $ 115,000
New Credit Facility.................................................... -- --
Existing Revolving Facilities.......................................... 36,041(2) --
Other debt............................................................. 70,201 1,064
------------- -------------
Total debt............................................................. $ 106,242 $ 116,064
Total stockholders' equity............................................... $ 13,915 $ 12,601(1)
------------- -------------
Total capitalization..................................................... $ 120,517 $ 128,665
------------- -------------
------------- -------------
</TABLE>
- ------------------------
(1) Decrease in total stockholders' equity is related to the write-off of
deferred financing fees resulting from the refinancing of existing Company
indebtedness, offset by the issuance of the Initial Payment Shares in
connection with the Brown-Bridge Merger.
(2) During the third quarter ended September 30, 1996 the existing revolving
facilities increased approximately $6.4 million primarily related to
approximately $4.2 million in capital expenditures for new machinery and
equipment at Brown-Bridge and Central Products.
29
<PAGE>
UNAUDITED PRO FORMA FINANCIAL DATA
The following unaudited pro forma consolidated financial information of the
Company are based on the historical consolidated financial statements of the
Company included elsewhere in this Prospectus and have been prepared to
illustrate the effects of the Recapitalization Plan as though such
Recapitalization Plan had occurred at the beginning of the periods presented for
the pro forma statements of operations.
The results of operations for the Company for the year ended December 31,
1995 have been derived from the Company's audited financial statements which
include Central Products' results of operations for the three months ended
December 31, 1995. The results of operations for Central Products for the nine
months ended September 30, 1995 have been derived from unaudited financial
records but, in the opinion of management, include all adjustments necessary for
that period. The pro forma adjustments include, in the opinion of management,
all adjustments necessary to give pro forma effect to the Recapitalization Plan
and the Central Products Acquisition in each case as though such transactions
had occurred on January 1, 1995 for the pro forma statements of operations and
to the Recapitalization Plan as if it had occurred on September 30, 1996 for the
pro forma balance sheet.
The unaudited pro forma consolidated financial information is not
necessarily indicative of how the Company's balance sheet and results of
operations would have been presented had the transactions referenced above
actually been consummated at the assumed dates, nor is it necessarily indicative
of presentation of the Company's balance sheet and results of operations for any
future period. The Unaudited Pro Forma Statement of Operations does not give
effect to a $1.6 million after tax charge from the extinguishment of debt and
the write-off of associated deferred financing fees resulting from the
refinancing of existing Company indebtedness. The unaudited pro forma
consolidated financial information should be read in conjunction with the
historical consolidated financial statements and related notes thereto included
elsewhere in this Prospectus.
30
<PAGE>
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED PRO FORMA
DECEMBER 31, 1995 SEPTEMBER 30, 1995 PRO FORMA YEAR ENDED
(SPINNAKER) (CENTRAL PRODUCTS) ADJUSTMENTS DECEMBER 31, 1995
----------------- ------------------ ------------- -----------------
<S> <C> <C> <C> <C>
Net sales............................... $ 135,289 $ 91,269 $ -- $ 226,558
Cost of sales........................... 117,737 75,071 (485)(1)
(609)(2) 191,714
-------- ------- ------------- --------
Gross profit............................ 17,552 16,198 1,094 34,844
Selling, general and administrative..... 11,763 11,731 (32)(2)
(92)(1)
865(3)
(1,333)(4)
22,902
-------- ------- ------------- --------
Operating income........................ 5,789 4,467 1,686 11,942
Interest expense........................ 4,468 -- (4,468)(5)
12,726(6)
620(7) 13,346
Guarantee fee to parent................. 375 -- (375)(8) --
Other income (expense).................. 7 -- -- 7
-------- ------- ------------- --------
Income (loss) before taxes.............. 953 4,467 (6,817) (1,397)
Income tax provision (benefit).......... 112 1,768 (2,453)(9) (573)
Minority interest....................... 280 -- (280)(10) --
-------- ------- ------------- --------
Net income (loss)....................... $ 561 $ 2,699 $ (4,084) $ (824)
-------- ------- ------------- --------
-------- ------- ------------- --------
Income (loss) per share................. $ (0.12)
--------
--------
OTHER DATA:
EBITDA (11)........................... $ 7,572 $ 6,702 $ 2,710 $ 16,984
Adjusted EBITDA (12).................. 7,572 6,702 6,193 20,467
Depreciation and amortization......... 2,151 2,235 649 5,035
Capital expenditures.................. 1,620 1,021 -- 2,641
</TABLE>
See accompanying notes.
31
<PAGE>
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1996
------------------------------------
PRO FORMA
SPINNAKER ADJUSTMENTS PRO FORMA
---------- ----------- -----------
<S> <C> <C> <C>
Net sales............................................................. $ 184,358 $ -- $ 184,358
Cost of sales......................................................... 159,163 -- 159,163
---------- ----------- -----------
Gross profit.......................................................... 25,195 -- 25,195
Selling, general and administrative................................... 16,643 -- 16,643
---------- ----------- -----------
Income from operations................................................ 8,552 -- 8,552
Interest expense...................................................... 7,020 (7,020)(5)
9,443(6)
465(7) 9,908
Guarantee fee to parent............................................... 375 (375)(8) --
Other income (expense)................................................ (52) -- (52)
---------- ----------- -----------
Income (loss) before taxes............................................ 1,105 (2,513) (1,408)
Income tax provision (benefit)........................................ 453 (1,030)(9) (577)
Minority interest..................................................... 299 (299) 10) --
---------- ----------- -----------
Net income (loss)..................................................... $ 353 $ (1,184) $ (831)
---------- ----------- -----------
---------- ----------- -----------
Income (loss) per share............................................... $ (0.12)
-----------
-----------
OTHER DATA:
EBITDA (11)......................................................... $ 12,492 $ 375 $ 12,867
Depreciation and amortization....................................... 4,367 -- 4,367
Capital expenditures................................................ 7,260 -- 7,260
</TABLE>
See accompanying notes.
32
<PAGE>
NOTES TO UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
(DOLLARS IN THOUSANDS)
The Unaudited Pro Forma Statements of Operations give effect to the
following unaudited pro forma adjustments which relate to the Recapitalization
Plan and the Central Products Acquisition as though such transactions had
occurred on January 1, 1995, and the Alco Plant Closing.
(1) Represents, as a result of the closing by Alco of a water sensitive tape
production facility located in Linden, New Jersey, which was operated by
Central Products' predecessor, in June 1995, the Company's elimination of
rental and property tax expenses associated with maintaining the water
sensitive production capability at the Linden facility. See Note (12). The
adjustment reflects the following annual cost reductions pro rated for nine
months ended September 30, 1995:
<TABLE>
<S> <C>
Rent expense:................................................................ $ 646
Property taxes:.............................................................. 123
---------
Total........................................................................ 769
Pro rated for nine months ended September 30, 1995........................... 577
Less: Portion of adjustment related to selling, general and administrative
expenses.................................................................... 92
---------
Total adjustment to cost of sales............................................ $ 485
---------
---------
</TABLE>
(2) Reflects the following adjustments connected with the purchase accounting
revaluation of assets and liabilities related to the Central Products
Acquisition:
<TABLE>
<S> <C>
Revaluation of the LIFO reserve.............................................. $ 425
Depreciation adjustment on change in fair value and depreciable life in
property, plant and equipment............................................... 216
---------
Total adjustment............................................................. 641
Less: portion of adjustment related to selling, general and administrative
expense..................................................................... 32
---------
Total adjustment to cost of sales............................................ $ 609
---------
---------
</TABLE>
(3) Reflects adjustments to provide for the pro forma effect of goodwill
amortization for the nine months ended September 30, 1995 associated with
the Central Products Acquisition. The pro forma estimate of goodwill was
$28.8 million as a result of the Central Products Acquisition and such
goodwill is amortized over a period of twenty-five years.
(4) Represents the elimination of intercompany charges which the Company paid to
Alco during the nine months ended September 30, 1995. The charges represent
management fees allocated by Alco to its divisions and royalty fees
associated with trademarks owned by Alco prior to the Central Products
Acquisition. As a result of the Central Products Acquisition, trademarks are
owned by Central Products and all management fees and royalty charges have
been eliminated.
(5) Represents interest expense incurred under the financing from the Existing
Credit Facilities.
(6) Represents the pro forma effect of interest expense as though the execution
of the New Credit Facility and the Offering had occurred as of January 1,
1995. Such calculation utilizes an interest rate of 10.75% on the Offering.
(7) Represents amortization of deferred financing fees incurred under the
Recapitalization Plan.
(8) Reflects the elimination of the guarantee fee payable to Lynch in connection
with the Lynch guarantee of the Alco Debt in connection with the Central
Products Acquisition.
(9) Reflects the adjustment to provide income taxes at the effective tax rate on
the pro forma combined earnings of the Company for the respective period.
(10)Represents the purchase of the Minority Stockholders' interest in
Brown-Bridge. See "Recapitalization Plan."
(11)EBITDA represents the sum of net income (loss) before minority interest,
income taxes, interest expense, depreciation and amortization. EBITDA is
presented because it is a widely accepted financial indicator of
33
<PAGE>
a company's ability to incur or service indebtedness. However, EBITDA should
not be considered as an alternative to net income as a measure of the
Company's operating results or to cash flows as a measure of its liquidity.
(12)Adjusted EBITDA reflects (x) certain pro forma cost reductions (increases)
associated with manufacturing operations at Linden, which were closed by
Alco prior to (and which Linden operations were not acquired pursuant to)
the Central Products Acquisition, (y) the addition back to EBITDA of certain
non-recurring plant closing costs incurred in connection with the Alco Plant
Closing and (z) the addition back to EBITDA of certain unusual reengineering
related consulting charges incurred at Brown-Bridge in connection with
consulting agreements terminated in October 1995.
The Company had sufficient production capacity in Menasha to absorb all
production needs associated with the Alco Plant Closing, although certain
increased costs were (and will continue to be) incurred at Menasha as a
result of the transfer of Linden's production to Menasha. Cost savings
include the Company's elimination of redundant factory overhead expenses,
such as employee costs (indirect labor, factory supervision, inspection,
quality control and purchasing), and building operating costs (heat, light
and utility), associated with maintaining water sensitive carton sealing
tape production capability at both Menasha and Linden. The savings are
partially offset by increased shipping costs resulting from the need to ship
goods from only one production facility, and increased manufacturing
overhead and direct labor charges at Menasha as a result of the transfer of
production to Menasha. The net number of personnel reduced after the Alco
Plant Closing was 74.
To calculate the pro forma adjustments in arriving at Adjusted EBITDA
related to the Alco Plant Closing, (1) Net Manufacturing Cost Reductions, as
shown in the table below, is an amount equal to (i) the amount by which the
actual aggregate direct labor charges and manufacturing overhead expense of
Central Products (which included both the Linden and Menasha facilities) for
the first six months of 1995 exceeded the actual direct labor charges and
manufacturing overhead expense of Central Products (which included only de
minimus amounts related to the closed Linden facility) for the last six
months of 1995 (which amount represents management's estimate of the direct
labor cost and manufacturing overhead expense reductions which would have
been realized in the first six months of 1995 if the Alco Plant closing had
occurred prior to January 1, 1995), minus (ii) the $577 thousand of rental
and property tax expense savings already added back in determining pro forma
EBITDA as described in footnote 1 in the Notes to Unaudited Pro Forma
Statement of Operations, (2) Increased Shipping costs as shown in the table
below is an amount equal to the amount by which actual freight costs of
Central Products for the last six months of 1995 exceeded the actual freight
costs of Central Products for the first six months of 1995 (which amount
represents management's estimate of the shipping cost increases which would
have been incurred in the first six months of 1995 if the Alco Plant Closing
had occurred prior to January 1, 1995), (3) Research and Development Savings
as shown in the table below is an amount equal to the amount by which actual
research and development expenses of Central Products for the first six
months of 1995 exceeded the actual research and development expenses of
Central Products for the second six months of 1995 (which amount represents
management's estimate of the cost savings which would have been realized
during the first six months of 1995 if the Alco Plant Closing, and reduction
of research and development personnel in connection therewith, had occurred
prior to January 1, 1995) and (4) Accounting and Administration Savings as
shown in the table below is an amount equal to the amount by which actual
accounting and administration costs of Central Products incurred at its
Linden Facility for the first six months of 1995 exceeded the actual
accounting and administration costs incurred by Central Products at its
Linden Facility for the second six months of 1995 (which amount represents
management's estimate of the cost savings which would have been realized
during the first six months of 1995 if the Alco Plant Closing had occurred
prior to January 1, 1995). Physical production of water sensitive carton
sealing tape at the Linden facility ceased in June 1995. The Company
believes that its combined volume of water sensitive carton sealing tape
production (which was the production shifted from Linden to Menasha) was
relatively constant in the first versus second halves of 1995 and,
therefore, that the comparisons of the first half to the second half of 1995
as described above represent a reasonable estimate of the cost savings as
34
<PAGE>
described above. Alco Plant Closing Costs as shown below reflect certain
actual one-time costs incurred in connection with the Alco Plant Closing
(including severance pay, costs to move machinery, equipment lease buyout
costs and other similar items). The following table summarizes the above
adjustments:
<TABLE>
<CAPTION>
(DOLLARS IN
THOUSANDS)
<S> <C>
EBITDA.................................................................. $ 16,984
Pro Forma Adjustments to EBITDA for the first six months of 1995 Related
to Alco Plant Closing:
Net Manufacturing Cost Reductions..................................... 1,866
Increased Shipping Costs.............................................. (33)
Research and Development Savings...................................... 145
Accounting and Administration Savings................................. 85
-----------
Total Pro Forma Adjustments as Described Above.......................... 2,063
Alco Plant Closing Costs................................................ 858
Brown-Bridge Reenginnering Related Consulting Charges................... 562
-----------
Adjusted EBITDA......................................................... $ 20,467
-----------
-----------
</TABLE>
In determining Adjusted EBITDA, the Linden Plant Closing has not been
treated as a disposition of a business. In particular, revenues associated
with the Linden operations have not been eliminated. The Company believes
that there was no loss of revenues in 1995 because the Linden production was
shifted to Menasha. While presented with numerical specificity, the
adjustments relating to the Alco Plant Closing set forth above and used in
determining Adjusted EBITDA were prepared on the basis described above and
represent management's estimates of certain pro forma savings which would
have been realized if the Alco Plant Closing had occurred prior to January
1, 1995. The pro forma adjustments as described above are not necessarily
indicative of the actual cost savings which would have been realized had the
Alco Plant Closing occurred prior to January 1, 1995.
Adjusted EBITDA is not presented in accordance with Regulation S-X; however,
management believes that it provides useful information to investors. As
with EBITDA, Adjusted EBITDA should not be considered as an alternative to
net income as a measure of the Company's operating results or to cash flows
as a measure of its liquidity.
35
<PAGE>
UNAUDITED PRO FORMA BALANCE SHEET
(DOLLARS IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
----------------------------------------
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
---------- --------------- -----------
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents............................................. $ 3,163 $ 647(1) $ 3,810
Accounts receivable, net.............................................. 26,471 -- 26,471
Inventories, net...................................................... 34,183 -- 34,183
Prepaid expenses and other............................................ 2,614 -- 2,614
Deferred income taxes................................................. 1,234 -- 1,234
---------- --------------- -----------
Total current assets................................................ 67,665 647 68,312
Property plant and equipment, net....................................... 55,828 -- 55,828
Goodwill................................................................ 25,501 643(2) 26,144
Other assets............................................................ 3,507 3,182(3) 6,689
---------- --------------- -----------
Total assets........................................................ $ 152,501 $ 4,472 $ 156,973
---------- --------------- -----------
---------- --------------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable...................................................... $ 15,320 $ -- $ 15,320
Accrued liabilities................................................... 7,334 (2,046)(4) 5,288
Current portion of long term debt..................................... 10,559 (10,536)(5) 23
Existing revolving credit facility.................................... 36,041 (36,041)(6) --
Other current liabilities............................................. 536 -- 536
---------- --------------- -----------
Total current liabilities........................................... 69,790 (48,623) 21,167
Existing debt........................................................... 57,905 (56,864)(5) 1,041
Senior secured notes.................................................... -- 115,000(7) 115,000
Deferred income taxes................................................... 7,164 -- 7,164
Notes payable to related parties........................................ 1,737 (1,737)(8) --
Minority interest....................................................... 1,990 (1,990)(9) --
Stockholders' equity
Common stock.......................................................... 3,124 -- 3,124
Additional paid in capital............................................ 10,209 336(2) 10,545
Retained earnings (deficit)........................................... 694 (1,650)(10) (956)
Less: common stock in treasury........................................ (112) -- (112)
---------- --------------- -----------
Total stockholders' equity.............................................. 13,915 (1,314) 12,601
---------- --------------- -----------
Total liabilities and stockholders' equity.......................... $ 152,501 $ 4,472 $ 156,973
---------- --------------- -----------
---------- --------------- -----------
</TABLE>
See accompanying notes.
36
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1996
(1) Represents estimated remaining cash from issuance of the Notes, after
repayment of Existing Term Debt and Existing Revolving Facilities, and
payment of deferred financing fees.
(2) Reflects goodwill and issuance of the Initial Payment Shares pursuant to the
Brown-Bridge Merger. See "Recapitalization Plan."
(3) Represents deferred financing fees related to the sale of the Notes which
include fees charged and to be charged by the Initial Purchaser, legal,
accounting and related costs, net of the write-off of deferred financing
fees relating to debt refinanced as part of the Recapitalization Plan as
described below:
<TABLE>
<S> <C>
Fees related to the Recapitalization Plan.................. $ 6,200
Fees related to refinanced debt............................ (2,800)
Fees reflected in historical September 30, 1996 balance
sheet..................................................... (218)
---------
$ 3,182
---------
---------
</TABLE>
(4) Reflects payment of accrued interest ($146) due to Alco through September
30, 1996, payment of guarantee fee to Lynch ($750) and reduction of tax
liability ($1,150). See Note (10).
(5) Reflects repayment of Existing Term Debt other than the mortgage note to
Entoleter and capital leases.
(6) Reflects repayment of Existing Revolving Facilities.
(7) Reflects the issuance of the Notes.
(8) Reflects the repayment of the Affiliate Notes.
(9) Represents the purchase of the Minority Stockholders' interest in
Brown-Bridge pursuant to the Brown-Bridge Merger. See "Recapitalization
Plan."
(10)Reflects write-off of fees related to the Existing Credit Facilities:
<TABLE>
<S> <C>
Pre-tax write-off:......................................... $ (2,800)
Tax benefit @ estimated tax rate of 41%.................... 1,150
---------
After-tax write-off........................................ $ (1,650)
---------
---------
</TABLE>
37
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA
SPINNAKER
The following table sets forth selected historical consolidated financial
information for the Company. The selected historical consolidated financial
information should be read in conjunction with the historical consolidated
financial statements of the Company and notes thereto and the unaudited pro
forma consolidated financial statements of the Company and notes thereto, all
included elsewhere herein. The selected historical consolidated financial
information of the Company for the five years ended December 31, 1995 have been
derived from the Company's audited financial statements. The selected historical
consolidated financial information as of and for the nine months ended September
30, 1995 and 1996 is derived from unaudited financial records but, in the
opinion of management, includes all adjustments necessary for a fair
presentation of those periods. The results of operations of interim periods are
not necessarily indicative of those for a full year.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1991 1992 1993 1994 1995
--------- --------- --------- --------- --------- NINE MONTHS ENDED
SEPTEMBER 30,
------------------------
1995 1996
----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
INCOME STATEMENT DATA:
Net sales............................... $ 4,657 $ 4,533 $ 6,371 $ 33,632 $ 135,289 $ 77,716 $ 184,358
Cost of sales........................... 3,136 2,940 4,393 28,506 117,737 67,740 159,163
--------- --------- --------- --------- --------- ----------- -----------
Gross profit............................ 1,521 1,593 1,978 5,126 17,552 9,976 25,195
Selling, general and administrative..... 2,051 1,692 1,922 4,404 11,763 7,473 16,643
--------- --------- --------- --------- --------- ----------- -----------
Operating income (loss)................. (530) (99) 56 722 5,789 2,503 8,552
Interest expense........................ 110 106 104 768 4,468 1,942 7,020
Other income (expense).................. 388 208 167 124 (368) 13 (427)
Income tax provision (benefit).......... -- -- -- 70 112 (43) 453
Minority interest....................... -- -- -- 98 280 146 299
--------- --------- --------- --------- --------- ----------- -----------
Net income (loss)....................... $ (252) $ 3 $ 119 $ (90) $ 561 $ 471 $ 353
--------- --------- --------- --------- --------- ----------- -----------
--------- --------- --------- --------- --------- ----------- -----------
Income (loss) per share (1)............. $ (0.05) $ -- $ 0.02 $ (0.02) $ 0.08 $ 0.07 $ 0.05
--------- --------- --------- --------- --------- ----------- -----------
--------- --------- --------- --------- --------- ----------- -----------
OTHER DATA:
EBITDA (2).............................. $ (14) $ 229 $ 354 $ 1,257 $ 7,572 $ 3,285 $ 12,492
Depreciation and amortization........... 128 120 131 411 2,151 769 4,367
Capital expenditures.................... 65 145 91 450 1,620 1,038 7,260
Net cash provided by (used in) operating
activities............................. (379) (128) 265 2,503 9,192 846 (590)
Ratio of earnings to fixed charges
(3).................................... -- 1.0x 2.1x 1.1x 1.2x 1.3x 1.2x
BALANCE SHEET DATA:
Total assets............................ $ 8,031 $ 8,150 $ 8,209 $ 41,329 $ 137,584 $ 47,362 $ 156,973
Total long term debt.................... 1,050 1,033 1,015 9,149 71,225 7,665 59,642
Stockholders' equity.................... 6,470 6,472 6,591 6,501 7,062 6,972 13,915
</TABLE>
- ------------------------------
(1) All presentations of amounts per share have been restated to reflect the
three-for-two stock splits effective on December 30, 1994 and December 29,
1995, and a stock dividend, an effective two-for-one stock split, on August
16, 1996.
(2) EBITDA represents the sum of net income (loss) before minority interest,
income taxes, interest expense, depreciation and amortization. EBITDA is
presented because it is a widely accepted financial indicator of a company's
ability to incur or service indebtedness. However, EBITDA should not be
considered as an alternative to net income as a measure of the Company's
operating results or to cash flows as a measure of its liquidity.
(3) For purposes of calculating the ratio of earnings to fixed charges, earnings
represent income (loss) before income taxes and fixed charges. Fixed charges
consist of the total (i) interest, whether expensed or capitalized; (ii)
amortization of debt expense and discount or premium relating to any
indebtedness, whether expensed or capitalized; and (iii) that portion of
rental expense considered to represent interest cost (assumed to be
one-third). Earnings were insufficient to cover fixed charges by $252
thousand for the year ended December 31, 1991.
38
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company is one of the leading manufacturers and marketers of carton
sealing tape and adhesive-backed label stock products in the United States.
Central Products' branded and private label carton sealing tape products are
used primarily for commercial packaging applications, including the packaging of
goods for shipment by manufacturing, retail and distribution companies, and are
sold through its national sales force to over 1,500 paper and office products
distributors nationwide. Brown-Bridge offers a full line of more than 1,500
variations of label stock and sells its products in roll or sheet form to over
1,000 printers, paper merchants and industrial users, who convert the label
stock into labels used for a broad range of end use applications, including
bar-coding, mailing and shipping, packaging for pharmaceutical, food and other
consumer products, office identification and business forms, postage stamp
stock, decorative labels and other specialty industrial uses. The Company also
manufactures and markets industrial process equipment and air pollution control
scrubbers through Entoleter.
The Company has experienced rapid growth which is attributable to the
Central Products Acquisition and the Brown-Bridge Acquisition. Management
believes that at the time of the respective acquisitions, each of the companies
acquired was an underperforming operation. With the Brown-Bridge Acquisition,
the Company entered the adhesive-backed materials industry. The Central Products
Acquisition provided the Company with a leading position in the carton sealing
tape market of the adhesive-backed materials industry. As a result of the
acquisitions of Brown-Bridge and Central Products, the Company became a
manufacturer of the broadest line of adhesive-backed label stock and carton
sealing tape products in the adhesive-backed materials industry.
Subsequent to each of the foregoing acquisitions, the Company has
implemented cost reduction measures, including more effective management,
rationalization of raw materials and component purchasing, improved materials
flow and improved management information systems. The Company believes such
measures will contribute to improved operating profits at Central Products and
Brown-Bridge during 1996 and 1997.
The Company has historically operated at a high level of capacity
utilization. In order to meet production capacity requirements under the postage
stamp stock agreements awarded to Brown-Bridge in 1995 and 1996, Brown-Bridge
has contracted to invest $4.1 million to add a production line to manufacture
silicone liner, a portion of which is currently being outsourced. The Company
expects to incur higher cost of sales (approximately $2.2 million) for the year
ended December 31, 1996 as a result of outsourcing a portion of its production
requirements. The Company anticipates that the additional production line will
be fully operational by the end of the fourth quarter of 1996, which will enable
it to meet its anticipated silicone liner production requirements and
substantially reduce costs associated with its current level of outsourcing
silicone liner.
The cost of the Company's principal raw materials, polypropylene resin and
paper, have generally remained stable over the past several years. During fiscal
1995, however, raw material cost increases (as described below) resulted in
price increases by the Company for its carton sealing tape and adhesive-backed
label stock products. In the first half of fiscal 1995, industry-wide demand for
resin exceeded capacity principally due to a temporary disruption in
industry-wide resin production, which resulted in the Company instituting price
increases for carton sealing tape products. During the second half of fiscal
1995, industry-wide resin capacity increased, which resulted in a decrease in
prices for the Company's carton sealing tape products, as such raw material cost
declines were passed through to customers due to a very competitive pricing
environment. Also during 1995, costs for paper increased, which resulted in the
Company instituting higher prices that were consistent with the increases
instituted by its competitors during 1995 on carton
39
<PAGE>
sealing tape and adhesive-backed label stock products. The increases in raw
material costs during fiscal 1995 on the Company's products did not materially
impact the Company's gross profit because the Company was generally able to pass
along its raw material cost increases without negatively impacting sales of its
products.
During the first half of fiscal 1996, the Company's principal raw material
costs generally remained stable or declined. The Company is not aware of any
significant cost increases planned by its raw material suppliers for the second
half of fiscal 1996. In addition, Brown-Bridge has entered into agreements with
certain raw material suppliers to provide a portion of its estimated adhesive
and paper requirements over the next two years resulting from its pressure
sensitive postage stamp stock supply agreements, which do not have price
adjustments for raw material cost increases. The Company entered into these
agreements, which have ceilings on future price increases, to ensure a minimum
level of profit margins on the pressure sensitive postage stamp stock supplied
by it for use by the Postal Service. Other supply agreements under which the
Company's carton sealing tape products and a portion of its adhesive-backed
label stock products are sold do not contain adjustment mechanisms for
fluctuations in the cost of raw materials, although the Company has generally
passed along raw material price changes for products sold under such agreements,
as well as for products sold to other customers.
The future impact of a change in raw material costs on the Company's
profitability is based in part on pricing from the Company's competitors.
Although historically the Company has generally been able to pass through raw
material cost fluctuations, the Company cannot be assured that future raw
material cost increases can be passed through to its customers and that such
cost increases will not negatively impact the Company's gross profit. See "Risk
Factors--Exposure to Fluctuations in Raw Material Costs; Pressure on Margins."
During fiscal 1994 and 1995, the Company completed the acquisitions of
Brown-Bridge (September 19, 1994) and Central Products (October 4, 1995). These
acquisitions significantly increased the Company's net sales and had a major
impact on its operating results and its financial condition and liquidity. The
operations of each entity are included in the operating results of the Company
from the respective acquisition dates.
NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1995
ACQUISITIONS. Effective October 4, 1995 Central Products Acquisition
Corporation, a wholly-owned subsidiary of the Company, entered into a Stock and
Purchase Agreement with Alco to acquire Central Products, which manufactures and
sells water-activated and pressure sensitive carton sealing tapes. See Note 1 to
Consolidated Financial Statements.
NET SALES. Net sales were $184.4 million for the nine-month period ended
September 30, 1996, versus $77.7 million for the comparable 1995 period, an
increase of $106.7 million. The increase is a result of the acquisition of
Central Products ($95.1 million) and its improved marketing efforts as evidenced
by a 9 percent increase in net sales on a pro forma basis. The remainder of the
increase is attributable to new business activity at Brown-Bridge, including the
previously announced postage stamp stock contracts for the U.S. Posal Service's
pressure-sensitive stamps.
COST OF SALES. Cost of sales for the nine month period ended September 30,
1996, increased by $91.4 million compared with the corresponding period in 1995.
The addition of Central Products accounted for approximately $77.4 million of
the net increase. The remainder of the increase is directly attributable to
increased sales volume at Brown-Bridge. Gross margin for the nine-month period
ended September 30, 1996, improved from comparable 1995 period. This growth in
margin was driven by improved manufacturing efficiencies and product mix.
However, these improvements were offset by unfavorable material cost variances
at Central Products and Brown-Bridge resulting from capacity constraints and new
business activity. At Brown-Bridge, in particular, demand for pressure-sensitive
products required Brown-Bridge to purchase certain materials from suppliers at a
premium over the cost of internally manufacturing such materials. These cost
premiums affected margins by approximately $1.7 million for the nine-month
period
40
<PAGE>
ended September 30, 1996. Brown-Bridge anticipates completing the construction
and implementation of the new flexible silicone and adhesive coater by the close
of the fourth quarter which will increase capacity allowing it to internally
satisfy all of its coating requirements.
The material variances at Central Products, like those at Brown-Bridge, are
a result of the increased cost incurred in outsourcing for necessary materials
at times when internal capacity has reached its limit. The timing of acrylic
orders forced Central Products to fulfill the orders with alternative outsourced
product.
SELLING, GENERAL AND ADMINISTRATIVE. SG&A represents the expenses of the
operating subsidiaries and the Company's corporate office. For the nine months
ended September 30, 1996, SG&A as a percentage of net sales decreased to 9.0%
from 9.6% in the comparable 1995 period. In relative dollars, SG&A increased by
$9.2 million versus the comparable 1995 period. Of the increase approximately
$9.0 million of the increase is related to the addition of Central Products.
INTEREST EXPENSE. Interest expense for the nine month period ended
September 30, 1996 increased by $5.1 million when compared with the
corresponding period for 1995. The increase is attributable to the additional
debt incurred in the Central Products Acquisition (interest expense related to
this debt was $1.6 million for nine months ended September 30, 1996). This
increase was partially offset by lower interest expense at Brown-Bridge through
the reduction of outstanding principal when compared to 1995.
GUARANTEE FEE. As part of the acquisition of Central Products, the
Company's parent (LMC) agreed to guarantee a $25 million note to Alco at a rate
of 0.5% of the principal amount per month ($125 thousand). This guarantee ended
on March 31, 1996, upon the completion of the refinancing of the Alco notes.
INCOME TAXES. The 1996 and 1995 income tax provision provides for federal
and state income taxes at an effective rate of 41%. The 1995 income tax
provision for the nine months ended September 30, 1995 was reduced by $279
thousand due to the reversal of the Company's valuation allowance related to net
deferred tax assets.
FISCAL 1995 COMPARED TO FISCAL 1994
NET SALES. The Company's 1995 net sales were $135.3 million, an increase of
$101.7 million when compared with net sales of $33.6 million in 1994. The
increase in net sales were largely the result of the Central Products
Acquisition and a full year's results from Brown-Bridge, which was purchased in
September 1994. Brown-Bridge accounted for $70.3 million of the increase in net
sales. Central Products accounted for $30.6 million of the increase, with the
balance coming from Entoleter ($800 thousand).
COST OF SALES. Total cost of sales increased by $89.2 million to $117.7
million in 1995 when compared with cost of sales of $28.5 million in 1994. This
increase was attributable to the inclusion of Brown-Bridge for a full year and
the Central Products Acquisition. Included in the 1995 cost of sales is $86.4
million for Brown-Bridge and $26.2 million for Central Products with the
remainder related to Entoleter.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. SG&A for 1995 was $11.8
million, an increase of $7.4 million over 1994. The increase was attributable
primarily to the inclusion of Brown-Bridge for a full year ($4.4 million) and
the Central Products Acquisition ($2.6 million) with the remainder of the
increase attributable to the Company's corporate office. The 1995 SG&A at
Brown-Bridge included a charge of $600 thousand for fees paid to a consulting
firm which was retained for one year to assist Brown-Bridge in establishing
process improvement programs to enable the Company to improve its operations.
This consulting engagement began in 1994 and was completed in 1995. See "Certain
Transactions."
INTEREST EXPENSE. Interest expense for 1995 totaled $4.5 million, of which
$2.2 million, $1.3 million and $245 thousand relates to debt at Brown-Bridge,
Central Products and Entoleter, respectively. The remainder of the interest
expense ($800 thousand) relates to debt at the corporate level incurred in the
Brown-Bridge Acquisition and the Central Products Acquisition. Total interest
expense for 1995 increased by $3.7 million versus 1994 and relates to debt
incurred in the Central Products Acquisition and a full year of interest accrued
on the debt incurred in the Brown-Bridge Acquisition.
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GUARANTEE FEES. The Company accrued a $375 thousand charge for guarantee
fees due to Lynch in connection with debt incurred in the Central Products
Acquisition. This fee is 0.5% per month of the principal amount of certain
indebtedness ($25 million at December 31, 1995) of the Company. See Note 4 to
Consolidated Financial Statements.
INCOME TAXES. The 1995 income tax provision was calculated using a combined
federal state income tax rate of 41%. The Company's effective income tax rate
for 1995 was 11.7% due to a reduction in the tax provision of $279 thousand
attributable to the elimination of the Company's valuation allowance on its
deferred tax assets.
NET INCOME. The Company recorded net income of $561 thousand, or $0.17 per
share for 1995, versus a net loss of $90 thousand, or ($0.03) 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, respectively.
FISCAL 1994 COMPARED TO FISCAL 1993
NET SALES. As a result of the Brown-Bridge Acquisition, 1994 net sales were
$33.6 million, an increase of $27.3 million, compared with net sales of $6.4
million reported in 1993. Brown-Bridge accounted for $26.8 million of the
increase, with the remainder coming from Entoleter.
COST OF SALES. Total cost of sales increased by $24.1 million in 1994 over
1993. This increase was attributable to the inclusion of Brown-Bridge ($23.6
million) and higher costs at Entoleter because of increased sales volume in 1994
and the write-off of $200 thousand of shredder inventory reflecting a change in
strategy within that product line.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. SG&A for 1994 was $4.4
million, an increase of $2.5 million over 1993. The increase was attributable
primarily to Brown-Bridge ($1.8 million) and higher commission and selling
expenses at Entoleter resulting from increased sales volume. The SG&A at
Brown-Bridge includes a charge of $387 thousand for fees paid to a consulting
firm assisting Brown-Bridge to improve its operations and manufacturing
processes. SG&A for 1994 also includes non-recurring charges of $300 thousand
related to the implementation of the management agreement with Messrs. Boyle and
Fleming, and $100 thousand related to the settlement of litigation and related
matters at Entoleter.
INTEREST EXPENSE. Interest expense for 1994 totaled $800 thousand of which
$0.6 million relates to additional debt incurred in the acquisition of
Brown-Bridge. See Note 4 to Consolidated Financial Statements.
OTHER INCOME -- NET. Other income-net for 1994 was $100 thousand, a
decrease of $43 thousand, 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 thousand 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 Company.
NET INCOME. The Company recorded a net loss of $90 thousand, or ($0.03) per
share for 1994, versus net income of $100 thousand, or $0.04 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, respectively.
LIQUIDITY AND CAPITAL RESOURCES
GENERAL
The Company's principal sources of liquidity are expected to be cash flow
from operations and available borrowings under the New Credit Facility. It is
expected that the Company's principal uses of liquidity will be to provide
working capital, finance capital expenditures, fund costs associated with the
Recapitalization Plan and meet debt service requirements. Following the
Recapitalization Plan, the Company remains highly leveraged. The New Credit
Facility provides the Company with an aggregate of $40 million of senior secured
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financing, all of which is expected to be available upon consummation of the
Recapitalization Plan. Based upon current operations, anticipated cost savings
and future growth, the Company believes that its cash flow from operations,
together with available borrowings under the New Credit Facility and its other
sources of liquidity (including leases), will be adequate to meet its
anticipated requirements for working capital, capital expenditures, lease
payments and scheduled principal and interest payments, although the Company
believes that its ability to pay the Notes at maturity will be dependent on the
availability of refinancing indebtedness. There can be no assurance, however,
that the Company's business will continue to generate cash flow at or above
current levels or that estimated cost savings or growth can be achieved. See
"Risk Factors -- Substantial Leverage and Ability to Service Debt," "Risk
Factors -- Management of Growth" and "Risk Factors -- Lack of Combined Operating
History."
The Indenture will impose certain limitations on the ability of the Company
and its Restricted Subsidiaries to, among other things, incur additional
indebtedness, incur liens, pay dividends or make certain other restricted
payments, consummate certain asset sales, enter into certain transactions with
affiliates, issue preferred stock, merge or consolidate with any other person or
sell, assign, transfer, lease, convey or otherwise dispose of all or
substantially all of the assets of the Company or its Restricted Subsidiaries.
In addition, the New Credit Facility will contain other and more restrictive
covenants and will prohibit the Company from prepaying the Notes. The New Credit
Facility also will require the Company to maintain specified financial ratios
and satisfy certain financial tests. The Company's ability to meet such
financial ratios and tests may be affected by events beyond its control. There
can be no assurance that the Company will meet such tests. See "Description of
New Credit Facility."
SEPTEMBER 30, 1996 COMPARED TO SEPTEMBER 30, 1995
The Company used $590 thousand in net cash for operating activities during
the nine months ended September 30, 1996, compared to $846 thousand in net cash
generation in the corresponding period in 1995. The change in cash from
operations is attributable to increased working captial demands, primarily in
inventories, due to a growing revenue base. EBITDA for the nine months ended
September 30, 1996 was $12.5 million compared to $3.3 million in the comparable
1995 period. Net working capital at September 30, 1996 was negative $2.1 million
versus $7.9 million at December 31, 1995, a decrease of $10 million. This
decrease is directly attributable to the current classification of $7.0 million
subordinated note due April 5, 1997 and borrowings against the Company's working
capital revolver. Cash utilized in investing activities were for capital
improvements at Brown-Bridge, principally a silicone and adhesive coater, and
the acquisition of a warehouse facility in Brighton, Colorado utilized by
Central Products.
As of December 18, 1996, there was approximately $300,000 outstanding
against the New Credit Facility.
DECEMBER 31, 1995 COMPARED TO DECEMBER 31, 1994
Net capital expenditures for 1995 were $1.6 million, primarily for the
purchase of machinery and building improvements. The Company estimates spending
approximately $9 million of capital expenditures in 1996 and projects that it
will spend approximately $8 million of capital expenditures in 1997, which
together include the Company's planned investment of $10 million over the next
two years for expansion of production capacity at Central Products ($6 million)
and Brown-Bridge ($4 million).
The Company's business is subject to significant risks that could cause the
Company's results to differ materially from those expressed in any
forward-looking statements made in this Offering Memorandum. These risks include
the matters set forth above under this caption, under "Risk Factors," and
elsewhere herein.
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INDUSTRY
The Company considers the adhesive-backed materials industry to be over $5
billion, consisting of the $3.3 billion total tape market and the $2 billion
adhesive-backed label stock market. The Company competes in the carton sealing
tape and adhesive-backed label stock markets within the adhesive-backed
materials industry. The carton sealing tape market is part of the $1.2 billion
portion of the total tape market which relates to packaging and sealing tape
applications and the remaining portion of the market relates to tapes for other
applications, such as electrical, automotive, industrial and medical, which the
Company does not manufacture. The adhesive-backed label stock market excludes
the glue applied labels market in which the Company does not compete because
glue applied labels are applied to printed label stock, whereas adhesive-backed
label stock uses different technologies to apply an adhesive layer to the
backing.
CARTON SEALING TAPE MARKET
The Company estimates that the carton sealing tape market is approximately
$550 million, of which $430 million relates to pressure sensitive tape and $120
million relates to water sensitive tape. According to independent studies,
pressure sensitive tape for packaging and sealing constitute the largest
pressure sensitive tape applications and is estimated to increase approximately
7% annually from $1.1 billion in 1993 to $1.5 billion in 1998. Within this
category, sealing and forming of corrugated boxes and other shipping containers,
otherwise referred to herein as carton sealing, is the fastest growing tape
function.
Carton sealing tape market growth is expected to be driven by the continued
use of pressure sensitive tapes (natural rubber adhesive, acrylic adhesive and
hot-melt adhesive) to replace and supplement other joining methods, such as glue
and staples and, to a lesser extent, water sensitive applications. Pressure
sensitive tapes offer advantages over competing materials, such as cold press
glues, including ease of operation, less physical infrastructure requirements,
cost effectiveness in terms of lower energy and chemical material requirements,
convenience and high speed application capabilities. Demand in the carton
sealing tape market is also correlated to the demand for corrugated boxes. Sales
of corrugated boxes are projected to increase over 7% per year from $16.4
billion in 1993 to $23.4 billion in 1998, reflecting increases in industrial
production activity and manufacturers' shipments of both durable and nondurable
goods, in addition to increased specialized shipping (e.g., mail order
products), increased population relocation trends (e.g., packaging and shipment
of personal items) and increased shipments of content with high value which
requires enhanced package security and quality.
The Company expects demand for water sensitive tape products (fiberglass
reinforced and non-reinforced) to grow due to increased shipments of high value
products and demand for recycled paper content in paper products. The majority
of water sensitive tape revenue of the Company is generated from fiberglass
reinforced tapes which provide extra support and rigidity to cartons as well as
increased security.
The Company estimates that water sensitive tape growth is driven, in part,
by the use of recycled corrugated boxes which is continuing to grow because of
environmental concerns. Water sensitive tapes are constructed of environmentally
safe, biodegradable material that increases their re-pulpability for use in
recycled paper products. Over the last several years, pressure sensitive tapes
have grown rapidly at the expense of other tapes for a range of applications.
However, for certain carton sealing functions, such as sealing recycled
corrugated cartons, water sensitive tapes perform more effectively than pressure
sensitive tapes. Consequently, water sensitive tape products remain an integral
part of the Company's carton sealing tape business. Environmental concerns have
further benefitted the water sensitive tape market because of the perception
that paper-backed tape is environmentally safer than film-backed pressure
sensitive tapes. Lastly, the Company believes that through development of new
and improved equipment for dispensing and applying water sensitive tape, water
sensitive tape products will become more competitive with pressure sensitive
tape products.
Carton sealing tape products and other adhesive-backed carton closure
products are sold primarily through national, regional and local distributors,
some of which resell under private labels. Distributors and private label buyers
are the key decision makers for most carton sealing and closure applications.
The
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distributor often makes purchasing decisions based on the manufacturer's ability
to provide a full range of products to meet its customers' needs. The Company
manufactures the broadest range of private label carton sealing tape products
and has supply arrangements with the two largest national distributors. As
distributors continue to simplify their purchasing organizations and consolidate
their relationships, the Company expects to continue to benefit from this
consolidation trend.
ADHESIVE-BACKED LABEL STOCK MARKET
According to independent studies, the adhesive-backed label stock market is
approximately $2 billion, of which $1.7 billion relates to pressure sensitive
label stock products and $250 million relates to water and heat sensitive label
stock products. According to independent studies, pressure sensitive label stock
demand is projected to grow approximately 8% annually from $1.7 billion in 1994
to $2.7 billion in 2000, representing approximately 50% of the overall labels
market, whereas the more mature glue applied labels market is growing at
approximately 5% annually. The rapid growth in this market is attributable, in
part, to several advantages pressure sensitive labels have over traditional
glue-applied labels, such as reduced wrinkling and superior adhesion and
durability. Other factors contributing to the growth of pressure sensitive label
stock include: (i) new government regulations requiring an increase in the
amount of information displayed on consumer and industrial products, including
food, bulk chemicals, household appliances and automobiles; (ii) increased use
of barcoding to track retail sales of consumer products and business inventories
in a wide variety of manufacturing industries; (iii) continued demand from
businesses for targeted promotional material; (iv) continued need for
manufacturers to reduce potential product liabilities by providing consumers
with more instructions on product usage and (v) the emergence of product line
extensions that increase customer convenience, such as pressure sensitive
postage stamps.
Adhesive-backed label stock products consist of pressure, water and heat
sensitive paper and pressure sensitive film products. Pressure sensitive
products account for over 85% of total demand for adhesive-backed label stock
products and pressure sensitive products are expected to grow more than 10%
annually over the next several years. Pressure sensitive products are generally
preferred by customers as a result of their ease of use, despite their higher
price relative to water and heat sensitive products.
Other label stock products such as glue applied labels and direct product
imprinting can be substituted for adhesive-backed film and paper products.
However, these alternative technologies have not historically provided
significant competition to adhesive-backed products, principally due to relative
cost considerations. Because the cost of labeling and marking using
adhesive-backed products is low relative to the cost of most end use products,
users have little incentive to switch to alternative technologies.
The Company estimates that approximately 75% of adhesive-backed label stock
products are sold directly to printers, with sales to paper merchants and
converters accounting for the balance. The Company believes that customer
purchasing decisions are based upon consistent quality and delivery with price
being a secondary, but important, factor. The nature of customer's custom
printing specifications creates additional high switching costs for the buyer
relative to the benefits of obtaining a price discount. Management believes its
strong manufacturing capabilities and product focus on quality and service
contributed to Brown-Bridge's recent supply agreements to provide the Postal
Service with up to $35 million of pressure sensitive postage stamp stock.
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BUSINESS
GENERAL
Spinnaker is a leading manufacturer and marketer of adhesive carton sealing
tape and adhesive-backed label stock, primarily for the carton sealing tape and
pressure sensitive label stock markets. The Company's strategy is to focus on
the growing pressure sensitive markets for carton sealing tape and label stock
applications, while pursuing acquisitions within the adhesive-backed materials
industry that complement its existing businesses. The Company's products are
grouped into two principal businesses that accounted for the following
percentages of pro forma 1995 net sales: pressure and water sensitive carton
sealing tape (54%) and adhesive-backed label stock (43%). For the fiscal year
ended December 31, 1995, the Company had net sales of $226.6 million and
Adjusted EBITDA (as defined) of $20.5 million on a pro forma basis after giving
effect to the adjustments described under "Unaudited Pro Forma Financial Data."
Central Products, founded in 1917, is a leading manufacturer of carton
sealing tape and offers the broadest line of such products in the United States.
According to Company estimates, Central Products has a greater than 50% share of
the water sensitive carton sealing tape market, where its revenues are more than
twice those of its next largest competitor. In the pressure sensitive carton
sealing tape market, Central Products is one of the three largest manufacturers
for carton sealing tape applications, and the Company believes that Central
Products is the only manufacturer of all pressure sensitive technologies
(acrylic, hot melt and natural rubber), which provides the Company with a
competitive advantage by allowing it to meet the broadest range of application
requirements of its customers. Its branded and private label products are used
primarily for commercial packaging applications and are sold through its
national sales force to over 1,500 paper and office products distributors
nationwide, including the largest national distributors of paper products, for
resale to over 20,000 end users. In 1995, in connection with the Central
Products Acquisition, Central Products entered into a private label supply
agreement with Unisource, the largest United States distributor of office paper
products, to supply a complete line of private label carton sealing tape
products. Unisource is a subsidiary of Alco, the former owner of the Central
Products Operations prior to the Central Products Acquisition. In 1995, Central
Products also became a major vendor to ResourceNet, the second largest
distributor of paper products in the United States, to supply a full line of
private label water sensitive and pressure sensitive carton sealing tape
products. The Company believes that these arrangements with key customers
distinguish the Company's leading position as the only one-stop manufacturer of
private label products in the carton sealing tape market.
Brown-Bridge was founded in 1928 and, according to Company estimates, is the
fifth largest manufacturer of adhesive-backed label stock and is the only
manufacturer of all adhesive-backed paper technologies (pressure, water and heat
sensitive), which enables the Company to provide a broad range of standard and
custom adhesive-backed label stock products that meet the design specifications
of its customers. Brown-Bridge offers a full line of more than 1,500 variations
of adhesive-backed label stock and sells its products in roll and sheet form to
over 1,000 printers, paper merchants and industrial users. Customers convert its
label stock into labels used for a broad range of end use applications,
including bar-coding, mailing and shipping, packaging for pharmaceutical, food
and other consumer products, office identification and business forms, postage
stamp stock, decorative labels and other specialty industrial uses. Brown-Bridge
is the largest supplier of pressure sensitive postage stamp stock for use by the
Postal Service.
BUSINESS STRATEGY
The Company's strategy is to enhance its market position by focusing on the
following:
PURSUE ACQUISITIONS. The Company plans to pursue acquisitions which
complement its position in the adhesive-backed materials industry. The Company
has experience identifying and integrating acquisitions with its existing
businesses, as evidenced by its acquisitions of Central Products and
Brown-Bridge. The Company believes that the carton sealing tape and label stock
markets are fragmented, as approximately 45% of the carton sealing tape market
and approximately 30% of the adhesive-backed label stock market is
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held by numerous competitors that are smaller than the Company. The Company
intends to use its existing businesses as platforms to take advantage of
consolidation opportunities to acquire complementary product lines or businesses
to increase its market share in the adhesive-backed materials industry.
DEVELOP KEY CUSTOMERS. The Company intends to focus on strengthening its
relationships with large distributors for its carton sealing products. As
customers consolidate their purchases among selected national suppliers, the
Company will continue to pursue strategic partnerships, such as those with
Unisource and ResourceNet, to supply a full line of carton sealing tape products
to meet all of their requirements. For its label stock customers, the Company
intends to focus on expanding its customer base in niche markets by working with
customers to develop custom product applications.
INTRODUCE NEW PRODUCTS. The Company intends to target new product growth
opportunities to increase market share. For example, the Company worked closely
with a supplier to the Postal Service to develop new pressure sensitive roll,
booklet and sheet stamp products to meet the needs of this growing market
segment. The Company has utilized existing manufacturing capabilities to create
product line extensions such as over-laminating film for use in labeling
applications. The Company believes that the breadth of its product line,
commitment to product quality and reputation for innovation will continue to
enable it to increase its market share through the introduction of new products.
IMPROVE OPERATING EFFICIENCIES. The Company intends to improve overall
operating efficiencies through its C(2)E program at Brown-Bridge and other
operating improvement programs at Central Products. These programs will focus on
a variety of efficiency initiatives, such as improving through-put, reducing
working capital needs, and reducing overall costs. For example, the expansion of
silicone coating capacity at Brown-Bridge is intended to reduce costs connected
with outsourcing silicone coated liner, which management estimates to be
approximately $2 million during fiscal 1996. Various contingencies could affect
the realization of the projected cost savings. In particular, and without
limiting the contingencies that could affect the realization of the projected
cost savings described above, such projected savings would be adversely affected
if the installation of the capital equipment required to expand the silicone
coating capacity is delayed, the Company experiences problems with such
equipment or the Company's needs for silicone coated liner are less than those
currently projected by it.
EXPAND PRODUCTION CAPACITY. In order to take advantage of anticipated
growth in its existing markets, the Company intends to expand production
capacity at both Brown-Bridge and Central Products to meet increasing customer
demand. The Company plans to invest approximately $10 million over the next two
years, which includes the silicone coater expansion, to add capacity to meet
anticipated demand for pressure sensitive carton sealing tape and add pressure
sensitive coating capacity for label stock which is currently outsourced. By
adding production capacity, the Company expects to increase sales volume and
market share while improving overall gross margins.
FOCUS ON CUSTOMER SERVICE. The Company intends to maintain its reputation
for excellent customer service. The Company has recently completed a new
management information system at Brown-Bridge and is upgrading its computer
system at Central Products in order to provide customer service departments with
on-line information to reduce the time and cost associated with order
fulfillment. The Company's research and development department provides its
customers with custom label stock solutions for unique end user applications. In
addition, the Company conducts frequent product education and technical support
programs for its customers at certain of its carton sealing tape facilities.
CENTRAL PRODUCTS
Central Products' carton sealing tape is used for the packaging of goods for
shipment by manufacturing, retail or distribution companies. Central Products
manufactures pressure sensitive tape with all three primary adhesive
technologies: acrylic, hot melt and natural rubber. It also offers three types
of water sensitive tape: paper tape, fiberglass reinforced tape and box tape.
Central Products believes it is the only United States supplier to manufacture
both pressure sensitive tape and water sensitive tape, and is the only company
to produce pressure sensitive tape utilizing all three pressure sensitive
adhesive technologies.
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PRESSURE SENSITIVE TAPE. Pressure sensitive tape is manufactured primarily
through the coating of plastic film with a thin layer of acrylic, hot melt or
natural rubber adhesive. 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 adhesives, which are noted for their clarity,
non-yellowing properties, good temperature resistance and low application cost,
are best suited for manual applications on light and medium carton sealing
situations. Hot melt adhesives, noted for their quiet release and easy unwind
during application, are the most widely used pressure sensitive adhesives
because they satisfy 90% of all carton sealing requirements. Natural rubber
adhesives are unique because of their aggressive adhesion properties and,
although they are ideal for recycled content cartons and cartons requiring hot,
humid or cold packing, transportation and storage, they can be used for a wide
variety of surface conditions and extreme temperature tolerances. Central
Products' pressure sensitive tapes are sold under the trade names
Alltac-Registered Trademark- and Central-Registered Trademark-.
WATER SENSITIVE TAPE. Water sensitive tape is generally manufactured
through the application of a thin layer of water sensitive adhesive to gumming
kraft paper. It is offered as either non-reinforced (paper) tape or fiberglass
reinforced tape. Non-reinforced tape is made by applying an adhesive to a single
layer of high tensile strength kraft paper coated with Central Products'
patented starch-based adhesive. Non-reinforced tapes are totally biodegradable
and are used in light to medium carton sealing applications. Fiberglass
reinforced tape contains a layer of fiberglass yarn placed between two layers of
kraft paper, and is typically used to seal heavy packages or on cartons that
will be subject to a high level of abuse during shipping and is also favored in
shipping high value goods due to its strong sealing qualities. Both
non-reinforced tape and fiberglass reinforced tape are available in light,
medium and heavy grades. Central Products' water sensitive carton sealing tapes
are sold under the trade names Glasseal-Registered Trademark-,
Central-Registered Trademark-, Green CoreTM and Tru-SealTM.
Central Products also supplies tape dispensing equipment manufactured by
other companies. It currently offers a broad line of carton sealing equipment
for pressure sensitive tape, which ranges from hand held dispensers to automatic
random sizing equipment. Central Products also offers two types of table top
dispensers for water sensitive tape -- a manual dispenser and a more expensive
electric dispenser.
BROWN-BRIDGE
Brown-Bridge develops, manufactures and markets adhesive-backed label stock
that is converted by printers and industrial users into products that are
utilized for marking, identifying, labeling and decorating applications and
products. Brown-Bridge's products are offered in three primary adhesive
categories: pressure sensitive, water sensitive and heat sensitive.
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.
Brown-Bridge's pressure sensitive products are sold under the trade names Strip
Tac-Registered Trademark- and Strip Tac Plus-Registered Trademark-. 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. Sheet pressure
sensitive products are sold to commercial sheet printers, who provide
information labels and other products (such as laser printer stock). During
fiscal 1995, pressure sensitive products constituted approximately 85% of
Brown-Bridge's net sales.
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. 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 trade name
Pancake-Registered Trademark- and consists of three product groups: dry process,
conventional gummed and industrial. Dry process is sold primarily for label and
business form uses. Conventional gum
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products serve many of the same end uses for hand applied labels as dry process
stock. A major portion of these products is sold for government postage and
promotional stamp uses. Industrial products are sold in several niche markets,
such as electrical and other specialty markets.
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, such as 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's heat sensitive products are sold under the trade name Heat Seal.
MARKETING AND CUSTOMERS
The Company markets its broad range of products to a variety of customers.
During 1995, no single customer accounted for more than 10% of the Company's net
sales.
Central Products' marketing and sales strategy emphasizes supplying a full
line of both water sensitive and pressure sensitive tape products to the carton
sealing tape industry. Central Products believes that it is the only company in
the industry supplying a complete line of water sensitive and pressure sensitive
tape products for the carton sealing market, and, as a result, Central Products
is unique in its capacity to provide their customers with all of the benefits of
a one-stop supplier.
Central Products sells its products directly to over 1,500 paper
distributors (customers), who in turn resell these tape products to the end user
markets. In addition, Central Products sells private-brand carton closure tapes
direct to large customers who in turn distribute the products under their name
to end users. Central Products provides its distributor customers with a high
level of product education to enable them to better sell the Company's products.
Central Products maintains a training center at its Menasha facility, where it
conducts a "Tape School" five times yearly for educating customers about its
products. Central Products also provides on-site training and gives its
distributors in-depth product literature and technical materials.
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, to broaden its market penetration,
Brown-Bridge 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.
The Company's customers are leaders in their markets and include the two
largest paper distributors in the United States and end users that are some of
the largest corporations in the United States. Management believes that the
Company's customer base is stable in large part due to high product switching
costs.
MANUFACTURING AND RAW MATERIALS
Management believes that the Company is the only manufacturer of all
adhesive technologies for carton sealing tape and adhesive-backed label stock.
The Company's operations utilize advanced manufacturing methods and
sophisticated equipment to produce carton sealing tapes and label stock for a
variety of standard and custom applications requiring water, pressure and heat
sensitive technologies. The Company believes its strong manufacturing
capabilities enable it to maintain high product quality and low operating costs
and respond to customers' needs quickly and efficiently.
To improve efficiency, the Company has adopted a variety of operating
improvement programs. For example, Central Products adopted the "Crosby Quality
Process" in 1990 for implementations of total quality initiatives throughout its
organization. All of its Menasha plant employees and corporate employees
received approximately 30 hours in comprehensive training on quality concepts,
leading to substantial, quantifiable results, including reductions in machine
downtime, material waste and other costs at Menasha which have resulted in $2
million in cost reductions during the last three years, according to
management's estimates. A similar program has been implemented at the Central
Products' Brighton facility yielding
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equally positive results. The Company also intends to improve operating
efficiencies at Brown-Bridge through its C(2)E program and other programs which
will focus on a variety of efficiency initiatives intended to improve
productivity at Brown-Bridge. One such initiative is the silicone coating
capacity expansion at Brown-Bridge, which is expected to reduce costs connected
with outsourcing silicone coated liner, and is projected to result in at least
$2.2 million of annualized cost savings each year, according to management's
estimates.
Raw materials are the most significant cost component in Spinnaker's
production process. The material component accounts for approximately 65% to 70%
of the total cost of its products, with the most important raw materials being
paper (gumming kraft and face stock), adhesive materials, fiberglass, and
polypropylene resin. These materials are currently readily available and are
procured from numerous suppliers.
Among the Company's manufacturing strengths at its Central Products water
sensitive tape operation are fully integrated, computerized coating and
laminating machines, fully automated slitting, rewinding and packaging machines
and a state of the art print shop. At its pressure sensitive tape operation,
they include an in-house film line for production of polypropylene film and an
advanced computerized coating machine for each of the three adhesive
technologies.
COMPETITION
The adhesive-backed materials industry is highly competitive, and the
Company competes with both national and regional suppliers. As a result of the
competitive environment in the markets in which the Company operates, the
Company faces (and will continue to face) pressure on sales prices of its
products. As a result of such pricing pressures, the Company may in the future
experience reductions in the profit margins on its sales, or may be unable to
pass future raw material price increases to its customers (which would also
reduce profit margins). The Company operates in markets characterized by a few
large diversified companies selling products under recognized trade names and a
number of smaller public and privately-held companies selling to the market. In
addition to branded products, some companies in the industry produce
private-label products to enhance supply relationships with large buyers.
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 large diversified corporations (principally
in pressure sensitive) and small private companies (principally in water
sensitive tape). Central Products is one of the leading manufactures of water
sensitive tape. 3M Corporation is the largest manufacturer of pressure sensitive
tape in the carton sealing market in the United States.
The adhesive-backed label stock market is fragmented. The Company competes
with several national manufacturers, including Avery-Dennison, Bemis, 3M
Corporation and a number of smaller regional manufacturers. The Company believes
that Avery-Dennison, Bemis and 3M Corporation are the only competitors with
national production facilities and Avery-Dennison and 3M Corporation are the
only competitors with nationally recognized brand names.
ENVIRONMENTAL REGULATIONS
The Company is subject to environmental laws and regulations governing
emissions to the air, discharges to waterways, and generation, handling,
storage, transportation, treatment and disposal of waste materials. The Company
is also subject to other federal and state laws and regulations regarding health
and safety matters. Environmental laws and regulations are constantly evolving
and it is impossible to predict the effect that these laws and regulations will
have on the Company in the future. While the Company believes it is currently in
substantial compliance with all such environmental laws and regulations, there
can be no assurance that it will at all times be in complete compliance with all
such requirements. In addition, although the Company believes that any
noncompliance is unlikely to have a material adverse effect on the Company, it
is possible that such noncompliance could have a material adverse effect on the
Company. The Company has made and will continue to make capital expenditures to
comply with environmental requirements. As is
50
<PAGE>
the case with manufacturers in general, if a release of hazardous substances
occurs on or from the Company's properties or any associated offsite disposal
location, or if contamination from prior activities is discovered at any of the
Company's properties, the Company may be held liable and the amount of such
liability could be material.
PATENTS AND TRADEMARKS
Patents are held by the Company with respect to the manufacture of certain
of its products, but management does not consider such patents to be important
to the Company's operations. The patents expire over various lengths of time
with the last patent expiring in about 10 years. The Company has registered
several of its trade names and trademarks for adhesive-backed materials. The
Company does not believe that its use of trademarks or trade names infringes on
the rights of any third parties.
INTERNATIONAL SALES
The Company's foreign sales were $10.4 million, $3.9 million and $0.8
million in 1995, 1994 and 1993, respectively. Of the $10.4 million in 1995
foreign sales, approximately $6.6 million were represented by exports of
Brown-Bridge products. The substantial majority of these sales were to Canadian
customers and, consequently, the Company believes that the risks commonly
associated with doing business in foreign countries are minimal. The
profitability of foreign sales is substantially equivalent to that of domestic
sales. Because foreign sales are transacted in United States 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 Company believes that the
risks commonly associated with doing business in foreign countries are
minimized.
LITIGATION
The Company from time to time is involved in various legal proceedings
arising in the ordinary course of business operations, such as employment
matters, contractual disputes and personal injury claims. There are no
proceedings currently pending for which the Company's potential liability would
be material to its financial condition or results of operations.
BACKLOG
The Company's backlog believed to be firm was $10.7 million at December 31,
1995, as compared to $6.3 million at December 31, 1994. Of the $10.7 million
backlog of firm orders at such date, approximately $5.7 million was represented
by Brown-Bridge's customers, and approximately $3.1 million was represented by
Central Products' customers with the remainder related to Entoleter. The Company
believes that all such orders will be shipped in 1996.
INDUSTRIAL PROCESS EQUIPMENT BUSINESS
Through its Entoleter subsidiary, the Company engineers, manufactures and
markets a line of industrial process equipment and a line of air pollution
control equipment. Entoleter's net sales consist entirely of sales to commercial
and industrial customers.
EMPLOYEES
As of December 31, 1995, the Company employed approximately 1,100 persons,
of which 370 were Brown-Bridge employees, 680 were Central Products employees
and 40 were Entoleter employees. All employees other than management are paid on
an hourly basis. A majority of its hourly employees are not represented by
unions. Central Products has a labor agreement expiring in 1998 with the United
Paperworkers International Union AFL-CIO covering approximately 200 hourly
employees at the Menasha, Wisconsin plant. Entoleter's approximately 20
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, 1999. The Company believes that its relations with its
employees are good; however, there can be no assurance that the Company will not
experience work stoppages or slowdowns in the future.
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<PAGE>
PROPERTIES
The Company's principal executive offices are located in Dallas, Texas,
where it shares office space with an affiliate of its principal executive
officers. The following table sets forth certain information with respect to the
principal operating and administrative facilities used by the Company:
<TABLE>
<CAPTION>
APPROXIMATE OWNED OR
LOCATION SQUARE FEET LEASED EXPIRATION OF LEASE
- --------------------------------------------------------- ------------ ----------- -------------------
<S> <C> <C> <C>
CENTRAL PRODUCTS
Menasha, Wisconsin..................................... 160,000 Owned N/A
Menasha, Wisconsin..................................... 20,000 Owned N/A
Neenah, Wisconsin...................................... 90,000 Leased April 25, 1998
Linden, New Jersey..................................... 30,000 Leased Month-to-Month
Brighton, Colorado..................................... 211,000 Leased January 31, 2014
Denver, Colorado....................................... 100,000 Owned N/A
BROWN-BRIDGE
Troy, Ohio (Plant One)................................. 200,000 Owned N/A
Troy, Ohio (Plant Two) (1)............................. 98,000 Owned N/A
Waco, Ohio............................................. 20,600 Leased Month-to-Month
ENTOLETER
Hamden, Connecticut.................................... 72,000 Owned N/A
</TABLE>
- ------------------------
(1) Brown-Bridge also owns a five-acre tract adjacent to this tract that is
available for expansion.
52
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The name, age and position(s) of each director and executive officer of the
Company is as follows:
<TABLE>
<CAPTION>
PRINCIPAL POSITION
NAME AGE AND OFFICES WITH THE COMPANY
- ------------------------- --- -----------------------------------------------------------
<S> <C> <C>
Richard J. Boyle 62 Chairman and Chief Executive Officer
Ned N. Fleming, III 36 President and Director
Philip Wm. Colburn 67 Director
Robert E. Dolan 44 Director
Frank E. Grzelecki 59 Director
Joseph P. Rhein 69 Director
Anthonie C. van Ekris 61 Director
K. C. Caldabaugh 49 Chairman, Chief Executive Officer and President --
Brown-Bridge
John R. Powers 63 President -- Central Products
Mark R. Matteson 33 Vice President, Corporate Development
James W. Toman 45 Controller and Assistant Secretary
</TABLE>
RICHARD J. BOYLE
Mr. Boyle has been a director and Chairman and Chief Executive Officer of
the Company since June 1994. Mr. Boyle also has served as a Managing Director of
BF since 1993. From 1990 to 1992, Mr. Boyle was President and Chief Executive
Officer of LTV Aerospace and Defense Company, a manufacturer of aircraft,
missiles and specialty vehicles. Mr. Boyle 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 and several privately-held companies.
NED N. FLEMING, III
Mr. Fleming became a member of the Board of Directors and President of the
Company in June 1994. In addition, Mr. Fleming is a Managing Director of BF, a
position he has held since 1993. From 1988 to 1993, Mr. Fleming was an Associate
at Cardinal Investment Company, Inc., an investment concern. Mr. Fleming serves
on the board of directors of several privately-held companies.
PHILIP WM. COLBURN
Mr. Colburn, elected to the Board of Directors of the Company in March 1996,
has been the Chairman of The Allen Group, Inc. ("AGI") since 1992. From 1988 to
1992, Mr. Colburn was the Chief Executive Officer of AGI. Mr. Colburn is a
director of AGI, Superior Industries International, Earl Scheib, Inc. and
TransPro, Inc.
ROBERT E. DOLAN
Mr. Dolan became a director of the Company in November 1995. Since February
1992, he has been the Chief Financial Officer of Lynch, and he has been its
Controller since May 1990. From 1984 to 1989, Mr. Dolan was the Corporate
Controller of Plessy North America Corporation, which was formerly a United
States subsidiary of a United Kingdom defense electronics and telecommunications
company.
FRANK E. GRZELECKI
Mr. Grzelecki is President and Chief Operating Officer of Handy & Harman, a
New York-based diversified manufacturer. Prior to being named President and
Chief Operating Officer in 1992, Mr. Grzelecki had served as Vice Chairman of
the Handy & Harman board of directors for three years. Prior to joining Handy &
Harman, Mr. Grzelecki was a management consultant. From 1984 until 1986, he was
a
53
<PAGE>
Corporate Executive Vice President and a member of the board of directors of
Beatrice Companies, Inc., where he also served as President of the Beatrice
Consumer Products division. Mr. Grzelecki currently serves on the board of
directors of Handy & Harman, The Morgan Group, Inc. and Chartwell Re
Corporation.
JOSEPH P. RHEIN
Mr. Rhein has served as director of the Company since 1992 and has been a
business consultant since 1989. From 1969 to 1989, Mr. Rhein was Vice President
of Finance of SPS Technologies, Inc., a diversified world-wide manufacturing
company.
ANTHONIE C. VAN EKRIS
Mr. van Ekris has been a director of the Company since December 1995. Mr.
van Ekris is Chairman and Chief Executive Officer of Balmac International, Inc.,
a New York based importer of coffee and cocoa and exporter of refrigeration
equipment, a position he has held since 1991. He also serves as a Director of
Stahel (America), Inc., The Gabelli US Treasury Money Market Fund, Gabelli Gold
Fund, Gabelli International Growth Fund, Inc., The Gabelli Growth Fund, The
Gabelli Asset Fund, The Gabelli Convertible Securities Fund, Inc., The Gabelli
Small Cap Growth Fund, The Gabelli Equity Income Fund, The Gabelli Global
Telecommunications Fund, The Gabelli Global Convertible Securities Fund, The
Gabelli Global Interactive Couch Potato Fund and Gabelli Capital Asset Fund.
OTHER EXECUTIVE OFFICERS OF THE COMPANY AND ITS SUBSIDIARIES
K. C. CALDABAUGH
Mr. Caldabaugh has been the Chairman, Chief Executive Officer and President
of Brown-Bridge 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 joined Central Products 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 became Vice President, Corporate Development of the Company in
January 1995. During 1994, Mr. Matteson was an Associate at BF. 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 where he earned a
Masters degree in business administration.
JAMES W. TOMAN
Mr. Toman has been Controller of the Company since January 1995. From 1991
to 1994, he was Chief Financial Officer of Entoleter. Mr. Toman served as the
Controller of Oxford Health Plans, Inc. from 1988 until 1991, and, from 1986 to
1988, served as the Assistant Treasurer at Moore McCormack Resources, Inc.
DIRECTOR TERMS
The Bylaws of the Company provide that the Board of Directors (who are
elected annually) 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 generally may be filled by the Board of Directors at any meeting.
LMC, a wholly-owned subsidiary of Lynch, is the holder of a majority of the
outstanding Class A Common Stock and the outstanding Common Stock; therefore, it
has the power to elect the Board of Directors of the Company and its
subsidiaries. Prior to termination of the Management Agreement, nominations to
the Board were subject to the terms of a voting agreement among the Company, LMC
and BF, an affiliate of Richard J. Boyle and
54
<PAGE>
Ned N. Fleming, III, pursuant to which BF would nominate one director and LMC
would nominate the rest of the Board. Messrs. Boyle, Dolan, Gabelli, Rhein,
Colburn and van Ekris are the persons who were nominated by LMC and Mr. Fleming
is the person who was nominated by BF. See "-- Certain Transactions."
BOARD COMMITTEES
The Board of Directors has established two standing committees, the Audit
Committee and the Compensation Committee. The Audit Committee consists of
Messrs. Colburn and Rhein. Mr. Rhein currently is Chairman of the Audit
Committee. The principal duties of the Audit Committee are to recommend to the
Board of Directors the appointment of independent auditors; to review annual
financial reports to stockholders prior to their publication; to review the
report by the independent auditors concerning management procedures and
policies; and to determine whether the independent auditors have received
satisfactory access to the Company's financial records and full cooperation of
corporate personnel in connection with their audit of the Company's records. The
Audit Committee met once during 1995.
The Compensation Committee, which was created in August 1996, consists of
Messrs. Colburn and van Ekris. Mario J. Gabelli, a former director of the
Company, served on the Compensation Committee until December 31, 1996.
The Company does not have a nominating committee or executive committee.
Nominations for directors and officers are considered by the entire Board of
Directors.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Mr. Dolan and Mr. Gabelli are executive officers of Lynch, which through LMC
beneficially owned 62.8% of the Old Stock as of June 30, 1996. Messrs. Boyle and
Fleming are executive officers of the Company, and Mr. Boyle served as a
director of Lynch, 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 Company, the Company entered into the Management
Agreement with BF, pursuant to which Mr. Boyle became the Chairman of the Board
and Chief Executive Officer and Mr. Fleming became the President of the Company
and both were elected to the Board of Directors. See "-- Certain Transactions."
COMPENSATION OF DIRECTORS
The Company maintains through Lynch 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 Company or Lynch receives a director's fee of $1,000 per month and an
additional $1,000 for each Board or committee meeting the director attends and
also is granted options for 10,000 shares of Class A Common Stock and 10,000
shares of Common Stock (after giving effect to the Stock Split), which vest over
a period of two years. Pursuant to an agreement with LMC, Mr. Colburn also
receives annual compensation equal to the difference between $50,000 and the
director's fees paid to him by the Company each year for serving as a director
of the Company.
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 Company and the three other most highly compensated executive officers who
earned more than $100,000.
55
<PAGE>
SUMMARY COMPENSATION TABLE (1)(2)
<TABLE>
<CAPTION>
OTHER ANNUAL ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY ($) 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)
Chairman, Chief Executive Officer and 1994 --(6) -- -- --
President of Brown-Bridge (6)
John R. Powers......................... 1995 $ 194,300(7) $ 194,300(7)(8) $ 11,500(7) $ 3,000(7)(9)
President of Central
Products (7)
</TABLE>
- ------------------------------
(1) Neither the Chief Executive Officer nor any of the other three most highly
compensated executive officers was employed by the Company before 1994.
(2) Except as noted, the Company 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 agreements.
(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 the Management Agreement and other related agreements. During the
term of the Management Agreement, they received no salary from the Company,
but under the Management Agreement, BF received a management fee of
$200,000 per year, plus the reimbursement of expenses. Effective January
1996, the management fee was increased to $400,000 per year. Effective upon
termination of the Management Agreement, the Company began paying Messrs.
Boyle and Fleming an aggregate salary of $400,000 per year as employees of
the Company. See "-- 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 Chairman, Chief Executive Officer and President of
Brown-Bridge upon its acquisition by the Company in September 1994. As part
of Mr. Caldabaugh's employment agreement, Mr. Caldabaugh did not commence
to earn any salary until January 1995.
(7) Central Products, formerly a division of Alco, was acquired in October
1995. Mr. Powers, who ran the division for the seller, continued as the
President of Central Products following the Central Products 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;
thus 87% of the 1995 compensation was paid by the seller. From date of the
purchase through year-end, the Company paid Mr. Powers $50,450 or 13% of
his total 1995 compensation.
(8) Reflects a bonus paid to him by Alco 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.
EMPLOYMENT AGREEMENT AND OTHER COMPENSATION ARRANGEMENTS
Mr. Caldabaugh has an employment agreement with Brown-Bridge 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
and a similar employment agreement with Richard T. Ray, the Executive Vice
President and Chief Financial Officer of Brown-Bridge, granted to Mr. Caldabaugh
and Mr. Ray options to purchase up to an aggregate 71,065 shares of
Brown-Bridge's common stock at various prices ranging between $7.16 and $14.62
per share (the "Brown-Bridge Options"). Pursuant to an agreement with the
Company entered into in connection with the Brown-Bridge Merger, the
Brown-Bridge Options were accelerated. Mr. Caldabaugh and Mr. Ray exercised
their respective Brown-Bridge Options for shares of Brown-Bridge's common stock
immediately prior to the exchange of the outstanding shares of Brown-Bridge
common stock pursuant to the Brown-Bridge Merger. See "-- Certain Transactions."
56
<PAGE>
CERTAIN TRANSACTIONS
In June 1994, the Company entered into the Management Agreement with BF,
whereby BF and Messrs. Boyle and Fleming agreed to provide the Company with
operations management, strategic planning, acquisition analysis and
implementation, investment banking and financial advisory services and the
supervision of the Company's financial reporting and regulatory obligations.
Pursuant to the Management Agreement, Mr. Boyle became the Chairman of the Board
and Chief Executive Officer, Mr. Fleming became the President, and both were
elected to the Board of Directors of the Company. Under the Management
Agreement, BF received a management fee of $200,000 per year (increased to
$400,000 per year effective January 1, 1996), plus reimbursement of overhead and
other expenses. The Company has agreed to indemnify BF and its affiliates
against certain claims resulting from their providing services to the Company
pursuant to the Management Agreement. The Management Agreement had an initial
term of one year, and was automatically renewed for a term of one additional
year ending in June 1996, after which it became terminable upon 90 days' prior
notice by either party. Pursuant to notice sent by the Company on May 24, 1996,
the Management Agreement was terminated effective August 31, 1996. Mr. Boyle and
Mr. Fleming continue to be Chairman and Chief Executive Officer and President,
respectively, of the Company.
In June 1994, the Company and BF also entered into a warrant purchase
agreement, under which BF received a warrant (the "A Warrant") to purchase
678,945 shares of Common Stock and 678,945 shares of Class A Common Stock (as
adjusted for the 3-for-2 stock splits that occurred in December 1994 and
December 1995 and for the Stock Split that occurred in August 1996) for a price
of $2.67 for one share of both Class A Common Stock and Common Stock at any time
on or before June 10, 1999, in exchange for the Company's right to receive
certain future fees and co-investment rights. The warrant purchase agreement
also grants certain demand and incidental registration rights to BF and certain
repurchase rights to the Company. In April 1996, in connection with the Company
incurring the Alco Refinancing Debt, BF partially exercised the A Warrant to the
extent of 187,476 shares of Old Stock, which were pledged to secure repayment of
the Alco Refinancing Debt. In addition, an agreement with Bankers Trust Company
required BF to further exercise the A Warrant if necessary to enable the Company
to make its interest payments under the Alco Refinancing Debt. BF had pledged
the A Warrant and the shares of Common Stock and Class A Common Stock issued or
issuable upon exercise thereof to secure repayment of the Alco Refinancing Debt.
In addition, all capital stock of the Company owned by LMC was pledged to secure
repayment of the Alco Refinancing Debt. Thus, the repayment of the Alco
Refinancing Debt resulted in a benefit to affiliates of the Company.
When the Company acquired its 80.1% interest in its majority-owned
subsidiary, Brown-Bridge (an acquisition opportunity developed by BF before
entering into the Management Agreement), certain affiliates of BF (including
Messrs. Boyle and Fleming) and Lynch loaned the Company approximately $322,000
and $965,000, respectively, under the Affiliate Notes, which have an interest
rate of 18%, to help provide the Company the capital necessary to fund its
portion of the Brown-Bridge Acquisition. The Affiliate Notes were repaid with a
portion of the net proceeds of the Initial Offering.
The Minority Stockholders, which included Lynch, certain officers and
employees of Brown-Bridge, and certain affiliates of BF (including Messrs. Boyle
and Fleming), all acquired their respective interests on the same terms and
conditions as the Company. Prior to the Initial Offering, the common stock of
Brown-Bridge held by the Minority Stockholders was converted into an aggregate
of approximately $2.3 million and approximately 9,606 shares of Common Stock. In
addition, as part of the consideration for the shares of capital stock of
Brown-Bridge that were converted pursuant to the Brown-Bridge Merger, the
Minority Stockholders received the right to a contingent payment, which is
exercisable at any time during the period beginning October 1, 1998 and ending
September 30, 2000. The value of the contingent payment shall be equal to the
percentage of the capital stock of the former Brown-Bridge entity owned by such
stockholder at the time of the Merger multiplied by 75% of the fair market value
of the capital stock of Brown-Bridge, as determined in accordance with certain
economic assumptions, as of the date such right is exercised, less the
consideration already received pursuant to the Brown-Bridge Merger. The
contingent purchase price is
57
<PAGE>
payable through the issuance of Common Stock of the Company, unless the Company
elects to pay the contingent price in cash. If such payments are made in cash,
they could give rise to a default under the Indenture, unless there is
sufficient availability under provisions regarding Restricted Payments contained
in the Indenture. See "Description of the Notes -- Cetain Covenants --
Limitation on Restricted Payments." The Minority Stockholders will be granted
demand and incidental registration rights for their shares of Common Stock
received in connection with the Brown-Bridge Merger. In connection with the
Brown-Bridge Merger and other related agreements, Brown-Bridge accelerated all
of the Brown-Bridge Options, which were owned by K. C. Caldabaugh, the Chairman,
Chief Executive Officer and President of Brown-Bridge, and Richard T. Ray, the
Executive Vice President and Chief Financial Officer of Brown-Bridge. In
addition, pursuant to agreements with such officers, the Company loaned such
officers an amount equal to the corporate tax benefit resulting to the Company
from the deduction received by it (or its consolidated group) as a result of the
early vesting of such options, which is evidenced by promissory notes executed
by such officers. The promissory notes had an aggregate principal amount at
closing of the Initial Offering of approximately $225,000, bear interest at the
rate of 6.02% per annum, shall mature and be repayable on the 90th day after the
contingent payment is made, and are secured by each officer's rights to receive
such contingent payments.
From 1994 to 1995, Brown-Bridge retained the services of George Group,
Incorporated, a consulting firm owned by Michael L. George, a former shareholder
and director of BF and a Minority Stockholder, to assist Brown-Bridge in
establishing process improvement programs to enable the Company to improve its
operations. The fees for these services totaled $872,000 in 1995 and $387,000 in
1994. In 1995, $310,000 of the $872,000 in total fees for that year was
capitalized.
The Company is a party to a management agreement with Lynch that provides
for Lynch to render management, financial and other services to the Company in
exchange for an annual payment of management fees, the amount of which is
subject to review each year. Pursuant to the foregoing management agreement,
Lynch was paid $100,000 for each of the three years ended December 31, 1995.
In connection with the Central Products Acquisition, Lynch guaranteed $25
million of indebtedness of the Company and undertook certain other obligations.
Under the terms of agreements dated October 3, 1995, the Company agreed to pay
Lynch a monthly fee equal to .5% of the principal amount guaranteed by Lynch.
The Company accrued $750,000 in fees payable to Lynch through March 31, 1996
(the termination date of the agreement), which were paid with a portion of the
proceeds of the Initial Offering.
In connection with the Central Products Acquisition, Alco provided two
subordinated notes to the Company totaling $25 million and received the right to
sell these notes back to the Company. In April 1996, the Company completed the
refinancing of the two subordinated notes held by Alco. As part of the
refinancing, the Company paid Alco $7.5 million, of which $5.5 million was a
principal payment, approximately $1 million was related to accrued interest and
$1 million was applied toward the purchase price of a distribution facility
which the Company had a right to acquire as part of the original acquisition.
The unpaid balance of the $25 million notes was refinanced by the issuance of
the Convertible Alco Notes. The first $6 million of principal of the Convertible
Alco Notes was converted automatically into the Initial Conversion Shares in May
1996. The Company assisted Alco in placing the Initial Conversion Shares in July
1996, and in connection with that sale, the Company granted demand and
incidental registration rights to the transferees of the Initial Conversion
Shares. Interest on the Convertible Alco Notes was payable semiannually at an
annual rate of 7%, or 9% if the Company elected to pay interest in-kind. The
remaining principal amount of the Convertible Alco Note was paid in connection
with the Recapitalization Plan.
58
<PAGE>
SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth information concerning the beneficial
ownership of the capital stock of the Company and Lynch by each director of the
Company, as well as by all directors and executive officers of the Company as a
group, as of August 31, 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 the
conversion of securities.
<TABLE>
<CAPTION>
AMOUNT OF CLASS A COMMON
AMOUNT OF LYNCH SHARES STOCK SHARES BENEFICIALLY AMOUNT OF COMMON STOCK
BENEFICIALLY OWNED (1) OWNED (1) BENEFICIALLY OWNED (2)
-------------------------- ------------------------- -------------------------
NUMBER OF NUMBER OF NUMBER OF
NAME SHARES PERCENT SHARES PERCENT SHARES PERCENT
- ------------------------------------------ ------------ ------------ ------------ ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Richard J. Boyle.......................... 1,400 * 678,945(2) 19.0% 678,945(2) 19.0%
Ned N. Fleming, III....................... -- -- 678,945(2) 19.0% 678,945(2) 19.0%
Philip Wm. Colburn........................ -- -- -- -- -- --
Robert E. Dolan........................... 235 * 1,225 * 1,225 *
Anthonie C. van Ekris..................... -- -- -- -- -- --
Joseph P. Rhein........................... -- -- 12,250 * 12,250 *
All Directors and Officers of the Company
as a Group (eleven persons, including
those named above)....................... 348,540 25.1% 702,970(2) 19.7% 702,970(2) 19.7%
</TABLE>
- ------------------------
* Less than one percent.
(1) Except as otherwise noted, each director and officer has sole voting and
investment power with respect to the shares of common stock of the Company
and Lynch.
(2) Includes 491,469 shares of Class A Common Stock and Common Stock,
respectively, issuable upon the exercise of the A Warrant granted to BF in
June 1994 (as adjusted for two 3-for-2 stock splits that occurred in
December 1994 and December 1995, respectively and the Stock Split that
occurred in August 1996). BF, an investment and management firm, is an
affiliate of Richard J. Boyle and Ned N. Fleming, III, who each own 50% of
the outstanding capital stock of BF. Messrs. Boyle and Fleming, together
with former shareholders of BF, may be deemed to share voting and
dispositive power over these shares of Common Stock and Class A Common
Stock; however, Mr. Fleming and Mr. Boyle specifically disclaim beneficial
ownership of such shares. See "Principal Stockholders" and "Management --
Certain Transactions."
59
<PAGE>
PRINCIPAL STOCKHOLDERS
As of August 31, 1996, the Company had 3,074,598 shares of Class A Common
Stock, and 3,074,598 shares of Common Stock issued and outstanding. The
following table sets forth the number of shares of such common stock (which are
the only classes of outstanding voting stock of the Company) held as of such
date by persons known to the Company to own beneficially more than 5% of such
classes of common stock as of such date. Each person has sole investment and
voting power with respect to the shares of common stock beneficially owned,
except as otherwise noted. 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 the
conversion of securities. The following information is reflected in Schedule
13Ds as amended, that have been filed with the Commission or which have
otherwise been furnished to the Company.
<TABLE>
<CAPTION>
CLASS A COMMON STOCK COMMON STOCK
---------------------------- ----------------------------
AMOUNT OF AMOUNT OF
NAME AND ADDRESS OF BENEFICIAL PERCENT OF BENEFICIAL PERCENT OF
BENEFICIAL OWNER OWNERSHIP CLASS OWNERSHIP CLASS
- ----------------------------------------------------------- -------------- ------------ -------------- ------------
<S> <C> <C> <C> <C>
Lynch Manufacturing Corporation (1) ....................... 2,259,063(1) 62.8% 2,259,063(1) 62.8%
100 Douglas Street
Yankton, South Dakota 57078
Boyle, Fleming & Co. Inc. (2) ............................. 678,945(2)(3) 19.0% 678,945(2)(3) 19.0%
600 N. Pearl Street, Suite 2160
Dallas, Texas 75201
</TABLE>
- ------------------------
(1) Mario J. Gabelli, of Corporate Center at Rye, Rye, New York, 10580, Chairman
of the Board and Chief Executive Officer of Lynch, owns 20,550 shares
(0.67%) of the Class A Common Stock and the Common Stock, respectively. He
may also be deemed to be a beneficial owner of the Class A Common Stock and
the Common Stock owned by Lynch, through LMC, by virtue of his and certain
affiliated parties' beneficial ownership of 23.5% of the shares of common
stock of Lynch. Mr. Gabelli, however, specifically disclaims beneficial
ownership of all shares of the capital stock of the Company held by Lynch
and LMC. See "Management -- Certain Transactions."
(2) Includes 491,469 shares of Class A Common Stock and Common Stock,
respectively, issuable upon the exercise of the A Warrant (as adjusted for
two 3-for-2 stock splits that occurred in December 1994 and December 1995,
respectively and the Stock Split that occurred in August 1996). BF, an
investment and management firm, is an affiliate of Richard J. Boyle and Ned
N. Fleming, III, who each own 50% of the outstanding capital stock of BF.
Messrs. Boyle and Fleming, together with former shareholders of BF, may be
deemed to share voting and dispositive power over these shares of Common
Stock and Class A Common Stock; however, Mr. Fleming and Mr. Boyle
specifically disclaim beneficial ownership of such shares.
(3) Determined in accordance with Rule 13d-3(d)(1)(i) of the Exchange Act.
60
<PAGE>
DESCRIPTION OF THE NEW CREDIT FACILITY
GENERAL
On October 23, 1996, in connection with the closing of the Initial Offering,
the Company entered into a New Revolving Credit Facility (the "New Credit
Facility") with BT Commercial Corporation, as agent, and Transamerica Business
Credit Corporation, as collateral agent (together the "Lenders"), which provides
separate revolving credit facilities for Central Products, Brown-Bridge and
Entoleter for the making of revolving loans and the issuance of standby letters
of credit. These facilities are unconditionally guaranteed by the Company and
each Guarantor guarantees the revolving credit facilities of the other
Guarantors. The proceeds of the loans will be used for general corporate
purposes and acquisitions.
Total borrowings (subject to the borrowing base limitations set forth below)
will be in the maximum amount of up to $40 million, of which up to $5 million is
designated for letters of credit. The amount from time to time available under
each revolving credit facility (for revolving loans and letters of credit) will
not be permitted to exceed an amount equal to the sum of (x) up to 85% of the
respective "eligible accounts receivable" (as defined in the New Credit
Facility) and (y) up to 65% of Guarantors "eligible inventory" (as defined in
the New Credit Facility). The maturity of the revolving credit facilities will
be five years from the closing date; however, mandatory prepayments of the
revolving credit facilities are required in the event of certain events (which
may include public equity offerings and sales of assets). As of December 18,
1996, the Company had $40 million availability under the New Credit Facility.
Interest accrues on amounts borrowed under the New Credit Facility at an
annual rate of prime or LIBOR plus a margin (ranging from 0.75% to 1.75% over
prime and from 1.75% to 2.75% over LIBOR). The interest margin is initially
1.75% for prime rate loans and 2.75% for LIBOR rate loans. Commencing on the
first anniversary of the closing date of the New Credit Facility, the interest
margin will vary depending upon the Company's consolidated debt to EBITDA ratio.
The obligations of the Company and its subsidiaries under the New Credit
Facility rank PARI PASSU in right of payment with the Notes, except that the
obligations under the New Credit Facility, but not the Notes or the Guarantees,
are secured by a first priority lien on all of the Company's and such
subsidiaries' accounts receivable, inventory and general intangibles (and
certain related assets) and all proceeds thereof. The Notes and the Guarantees
are effectively subordinated to the obligations under the New Credit Facility
and to any other secured debt of the Company and the Guarantors, to the extent
of the assets serving as security therefor.
CERTAIN COVENANTS
The New Credit Facility contains various covenants that restrict the Company
from taking various actions and that require that the Company achieve and
maintain certain financial covenants. The New Credit Facility contains covenants
relating to minimum net worth, minimum current ratio, minimum interest coverage
ratio, and limitations on capital expenditures, investments, indebtedness,
liens, dividends, acquisitions and sales of assets. The New Credit Facility also
prohibits the Company from prepaying the Notes and prohibits certain changes in
control of the Company.
61
<PAGE>
DESCRIPTION OF THE NOTES
The New Notes will be issued, and the Old Notes were issued, under an
indenture (the "Indenture"), dated October 23, 1996 by and between the Company,
the Guarantors and The Chase Manhattan Bank, N.A., as Trustee (the "Trustee").
For purposes of the following summary, the Old Notes and the New Notes will be
collectively referred to as the "Notes." The terms and conditions of the Notes
include those stated in the Indenture and those made a part of the Indenture by
referral to the Trust Indenture Act of 1939, as amended (the "Trust Indenture
Act"), as in effect on the date of the Indenture. The following summary of
certain provisions of the Indenture does not purport to be complete and is
subject to, and qualified in its entirety by reference to, the Trust Indenture
Act, and to all of the provisions of the Indenture, including the definitions of
certain terms therein and those terms made a part of the Indenture by reference
to the Trust Indenture Act as in effect on the date of the Indenture. The
Indenture was filed as an exhibit to the Registration Statement of which this
Prospectus is a part. Terms used herein have the meaning ascribed to them in the
Indenture, unless expressly stated otherwise herein. For purposes of this
section, references to the "Company" include only Spinnaker Industries, Inc. and
not its subsidiaries.
The Notes will be senior obligations of the Company, which obligations will
be secured by a lien on and security interest in all of the issued and
outstanding capital stock of all of the direct and indirect existing
Subsidiaries of the Company on the Issuance Date and any future Restricted
Subsidiaries of the Company and its Subsidiaries which become Guarantors in
accordance with the terms of the Indenture after the Issuance Date. The Notes
will be unconditionally guaranteed on a senior basis, jointly and severally, by
each of the Guarantors.
The Notes will be issued in fully registered form only, without coupons, in
denominations of $1,000 and integral multiples thereof. Initially, the Trustee
will act as Paying Agent and Registrar for the Notes. The Notes may be presented
for registration of transfer and exchange at the offices of the Registrar, which
initially will be the Trustee's corporate trust office. The Company may change
any Paying Agent and Registrar without notice to holders of the Notes. The
Company will pay principal (and premium, if any) on the Notes at the Trustee's
corporate office in New York, New York. At the Company's option, interest may be
paid at the Trustee's corporate trust office or by check mailed to the
registered address of holders.
PRINCIPAL, MATURITY AND INTEREST
The Notes are limited to $115 million in aggregate principal amount. The
Notes will mature on October 15, 2006, and will bear interest from the Issuance
Date at the rate of 10 3/4% per annum payable semi-annually on April 15 and
October 15 of each year, commencing on April 15, 1997, to the persons who are
registered holders thereof at the close of business on April 1 or October 1
immediately preceding the applicable interest payment date. The interest rate on
the Old Notes is subject to increase and such Additional Interest (as defined)
will be payable on such interest payment dates, in certain circumstances,
including if the New Notes are not registered with the Commission within
prescribed time periods. Interest on the Notes will be computed on the basis of
a 360-day year, comprised of twelve 30-day months.
The Notes will not be entitled to the benefit of any mandatory sinking fund.
REDEMPTION
OPTIONAL REDEMPTION. The Notes are not redeemable at the Company's option
prior to October 15, 2001. Thereafter, the Notes will be redeemable, at the
option of the Company, in whole or in part, on at least 30 days' but not more
than 60 days' notice to each holder of the Notes to be redeemed, at the
following
62
<PAGE>
redemption prices (expressed as percentages of the principal amount of the
Notes) if redeemed during the twelve-month period commencing on October 15 of
the year set forth below, plus, in each case, accrued and unpaid interest to the
date of redemption:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
- ----------------------------------------------------------------------- -----------
<S> <C>
2001................................................................... 105.375%
2002................................................................... 104.031
2003................................................................... 102.688
2004................................................................... 101.344
2005 and thereafter.................................................... 100.000
</TABLE>
OPTIONAL REDEMPTION UPON PUBLIC EQUITY OFFERINGS. At any time, or from time
to time, on or prior to October 15, 1999, the Company may, at its option, use
the net cash proceeds of one or more Public Equity Offerings (as defined) to
redeem up to 33 1/3% of the aggregate principal amount of Notes originally
issued at a redemption price equal to 110.75% of the principal amount thereof,
plus, in each case, accrued and unpaid interest to the date of redemption;
PROVIDED that at least 66 2/3% of the aggregate principal amount of Notes
originally issued remains outstanding after any such redemption. In order to
effect the foregoing redemption with the proceeds of any Public Equity Offering,
the Company shall make such redemption not more than 120 days after the
consummation of any such Public Equity Offering.
As used in the preceding paragraph, "Public Equity Offering" means an
underwritten primary public offering of Qualified Capital Stock of the Company
pursuant to a registration statement filed with the Commission in accordance
with the Securities Act.
SELECTION AND NOTICE
In case of a partial redemption, selection of the Notes or portions thereof
for redemption shall be made by the Trustee by lot, PRO RATA or in such manner
as it shall deem appropriate and fair and in such manner as complies with any
applicable legal requirements; PROVIDED, HOWEVER, that if a partial redemption
is made with the proceeds of a Public Equity Offering, selection of the Notes or
portion thereof for redemption shall be made by the Trustee only on a PRO RATA
basis, unless such method is otherwise prohibited. Notes may be redeemed in part
in multiples of $1,000 principal amount only. Notice of redemption will be sent,
by first class mail, postage prepaid, at least 45 days (unless a shorter period
is acceptable to the Trustee) prior to the date fixed for redemption to each
holder whose Notes are to be redeemed at the last address for such holder then
shown on the registry books. If any Note is to be redeemed in part only, the
notice of redemption that relates to such Note shall state the portion of the
principal amount thereof to be redeemed. A new Note in principal amount equal to
the unredeemed portion thereof will be issued in the name of the holder thereof
upon cancellation of the original Note. On and after any redemption date,
interest will cease to accrue on the Notes or part thereof called for redemption
as long as the Company has deposited with the Paying Agent funds in satisfaction
of the redemption price pursuant to the Indenture.
RANKING AND GUARANTEES
The Indebtedness evidenced by the Notes will rank PARI PASSU in right of
payment with any other existing and future senior indebtedness and obligations
of the Company and senior in right of payment to all existing and future
subordinated indebtedness of the Company. Indebtedness outstanding under the New
Credit Facility will be secured by a first priority Lien on all of the Company's
and Guarantors' accounts receivable, inventory and general intangibles (and
certain related assets) and all proceeds thereof. The Indebtedness evidenced by
the Notes and the Guarantees (as defined) will be effectively subordinated to
all existing and future secured indebtedness of the Company and the Guarantors
to the extent of the assets serving as security therefor. As of September 30,
1996, after giving effect to the consummation of the Recapitalization Plan, the
Company would have had outstanding approximately $116.1 million aggregate
principal amount of senior indebtedness (including $1.1 million of secured
indebtedness, to which the Notes and Guarantees would have been effectively
subordinated).
63
<PAGE>
Each Guarantor unconditionally guarantees (the "Guarantees"), jointly and
severally, to each holder and the Trustee, the full and prompt performance of
the Company's obligations under the Indenture and the Notes, including the
payment of principal of and interest on the Notes. The Guarantees will rank PARI
PASSU in right of payment with all existing and future unsubordinated
indebtedness and obligations of each Guarantor. Upon the sale or disposition of
all of the equity interests of a Guarantor to any person which is not, or to any
persons each of which is not, a Restricted Subsidiary of the Company, which is
otherwise in compliance with the Indenture, such Guarantor shall be deemed
released from all its obligations under the Indenture and its Guarantee;
PROVIDED, HOWEVER, that any such termination shall occur only to the extent that
all obligations of each Guarantor under all of its guarantees of, and under all
of its pledges of assets or other security interests which secure, Indebtedness
of the Company and the other Guarantors shall also terminate upon such release,
sale or transfer; PROVIDED, FURTHER, that without limiting the foregoing, any
proceeds received by the Company or any Restricted Subsidiary of the Company
from such transaction shall be applied as provided in the LIMITATION ON ASSET
SALES covenant. With respect to certain risks associated with the Guarantees,
see "Risk Factors."
The obligations of each Guarantor are limited to the maximum amount as will,
after giving effect to all other contingent and fixed liabilities of such
Guarantor and after giving effect to any collections from or payments made by or
on behalf of any other Guarantor in respect of the obligations of such other
Guarantor under its Guarantee or pursuant to its contribution obligations under
the Indenture, result in the obligations of such Guarantor under its Guarantee
not constituting a fraudulent conveyance or fraudulent transfer under federal or
state law. Each Guarantor that makes a payment or distribution under a Guarantee
shall be entitled to a contribution from each other Guarantor in a PRO RATA
amount based on the Adjusted Net Assets of each Guarantor.
Each Guarantor may consolidate with or merge into or sell its assets to the
Company or another Guarantor without limitation. Each Guarantor may consolidate
with or merge into or sell all or substantially all of its assets to a
corporation other than the Company or another Guarantor (whether or not
affiliated with such Guarantor), provided that (a) (i) the respective
transaction is treated as an Asset Sale for purposes of the LIMITATION ON ASSET
SALES covenant or (ii) if the surviving corporation is not a Guarantor, the
surviving corporation agrees to assume such Guarantor's Guarantee and all its
obligations pursuant to the Indenture and (b) such transaction does not (i)
violate any covenants set forth in the Indenture or (ii) result in a Default or
Event of Default immediately thereafter that is continuing.
Subsequent to the Issuance Date, separate financial information for the
Guarantors will not be provided except to the extent required by Regulation S-X
under the Securities Act. The Guarantors will be Wholly Owned Restricted
Subsidiaries and will be jointly and severally liable with respect to the
Company's obligations pursuant to the Notes, and the aggregate net assets,
liabilities, earnings and equity of the Guarantors will be substantially
equivalent to the net assets, liabilities, earnings and equity of the Company on
a consolidated basis.
SECURITY
The obligations of the Company with respect to the Notes will be secured by
a pledge of all of the issued and outstanding Capital Stock of each Guarantor.
Pursuant to the Indenture, the Company will assign and pledge to the Trustee,
for its benefit and the benefit of the holders of the Notes, a security interest
in the Capital Stock of each Guarantor and certain proceeds from time to time
received, receivable or otherwise distributed in respect thereof (the
"Collateral"). The Company and the Guarantors also will agree to assign and
pledge to the Trustee as part of the Collateral all shares of Capital Stock of
each Guarantor hereafter acquired by the Company or by a Guarantor. The security
interest in the Collateral will be a first priority security interest. However,
absent an acceleration of the Notes, the Company or the applicable Subsidiary
will be able to vote, as it sees fit in its sole discretion, the Capital Stock
of each Guarantor.
There can be no assurance that the proceeds of any sale of the Collateral
pursuant to the Indenture following an Event of Default would be sufficient to
satisfy payments due on the Notes. In addition, the
64
<PAGE>
ability of the holders of Notes to realize upon the Collateral may be subject to
certain bankruptcy limitations in the event of a bankruptcy. Upon the sale or
disposition of all of the equity interests of a Guarantor to any person which is
not, or to any persons each of which is not, a Restricted Subsidiary of the
Company, which is otherwise in compliance with the Indenture, the pledge of such
Capital Stock shall be deemed released and will no longer constitute Collateral
under the Indenture; PROVIDED, HOWEVER, that any such release shall occur only
to the extent that all obligations of each Guarantor under all of its guarantees
of, and under all of its pledges of assets or other security interests which
secure, Indebtedness of the Company and the other Guarantors shall also
terminate upon such release, sale or transfer; PROVIDED, FURTHER, that without
limiting the foregoing, any proceeds received by the Company or any Restricted
Subsidiary of the Company from such transaction shall be applied as provided in
the LIMITATION ON ASSET SALES covenant. See " -- Certain Bankruptcy
Limitations;" "Risk Factors -- Fraudulent Conveyance Risks."
If an Event of Default occurs under the Indenture, the Trustee, on behalf of
the holders of the Notes, in addition to any rights or remedies available to it
under the Indenture, may take such action as it deems advisable to protect and
enforce its rights in the Collateral, including the institution of foreclosure
proceedings. The proceeds received by the Trustee from any foreclosure will be
applied by the Trustee first to pay the expenses of such foreclosure and fees
and other amounts then payable to the Trustee under the Indenture and,
thereafter, to pay the principal of and interest on the Notes.
CERTAIN BANKRUPTCY LIMITATIONS
The right of the Trustee to repossess and dispose of the Collateral upon the
occurrence of an Event of Default is likely to be significantly impaired by
applicable bankruptcy law if a bankruptcy proceeding were to be commenced by or
against the Company or one or more of the Guarantors prior to the trustee's
having disposed of the Collateral. Under Title 11 of the United States Code (the
"Bankruptcy Code"), a secured creditor such as the Trustee is prohibited from
disposing of a security repossessed from a debtor in a bankruptcy case without
bankruptcy court approval. Moreover, the Bankruptcy Code prohibits a secured
creditor from disposing of collateral even though the debtor is in default under
the applicable debt instruments if the secured creditor is given "adequate
protection." The meaning of the term "adequate protection" may vary according to
circumstances, but it is intended in general to protect the value of the secured
creditor's interest in the collateral and may include cash payments or the
granting of additional security, if and at such times as the court in its
discretion determines, for any diminution in the value of the collateral as a
result of the stay of disposition during the pendency of the bankruptcy case. In
view of the lack of a precise definition of the term "adequate protection" and
the broad discretionary powers of a bankruptcy court, it is impossible to
predict how long payments under the Notes could be delayed following
commencement of a bankruptcy case, whether or when the Trustee could dispose of
the Collateral, or whether or to what extent holders of the Notes would be
compensated for any delay in payment or loss of value of the Collateral through
the requirement of "adequate protection."
FRAUDULENT CONVEYANCE
The use of the proceeds of the debt (including the Notes) incurred in
connection with the Recapitalization Plan to refinance indebtedness may subject
such incurrence of debt and the obligations of the Company under the Notes and
of the Guarantors under the Guarantees to review by a court under relevant
federal bankruptcy and state fraudulent conveyance and transfer statutes and, if
a court makes certain findings, it could take certain actions detrimental to the
holders of the Notes. See "Risk Factors -- Fraudulent Conveyance Risks."
CHANGE OF CONTROL
Upon the occurrence of a Change of Control, each holder of Notes will have
the right to require the Company to repurchase all or any part of such holder's
Notes at a repurchase price equal to 101% of the principal amount thereof, plus
any accrued and unpaid interest, if any, to the date of repurchase (subject to
the right of holders of record on the relevant Record Date to receive interest
due on the relevant interest payment date).
65
<PAGE>
Within 30 days following any Change of Control, the Company will be required
to mail a notice to each holder stating (i) that a Change of Control has
occurred and that such holder has the right to require the Company to repurchase
all or any part of such holder's Notes at a repurchase price in cash equal to
101% of the principal amount thereof, plus accrued and unpaid interest, if any,
to the date of repurchase (subject to the right of holders of record on the
relevant record date to receive interest due on the relevant interest payment
date); (ii) the circumstances and relevant facts regarding such Change of
Control; (iii) the repurchase date (which will be no earlier than 30 days nor
later than 60 days from the date such notice is mailed); and (iv) the
instructions, determined by the Company consistent with the Indenture, that a
holder must follow in order to have its Notes repurchased (any offer by the
Company to repurchase Notes as required above is herein called a "Change of
Control Offer").
A Change of Control can occur in certain circumstances (pursuant to the
definition thereof) upon a sale of all or substantially all of the assets of the
Company. In connection therewith, the phrase "all or substantially all" as used
in the Indenture (including as set forth under "Limitations on Merger,
Consolidation or Sale of Assets") varies according to the facts and
circumstances of the subject transaction, has no clearly established meaning
under New York law (which governs the Indenture) and is subject to judicial
interpretation. Accordingly, in certain circumstances there may be a degree of
uncertainty in ascertaining whether a particular transaction would involve a
disposition of "all or substantially all" of the assets of a person and
therefore it may be unclear as to whether a Change of Control has occurred and
whether the Notes are subject to a Change of Control Offer.
If a Change of Control were to occur, there can be no assurance that the
Company would have sufficient funds to pay the purchase price for all Notes that
the Company is required to purchase. Moreover, as of the date of this
Prospectus, the Company would not have sufficient funds available to purchase
all of the outstanding Notes pursuant to a Change of Control Offer. In the event
that the Company were required to purchase outstanding Notes pursuant to a
Change of Control Offer, the Company expects that it would need to seek
third-party financing to the extent it does not have available funds to meet its
purchase obligations. However, there can be no assurance that the Company would
be able to obtain such financing on favorable terms, if at all. In addition, the
Company's ability to purchase the Notes may be limited by other then-existing
borrowing agreements (including, without limitation, the New Credit Facility),
and the existence of the Change of Control (or the financial effect of the
required repurchases by the Company) could cause a default under the New Credit
Facility or other indebtedness of the Company and its Subsidiaries. Failure by
the Company to purchase the Notes when required by a Change of Control will
result in an Event of Default with respect to the Notes.
The Company will be required to comply with any tender offer rules under the
Exchange Act which may then be applicable, including Rule 14e-1, in connection
with any Change of Control Offer. To the extent that the provisions of any
securities laws or regulations conflict with the provisions of the Indenture
relative to the Company's obligation to make an offer to repurchase the Notes as
a result of a Change of Control, the Company will comply with the applicable
securities laws and regulations and will not be deemed to have breached its
obligations under such provisions of the Indenture by virtue thereof.
CERTAIN COVENANTS
The Indenture contains, among others, the following covenants.
LIMITATION ON RESTRICTED PAYMENTS. The Indenture will prohibit the making,
directly or indirectly, of any Restricted Payment by the Company or any of its
Restricted Subsidiaries at any time; PROVIDED, HOWEVER, that the Company and its
Restricted Subsidiaries may make Restricted Payments so long as at the time of
the making of such Restricted Payment and immediately after giving effect
thereto:
(a)
no Default or Event of Default shall have occurred and be continuing
or shall occur as a consequence of such Restricted Payment;
66
<PAGE>
(b)
immediately after giving effect to such Restricted Payment (on a pro
forma basis as if such Restricted Payment had been made at the
beginning of the four-quarter period immediately preceding such Restricted
Payment), the Company would have been permitted to incur $1.00 of additional
Indebtedness pursuant to the terms of the first paragraph of the LIMITATION
ON INCURRANCE OF INDEBTEDNESS covenant; and
(c)
such Restricted Payment, together with the aggregate of all
Restricted Payments made after the Issuance Date (including all
Restricted Payments permitted by clauses (i) and (ii) of the next succeeding
paragraph), is less than the sum of (w) 50% of the Consolidated Net Income
of the Company for the period (taken as one accounting period) from the
beginning of the first fiscal quarter that begins after the Issuance Date to
the end of the Company's most recently ended fiscal quarter (or, in the case
such Consolidated Net Income for such period is a deficit, minus 100% of
such deficit), plus (x) 100% of the aggregate net proceeds received by the
Company (including the fair market value of property other than cash) from
any Person since the Issuance Date from the issue or sale of Equity
Interests of the Company or from equity contributions received by the
Company from a holder of the Company's Capital Stock (but in each case
excluding (i) proceeds received from the issuance of Disqualified Stock of
the Company, (ii) proceeds received from Subsidiaries of the Company and
(iii) proceeds to the extent the same have been utilized (A) to redeem,
repurchase, defease, retire or acquire any Indebtedness (including the
Notes) of the Company or any Subsidiary of the Company or (B) in the manner
permitted pursuant to clause (ii) in the next succeeding paragraph), plus
(y) 100% of the aggregate net proceeds (including the fair market value of
property other than cash) of any (i) sale or other disposition of Restricted
Investments made by the Company and its Restricted Subsidiaries or (ii)
dividend from, or the sale of the stock of, an Unrestricted Subsidiary.
Notwithstanding the foregoing, the Indenture will not prevent (i) the
payment of any dividend within 60 days after the date of declaration if the
dividend would have been permitted on the date of declaration, (ii) so long as
no Default or Event of Default shall have occurred or be continuing or shall
occur as a consequence thereof, the acquisition of Subordinated Debt or
Preferred Stock in exchange for or out of the proceeds of a substantially
concurrent sale (other than to the Company or any of its Subsidiaries) of Equity
Interests of the Company (other than Disqualified Stock of the Company) and
(iii) so long as no Default or Event of Default shall have occurred or be
continuing or shall occur as a consequence thereof, the exchange, refinancing or
refunding of Subordinated Debt through the substantially concurrent issuance of
new Subordinated Debt so long as (a) the principal amount of the new
Subordinated Debt to be issued does not exceed the principal amount of the
Subordinated Debt so exchanged, refinanced or refunded, (b) the Subordinated
Debt to be issued does not (x) mature prior to the stated maturity of the
Subordinated Debt being so exchanged, refinanced or refunded or (y) contain any
sinking fund or mandatory redemption or prepayment requirements which might have
the effect of requiring payments to be made, in excess of, or earlier than, the
payments required to be made pursuant to the terms of the Subordinated Debt
being so exchanged, refinanced or refunded and (c) the Subordinated Debt to be
issued is subordinated in right of payment to the Notes at least to the same
extent as the Subordinated Debt being so exchanged, refinanced or refunded.
For purposes of determining compliance with the foregoing covenant,
Restricted Payments may be made with cash or non-cash assets, provided that any
Restricted Payment made other than in cash shall be valued at the fair market
value (determined, subject to the additional requirements of the immediately
succeeding proviso, in good faith by the Company) of the assets so utilized in
making such Restricted Payment, provided further that (i) in the case of any
Restricted Payment made with capital stock or indebtedness, such Restricted
Payment shall be deemed to be made in an amount equal to the greater of the fair
market value thereof and the liquidation preference (if any) or principal amount
of the capital stock or indebtedness, as the case may be, so utilized, (ii) in
the case of any Restricted Payment in an aggregate amount in excess of $500,000
(as determined above), the fair market value thereof shall be established by a
Board Resolution adopted by a majority of the Board of Directors of the Company
and (iii) in the case of any Restricted Payment involving consideration
determined (as described above) to be in excess of $1 million, a written opinion
as to the fairness of the valuation thereof (as determined by the Board
Resolution as
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referenced in preceding clause (ii)) for purposes of determining compliance with
the LIMITATION ON RESTRICTED PAYMENTS covenant in the Indenture shall be issued
by an investment banking, appraisal or accounting firm of national standing;
and, provided further, that no Restricted Payment shall be made in capital stock
of a Subsidiary of the Company unless, after giving effect thereto, 100% of the
Equity Interests of the Company and its Restricted Subsidiaries in the
respective such Subsidiary are distributed to Persons other than the Company and
its Restricted Subsidiaries pursuant to the respective Restricted Payment.
LIMITATION ON INCURRENCE OF INDEBTEDNESS. The Indenture will provide that
the Company will not, and will not permit any of its Restricted Subsidiaries,
directly or indirectly, to create, incur, assume, guarantee or otherwise become
responsible for (collectively, "incur") any Indebtedness; PROVIDED, HOWEVER,
that the Company may incur (and Guarantors may guaranty on substantially the
same terms as their Guarantees of the Notes) Indebtedness if (i) no Default or
Event of Default shall have occurred and be continuing or would occur as a
consequence thereof and (ii) the Fixed Charge Coverage Ratio of the Company for
the four fiscal quarters ending with the fiscal quarter ended immediately
preceding such incurrence would have been at least 2.0 to 1.0, determined on a
pro forma basis (including a pro forma application of the net proceeds
therefrom), as if such incurrence and application of proceeds had occurred at
the beginning of such period.
Notwithstanding the foregoing, the limitations set forth in the immediately
preceding paragraph will not apply to the incurrence of any of the following
(collectively, the "Permitted Indebtedness"): (a) the incurrence by the Company
and/or the Guarantors of revolving credit Indebtedness and letters of credit
(whether pursuant to the New Credit Facility or otherwise) in an aggregate
consolidated principal amount at any one time outstanding not to exceed the
greater of (A) $40 million and (B) the Borrowing Base of the Company and the
Guarantors at such time, less, in either case, the aggregate amount of proceeds
of Asset Sales applied to permanently reduce outstanding Indebtedness pursuant
to this clause (a); (b) Existing Indebtedness, which shall be permitted to
remain outstanding; (c) the incurrence by the Company of Indebtedness
represented by the Notes and the Guarantee by any Guarantor of the Notes; (d)
Acquired Indebtedness to the extent the Company could have incurred such
Indebtedness in accordance with the first paragraph of this covenant on the date
such Indebtedness became Acquired Indebtedness; (e) the incurrence by the
Company of Indebtedness, and the incurrence by the Company's Subsidiaries of
guarantees of such Indebtedness (the "Refinancing Indebtedness"), issued in
exchange for, or the proceeds of which are used to extend, refinance, renew,
replace, or refund Indebtedness referred to in clause (b), (c) or (d) above or
incurred pursuant to the proviso to the first paragraph of the LIMITATION ON
INCURRENCE OF INDEBTEDNESS covenant (but without regard to the definition of
Permitted Indebtedness); PROVIDED, HOWEVER, that (1) the aggregate principal
amount or liquidation preference of such Refinancing Indebtedness (or if such
Refinancing Indebtedness is issued at a price less than the principal amount
thereof, the original issue price) shall not exceed the principal amount or
liquidation preference of Indebtedness so extended, refinanced, renewed,
replaced, or refunded (plus accrued interest or premiums required by the
instruments governing such existing or future Indebtedness as in effect at the
time of issuance thereof ("Required Premiums") and the amount of reasonable
expenses incurred in connection therewith), (2) the Refinancing Indebtedness
shall rank PARI PASSU with or be subordinate in right and priority of payment at
least to the same extent as the Indebtedness so extended, refinanced, renewed,
replaced, substituted or refunded, (3) the Refinancing Indebtedness shall have a
Weighted Average Life to Maturity equal to or greater than the Weighted Average
Life to Maturity of the Indebtedness being extended, refinanced, renewed,
replaced, substituted or refunded, (4) the Refinancing Indebtedness shall have
the same obligor(s) and guarantor(s) (except to the extent that guarantees are
being dropped in connection with the extension of the Refinancing Indebtedness)
as the Indebtedness being refinanced, and (5) immediately after the incurrence
of such Refinancing Indebtedness no Default or Event of Default shall have
occurred and be continuing; (f) Indebtedness of the Company or any Restricted
Subsidiary of the Company to the Company or any Wholly Owned Restricted
Subsidiary which is a Guarantor; (g) Hedging Obligations that are incurred for
the purpose of fixing or hedging interest rate risk with respect to any floating
rate Indebtedness that is permitted by the terms of the Indenture to be
outstanding; and (h) the Company and/or the Guarantors may incur Indebtedness
(and each such Person may guaranty such Indebtedness) not otherwise permitted
under the Indenture in an aggregate principal
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amount outstanding under this clause (h) not to exceed $10 million at any one
time less the aggregate amount of proceeds of Asset Sales applied to repay
permanently Indebtedness outstanding pursuant to this clause (h) as provided in
the LIMITATION ON ASSET SALES covenant.
LIMITATION ON LIENS. The Indenture will provide that the Company will not,
and will not permit any Restricted Subsidiary to, directly or indirectly create,
incur, assume or suffer to exist any Liens except for Permitted Liens.
LIMITATION ON TRANSACTIONS WITH AFFILIATES. The Indenture will provide that
the Company will not, and will not permit any of its Restricted Subsidiaries to,
directly or indirectly, enter into or permit to exist any transaction or series
of related transactions (including, without limitation, the purchase, sale,
lease or exchange of any property or the rendering of any service) with, or for
the benefit of, any Affiliate (each of the foregoing, an "Affiliate
Transaction"), unless (a) such Affiliate Transaction is on terms that are fair
and reasonable and no less favorable to the Company or such Restricted
Subsidiary, as the case may be, than those that would have been obtained in a
comparable transaction made on an arms'-length basis by the Company or such
Restricted Subsidiary, as the case may be, with an unrelated Person and (b) the
Company shall have delivered to the Trustee (i) with respect to any Affiliate
Transaction involving aggregate payments in excess of $500,000, (x) a Board
Resolution adopted by a majority of the Board of Directors (including a majority
of its disinterested members) approving such Affiliate Transaction and (y) an
Officers' Certificate certifying that such Affiliate Transaction complies with
clause (a) above, and (ii) with respect to any Affiliate Transaction involving
aggregate payments in excess of $1 million, a written opinion as to the fairness
of such Affiliate Transaction to the Company from a financial point of view
issued by an investment banking, appraisal or accounting firm of national
standing; PROVIDED, HOWEVER, that (i) any employment agreement entered into by
the Company or any Restricted Subsidiary in the ordinary course of business and
consistent with the past practice of the Company or such Restricted Subsidiary,
(ii) transactions between or among the Company and/or any Wholly Owned
Restricted Subsidiary thereof which is a Guarantor, (iii) agreements or
contracts with, or for the benefit of, any Affiliate, which exist on the
Issuance Date and which are described in the Offering Memorandum and (iv)
transactions permitted by, and complying with, the provisions of the Indenture
described above under the covenant LIMITATION ON RESTRICTED PAYMENTS, in each
case, shall not be deemed Affiliate Transactions.
LIMITATION ON DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING
SUBSIDIARIES. The Indenture will provide that the Company will not, and will
not permit any of its Restricted Subsidiaries to, directly or indirectly, create
or otherwise cause or suffer to exist or become effective any encumbrance or
restriction on the ability of any such Restricted Subsidiary to (a) pay
dividends or make any other distributions to the Company or any Restricted
Subsidiary (i) on its Capital Stock or (ii) with respect to any other interest
or participation in, or measured by, its profits, (b) pay any Indebtedness owed
to the Company or any Restricted Subsidiary thereof, (c) make loans or advances
to the Company or any Restricted Subsidiary thereof or (d) sell, lease, or
transfer any of its properties or assets to the Company or any Restricted
Subsidiary thereof, except (in each case) for such encumbrances or restrictions
existing under or by reason of (1) Existing Indebtedness as in effect on the
Issuance Date, (2) the New Credit Facility, and any amendments, modifications,
restatements, renewals, increases, supplements, refundings, replacements or
refinancings thereof; PROVIDED that the New Credit Facility and any such
amendments, modifications, restatements, renewals, increases, supplements,
refundings, replacements or refinancings are no more restrictive with respect to
the restrictions described in clauses (a) through (d) above than those contained
in the New Credit Facility on the Issuance Date, (3) the Indenture and the
Notes, (4) applicable law, (5) customary non-assignment provisions in leases or
other contracts (providing for the non-assignability of such contracts) entered
into in the ordinary course of business and consistent with past practices, (6)
any instrument governing or evidencing Indebtedness of a Person acquired by the
Company or any Restricted Subsidiary of the Company at the time of such
acquisition, which encumbrance or restriction is not applicable to any Person,
or the properties or assets of any Person, other than the Person so acquired;
PROVIDED, HOWEVER, that such Indebtedness is not incurred in connection with or
in contemplation of, such acquisition, (7) any
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agreements evidencing Permitted Liens which may restrict the transfer of the
assets subject to such Permitted Liens and (8) permitted Refinancing
Indebtedness, PROVIDED that the restrictions contained in the agreements
governing such Refinancing Indebtedness are no more restrictive than those
contained in the agreements governing the Indebtedness being extended,
refinanced, renewed, replaced or refunded.
LIMITATION ON PREFERRED STOCK OF SUBSIDIARIES. The Indenture will provide
that the Company will not permit any of its Restricted Subsidiaries to issue any
Preferred Stock (other than to the Company or to a Wholly Owned Restricted
Subsidiary of the Company) or permit any Person (other than the Company or a
Wholly Owned Restricted Subsidiary of the Company) to own any Preferred Stock of
any Restricted Subsidiary of the Company.
PROHIBITION ON INCURRENCE OF SENIOR SUBORDINATED DEBT. The Indenture will
prohibit the Company and each Guarantor from incurring or suffering to exist any
Indebtedness that is expressly subordinate in right of payment to any other
Indebtedness of the Company or the respective Guarantor unless such Indebtedness
is subordinated on substantially the same terms to the Notes.
LIMITATION ON ASSET SALES. The Indenture will provide that the Company will
not, and will not permit any of its Restricted Subsidiaries to, directly or
indirectly, conduct an Asset Sale, unless (w) no Default or Event of Default
exists or is continuing immediately prior to and after giving effect to such
Asset Sale, (x) in the case of any sale of Equity Interests in, or issuance of
any Equity Interests by, a Guarantor, 100% of the Equity Interests of the
Company and its Restricted Subsidiaries in the respective Guarantor must be sold
pursuant to the respective Asset Sale, (y) in each case, the Company or such
Restricted Subsidiary, as the case may be, receives consideration at the time of
each such Asset Sale at least equal to the fair market value of the assets sold
or otherwise disposed of and (z) in each case at least 80% of the consideration
therefor received by the Company or such Restricted Subsidiary is in the form of
cash or Cash Equivalents. Within 270 days after consummation of any Asset Sale,
the Company or such Restricted Subsidiary may apply the Net Proceeds from such
Asset Sale (i) to an investment in any business, capital expenditure or other
tangible asset in the Permitted Businesses or (ii) prepay Indebtedness (other
than Subordinated Debt) of the Company and the Guarantors which results in a
permanent reduction thereof (and to any commitments thereunder). Pending the
final application of any such Net Proceeds, the Company or the Restricted
Subsidiary may invest such Net Proceeds in Cash Equivalents or apply such Net
Proceeds to temporarily reduce borrowings and commitments outstanding under the
New Credit Facility if, within such 270-day period, the Company or the
Restricted Subsidiary withdraws from the New Credit Facility such Net Proceeds
(to the extent not used to permanently reduce borrowings and commitments
available thereunder) and applies such Net Proceeds in accordance with clause
(i) of the preceding sentence. Any Net Proceeds from the Asset Sale that are not
applied or invested as provided in the second sentence of this paragraph will be
deemed to constitute "Excess Proceeds."
In the event the Company or any Restricted Subsidiary shall receive any
Excess Proceeds, the Company shall make an offer to all holders of the Notes (an
"Asset Sale Offer") to purchase the maximum principal amount of Notes, that is
an integral multiple of $1,000, that may be purchased out of the Excess
Proceeds, at an offer price in cash in an amount equal to 100% of the principal
amount thereof, plus accrued and unpaid interest, if any, to the date fixed for
the closing of such offer, in accordance with the procedures set forth in the
Indenture. If the aggregate principal amount of Notes surrendered by holders
thereof exceeds the amount of Excess Proceeds, the Trustee shall select the
Notes to be purchased on a PRO RATA basis. Upon completion of such Asset Sale
Offer, the amount of Excess Proceeds shall be reset at zero. Notwithstanding the
foregoing, in the event that such Excess Proceeds are less than $5 million, the
application of such Excess Proceeds to repurchase Notes may be deferred until
such time as such Excess Proceeds are at least equal to $5 million, at which
time the Company or such Restricted Subsidiary shall apply all such Excess
Proceeds to repurchase Notes.
In the event the repurchase of Notes with Excess Proceeds constitutes a
"tender offer" for purposes of Rule 14e-1 under the Exchange Act at the time it
is required, the Company will be required to comply with Rule 14e-1 as then in
effect with respect to such repurchase.
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LIMITATION ON BUSINESS. The Company will not, and will not permit any of
its Restricted Subsidiaries to, engage substantially in any business other than
the Permitted Businesses.
COMPANY TO CAUSE CERTAIN SUBSIDIARIES TO BECOME GUARANTORS. The Indenture
will provide that the Company will not (i) permit any of its Restricted
Subsidiaries to incur, guarantee or secure through the granting of Liens any
Indebtedness (excluding Acquired Indebtedness to the extent incurred as
permitted pursuant to clause (d) of the second paragraph of the LIMITATION ON
INCURRENCE OF INDEBTEDNESS covenant and secured, if secured, by Permitted Liens
of the type described in clause (c) of the definition thereof which were in
existence prior to the acquisition of the respective Restricted Subsidiary), or
(ii) pledge any intercompany notes representing obligations of any of its
Restricted Subsidiaries to secure the payment of any Indebtedness, in either
case unless such Restricted Subsidiary is a Wholly Owned Restricted Subsidiary
which is a Guarantor or at such time becomes a Guarantor by executing a
supplemental indenture in which such Restricted Subsidiary agrees to be bound by
the terms of the Indenture as a Guarantor and executes a Guarantee.
LIMITATIONS ON MERGER, CONSOLIDATION OR SALE OF ASSETS
The Indenture will provide that the Company may not, in a single transaction
or through a series of related transactions, consolidate or merge with or into
or sell, assign, transfer, lease, convey or otherwise dispose of (or permit any
of its Restricted Subsidiaries to sell, assign, transfer, lease, convey or
otherwise dispose of) all or substantially all of the Company's and its
Restricted Subsidiaries' assets (determined on a consolidated basis for the
Company and its Restricted Subsidiaries taken as a whole) in one or more related
transactions to another Person unless (i) the Company is the surviving
corporation, or the Person formed by or surviving any such consolidation or
merger (if other than the Company) or to which such sale, assignment, transfer,
lease, conveyance or other disposition shall have been made is a corporation
organized and existing under the laws of the United States, any state thereof or
the District of Columbia, (ii) the Person formed by or surviving any such
consolidation or merger (if other than the Company) or the Person to which such
sale, assignment, transfer, lease, conveyance or other disposition will have
been made assumes, pursuant to a supplemental indenture, all the obligations of
the Company under the Notes and the Indenture, (iii) immediately after such
transaction (including any Indebtedness incurred or anticipated to be incurred
in connection with such transaction), (A) no Default or Event of Default exists,
(B) the Consolidated Net Worth of the resulting, surviving or transferee
corporation is not less than that of the Company immediately prior to the
transaction and (C) the Company or any Person formed by or surviving any such
consolidation or merger, or to which such sale, assignment, transfer, lease,
conveyance or other disposition will have been made at the time of such
transaction and after giving pro forma effect thereto as if such transaction had
occurred at the beginning of the applicable period, shall be permitted to incur
at least $1.00 of additional Indebtedness pursuant to the first paragraph of the
LIMITATION ON INCURRENCE OF INDEBTEDNESS covenant and (iv) the Company shall
have delivered to the Trustee an Officers' Certificate and Opinion of Counsel
demonstrating compliance with each of the foregoing.
EVENTS OF DEFAULT
An Event of Default will be defined in the Indenture to mean, among other
things, (i) the failure by the Company to pay interest on any Note when the same
becomes due and payable and the continuance of any such failure for 30 days;
(ii) the failure to pay principal of, or premium, if any, on any Note when and
as the same shall become due and payable, at maturity, upon acceleration,
redemption or otherwise, (iii) the failure by the Company or any Guarantor to
comply with any of its agreements or covenants described under the CHANGE OF
CONTROL, LIMITATIONS ON MERGER, CONSOLIDATION OR SALE OF ASSETS, LIMITATION ON
RESTRICTED PAYMENTS, LIMITATION ON ASSET SALES OR LIMITATION ON INCURRENCE OF
INDEBTEDNESS covenants, (iv) the failure by the Company or any Guarantor to
comply with any of its other agreements or covenants in the Notes or the
Indenture and the continuance of such failure for 30 days after written notice
is given to the Company by the Trustee or to the Company and the Trustee by the
holders of 25% in aggregate principal amount of the Notes then outstanding; (v)
the occurrence of a default or an event of default by the Company or any
Restricted
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Subsidiary thereof under any mortgage, indenture or other instrument under which
there is issued or by which there is secured or evidenced any Indebtedness of
the Company or any Restricted Subsidiary thereof, whether such Indebtedness or
guarantee now exists or is created after the Issuance Date, which default, (A)
is caused by failure to pay when due principal on such Indebtedness (which
failure continues beyond any applicable grace period) (a "Payment Default") or
(B) results in the acceleration of such Indebtedness prior to its express
maturity and, in each case, the principal amount of any such Indebtedness,
together with the principal amount of any other such Indebtedness under which a
Payment Default then exists or with respect to which the maturity thereof has
been so accelerated, aggregates $1 million or more, (vi) the failure by the
Company or any Restricted Subsidiary thereof to pay final judgments aggregating
in excess of $1 million which are entered by a court or courts of competent
jurisdiction against the Company or such Restricted Subsidiary, which final
judgments remain unpaid, undischarged and unstayed for a period of more than 60
days, (vii) the provision of the Indenture relating to the granting of any
security interest in the Collateral shall cease to be in full force and effect
in any material respect or shall cease to give the Trustee in any material
respect the liens, rights, powers and privileges purported to be created thereby
(including, without limitation, a perfected security interest in, and Lien on,
all of the Collateral subject thereto, in favor of the Trustee, subject to no
other Liens) or any Collateral required to be delivered to the Trustee for
pledge thereunder shall not have been so delivered, (viii) certain events of
bankruptcy, insolvency, foreclosure or reorganization of the Company or any
Significant Subsidiary thereof and (ix) any of the Guarantees of the Guarantors
that are also Significant Subsidiaries of the Company ceases to be in full force
and effect or any of such Guarantees is declared to be null and void and
unenforceable or any of such Guarantees is found to be invalid or any such
Guarantor denies its liability under its Guarantee (other than by reason of
release of a Guarantor in accordance with the terms of the Indenture). The
Indenture will provide that the Trustee must, within 90 days after the
occurrence of a Default, give to the holders of the Notes notice of all uncured
Defaults known to it; PROVIDED that, except in the case of a Default relating to
the payment of principal or interest in respect of such Notes, the Trustee will
be protected in withholding such notice if a committee of its trust officers in
good faith determines that the withholding of such notice is in the interest of
the holders of the Notes. The Indenture will provide that the Company is
required to furnish annually to the Trustee a certificate as to its compliance
with the terms of the Indenture.
RIGHTS UPON DEFAULT
The Trustee or the holders of at least 25% in aggregate principal amount of
the then outstanding Notes will be authorized, upon the happening of any Event
of Default specified in the Indenture (other than an Event of Default resulting
from the bankruptcy, insolvency, foreclosure or reorganization of the Company or
a Guarantor, which shall result in automatic acceleration), to declare by
written notice to the Company (a "Declaration") due and payable an amount equal
to 100% of the unpaid principal of, and accrued interest on, all Notes issued
then outstanding (the "Default Amount"). Upon any such Declaration, the Default
Amount shall become immediately due and payable.
The holders of not less than a majority in aggregate principal amount of
Notes outstanding are authorized to rescind any Declaration if all Events of
Default then continuing (other than an Event of Default with respect to the
nonpayment of principal of or interest on any Note which has become due solely
as a result of such Declaration) have been cured, and to waive any Default other
than a Default with respect to a covenant or provision that cannot be modified
or amended without the consent of the holder of each outstanding Note affected.
Subject to the provisions of the Indenture relating to the duties of the
Trustee, the Trustee is under no obligation to exercise any of its rights or
powers under the Indenture at the request, order or direction of any of the
holders of the Notes issued thereunder, unless the holders of such Notes have
offered to the Trustee indemnity satisfactory to it. Subject to all provisions
of the Indenture and applicable law, the holders of a majority in aggregate
principal amount of the Notes then outstanding have the right to direct the
time, method and place of conducting any proceeding for any remedy available to
the Trustee, or exercising any trust or power conferred on the Trustee.
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TRANSFER AND EXCHANGE
Upon any transfer of a Note, the Registrar may require a holder, among other
things, to furnish appropriate endorsements and transfer documents, and to pay
any taxes and fees required by law or permitted by the Indenture. The Registrar
is not required to transfer or exchange any Notes selected for redemption nor is
the Registrar required to transfer or exchange any Notes for a period of 15 days
before a selection of Notes to be redeemed. The registered holder of a Note may
be treated as the owner of it for all purposes.
AMENDMENT AND SUPPLEMENT
The Indenture will contain provisions permitting the Company and the
Trustee, with the consent of the holders of not less than a majority in
aggregate principal amount of the Notes outstanding, to amend or supplement the
Indenture or any supplemental indenture or the rights of the holders of Notes,
PROVIDED that no such modification may, without the consent of each holder of
Notes affected thereby; (i) reduce the amount of Notes whose holders must
consent to an amendment, supplement or waiver, (ii) reduce the rate of or extend
the time for payment of interest on any Note, (iii) reduce the principal of or
extend the fixed maturity of any Note or alter the redemption provisions with
respect thereto; (iv) waive a default in the payment of the principal of or
interest on any Note; (v) make any Note payable in money other than that stated
in such Note; or (vi) make a change in certain waiver, payment and amendment
provisions of the Indenture.
Without the consent of any holder of the Notes, the Company and the Trustee
may amend or supplement the Indenture to cure any ambiguity, omission, defect or
inconsistency, to provide for the assumption by a successor corporation of the
obligations of the Company under the Indenture, to provide for uncertificated
Notes in addition to or in place of certificated Notes (PROVIDED that the
uncertificated Notes are issued in registered form for purposes of Section
163(f) of the Internal Revenue Code of 1986, as amended (the "Code"), or in a
manner such that the uncertificated Notes are described in Section 163(f)(2)(B)
of the Code), to add to the covenants of the Company for the benefit of the
holders of the Notes or to surrender any right or power conferred upon the
Company, to make any change that does not adversely affect the rights of any
holder of the Notes or to comply with any requirement of the Commission in
connection with the qualification of the Indenture under the Trust Indenture
Act.
DEFEASANCE
The Company at any time may terminate all of its obligations under, and with
respect to, the Notes and the Indenture ("legal defeasance"), except for certain
obligations, including those respecting the defeasance trust and obligations to
register the transfer or exchange of the Notes, to replace mutilated, destroyed,
lost or stolen Notes and to maintain a registrar and paying agent in respect of
the Notes. The Company at any time may terminate its obligations under the
covenants described under "Certain Covenants" and "Change of Control" above, the
operation of the cross acceleration provision, certain of the bankruptcy
provisions, and the judgment default provision described under "Events of
Default" above and the limitations contained in clause (iii) under "Merger,
Consolidation or Sale of Substantially All Assets" above ("covenant
defeasance").
The Company may exercise its legal defeasance option notwithstanding its
prior exercise of its covenant defeasance option. If the Company exercises its
legal defeasance option, payment of the Notes may not be accelerated because of
an Event of Default with respect thereto. If the Company exercises its covenant
defeasance option, payment of the Notes may not be accelerated because of an
Event of Default specified in clause (v), (vi) or (viii) (except with respect to
the Company or a Significant Subsidiary which is a Guarantor) under "Events of
Default" above or because of the failure of the Company to comply with the
covenants described under "Certain Covenants" or "Change of Control" or with
clause (iii) under "Merger, Consolidation or Sale of Assets" above.
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In order to exercise either defeasance option, the Company must irrevocably
deposit in trust (the "defeasance trust") with the Trustee money or U.S.
Government Obligations for the payment of principal, premium (if any) and
interest on the Notes to redemption or maturity, as the case may be, and must
comply with certain other conditions, including delivering to the Trustee an
Opinion of Counsel to the effect that holders of the Notes will not recognize
income, gain or loss for federal income tax purposes as a result of such deposit
and defeasance and will be subject to federal income tax on the same amount and
in the same manner and at the same times as would have been the case if such
deposit and defeasance had not occurred (and, in the case of legal defeasance
only, such Opinion of Counsel must be based on a ruling of the Internal Revenue
Service or other change in applicable federal income tax law).
ADDITIONAL INFORMATION
So long as any Notes are outstanding, the Company will furnish to the
Trustee and the holders of Notes within 15 days after the Company files them
with the Securities and Exchange Commission (the "Commission") all quarterly and
annual reports that the Company is required to file with the Commission under
the Exchange Act. In the event that the Company is not at the time required to
file such reports with the Commission pursuant to the Exchange Act, the Company
shall nevertheless continue to file such reports with the Commission and furnish
them to holders of the Notes as if the Company were so required. The Company
will also comply with the other provisions of Section314(a) of the Trust
Indenture Act.
THE TRUSTEE
The Chase Manhattan Bank is to be the Trustee under the Indenture and has
been appointed by the Company as Registrar and Paying Agent with respect to the
Notes.
The Indenture contains certain limitations on the rights of the Trustee,
should it become a creditor of the Company, to obtain payment of claims in
certain cases, or to realize on certain property received in respect of any such
claim as security or otherwise. The Trustee will be permitted to engage in other
transactions; however, if it acquires any conflicting interest (as defined), it
must eliminate such conflict or resign.
The holders of a majority in aggregate principal amount of the then
outstanding Notes issued under the Indenture will have the right to direct the
time, method and place of conducting any proceeding for exercising any remedy
available to the Trustee. The Indenture provides that in case an Event of
Default shall occur (which shall not be cured), the Trustee will be required, in
the exercise of its power, to use the degree of care of a prudent man in the
conduct of his own affairs. Subject to such provisions, the Trustee will be
under no obligation to exercise any of its rights or powers under the Indenture
at the request of any of the holders of the Notes issued thereunder, unless they
shall have offered to the Trustee security and indemnity satisfactory to it.
GOVERNING LAW
The Indenture provides that it and the Notes will be governed by, and
construed in accordance with, the laws of the State of New York without giving
effect to applicable principles of conflicts of law to the extent that the
application of the law of another jurisdiction would be required thereby.
CERTAIN DEFINITIONS
The Indenture contains the following defined terms.
"ACQUIRED INDEBTEDNESS" of any specified Person means Indebtedness of any
other Person existing at the time such other Person is merged with or into or
became a Restricted Subsidiary of such specified Person, but excluding any
Indebtedness incurred in connection with, or in contemplation of, such merger or
such other Person becoming a Restricted Subsidiary of such specified Person.
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"ADJUSTED NET ASSETS" of a Guarantor at any date shall mean the lesser of
the amount by which (x) the fair value of the property of such Guarantor exceeds
the total amount of liabilities, including, without limitation, the probable
liability of such Guarantor with respect to its contingent liabilities (after
giving effect to all other fixed and contingent liabilities incurred or assumed
on such date), but excluding liabilities under the Guarantee, of such Guarantor
at such date and (y) the present fair salable value of the assets of such
Guarantor at such date exceeds the amount that will be required to pay the
probable liability of such Guarantor on its debts (after giving effect to all
other fixed and contingent liabilities incurred or assumed on such date and
after giving effect to any collection from any Subsidiary by such Guarantor in
respect of the obligations of such Subsidiary under the Guarantee), excluding
debt in respect of the Guarantee, as they become absolute and matured.
"AFFILIATE" means, with respect to any Person, any other Person that
directly, or indirectly through one or more intermediaries, controls, or is
controlled by, or is under common control with, such Person. The definition of
Affiliate as contained in the preceding sentence, and the term "control"
(including the terms "controlling," "controlled by" and "under common control
with") as used therein, shall be construed in a manner consistent with the
definitions of "affiliate" and "control" contained in Rule 405 promulgated under
the Securities Act, as such rule is in effect on the Issuance Date. Without
limiting the foregoing, for purposes of the Indenture (other than in relation to
the definitions of "Change of Control" and "Permitted Holders"), the ownership
of, or control of the votes with respect to, 10% or more of the voting common
equity (on a fully diluted basis) of a Person will be deemed to be control of
such Person.
"ASSET ACQUISITION" means (i) an Investment by the Company or any
Restricted Subsidiary of the Company in any other Person pursuant to which such
Person shall become a Restricted Subsidiary of the Company or shall be merged or
consolidated with the Company or any Restricted Subsidiary of the Company or
(ii) the acquisition by the Company or any Restricted Subsidiary of the Company
of assets of any Person comprising a division or line of business of such
Person.
"ASSET SALE" means (i) the sale, lease, conveyance, transfer or other
disposition (whether in a single transaction or a series of related
transactions) of property or assets of the Company or any Restricted Subsidiary
thereof (each referred to in this definition as a "disposition") or (ii) the
issuance or sale of Equity Interests of (or by) any Restricted Subsidiary of the
Company, in each case, other than (a) a disposition of inventory in the ordinary
course of business, (b) the disposition of all or substantially all of the
assets of the Company or the Restricted Subsidiaries thereof in a manner
permitted pursuant to the provisions described above under "Limitations on
Merger, Consolidation or Sale of Assets" or "Change in Control" and (c) in the
case of clause (i) only, any single disposition, or related series of
dispositions, of assets with an aggregate fair market value of less than
$500,000. Notwithstanding anything to the contrary contained above, a Restricted
Payment made in compliance with the LIMITATION ON RESTRICTED PAYMENTS covenant
shall not constitute an Asset Sale except for purposes of determinations of the
Fixed Charge Coverage Ratio (as defined).
"BANKRUPTCY LAW" means Title 11, U.S. Code or any similar Federal, state or
foreign law for the relief of debtors.
"BOARD RESOLUTION" means, with respect to any Person, a copy of a
resolution certified by the Secretary or an Assistant Secretary of such Person
to have been duly adopted by the Board of Directors of such Person and to be in
full force and effect on the date of such certification, and delivered to the
Trustee.
"BORROWING BASE" means, as of any date with respect to any Person, an
amount equal to the sum of (a) 85% of the face amount of all accounts receivable
owned by such Person as of such date that are not more than 120 days past due,
and (b) 65% of all inventory owned by such Person as of such date, in each case
valued at the lower of cost or market calculated on a consolidated basis and in
accordance with the Company's financial statements. To the extent that
information is not available as to the amount of accounts receivable or
inventory as of a specific date, such Person may utilize the most recent
available information for purposes of calculating the Borrowing Base.
"BROWN-BRIDGE" shall mean Brown-Bridge Industries, Inc., a Delaware
corporation.
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"BROWN-BRIDGE ROLL-UP CONTINGENT PAYMENTS" shall mean all payments made
after the Issuance Date (excluding the cash payments to be made as part of the
Recapitalization Plan on, or immediately after, the Issuance Date in an
aggregate amount not to exceed $2.5 million) to Persons other than the Company
who were shareholders of Brown-Bridge prior to the Issuance Date, including
without limitation all payments of the Contingent Price under, and as defined
in, that certain Agreement and Plan of Merger (Brown-Bridge Minority Interest),
by and among the Company, BB Merger Corp. and Brown-Bridge.
"CAPITAL LEASE" means, as applied to any Person, any lease of any property
(whether real, personal or mixed) by that Person as lessee which, in accordance
with GAAP, is accounted for as a capital lease on the balance sheet of such
Person.
"CAPITAL LEASE OBLIGATION" means obligations under a lease that is required
to be capitalized for financial reporting purposes in accordance with GAAP, and
the amount of Indebtedness represented by such obligations will be the
capitalized amount of such obligations determined in accordance with GAAP.
"CAPITAL STOCK" of any Person means any and all shares, interests, rights
to purchase, warrants, options, participations or other equivalents of or
interests in (however designated) the common or preferred equity of such Person,
including, without limitation, partnership interests.
"CASH EQUIVALENTS" means (i) marketable direct obligations issued by, or
unconditionally guaranteed by, the United States Government or issued by any
agency thereof and backed by the full faith and credit of the United States, in
each case maturing within one year from the date of acquisition thereof; (ii)
marketable direct obligations issued by any state of the United States of
America or any political subdivision of any such state or any public
instrumentality thereof maturing within one year from the date of acquisition
thereof and, at the time of acquisition, having one of the two highest ratings
obtainable from either Standard & Poor's Rating Services or Moody's Investors
Service, Inc.; (iii) commercial paper maturing no more than one year from the
date of creation thereof and, at the time of acquisition, having a rating of at
least A-1 from Standard & Poor's Rating Services or at least P-1 from Moody's
Investors Service, Inc.; (iv) certificates of deposit or bankers' acceptances
maturing within one year from the date of acquisition thereof issued by any
commercial bank organized under the laws of the United States of America or any
state thereof or the District of Columbia or any U.S. branch of a foreign bank
having at the date of acquisition thereof combined capital and surplus of not
less than $500 million; (v) repurchase obligations with a term of not more than
seven days for underlying securities of the types described in clause (i) above
entered into with any bank meeting the qualifications specified in clause (iv)
above; and (vi) investments in money market funds which invest substantially all
their assets in securities of the types described in clauses (i) through (v)
above.
"CHANGE OF CONTROL" means the occurrence of any of the following: (i) the
adoption of a plan relating to the liquidation or dissolution of the Company,
(ii) the sale, lease or transfer, in one or a series of transactions, of all or
substantially all of the assets of the Company or of the Company and its
Subsidiaries taken as a whole, to any Person or group (as such term is used in
Section 13(d)(3) of the Exchange Act), other than to any one or more of the
Permitted Holders, (iii) any Person or group, other than one or more of the
Permitted Holders, is or becomes the "beneficial owner" (as defined in Rules
13d-3 and 13d-5 under the Exchange Act, except that (x) a person shall be deemed
to have "beneficial ownership" of all shares that any such person has the right
to acquire, whether such right is exercisable immediately or only after the
passage of time and (y) in the case of a group which is not a Permitted Holder
but includes as members thereof one or more Permitted Holders, such group
(except to the extent provided in preceding clause (x)) shall not be considered
to be the "beneficial owner" of any capital stock of the Company beneficially
owned (other than as a result of attribution to Permitted Holders by reason of
their being members of such group) by the Permitted Holders, if any, who are
members of such group), directly or indirectly, of shares of Voting Stock of the
Company representing more than 50% of the voting power of all of the Voting
Stock of the Company by way of merger or consolidation or otherwise; PROVIDED,
HOWEVER, that a Person which ceases to be a Permitted Holder by reason of
ceasing to be an Affiliate of, or a member of a group controlled by, a Permitted
Holder shall not be deemed to have acquired beneficial ownership of any shares
of Voting Stock of the Company unless and until a "Change of Control" (as
measured from the Issuance Date) shall have
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occurred with respect to such Person (for purposes of determining whether such a
"Change of Control" has occurred, such Person shall be substituted for the
Company), or (iv) the first day within any two-year period on which a majority
of the members of the Board of Directors of the Company are not Continuing
Directors.
"CONSOLIDATED EBITDA" of any Person with respect to any period means
Consolidated Net Income of such Person for such period (x) adjusted to exclude
(to the extent included in Consolidated Net Income for such period) (i) gains
and losses from Asset Sales (without regard to the $500,000 limitation set forth
in the definition thereof) or abandonments or reserves relating thereto and (ii)
items classified as extraordinary gains and losses and (y) increased (to the
extent already deducted from Consolidated Net Income for such period) by the sum
(but without duplication), on a consolidated basis, of (i) all income tax
expense for such period, (ii) all cash and non-cash interest expense (including
interest with respect to Capitalized Lease Obligations and interest rate
protection agreements and net of any interest income) paid or accrued for such
period and (iii) all consolidated depreciation and consolidated amortization and
any other consolidated non-cash charges (including with respect to writedowns or
writeoffs of assets) for such period, in each case determined in accordance with
GAAP.
"CONSOLIDATED INTEREST EXPENSE" means, with respect to any Person for any
period, the sum of (a) consolidated interest expense of such Person and its
Restricted Subsidiaries for such period, whether paid or accrued, to the extent
such expense was deducted in computing Consolidated Net Income (including
amortization of original issue discount and original issuance costs, non-cash
interest payments, the interest component of Capital Leases, and net payments
(if any) pursuant to Hedging Obligations), (b) commissions, discounts and other
fees and charges paid or accrued with respect to letters of credit and bankers'
acceptance financing and (c) interest actually paid by such Person or its
Restricted Subsidiaries under a Guarantee of Indebtedness of any other Person.
"CONSOLIDATED NET INCOME" means, with respect to any Person for any period,
the aggregate net income (or loss) of such Person and its Restricted
Subsidiaries for such period on a consolidated basis, determined in accordance
with GAAP; provided that there shall be excluded therefrom, without duplication,
(a) the net income or loss of any Person acquired in a pooling of interests
transaction accrued prior to the date it becomes a Restricted Subsidiary of such
Person or is merged or consolidated with such Person or any Restricted
Subsidiary, (b) the net income of any Person, other than a consolidated
Restricted Subsidiary, in which such first referred to Person or a consolidated
Restricted Subsidiary has an interest shall be included only to the extent of
the lesser of (i) any dividends or distributions actually paid to such first
referred to Person and its consolidated Restricted Subsidiaries during such
period and (ii) the net income of such Person (but in no event less than zero),
and the net loss of such Person shall be included only to the extent of the
aggregate Investment of the first referred to Person or a consolidated
Restricted Subsidiary in such Person, and (c) the net income or loss of any
consolidated Restricted Subsidiary of such Person shall be excluded to the
extent such Restricted Subsidiary is restricted by contract, operation of law or
otherwise from distributing its net income.
"CONSOLIDATED NET WORTH" with respect to any Person means the consolidated
equity of the common stockholders of such Person and its consolidated
Subsidiaries (or, in the case of the Company, the Restricted Subsidiaries),
less, to the extent included in the foregoing, amounts attributable to
Disqualified Stock, each item determined on a consolidated basis and in
accordance with GAAP.
"CONTINUING DIRECTORS" means, as of any date of determination, any member of
the Board of Directors of the Company who (i) was a member of such Board of
Directors on the Issuance Date or (ii) was nominated for election or elected to
such Board of Directors with, or whose election to such Board of Directors was
approved by, the affirmative vote of a majority of the Continuing Directors who
were members of such Board of Directors at the time of such nomination or
election or (iii) is a representative of one or more of the Permitted Holders or
was nominated by one or more of the Permitted Holders or any representative of
the Permitted Holders on the Board of Directors.
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"DEFAULT" means any event that is or with the passing of time or giving of
notice or both would be an Event of Default.
"DISQUALIFIED STOCK" means any Capital Stock which, by its terms (or by the
terms of any security into which it is convertible or for which it is
exchangeable), or upon the happening of any event (other than an event which
would constitute a Change of Control), (i) matures (excluding any maturity as
the result of an optional redemption by the issuer thereof) or is mandatorily
redeemable, pursuant to a sinking fund obligation or otherwise, or redeemable at
the sole option of the holder thereof (except, in each case, upon the occurrence
of a Change of Control), in whole or in part, on or prior to the first
anniversary of the final stated maturity of the Notes, or (ii) is convertible
into or exchangeable for (whether at the option of the issuer or the holder
thereof) (a) debt securities or (b) any Capital Stock referred to in (i) above,
in each case at any time prior to the first anniversary of the final stated
maturity of the Notes.
"EQUITY INTERESTS" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock).
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended, and
the rules and regulations of the Commission promulgated thereunder.
"EXISTING INDEBTEDNESS" means Indebtedness of the Company and its Restricted
Subsidiaries (other than Indebtedness under the New Credit Facility) in
existence on the Issuance Date.
"FIXED CHARGE COVERAGE RATIO" means, with respect to any Person for any
period, the ratio of the Consolidated EBITDA of such Person for such period to
the sum of (i) the Consolidated Interest Expense of such Person for such period
and (ii) dividend requirements on Disqualified Stock of such Person and
Disqualified Stock and any Preferred Stock of its Restricted Subsidiaries
(whether in cash or otherwise (except dividends payable (x) by the Company in
shares of Capital Stock which is not Disqualified Stock and (y) by any
Restricted Subsidiary of the Company to the Company or a Wholly Owned Restricted
Subsidiary of the Company)) paid, accrued or scheduled to be paid or accrued
during such period (except to the extent accrued in a prior period) and
excluding items eliminated in consolidation; PROVIDED that (a) in the event that
the Company or any of its Restricted Subsidiaries incurs, assumes, guarantees or
redeems any Indebtedness or issues Capital Stock subsequent to the commencement
of the period for which the Fixed Charge Coverage Ratio is being calculated but
prior to the event for which the calculation of the Fixed Charge Coverage Ratio
is made, then the Fixed Charge Coverage Ratio shall be calculated giving pro
forma effect to such incurrence, assumption, guarantee or redemption of
Indebtedness, or such issuance or redemption of Capital Stock, as if the same
had occurred at the beginning of the applicable four-quarter period, (b) in
making such computation, the Consolidated Interest Expense of such Person
attributable to interest on any Indebtedness bearing a floating interest rate
shall be computed on a pro forma basis as if the rate in effect on the date of
computation had been the applicable rate for the entire period, (c) in making
such computation, the Consolidated Interest Expense of such Person attributable
to interest on any Indebtedness incurred for working capital purposes under a
revolving credit facility (but not including Indebtedness incurred in connection
with Asset Sales and/or Asset Acquisitions covered by clause (f) below) which
facility was in effect during the respective period shall be computed on a pro
forma basis based upon the average daily balance of such Indebtedness
outstanding during the applicable period (or, if shorter, the portion of the
period during which such revolving credit facility was in effect), (d) in making
such computation, for purposes of clause (ii) above, dividend requirements will
be increased to an amount representing the pretax earnings that would be
required to cover such dividend requirements; accordingly, the increased amount
will be equal to such dividend requirements multiplied by a fraction, the
numerator of which is one and the denominator of which is one minus the
applicable actual combined Federal, state, local and foreign income tax rate of
such Person and its Restricted Subsidiaries (expressed as a decimal), on a
consolidated basis, for the fiscal year immediately preceding the date of the
transaction giving rise to the need to calculate the Fixed Charge Coverage
Ratio, (e) in making such computation, Consolidated Interest Expense will be
increased or
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reduced by the net cost (including amortization of discount) or benefit (after
giving effect to amortization of discount) associated with Hedging Obligations
attributable to such period and (f) in the event that the Company or any of its
Restricted Subsidiaries consummates any Asset Sales or Asset Acquisitions
(including, without limitation, any Asset Acquisition giving rise to the need to
make such calculation as a result of the Company or one of its Restricted
Subsidiaries (including any Person who becomes a Restricted Subsidiary as a
result of the Asset Acquisition) incurring, assuming or otherwise being liable
for Indebtedness) at any time subsequent to the commencement of the period for
which the Fixed Charge Coverage Ratio is being calculated but prior to the event
for which the calculation of the Fixed Charge Coverage Ratio is made, then the
Fixed Charge Coverage Ratio shall be calculated giving pro forma effect
(calculated on a basis consistent with Regulation S-X under the Securities Act)
to such Asset Sale and Asset Acquisition as if such Asset Sale or Asset
Acquisition (including the incurrence, assumption or liability for any such
Indebtedness and also including (or excluding, as the case may be) any
Consolidated EBITDA associated with such Asset Sale or Asset Acquisition)
occurred on the first day of the applicable four-quarter period. If such Person
or any of its Restricted Subsidiaries directly or indirectly guarantees
Indebtedness of a third person, the preceding sentence shall give effect to the
incurrence of such guaranteed Indebtedness as if such Person or any Restricted
Subsidiary of such Person had directly incurred or otherwise assumed such
guaranteed Indebtedness.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as may be approved by a significant segment of the accounting
profession of the United States, which were used by the Company in the
preparation of its audited financial statements as of and for the period ended
December 31, 1995, included in the Prospectus.
"GUARANTOR" means (i) each of Central Products Company, Brown-Bridge
Industries, Inc., and Entoleter, Inc., and (ii) each of the Company's Restricted
Subsidiaries which, after the Issuance Date, becomes a Guarantor by executing a
supplemental indenture in which such Subsidiary agrees to be bound by the terms
of the Indenture as a Guarantor and executes a Guarantee; provided that any
Person constituting a Guarantor as described above shall cease to constitute a
Guarantor when its respective Guarantee is released in accordance with the terms
thereof.
"HEDGING OBLIGATIONS" means, with respect to any Person, the obligations of
such Person under (i) interest rate swap agreements, interest rate cap
agreements and interest rate collar agreements and (ii) other agreements or
arrangements in respect thereof, of all or any part of any Indebtedness.
"INDEBTEDNESS" means with respect to any Person, without duplication, (i)
all liabilities, contingent or otherwise, of such Person (a) for borrowed money
(whether or not the recourse of the lender is to the whole of the assets of such
Person or only to a portion thereof), (b) evidenced by bonds, notes, debentures,
drafts accepted or similar instruments or letters of credit or representing the
balance deferred and unpaid of the purchase price of any property (other than
any such balance that represents an account payable or any other monetary
obligation to a trade creditor (whether or not an Affiliate)) created, incurred,
assumed or guaranteed by such Person in the ordinary course of business of such
Person in connection with obtaining goods, materials or services and due within
12 months (or such longer period for payment as is customarily extended by such
trade creditor) of the incurrence thereof, which account is not overdue by more
than 90 days, according to the original terms of sale, unless such account
payable is being contested in good faith, or (c) for the payment of money
relating to a Capital Lease Obligation, (ii) the maximum fixed repurchase price
of all Disqualified Stock of such Person, (iii) reimbursement obligations of
such Person with respect to letters of credit, (iv) obligations of such Person
with respect to Hedging Obligations, (v) all liabilities of others of the kind
described in the preceding clause (i), (ii), (iii) or (iv) that such Person has
guaranteed or that is otherwise its legal liability, and (vi) all obligations of
others secured by a Lien to which any of the
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properties or assets (including, without limitation, leasehold interests and any
other tangible or intangible property rights) of such Person are subject,
whether or not the obligations secured thereby will have been assumed by such
Person or will otherwise be such Person's legal liability (PROVIDED that if the
obligations so secured have not been assumed by such Person or are not otherwise
such Person's legal liability, such obligations will be deemed to be in an
amount equal to the fair market value of such properties or assets, as
determined in good faith by the Board of Directors of such Person, which
determination will be evidenced by a Board Resolution).
"INVESTMENTS" means, with respect to any Person, all investments by such
Person in other Persons (including Affiliates) in the form of loans, guarantees,
advances or capital contributions (excluding commission, travel and similar
advances to directors, officers and employees made in the ordinary course of
business), purchases or other acquisitions for consideration of Indebtedness,
Equity Interests or other securities, and all other items that are or would be
classified as investments on a balance sheet prepared in accordance with GAAP.
"ISSUANCE DATE" means the date of original issuance of the Notes.
"LIEN" means any lien, security interest, charge or encumbrance of any kind
(including any conditional sale or other title retention agreement, any lease in
the nature thereof, and any agreement to give any security interest).
"NET PROCEEDS" from an Asset Sale means cash payments received (including
any cash payments received by way of conversion into cash of any note or other
obligation received in connection with such Asset Sale or by way of deferred
payment of principal pursuant to, or liquidation of, any note or installment
receivable or otherwise, but only as and when received therefrom) in each case
net of all legal, title and recording tax expenses, commissions and other fees
and expenses incurred, and all taxes required to be accrued as a liability under
GAAP, as a consequence of such Asset Sale and the amount of Indebtedness that is
secured by the assets subject to an Asset Sale and is repaid with the proceeds
thereof.
"NEW CREDIT FACILITY" means the Credit Facility, dated as of October 23,
1996, among the Company, the Guarantors, BT Commercial Corporation, as agent,
TransAmerica Business Credit Corporation, as collateral agent, and any other
financial institutions from time to time party thereto, together with the
related documents thereto (including, without limitation, any guarantee
agreements and security documents), in each case as such agreements may be
amended (including any amendment and restatement thereof), supplemented or
otherwise modified from time to time, including any agreement extending the
maturity of, refinancing, replacing or otherwise restructuring (including by way
of adding Subsidiaries of the Company as additional borrowers or guarantors
thereunder) all or any portion of the Indebtedness under such agreement or any
successor or replacement agreement and whether by the same or any other agent,
lender or group of lenders.
"OFFERING MEMORANDUM" shall mean the final Offering Memorandum, dated
October 18, 1996, with respect to the Old Notes.
"OFFICER" means the Chairman of the Board, the President, any Senior Vice
President, any Vice President, the Treasurer or the Secretary of the Company.
"OFFICERS' CERTIFICATE" means a certificate signed by two Officers of the
Company which complies with the applicable portions of the Indenture.
"PERMITTED BUSINESSES" means the businesses within the industries engaged in
by Central Products and Brown Bridge on the Issuance Date and reasonable
extensions thereof.
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"PERMITTED HOLDERS" means and includes (x) Mario Gabelli; Richard J. Boyle;
Ned N. Fleming, III; each Affiliate of any of the foregoing natural persons (so
long as it remains such an Affiliate); each member of the immediate family of
any of the foregoing natural persons and any trust or similar device created for
the benefit of any one or more of the foregoing and each Person which acquires a
direct or indirect beneficial ownership interest in shares of stock of the
Company as an executor or administrator for or by way of inheritance or bequest
from one or more of the natural persons described in the preceding clause (x)
following the death of such Person; and (y) each group (as such term is used in
Section 13(d)(3) of the Exchange Act) which is controlled by (with the term
"controlled by" as used herein to be determined in a manner consistent with the
phrase "controlled by" as used in the definition of Affiliate contained herein)
one or more of the Permitted Holders described in preceding clause (x), but only
so long as the respective such group is so controlled.
"PERMITTED INVESTMENTS" means (a) any Investments in the Company; (b) any
Investments in Cash Equivalents; (c) Investments by the Company in a Person, if
as a result of, or immediately after, such Investment (i) such Person is or
becomes a Wholly Owned Restricted Subsidiary which is a Guarantor or (ii) such
Person is merged, consolidated or amalgamated with or into, or transfers or
conveys substantially all of its assets to, or is liquidated into the Company or
a Person which is a Wholly Owned Restricted Subsidiary and a Guarantor after
giving effect thereto; (d) Investments by a Guarantor in other Guarantors and
Investments by Wholly Owned Restricted Subsidiaries which are not Guarantors in
other Wholly Owned Restricted Subsidiaries which are not Guarantors; (e)
Investments received by the Company or a Restricted Subsidiary as consideration
for asset sales, including Asset Sales; provided in the case of an Asset Sale
such Asset Sale is effected in compliance with the LIMITATION ON ASSET SALES
covenant; and (f) additional Investments having an aggregate fair market value,
taken together with all other Investments made pursuant to this clause (f) that
are at that time outstanding, not to exceed $10 million (with the fair market
value of each Investment being measured at the time made and without giving
effect to subsequent changes in value).
"PERMITTED LIENS" means (a) Liens granted by the Company and the Guarantors
which secure Indebtedness to the extent the Indebtedness is incurred pursuant to
clause (a) of the second paragraph under the LIMITATION ON INCURRENCE OF
INDEBTEDNESS covenant; (b) Liens in favor of the Company; (c) Liens on property
of a Person existing at the time such Person is merged into or consolidated with
the Company or any Restricted Subsidiary thereof; PROVIDED that such Liens were
in existence prior to the contemplation of such
acquisition and do not extend to any assets of the Company or its Restricted
Subsidiaries other than those acquired in connection with such merger or
consolidation; (d) Liens to secure the performance of statutory obligations,
surety or appeal bonds, performance bonds or other obligations of a like nature
incurred in the ordinary course of business; (e) Liens existing on the Issuance
Date; (f) Liens in respect of extensions, renewals, refundings or refinancings
of any Indebtedness secured by the Liens referred to in clauses (a), (b), (c)
and (e) above and (h) below; PROVIDED that the Liens in connection with such
renewal, extension, refunding or refinancing shall be limited to all or part of
the specific property which was subject to the original Lien; (g) Liens for
taxes, assessments or governmental charges or claims that are not yet delinquent
or that are being contested in good faith by appropriate proceedings promptly
instituted and diligently concluded; PROVIDED that any reserve or other
appropriate provision as shall be required in conformity with GAAP shall have
been made therefor; (h) any Lien securing purchase money obligations incurred in
connection with the purchase of real or personal property; provided that (A) at
the time such Lien attaches to the real or personal property of the Company or
Guarantor, the Company shall be permitted to incur at least $1.00 of additional
indebtedness pursuant to the first paragraph of the LIMITATION ON INCURRENCE OF
INDEBTEDNESS covenant and (B) such Liens do not extend to any property (other
than the property so purchased) owned by the Company or its Restricted
Subsidiaries and is not incurred more than 30 days after the incurrence of such
Indebtedness secured by such Lien; (i) Liens to secure Capitalized Lease
Obligations (except in respect of Sale and Leaseback Transactions) on real or
personal property of the Company to the extent consummated in compliance with
the Indenture; provided that (A) at the time such Lien attaches to the real or
personal property of the Company or Guarantor, the Company shall be permitted to
incur at least
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$1.00 of additional indebtedness pursuant to the first paragraph of the
LIMITATION ON INCURRENCE OF INDEBTEDNESS covenant and (B) such Liens do not
extend to or cover any property of the Company of any of its Subsidiaries other
than the property subject to such Capitalized Lease Obligation; and (j) Liens
incurred in the ordinary course of business of the Company or any Restricted
Subsidiary thereof with respect to obligations that do not exceed $2 million at
any one time outstanding and that (A) are not incurred in connection with the
borrowing of money or the obtaining of advances or credit (other than trade
credit in the ordinary course of business) and (B) do not in the aggregate
materially detract from the value of the property or materially impair the use
thereof in the operation of the business by the Company or such Restricted
Subsidiary.
"PERSON" shall mean any individual, partnership, joint venture, firm,
corporation, association, limited liability company, trust or other enterprise
or any government or political subdivisions or any agency, department or
instrumentality thereof.
"PREFERRED STOCK" of any Person means any Capital Stock of such Person that
has preferential rights to any other Capital Stock of such Person with respect
to dividends or redemptions or upon liquidation.
"PROPERTY" of any Person means all types of real, personal, tangible,
intangible or mixed property owned by such Person whether or not included on the
most recent consolidated balance sheet of such Person in accordance with GAAP.
"QUALIFIED CAPITAL STOCK" shall mean any Capital Stock which is not
Disqualified Stock.
"RESTRICTED INVESTMENT" means any Investment other than a Permitted
Investment.
"RESTRICTED PAYMENT" means (i) any dividend or distribution on or in respect
of any shares of Capital Stock of the Company or any Restricted Subsidiary of
the Company or to the direct or indirect holders (in their capacities as such)
of Capital Stock of the Company or such Restricted Subsidiary (except dividends
or distributions (x) by any Restricted Subsidiary which is not a Wholly Owned
Restricted Subsidiary to its shareholders generally, so long as the Company
and/or its Restricted Subsidiaries receive at least their proportionate share
thereof (based on their equity interests in the respective Restricted
Subsidiary), (y) to the Company or any Wholly Owned Restricted Subsidiary or (z)
payable solely in Qualified Capital Stock of the Company), (ii) the redemption,
repurchase, retirement or other acquisition for value of any Capital Stock of
the Company or any Restricted Subsidiary of the Company (excluding payments made
to the Company or a Wholly Owned Restricted Subsidiary), (iii) any redemption,
repurchase, prepayment, defeasance (including, but not limited to, in substance
or legal defeasance) or any other acquisition or retirement for value by either
the Company or any Restricted Subsidiary of the Company prior to any scheduled
maturity, scheduled repayment or scheduled sinking fund payment of any
Subordinated Debt, (iv) any Restricted Investment by the Company or any
Restricted Subsidiary of the Company and (v) any Brown-Bridge Roll-up Contingent
Payments made by the Company or any Restricted Subsidiary of the Company (except
to the extent paid through the issuance of Qualified Capital Stock of the
Company).
"RESTRICTED SUBSIDIARY" of any Person means any Subsidiary of such Person
which at the time of determination is not an Unrestricted Subsidiary.
"SALE AND LEASEBACK TRANSACTION" means any direct or indirect arrangement
with any Person or to which any such Person is a party, providing for the
leasing to the Company or a Subsidiary of the Company of any property, whether
owned by the Company or any Subsidiary of the Company at the Issue Date or later
acquired, which has been or is to be sold or transferred by the Company or such
Subsidiary to such Person or to any other Person from whom funds have been or
are to be advanced by such Person on the security of such property.
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"SIGNIFICANT SUBSIDIARY" shall mean any Restricted Subsidiary of the Company
which would be a "Significant Subsidiary" within the meaning ascribed to such
term in Rule 1-02 of Regulation S-X adopted by the Commission.
"SUBORDINATED DEBT" means Indebtedness of the Company that is subordinate or
junior in right of payment to the Notes.
"SUBSIDIARY" means, with respect to any Person, any corporation, association
or other business entity of which more than 50% of the total voting power of
shares of Capital Stock entitled (without regard to the occurrence of any
contingency) to vote in the election of directors, managers or trustees thereof
is at the time owned or controlled, directly or indirectly, by such Person or
one or more of the other Subsidiaries of that Person or a combination thereof.
"U.S. GOVERNMENT OBLIGATIONS" means direct obligations (or certificates
representing an ownership interest in such obligations) of the United States of
America (including any agency or instrumentality thereof) for the payment of
which the full faith and credit of the United States of America is pledged and
which are not callable at the issuer's option.
"UNRESTRICTED SUBSIDIARY" of any Person means (i) any Subsidiary of such
Person that at the time of determination shall be or continue to be designated
an Unrestricted Subsidiary by the Board of Directors of such Person in the
manner provided below and (ii) any Subsidiary of an Unrestricted Subsidiary. The
Board of Directors may designate any Subsidiary (including any newly acquired or
newly formed Subsidiary) to be an Unrestricted Subsidiary unless such Subsidiary
owns any Capital Stock of, or owns or holds any Lien on any property of, the
Company or any other Subsidiary of the Company that is not a Subsidiary of the
Subsidiary to be so designated; provided that (x) the Company certifies to the
Trustee that such designation complies with the LIMITATION ON RESTRICTED
PAYMENTS covenant and (y) each Subsidiary to be so designated and each of its
Subsidiaries has not at the time of designation, and does not thereafter,
create, incur, issue, assume, guarantee or otherwise become directly or
indirectly liable with respect to any Indebtedness pursuant to which the lender
has recourse to any of the assets of the Company or any of its Restricted
Subsidiaries. The Board of Directors of the Company may designate any
Unrestricted Subsidiary to be a Restricted Subsidiary only if (x) immediately
after giving effect to such designation, the Company is able to incur at least
$1.00 of additional Indebtedness (other than Permitted Indebtedness) in
compliance with the LIMITATION ON INCURRENCE OF INDEBTEDNESS covenant and (y)
immediately before and immediately after giving effect to such designation, no
Default or Event of Default shall have occurred and be continuing. Any such
designation by the Board of Directors of the Company shall be evidenced to the
Trustee by promptly filing with the Trustee a copy of the Board Resolution
giving effect to such designation and an Officers' Certificate that such
designation complied with the foregoing provisions.
"VOTING STOCK" with respect to any Person means all classes of Capital Stock
of such Person then outstanding and normally entitled to vote in elections of
directors of such Person.
"WEIGHTED AVERAGE LIFE TO MATURITY" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing (a) the then outstanding
principal amount of such Indebtedness into (b) the total of the product obtained
by multiplying (x) the amount of each then remaining installment, sinking fund,
serial maturity or other required payments of principal, including payment at
final maturity, in respect thereof, by (y) the number of years (calculated to
the nearest one-twelfth) that will elapse between such date and the making of
such payments.
"WHOLLY OWNED RESTRICTED SUBSIDIARY" of any Person means any Restricted
Subsidiary of such Person of which all the outstanding Voting Stock (other than
directors' qualifying shares or an immaterial amount of shares required to be
owned by other Persons pursuant to applicable law) are owned by such Person or
any Wholly Owned Restricted Subsidiary of such Person.
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OLD NOTES REGISTRATION RIGHTS
The Company, the Guarantors and the Initial Purchaser entered into a
registration rights agreement on or prior to the original issue date of the
Notes (the "Registration Rights Agreement") pursuant to which each of the
Company and the Guarantors will agree, for the benefit of the holders, that it
will, at its own cost, (i) within 90 days after the original issue date of the
Old Notes (the "Issue Date"), file a registration statement (the "Exchange Offer
Registration Statement") with the Commission with respect to the Exchange Offer,
(ii) use its best efforts to cause the Exchange Offer Registration Statement to
be declared effective under the Securities Act within 180 days after the Issue
Date and (iii) use its best efforts to consummate the Exchange Offer within 225
days after the Issue Date. Upon the Exchange Offer Registration Statement being
declared effective, the Company and the Guarantors will offer the New Notes (and
the related guarantees) in exchange for surrender of the Old Notes (and the
related guarantees). The Company and the Guarantors will keep the Exchange Offer
open for not less than 20 business days (or longer if required by applicable
law) after the date notice of the Exchange Offer is mailed to the holders of the
Old Notes. For each of the Old Notes surrendered pursuant to the Exchange Offer,
the holder who surrendered such Old Note will receive a New Note having a
principal amount equal to that of the surrendered Old Note. Interest on each New
Note will accrue from the last interest payment date on which interest was paid
on the Old Note surrendered in exchange therefor or, if no interest has been
paid on such Old Note, from the Issue Date. Under existing Commission
interpretations, the New Notes (and the related guarantees) would be freely
transferable by holders thereof other than affiliates of the Company and the
Guarantors after the Exchange Offer without further registration under the
Securities Act if the holder of the New Notes represents that it is acquiring
the New Notes in the ordinary course of business, that it has no arrangement or
understanding with any person to participate in the distribution of the New
Notes and that it is not an affiliate of the Company or the Guarantors, as such
terms are interpreted by the Commission; PROVIDED that broker-dealers
("Participating Broker-Dealers") receiving New Notes in the Exchange Offer will
have a prospectus delivery requirement with respect to resales of such New
Notes. The Commission has taken the position that the Participating
Broker-Dealers may fulfill their prospectus delivery requirements with respect
to the New Notes (other than a resale of an unsold allotment from the original
sale of the Old Notes) with the prospectus contained in the Exchange Offer
Registration Statement. The Company and the Guarantors have agreed for a period
of 180 days after consummation of the Exchange Offer to make available a
prospectus meeting requirements of the Securities Act to Participating
Broker-Dealers and other persons, if any, with similar prospectus delivery
requirements for use in connection with any resale of such New Notes.
Each holder who wishes to exchange its Old Notes for New Notes in the
Exchange Offer will be required to represent that any New Notes to be received
by it will be acquired in the ordinary course of its business and that at the
time of the commencement of the Exchange Offer it has no arrangement or
understanding with any person to participate in the distribution (within the
meaning of the Securities Act) of the New Notes and that it is not an affiliate
of the Company or the Guarantors.
If the holder is not a broker-dealer, it will be required to represent that
it is not engaged in, and does not intend to engage in, the distribution of the
applicable New Notes. If the holder is a broker-dealer that will receive New
Notes for its own account in exchange for Notes that were acquired as a result
of market making activities or other trading activities, it will be required to
acknowledge that it will deliver a prospectus in connection with any resale of
such New Notes.
In the event that applicable interpretations of the staff of the Commission
do not permit the Company and the Guarantors to effect such an Exchange Offer,
or if for any other reason the Exchange Offer is not consummated within 225 days
after the Issue Date, or, under certain circumstances, if the Initial Purchasers
shall so request, each of the Company and the Guarantors, jointly and severally,
will at their cost, (a) as promptly as practicable, file a shelf registration
statement covering resales of the Old Notes (a "Shelf Registration Statement"),
(b) use its best efforts to cause such Shelf Registration Statement to be
declared effective under the Securities Act and (c) use its best efforts to keep
effective such Shelf Registration
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Statement until the earlier of three years after the Issue Date and such time as
all of the applicable Old Notes have been sold thereunder. The Company will, in
the event of the filing of a Shelf Registration Statement, provide to each
holder of the Old Notes copies of the prospectus which is a part of such Shelf
Registration Statement, notify each such holder when such Shelf Registration
Statement has become effective and take certain other actions as are required to
permit unrestricted resales of the Old Notes. A holder that sells its Old Notes
pursuant to a Shelf Registration Statement generally will be required to be
named as a selling securityholder in the related prospectus and to deliver a
prospectus to purchasers, will be subject to certain of the civil liability
provisions under the Securities Act in connection with such sales and will be
bound by the provisions of the Registration Rights Agreement which are
applicable to such holder (including certain indemnification obligations).
If the Company and the Guarantors fail to comply with the above provisions
or if such registration statement fails to become effective, then, as liquidated
damages, additional interest (the "Additional Interest") shall become payable
with respect to the Old Notes as follows:
(i)if the Exchange Offer Registration Statement or Shelf Registration
Statement is not filed within 90 days following the Issue Date,
Additional Interest shall accrue on the Old Notes over and above the stated
interest at a rate of 0.50% per annum for the first 90 days commencing on the
91st day after the Issue Date, such Additional Interest rate increasing by an
additional 0.50% per annum at the beginning of each subsequent 90-day period;
(ii)
if the Exchange Offer Registration Statement or Shelf Registration
Statement is not declared effective within 180 days following the Issue
Date, Additional Interest shall accrue on the Old Notes over and above the
stated interest at a rate of 0.50% per annum for the first 90 days commencing on
the 181st day after the Issue Date, such Additional Interest rate increasing by
an additional 0.50% per annum at the beginning of each subsequent 90-day period;
or
(iii)
if (A) the Company and the Guarantors have not exchanged all Old Notes
validly tendered in accordance with the terms of the Exchange Offer on or
prior to 225 days after the Issue Date or (B) the Exchange Offer Registration
Statement ceases to be effective at any time prior to the time that the Exchange
Offer is consummated or (C) if applicable, the Shelf Registration Statement has
been declared effective and such Shelf Registration Statement ceases to be
effective at any time prior to the third anniversary of the Issue Date (unless
all the Old Notes have been sold thereunder), then Additional Interest shall
accrue on the Old Notes over and above the stated interest at a rate of 0.50%
per annum for the first 90 days commencing on (x) the 226th day after the Issue
Date with respect to the Old Notes validly tendered and not exchanged by the
Company, in the case of (A) above, or (y) the day the Exchange Offer
Registration Statement ceases to be effective or usable for its intended purpose
in the case of (B) above, or (z) the day such Shelf Registration Statement
ceases to be effective in the case of (C) above, such Additional Interest rate
increasing by an additional 0.50% per annum at the beginning of each subsequent
90-day period; PROVIDED, HOWEVER, that the Additional Interest rate on the Old
Notes may not exceed in the aggregate 2.0% per annum; and PROVIDED FURTHER, that
(1) upon the filing of the Exchange Offer Registration Statement or Shelf
Registration Statement (in the case of clause (i) above), (2) upon the
effectiveness of the Exchange Offer Registration Statement or Shelf Registration
Statement (in the case of (ii) above), or (3) upon the exchange of New Notes for
all Old Notes tendered (in the case of clause (iii)(A) above), or upon the
effectiveness of the Exchange Offer Registration Statement which had ceased to
remain effective in the case of clause (iii)(B) above, or upon the effectiveness
of the Shelf Registration Statement which had ceased to remain effective (in the
case of clause (iii)(C) above), Additional Interest on the Old Notes as a result
of such clause (or the relevant subclause thereof), as the case may be, shall
cease to accrue.
Any amounts of Additional Interest due pursuant to clauses (i), (ii) or
(iii) above will be payable in cash, on the same original interest payment dates
as the Old Notes. The amount of Additional Interest will be determined by
multiplying the applicable Additional Interest rate by the principal amount of
the Old Notes
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multiplied by a fraction, the numerator of which is the number of days such
Additional Interest rate was applicable during such period (determined on the
basis of a 360-day year comprised of twelve 30-day months), and the denominator
of which is 360.
The summary herein of certain provisions of the Registration Rights
Agreement does not purport to be complete and is subject to, and is qualified in
its entirety by, all the provisions of the Registration Rights Agreement, a copy
of which will be available upon request to the Company.
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
The following summary of the material anticipated federal income tax
consequences of the issuance of New Notes and the Exchange Offer is based upon
the provisions of the Internal Revenue Code of 1986, as amended, the final,
temporary and proposed regulations promulgated thereunder, and administrative
rulings and judicial decisions now in effect, all of which are subject to change
(possibly with retroactive effect) or different interpretations. The following
summary is based on an opinion of counsel to the Company which is not binding on
the Internal Revenue Service ("IRS") and there can be no assurance that the IRS
will take a similar view with respect to the tax consequences described below.
No ruling has been or will be requested by the Company from the IRS on any tax
matters relating to the New Notes or the Exchange Offer. This discussion does
not purport to address all of the possible federal income tax consequences or
any state, local or foreign tax consequences of the acquisition, ownership and
disposition of the Old Notes, the New Notes or the Exchange Offer. It is limited
to investors who will hold the Old Notes and the New Notes as capital assets. It
does not address the federal income tax consequences that may be relevant to
particular investors in light of their unique circumstances or to certain types
of investors (such as dealers in securities, insurance companies, financial
institutions, foreign corporations, partnerships, trusts, nonresident
individuals, and tax-exempt entities) who may be subject to special treatment
under federal income tax laws.
INDEBTEDNESS
The Old Notes and the New Notes should be treated as indebtedness of the
Company. In the unlikely event the Old Notes or the New Notes were treated as
equity, the amount treated as a distribution on any such Old Note or New Note
would first be taxable to the holder as dividend income to the extent of the
Company's current and accumulated earnings and profits, and would next be
treated as a return of capital to the extent of the holder's tax basis in the
Old Notes or New Notes, with any remaining amount treated as a gain from the
sale of an Old Note or a New Note. In addition, in the event of equity
treatment, amounts received in retirement of an Old Note or a New Note might in
certain circumstances be treated as a dividend, and the Company could not deduct
amounts paid as interest on such Old Notes or New Notes. The remainder of this
discussion assumes that the Old Notes and the New Notes will constitute
indebtedness.
EXCHANGE OFFER
The exchange of the Old Notes for New Notes pursuant to the Exchange Offer
should not be treated as an "exchange." This is because the New Notes should not
be considered to differ materially in kind or extent from the Old Notes and the
New Notes are being issued in accordance with the terms of the Old Notes and the
Registration Rights Agreement entered into in conjunction therewith.
Accordingly, the New Notes received by a holder of the Old Notes should be
treated as a continuation of the Old Notes in the hands of such holder. As a
result, there should be no federal income tax consequences to holders exchanging
the Old Notes for the New Notes pursuant to the Exchange Offer, and the holding
period of New Notes in the hands of a holder should include the holding period
of the Old Notes exchanged into such New Notes.
INTEREST
A holder of an Old Note or a New Note will be required to report stated
interest on the Old Note and the New Note as interest income in accordance with
the holder's method of accounting for tax purposes. Because the Old Notes were
issued at par there is no original issue discount pursuant to the de minimis
exception to the "original issue discount" rules.
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TAX BASIS IN OLD NOTES AND NEW NOTES
A holder's tax basis in an Old Note will generally be the holder's purchase
price for the Old Note. If a holder of an Old Note exchanges the Old Note for a
New Note pursuant to the Exchange Offer, the tax basis of the New Note
immediately after such exchange should equal the holder's tax basis in the Old
Note immediately prior to the Exchange.
DISPOSITION OF OLD NOTES OR NEW NOTES
The sale, exchange, redemption or other disposition of an Old Note or a New
Note, except in the case of an exchange pursuant to the Exchange Offer (see the
above discussion), generally will be a taxable event. A holder generally will
recognize gain or loss equal to the difference between (i) the amount of cash
plus the fair market value of any property received upon such sale, exchange,
redemption or other taxable disposition of the Old Note or the New Note (except
to the extent attributable to accrued interest) and (ii) the holder's adjusted
tax basis in such debt instrument. Such gain or loss will be capital gain or
loss, and will be long term if the Old Notes or the New Notes have been held for
more than one year at the time of the sale or other disposition.
PURCHASERS OF OLD NOTES AT OTHER THAN ORIGINAL ISSUANCE PRICE
The foregoing does not discuss special rules which may affect the treatment
of purchasers that acquired Old Notes other than at par, including those
provisions of the Internal Revenue Code relating to the treatment of "market
discount," and "amortizable bond premium." Any such purchaser should consult its
tax advisor as to the consequences to him of the acquisition, ownership, and
disposition of Old Notes.
BACKUP WITHHOLDING
Unless a holder provides its correct taxpayer identification number
(employer identification number or social security number) to the Company and
certifies that such number is correct, generally under the federal income tax
backup withholding rules, 31% of (1) the interest paid on the Old Notes and the
New Notes, and (2) proceeds of sale of the Old Notes and the New Notes, must be
withheld and remitted to the United States Treasury. Therefore, each holder
should complete and sign the Substitute Form W-9 included so as to provide the
information and certification necessary to avoid backup withholding. However,
certain holders (including, among others, certain foreign individuals) are not
subject to these backup withholding and reporting requirements. For a foreign
individual holder to qualify as an exempt foreign recipient, that holder must
submit a statement, signed under penalties of perjury, attesting to that
individual's exempt foreign status. Such statements can be obtained from the
Company. For further information concerning backup withholding and instructions
for completing the Substitute Form W-9 (including how to obtain a taxpayer
identification number if you do not have one and how to complete the Substitute
Form W-9 if the Old Notes are held in more than one name), contact the Company's
Assistant Secretary, 600 N. Pearl Street, Suite 2160, Dallas, Texas 75201 or
telephone number (214) 855-0322.
Backup withholding is not an additional federal income tax. Rather, the
federal income tax liability of a person subject to backup withholding will be
reduced by the amount of tax withheld. If backup withholding results in an
overpayment of taxes, a refund may be obtained from the IRS.
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BOOK-ENTRY; DELIVERY AND FORM
The New Notes (and the related guarantees) initially will be represented by
a single permanent global certificate in definitive, fully registered form (the
"Global Note"). The Global Note will be deposited on the Issue Date with, or on
behalf of, The Depository Trust Company ("DTC") and registered in the name of a
nominee of DTC.
THE GLOBAL NOTE. The Company expects that pursuant to procedures
established by DTC (i) upon the issuance of the Global Note, DTC or its
custodian will credit, on its internal system, the principal amount of Notes of
the individual beneficial interests represented by such global securities to the
respective accounts of persons who have accounts with such depositary and (ii)
ownership of beneficial interests in the Global Note will be shown on, and the
transfer of such ownership will be effected only through, records maintained by
DTC or its nominee (with respect to interests of participants) and the records
of participants (with respect to interests of persons other than participants).
Such accounts initially will be designated by or on behalf of the Initial
Purchaser and ownership of beneficial interests in the Global Note will be
limited to persons who have accounts with DTC ("participants") or persons who
hold interests through participants. QIBs may hold their interests in the Global
Note directly through DTC if they are participants in such system, or indirectly
through organizations which are participants in such system.
So long as DTC, or its nominee, is the registered owner or holder of the
Notes, DTC or such nominee, as the case may be, will be considered the sole
owner or holder of the Notes represented by such Global Note for all purposes
under the Indenture. No beneficial owner of an interest in any of the Global
Notes will be able to transfer that interest except in accordance with DTC's
procedures, in addition to those provided for under the Indenture with respect
to the Notes.
Payments of the principal of, premium (if any) and interest (including
Additional Interest) on the Global Note will be made to DTC or its nominee, as
the case may be, as the registered owner thereof. None of the Company, the
Trustee or any Paying Agent will have any responsibility or liability for any
aspect of the records relating to or payments made on account of beneficial
ownership interests in the Global Note or for maintaining, supervising or
reviewing any records relating to such beneficial ownership interest.
The Company expects that DTC or its nominee, upon receipt of any payment of
principal, premium, if any, or interest (including Additional Interest) in
respect of the Global Note, will credit participants' accounts with payments in
amounts proportionate to their respective beneficial interests in the principal
amount of the Global Note as shown on the records of DTC or its nominee. The
Company also expects that payments by participants to owners of beneficial
interests in the Global Note held through such participants will be governed by
standing instructions and customary practice, as is now the case with securities
held for the accounts of customers registered in the names of nominees for such
customers. Such payments will be the responsibility of such participants.
Transfers between participants in DTC will be effected in the ordinary way
in accordance with DTC rules and will be settled in clearinghouse funds. If a
holder requires physical delivery of a Certificated Security for any reason,
including to sell Notes to persons in states which require physical delivery of
the Notes, or to pledge such securities, such holder must transfer its interest
in the Global Note, in accordance with the normal procedures of DTC and with the
procedures set forth in the Indenture.
DTC has advised the Company that it will take any action permitted to be
taken by a holder of Notes (including the presentation of Notes for exchange as
described below) only at the direction of one or more participants to whose
account the DTC interests in the Global Note are credited and only in respect of
such portion of the aggregate principal amount of Notes as to which such
participant or participants has or have given such direction. However, if there
is an Event of Default under the Indenture, DTC will exchange the Global Note
for Certificated Securities, which it will distribute to its participants and
which will be legended as set forth under the heading "Transfer Restrictions."
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DTC has advised the Company as follows: DTC is a limited purpose trust
company organized under the laws of the State of New York, a member of the
Federal Reserve System, a "clearing corporation" within the meaning of the
Uniform Commercial Code and a "Clearing Agency" registered pursuant to the
provisions of Section 17A of the Exchange Act. DTC was created to hold
securities for its participants and facilitate the clearance and settlement of
securities transactions between participants through electronic book-entry
changes in accounts of its participants, thereby eliminating the need for
physical movement of certificates. Participants include securities brokers and
dealers, banks, trust companies and clearing corporations and certain other
organizations. Indirect access to the DTC system is available to others such as
banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a participant, either directly or indirectly
("indirect participants").
Although DTC has agreed to the foregoing procedures in order to facilitate
transfers of interests in the Global Note among participants of DTC, it is under
no obligation to perform such procedures, and such procedures may be
discontinued at any time. Neither the Company nor the Trustee will have any
responsibility for the performance by DTC or its participants or indirect
participants of their respective obligations under the rules and procedures
governing their operations.
CERTIFICATED SECURITIES. If DTC is at any time unwilling or unable to
continue as a depositary for the Global Note and a successor depositary is not
appointed by the Company within 90 days, Certificated Securities will be issued
in exchange for the Global Note.
PLAN OF DISTRIBUTION
Based on interpretations by the Staff set forth in no-action letters issued
to third parties, the Company believes that New Notes issued pursuant to the
Exchange Offer in exchange for the Old Notes may be offered for resale, resold
and otherwise transferred by holders thereof (other than any holder which is (i)
an "affiliate" of the Company within the meaning of Rule 405 under the
Securities Act, (ii) a broker-dealer who acquired Notes directly form the
Company or (iii) Broker-Dealers who acquired Notes as a result of market-making
or other trading activities) without compliance with the registration and
prospectus delivery provisions of the Securities Act provided that such New
Notes are acquired in the ordinary course of such holders' business, and such
holders are not engaged in, and do not intend to engage in, and have no
arrangement or understanding with any person to participate in, a distribution
of such New Notes; provided that Broker-Dealers ("Participating Broker-Dealers")
receiving New Notes in the Exchange Offer will be subject to a prospectus
delivery requirement with respect to resales of such New Notes. To date, the
Staff has taken the position that Participating Broker-Dealers may fulfill their
prospectus delivery requirements with respect to transactions involving an
exchange of securities such as the exchange pursuant to the Exchange Offer
(other than a resale of an unsold allotment from the sale of the Old Notes to
the Initial Purchasers) with the Prospectus, contained in the Exchange Offer
Registration Statement. Pursuant to the Registration Rights Agreement, the
Company has agreed to permit Participating Broker-Dealers and other persons, if
any, subject to similar prospectus delivery requirements to use this Prospectus
in connection with the resale of such New Notes. The Company has agreed that,
for a period of 180 days after the Expiration Date, it will make this
Prospectus, and any amendment or supplement to this Prospectus, available to any
Broker-Dealer that requests such documents in the Letter of Transmittal.
Each holder of the Old Notes who wishes to exchange its Old Notes for New
Notes in the Exchange Offer will be required to make certain representations to
the Company as set forth in "The Exchange Offer -- Terms and Conditions of the
Letter of Transmittal." In addition, each holder who is a Broker-Dealer and who
receives New Notes for its own account in exchange for Old Notes that were
acquired by it as a result of market-making activities or other trading
activities, will be required to acknowledge that it will deliver a prospectus in
connection with any resale by it of such New Notes.
The Company will not receive any proceeds from any sale of New Notes by
Broker-Dealers. New Notes received by Broker-Dealers for their own account
pursuant to the Exchange Offer may be sold from time to time in one or more
transactions in the over-the-counter market, in negotiated transactions, through
the
89
<PAGE>
writing of options on the New Notes or a combination of such methods of resale,
at market prices prevailing at the time of resale, at prices related to such
prevailing market prices or negotiated prices. Any such resale may be made
directly to purchasers or to or through brokers or dealers who may receive
compensation in the form of commissions or concessions from any such
Broker-Dealer and/or the purchasers of any such New Notes. Any Broker-Dealer
that resells New Notes that were received by it for its own account pursuant to
the Exchange Offer and any broker or dealer that participates in a distribution
of such New Notes may be deemed to be an "underwriter" within the meaning of the
Securities Act and any profit on any such resale of New Notes and any
commissions or concessions received by any such persons may be deemed to be
underwriting compensation under the Securities Act. The Letter of Transmittal
states that by acknowledging that it will deliver and by delivering a
prospectus, a Broker-Dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act.
The Company has agreed to pay all expenses incidental to the Exchange Offer
other than commissions and concessions of any brokers or dealers and will
indemnify holders of the Old Notes (including any Broker-Dealers) against
certain liabilities, including liabilities under the Securities Act, as set
forth in the Registration Rights Agreement.
The Purchase Agreement provides that the Company and the Guarantors, jointly
and severally, will indemnify the Initial Purchaser against certain liabilities,
including liabilities under the Securities Act, and will contribute to payments
that the Initial Purchaser may be required to make in respect thereof.
Prior to the Initial Offering, there had been no active market for the Old
Notes. Prior to this Exchange Offer, there has been no active market in the New
Notes. The Company does not intend to apply for listing of the Notes on any
securities exchange.
BT Commercial Corporation, an affiliate of the Initial Purchaser, is a
lender and agent under the New Credit Facility. See "Description of the New
Credit Facility." In addition, the Alco Refinancing Debt provided by Bankers
Trust Company on April 5, 1996, in the original principal amount of
approximately $8.5 million, was repaid with the proceeds of the Initial
Offering.
LEGAL MATTERS
The validity of the issuance of the Notes offered by the Company hereby will
be passed upon for the Company by Crouch & Hallett, L.L.P., Dallas, Texas.
Timothy R. Vaughan, a partner of Crouch & Hallett, L.L.P., held $8,699.66
principal amount of the Affiliate Notes, which were retired with a portion of
the proceeds from the Offering, and was a Minority Stockholder.
EXPERTS
The consolidated financial statements and schedules of Spinnaker Industries,
Inc. as of December 31, 1994 and 1995 and for each of the three years in the
period ended December 31, 1995 included in this Prospectus and Registration
Statement, have been audited by Ernst & Young LLP, independent auditors, as
stated in their report thereon appearing herein which, as to the year 1995, is
based in part on the report of Deloitte & Touche LLP, independent auditors. The
financial statements of Central Products Company, a wholly-owned subsidiary of
the Company, as of December 31, 1995 and September 30, 1995 and 1994 and for the
three month period ended December 31, 1995, and for each of the three years in
the period ended September 30, 1995, have been audited by Deloitte & Touche LLP,
independent auditors, as stated in their report appearing herein. The financial
statements and schedules referred to above are included in reliance upon such
reports given upon the authority of such firms as experts in accounting and
auditing.
90
<PAGE>
AVAILABLE INFORMATION
The Company files periodic reporting and other information requirements of
the Exchange Act. Periodic reports and other information filed by the Company
with the Commission may be inspected at the public reference facilities
maintained by the Commission at Room 1024, 450 Fifth Street, N.W., Washington,
D.C. 20549, or at its regional offices located at the Northwestern Atrium
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511 and 7
World Trade Center, Suite 1300, New York, New York 10048. Copies of such
material can be obtained from the Public Reference Section of the Commission at
450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549, at prescribed
rates. Electronic registration statements filed by the Company through the
Electronic Data Gathering Analysis and Retrieval ("EDGAR") system are publically
available through the Commission's web site at http:/www.sec.gov. All amendments
thereto and periodic reports required to be filed under the Exchange Act have
been and will be filed through EDGAR. In addition, such material can be
inspected at the offices of the Nasdaq Stock Market, Inc., 1735 K Street, N.W.,
Washington, D.C. 20006.
The Company has filed with the Commission a Registration Statement (of which
this Prospectus is a part) under the Securities Act with respect to the
securities offered hereby. This Prospectus does not contain all of the
information set forth in the Registration Statement, certain portions of which
have been omitted as permitted by the rules and regulations of the Commission.
Statements contained in the Prospectus as to the contents of any contract or
other document are not necessarily complete, and in each instance reference is
made to the copy of such contract or other document filed as an exhibit to the
Registration Statement, each such statement being qualified in all respects by
such reference and the exhibits and schedules thereto.
91
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
SPINNAKER INDUSTRIES, INC.
<TABLE>
<S> <C>
Report of Independent Auditors....................................................... F-2
Consolidated Balance Sheets at December 31, 1994 and 1995 and September 30, 1996
(unaudited)......................................................................... F-3
Consolidated Statements of Operations for the years ended December 31, 1993, 1994,
and 1995 and for the nine month periods ended September 30, 1995 and 1996
(unaudited)......................................................................... F-4
Consolidated Statements of changes in Shareholders' Equity for the years ended
December 31, 1993, 1994 and 1995 and for the nine month period ended September 30,
1996 (unaudited).................................................................... F-5
Consolidated Statements of Cash Flows for the years ended December 31, 1993, 1994 and
1995 and for the nine month periods ended September 30, 1995 and 1996 (unaudited)... F-6
Notes to Consolidated Financial Statements........................................... F-7
CENTRAL PRODUCTS COMPANY
Report of Independent Auditors....................................................... F-28
Balance Sheet of Central Products at December 31, 1995............................... F-29
Statement of Operations and Shareholder's Equity of Central Products for the three
month period ended December 31, 1995................................................ F-30
Statement of Cash Flows of Central Products for the three month period ended December
31, 1995............................................................................ F-31
Notes to Financial Statements of Central Products.................................... F-32
Report of Independent Auditors....................................................... F-38
Combined Balance Sheets of Central Products at September 30, 1995 and 1994........... F-39
Combined Statements of Operations and Business Unit Equity of Central Products for
the years ended September 30, 1995, 1994, and 1993.................................. F-40
Combined Statements of Cash Flows of Central Products for the years ended September
30, 1995, 1994, and 1993............................................................ F-41
Notes to Combined Financial Statements of Central Products........................... F-42
</TABLE>
F-1
<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 21(b). 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.
ERNST & YOUNG LLP
Dallas, Texas
February 29, 1996,
except for Note 4, as to which the date is
April 8, 1996
F-2
<PAGE>
SPINNAKER INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- SEPTEMBER 30,
1995 1994 1996
--------- --------- -------------
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE
AMOUNTS)
<S> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents................................................. $ 3,048 $ 484 $ 3,163
Short-term investments.................................................... -- 4 --
Accounts receivable, less allowance for doubtful accounts and cash
discounts of $1,234 in 1995, $378 in 1994, and $1,138 at September 30,
1996..................................................................... 24,789 12,510 26,471
Inventories............................................................... 27,041 14,572 34,183
Income taxes due from Parent.............................................. -- 70 --
Prepaid expenses and other................................................ 2,248 97 2,614
Deferred income taxes..................................................... 1,234 589 1,234
--------- --------- -------------
Total current assets........................................................ 58,360 28,326 67,665
Property, plant and equipment:
Land...................................................................... 583 420 583
Buildings and improvements................................................ 9,632 4,943 12,208
Machinery and equipment................................................... 45,372 10,059 50,803
Accumulated depreciation.................................................. (4,639) (2,927) (7,766)
--------- --------- -------------
50,948 12,495 55,828
Goodwill, net............................................................... 25,793 -- 25,501
Other assets................................................................ 2,483 508 3,507
--------- --------- -------------
Total assets................................................................ $ 137,584 $ 41,329 $ 152,501
--------- --------- -------------
--------- --------- -------------
Liabilities and shareholders' equity
Current liabilities:
Accounts payable.......................................................... $ 12,699 $ 5,003 $ 15,320
Accrued liabilities....................................................... 6,534 2,857 7,334
Current portion of long-term debt......................................... 3,666 2,217 10,559
Working capital revolver.................................................. 27,149 13,180 36,041
Other current liabilities................................................. 394 422 536
--------- --------- -------------
Total current liabilities................................................... 50,442 23,679 69,790
Long-term debt, less current portion........................................ 69,642 7,797 57,905
Notes payable to related parties............................................ 1,583 1,352 1,737
Deferred income taxes....................................................... 7,164 589 7,164
Minority interest........................................................... 1,691 1,411 1,990
Shareholders' equity:
Class A Common Stock, no par or stated value, authorized 10,000,000
shares; issued 2,811,026 shares in 1995 and 1994, 3,074,598 at September
30, 1996 and Common Stock, no par or stated value, authorized 15,000,000
shares; issued 3,074,598 at September 30, 1996 (at designated value)..... 3,124 3,124 3,124
Additional paid-in capital................................................ 3,709 3,709 10,209
Retained earnings (accumulated deficit)................................... 341 (220) 694
Less cost of common stock in treasury, 95,332 shares in 1995, 1994, and at
September 30, 1996....................................................... (112) (112) (112)
--------- --------- -------------
Total shareholders' equity.................................................. 7,062 6,501 13,915
--------- --------- -------------
Total liabilities and shareholders' equity.................................. $ 137,584 $ 41,329 $ 152,501
--------- --------- -------------
--------- --------- -------------
</TABLE>
See accompanying notes, which are an integral part of these financial
statements.
F-3
<PAGE>
SPINNAKER INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------------- -----------------------
1995 1994 1993 1996 1995
----------- ---------- --------- ----------- ----------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Net sales............................................ $ 135,289 $ 33,632 $ 6,371 $ 184,358 $ 77,716
Cost of sales........................................ (117,737) (28,506) (4,393) (159,163) (67,740)
----------- ---------- --------- ----------- ----------
Gross profit......................................... 17,552 5,126 1,978 25,195 9,976
Selling, general and administrative expenses......... (11,763) (4,404) (1,922) (16,643) (7,473)
----------- ---------- --------- ----------- ----------
Operating profit..................................... 5,789 722 56 8,552 2,503
Interest expense..................................... (4,468) (768) (104) (7,020) (1,942)
Guarantee fee to parent.............................. (375) -- -- (375) --
Other income (expense) -- net........................ 7 124 167 (52) 13
----------- ---------- --------- ----------- ----------
Income before income taxes and minority interest..... 953 78 119 1,050 574
Income taxes......................................... (112) (70) -- (453) 43
Minority interest.................................... (280) (98) -- (299) (146)
----------- ---------- --------- ----------- ----------
Net income (loss).................................... $ 561 $ (90) $ 119 $ 353 $ 471
----------- ---------- --------- ----------- ----------
----------- ---------- --------- ----------- ----------
Weighted average common and common equivalent shares
outstanding......................................... 6,702 5,626 5,432 6,959 6,761
Income (loss) per share.............................. $ 0.08 $ (0.02) $ 0.02 $ 0.05 $ 0.07
</TABLE>
See accompanying notes, which are an integral part of these financial
statements.
F-4
<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
----------- ----------- ----------- --------------- ----------- ---------
(DOLLAR 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
Net income................................... -- -- -- 353 -- 353
Issuance of common stock..................... 358,904 -- 6,500 -- -- 6,500
Stock dividend............................... 3,074,598 -- -- -- -- --
----------- ----------- ----------- ----- ----- ---------
Balance at September 30, 1996 (unaudited)...... 6,149,196 $ 3,124 $ 10,209 $ 694 $ (112) $ 13,915
----------- ----------- ----------- ----- ----- ---------
----------- ----------- ----------- ----- ----- ---------
</TABLE>
See accompanying notes, which are an integral part of these financial
statements.
F-5
<PAGE>
SPINNAKER INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------------- --------------------
1995 1994 1993 1996 1995
---------- ---------- --------- --------- ---------
(IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)......................................... $ 561 $ (90) $ 119 $ 353 $ 471
Adjustments to reconcile net/income (loss) to net cash
provided by (used in) operating activities:
Depreciation............................................ 1,745 395 131 3,165 715
Amortization of goodwill................................ 279 -- -- 779 --
Provision for losses on accounts receivable............. 627 317 1 -- --
Realized investment security gains...................... -- -- (11) -- --
Sales of short term investments, net.................... 4 1,988 -- -- 4
Amortization of deferred financing costs................ 127 16 -- 287 54
Minority interest....................................... 280 98 -- 299 146
Deferred income taxes................................... (312) -- -- -- --
Accrued interest on notes payable to related parties.... 231 67 -- 154 187
Changes in operating assets and liabilities:
Accounts receivable................................... (386) (1,392) 99 (1,682) (1,348)
Inventories........................................... 2,959 178 (3) (7,142) (1,932)
Income taxes due from Parent.......................... 70 -- (8) -- --
Prepaid expenses and other assets..................... (989) 102 (19) (366) (1,087)
Accounts payable and accrued liabilities.............. 3,996 824 (44) 3,563 3,636
---------- ---------- --------- --------- ---------
Net cash provided by (used in) operating activities....... 9,192 2,503 265 (590) 846
INVESTING ACTIVITIES
Acquisition of Brown-Bridge............................. -- (29,073) -- -- --
Acquisition of Central Products Company, net of cash
acquired............................................... (79,550) -- -- -- (2,000)
Purchases of property, plant, and equipment............. (1,620) (450) (91) (7,260) (1,038)
Net purchases of short-term investments................. -- -- (1,446) -- --
Additions to other assets............................... (643) -- -- 56 --
---------- ---------- --------- --------- ---------
Net cash used in investing activities..................... (81,813) (29,523) (1,537) (7,204) (3,038)
FINANCING ACTIVITIES
Proceeds (payments) from working capital revolvers,
net.................................................... (2,015) 13,180 -- 8,892 2,651
Proceeds from long-term debt............................ 81,984 9,000 -- 8,500 28
Principal payments on long-term debt.................... (2,706) (19) (16) (8,252) (898)
Deferred financing costs................................ (2,078) -- -- (1,731) (17)
Proceeds from notes payable to related parties.......... -- 1,285 -- -- --
Issuance of common stock................................ -- -- -- 500 --
Sale (purchase) of minority interest.................... -- 1,313 -- -- (45)
---------- ---------- --------- --------- ---------
Net cash provided by (used in) financing activities....... 75,185 24,759 (16) 7,909 1,719
Increase (decrease) in cash and cash equivalents.......... 2,564 (2,261) (1,288) 115 (473)
Cash and cash equivalents at beginning of period.......... 484 2,745 4,033 3,048 484
---------- ---------- --------- --------- ---------
Cash and cash equivalents at end of period................ $ 3,048 $ 484 $ 2,745 $ 3,163 $ 11
---------- ---------- --------- --------- ---------
---------- ---------- --------- --------- ---------
</TABLE>
See accompanying notes, which are an integral part of these financial
statements.
F-6
<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 and a stock dividend on August 16, 1996
of one share for each share outstanding. 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.
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.
F-7
<PAGE>
SPINNAKER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
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
F-8
<PAGE>
SPINNAKER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
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
F-9
<PAGE>
SPINNAKER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
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.
F-10
<PAGE>
SPINNAKER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995
2. ACQUISITIONS (CONTINUED)
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.
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 (loss)............................................................... 512 (28)
Net income (loss) 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>
F-11
<PAGE>
SPINNAKER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995
3. INVENTORIES (CONTINUED)
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.
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 .5% 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.
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
F-12
<PAGE>
SPINNAKER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995
4. LONG-TERM DEBT AND WORKING CAPITAL REVOLVERS (CONTINUED)
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 common 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
F-13
<PAGE>
SPINNAKER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995
4. LONG-TERM DEBT AND WORKING CAPITAL REVOLVERS (CONTINUED)
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.
F-14
<PAGE>
SPINNAKER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995
4. LONG-TERM DEBT AND WORKING CAPITAL REVOLVERS (CONTINUED)
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>
Scheduled principal payments on the term loans and long-term debt over the
next five years are as follows (in thousands):
<TABLE>
<CAPTION>
1996....................................................... $ 3,666
<S> <C>
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.
F-15
<PAGE>
SPINNAKER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995
4. LONG-TERM DEBT AND WORKING CAPITAL REVOLVERS (CONTINUED)
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.
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.
F-16
<PAGE>
SPINNAKER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995
7. EMPLOYEE BENEFIT PLANS (CONTINUED)
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.
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.
F-17
<PAGE>
SPINNAKER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995
7. EMPLOYEE BENEFIT PLANS (CONTINUED)
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.
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.
F-18
<PAGE>
SPINNAKER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995
7. EMPLOYEE BENEFIT PLANS (CONTINUED)
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.
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
----------------------------------------------
1995 1994
---------------------- ----------------------
ASSET LIABILITY ASSET LIABILITY
--------- ----------- --------- -----------
(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>
F-19
<PAGE>
SPINNAKER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995
8. INCOME TAXES (CONTINUED)
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>
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 split 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.
F-20
<PAGE>
SPINNAKER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995
9. RELATED PARTY TRANSACTIONS (CONTINUED)
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.
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-21
<PAGE>
SPINNAKER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995
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>
F-22
<PAGE>
SPINNAKER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995
12. LEASES
Future minimum rental payments under long-term non cancelable 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>
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-23
<PAGE>
SPINNAKER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 1996
1. BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements include
Spinnaker Industries, Inc. and its operating subsidiaries, Central Products
Company (100% owned), Brown-Bridge Industries, Inc. (80.1% owned) and Entoleter,
Inc. (100.0% owned) (collectively the "Company"). Effective October 4, 1995,
Central Products Acquisition Corporation acquired from Unisource Worldwide, Inc.
and Alco Standard Corporation (Alco), which is Unisource's parent, the assets
and stock of Central Products Company (CPC). The purchase price under the
agreement was approximately $80 million. Central Products Company manufactures
and sells water-activated and pressure-sensitive carton sealing tapes.
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.
The operating results of CPC are included in the consolidated statements of
operations for the nine month period ended September 30, 1996. The following pro
forma information, which is based on information currently available to the
Company, shows the results of the Company's operations presented as though the
purchase of CPC had been made at the beginning of 1995.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, 1995
------------------
<S> <C>
Net Sales....................................................... $ 168,985,000
Net Income...................................................... $ 201,000
Net Income Per Share............................................ $ 0.03
</TABLE>
Certain reclassifications have been made to conform prior year data to the
current year's presentation.
2. UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Article
10 of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the period ended September 30, 1996, are
not necessarily indicative of the results that may be expected for the year
ended December 31, 1996. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Company's annual
report on Form 10-K for the year ended December 31, 1995.
3. INVENTORIES
Of inventory values at September 30, 1996, and December 31, 1995, 48% are
valued using the last in, first out method (LIFO), 47% are valued using a
specific identification method with the remaining inventories valued using the
first-in, first-out method (FIFO). Inventories consist of the following at
September 30, 1996, and December 31, 1995:
<TABLE>
<CAPTION>
1996 1995
------------- -------------
<S> <C> <C>
Finished goods........................................................... $ 20,597,000 $ 14,476,000
Work-in-process.......................................................... 2,984,000 2,865,000
Raw materials............................................................ 10,602,000 9,700,000
------------- -------------
$ 34,183,000 $ 27,041,000
------------- -------------
------------- -------------
</TABLE>
F-24
<PAGE>
SPINNAKER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
SEPTEMBER 30, 1996
4. LONG-TERM DEBT AND WORKING CAPITAL REVOLVERS
The Company, as fully described in Note 5 of the Notes to the Consolidated
Financial Statements (Unaudited), issued $115 million of 10 3/4 percent
senior-secured debt subsequent to September 30, 1996. The proceeds from the debt
offering were primarily used to extinguish outstanding term and revolver debt
obligations described below, and satisfy debt issue costs.
At September 30, 1996, the Company maintained 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 $36.0 million
outstanding under the lines of credit as of September 30, 1996. Credit
availability under these lines of credit at September 30, 1996 was $6.4 million.
At September 30, 1996, the interest rates in effect ranged from 9.00% to 10.75%.
Credit availability under these lines of credit is subject to certain variables,
such as the amount of inventory and receivables eligible to be included in the
borrowing base.
Following is a summary of long term debt of Company at September 30, 1996,
and December 31, 1995:
<TABLE>
<CAPTION>
1996 1995
------------- -------------
<S> <C> <C>
Spinnaker bridge loan due December 30, 1996, if not paid, will convert to
a five year term loan.Bears interest at the greater of LIBOR plus 5% or
treasury plus 5% for 90 days, incrementally increasing .25% for each 90
day period thereafter. Interest is payable in arrears July 15 and
October 15, 1996, and January 15, 1997.................................. $ 8,500,000 $ --
Spinnaker convertible subordinated 7% note due the earlier of April 5,
1997, or, if the bridge loan is converted, six months after the maturity
of the converted bridge loan. Interest is payable in arrears each
September 30 and March 31 during the term of the note................... 7,000,000 --
Spinnaker convertible subordinated 7% note due the earlier of April 5,
1998, or the first anniversary after the payment of the $7 million
subordinated note. Interest is payable in arrears each September 30 and
March 31 during the term of the note.................................... 7,250,000 --
Spinnaker promissory note due to Alco, interest free to September 1996,
and at an interest rate of 8% thereafter, principal payment of
$1,000,000 due December 1998 and $4,000,000 due December 1999 (unless
senior debt is still outstanding, then $4,000,000 due December 2000).... 5,000,000 --
Brown-Bridge Term Loan -- secured by the assets of Brown-Bridge at an
interest rate of prime plus 1.25%, payable over five years maturing in
1999.................................................................... 5,121,000 6,691,000
Entoleter mortgage note -- payable on demand in 1997 and secured by
certain real property of Entoleter...................................... 974,000 992,000
Central Products Term Loan A -- held by Central Products at an interest
rate 9.5%, principal payable quarterly ranging from $375,000 to
$1,500,000 maturing in September 2000................................... 18,500,000 19,625,000
</TABLE>
F-25
<PAGE>
SPINNAKER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
SEPTEMBER 30, 1996
4. LONG-TERM DEBT AND WORKING CAPITAL REVOLVERS (CONTINUED)
<TABLE>
<CAPTION>
1996 1995
------------- -------------
<S> <C> <C>
Central Products Term Loan B -- held at an interest rate of 10%,
principal payable in quarterly installments of $2,000,000 from December
2000 to September 2002.................................................. 16,000,000 16,000,000
Spinnaker subordinated note is comprised of a $15 million subordinated
convertible note and a $10 million subordinated convertible note, both
due to Alco. ($15 million note is carried at an 8% interest rate, $10
million note carried at an 11% interest rate)........................... -- 25,000,000
Central Products subordinated promissory note due to Alco, interest free
to September 1996, and at an interest rate of 8% thereafter, principal
payment of $1,000,000 due December 1998 and $4,000,000 due December 1999
(unless senior debt is still outstanding, then $4,000,000 due December
2000)................................................................... -- 5,000,000
------------- -------------
68,345,000 73,308,000
Less: Current Maturities................................................. 10,559,000 3,666,000
------------- -------------
Total Long Term Debt..................................................... 58,487,000 69,642,000
Long Term Capital Lease Relating to Brown Bridge......................... 119,000 --
------------- -------------
Total Long Term Debt and Capital Lease................................... $ 57,905,000 $ 69,642,000
------------- -------------
------------- -------------
</TABLE>
On April 5, 1996, the Company refinanced the $25 million and $5 million
subordinated notes and in connection with this transaction borrowed $8,500,000
(Bridge Loan) from a bank. Concurrently with the closing of the Bridge Loan, the
Company paid Alco $7.5 million. The unpaid balance of the original $25 million
subordinated notes, together with a $750,000 balance due on a warehouse facility
newly acquired from Alco was restructured into a series of new convertible
subordinated notes aggregating $20.25 million (Convertible Notes). In May 1996,
$6 million of the Convertible Notes was converted into common stock of the
Company at a conversion price of approximately $35 per share.
5. ISSUANCE OF DEBT
On October 23, 1996, the Company completed the issuance of $115 million of
10 3/4 percent senior-secured debt ("the Notes") due 2006. The Notes were issued
in a private placement under Rule 144A and have not been registered under the
Securities Act of 1933. The debt proceeds were primarily used to recapitalize
the Company and extinguish previously existing credit facilities. In addition,
The Company established a $40 million asset-backed senior-secured revolving
credit facility.
The extinguishment of debt will result in an extraordinary charge to the
fourth quarter earnings of approximately $1.6 million, on an after tax basis.
6. SHAREHOLDER'S EQUITY AND EARNINGS PER SHARE
The Directors of the Company declared a 3-for-2 stock split of the Company's
common shares, effective as of December 29, 1995. The Directors of the Company
declared a stock dividend effective August 16, 1996 which was paid through the
issuance of one share of common stock no par value (now referred to as "Common
Stock") for each outstanding share of its existing common stock (now referred to
as "Class A
F-26
<PAGE>
SPINNAKER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
SEPTEMBER 30, 1996
6. SHAREHOLDER'S EQUITY AND EARNINGS PER SHARE (CONTINUED)
Common Stock"). The newly issued Common Stock has 1/10th vote per share,
compared to one vote per share for Class A Common Stock. Approximately 3,075,000
shares of each class of stock were outstanding after the split, for a total of
approximately 6,150,000 shares. All presentations of shares outstanding and
amounts per share have been restated to reflect the stock splits.
Earnings per share is based on the weighted average number of common and
common equivalent shares outstanding during each period, after giving effect to
the stock splits. Fully diluted earnings per share did not differ significantly
from primary earnings per share in any period presented.
In April 1996, the Company issued approximately 187,000 shares of Class A
Common Stock upon the exercise of Class A Warrants held by Richard J. Boyle and
Ned N. Fleming, III, the Company's Chairman and Chief Executive Officer and
President, respectively.
7. CONTINGENCIES
The Company 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.
8. ACQUISITION OF BROWN-BRIDGE MINORITY INTEREST
On October 23, 1996, concurrent with the issuance of the $115 million notes,
the Registrant acquired the approximately 19.9% minority interest in its
Brown-Bridge Industries subsidiary. The terms of the acquisition involved a cash
payment of approximately $2.3 million and the issuance of approximately 9,606
shares of the Company's Common Stock. In addition, as part of the consideration
for the shares of capital stock of Brown-Bridge, the minority shareholders
received the right to a contingent payment, which is exercisable at any time
during the period beginning October 1, 1998 and ending September 30, 2000. The
value of the contingent payment is equal to the percentage of the capital stock
of the former Brown-Bridge entity owned by such stockholder at the time of
merger multiplied by 75% of the fair value of the capital stock of Brown-Bridge,
as determined in accordance with certain economic assumptions, as of the date
such right is exercised, less the consideration received at closing.
F-27
<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 audits.
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.
Deloitte & Touche LLP
Milwaukee, Wisconsin
February 26, 1996
F-28
<PAGE>
CENTRAL PRODUCTS COMPANY
BALANCE SHEET
DECEMBER 31, 1995
(DOLLARS IN THOUSANDS)
ASSETS
<TABLE>
<S> <C>
CURRENT ASSETS:
Cash............................................................................. $ 2,043
Accounts receivable, net of allowance for doubtful accounts of $996.............. 12,344
Deferred income taxes (Note 7)................................................... 111
Inventories (Note 3)............................................................. 13,080
Prepaid expenses and other assets................................................ 1,881
---------
Total current assets........................................................... 29,459
PROPERTY, PLANT AND EQUIPMENT -- Net (Notes 4 and 5)............................... 37,129
OTHER ASSETS:
Goodwill -- Net.................................................................. 25,793
Deferred financing costs -- Net.................................................. 2,008
Other............................................................................ 103
---------
Total other assets............................................................. 27,904
---------
TOTAL ASSETS (Note 5).............................................................. $ 94,492
---------
---------
LIABILITIES AND EQUITY
CURRENT LIABILITIES:
Revolving line of credit (Note 5)................................................ $ 14,126
Accounts payable................................................................. 4,829
Accrued compensation and benefits................................................ 1,589
Other current liabilities........................................................ 1,424
Current portion of long-term debt (Note 5)....................................... 1,750
Accrued interest payable......................................................... 69
Income taxes (Note 7)............................................................ 320
---------
Total current liabilities...................................................... 24,107
LONG-TERM DEBT, Less current portion (Note 5)...................................... 38,875
DEFERRED INCOME TAXES (Note 7)..................................................... 6,242
---------
Total liabilities.............................................................. 69,224
COMMITMENTS AND CONTINGENCIES (Note 8)
SHAREHOLDER'S EQUITY (Note 5)
Common stock -- 1,000 shares $1 par value authorized, issued and outstanding..... 1
Additional paid-in capital....................................................... 24,999
Retained earnings................................................................ 268
---------
Total shareholder's equity..................................................... 25,268
---------
TOTAL LIABILITIES & EQUITY......................................................... $ 94,492
---------
---------
</TABLE>
See notes to financial statements.
F-29
<PAGE>
CENTRAL PRODUCTS COMPANY
STATEMENT OF OPERATIONS AND SHAREHOLDER'S EQUITY
FOR THE THREE MONTHS ENDED DECEMBER 31, 1995
(DOLLARS IN THOUSANDS)
<TABLE>
<S> <C>
NET SALES.......................................................................... $ 30,581
COST OF GOODS SOLD................................................................. 26,187
---------
GROSS PROFIT....................................................................... 4,394
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES....................................... 2,591
---------
OPERATING INCOME................................................................... 1,803
INTEREST EXPENSE................................................................... 1,326
---------
INCOME BEFORE INCOME TAXES......................................................... 477
INCOME TAXES (Note 7).............................................................. 209
---------
NET INCOME......................................................................... 268
SHAREHOLDER'S EQUITY, October 1, 1995.............................................. 25,000
---------
SHAREHOLDER'S EQUITY, December 31, 1995............................................ $ 25,268
---------
---------
</TABLE>
See notes to financial statements.
F-30
<PAGE>
CENTRAL PRODUCTS COMPANY
STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED DECEMBER 31, 1995
(DOLLARS IN THOUSANDS)
<TABLE>
<S> <C>
OPERATING ACTIVITIES:
Net income....................................................................... $ 268
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation................................................................... 665
Amortization................................................................... 350
Provision for income taxes..................................................... 209
Changes in current assets and liabilities:
Accounts receivable.......................................................... 203
Inventories.................................................................. 2,800
Prepaid expenses and other assets............................................ (649)
Accounts payable............................................................. 500
Other current liabilities.................................................... 62
---------
Cash provided by operating activities...................................... 4,408
---------
INVESTING ACTIVITIES -- Purchases of property, plant and equipment................. (582)
---------
FINANCING ACTIVITIES:
Net cash borrowed (repaid) on revolving line of credit........................... (1,858)
Principal payments on term loan.................................................. (375)
---------
Cash used in financing activities.......................................... (2,233)
---------
NET INCREASE IN CASH............................................................... 1,593
CASH, October 1, 1995.............................................................. 450
---------
CASH, December 31, 1995............................................................ $ 2,043
---------
---------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest....................................................................... $ 1,257
Income taxes................................................................... --
</TABLE>
See notes to financial statements.
F-31
<PAGE>
CENTRAL PRODUCTS COMPANY
NOTES TO FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED DECEMBER 31, 1995
(DOLLARS IN THOUSANDS)
1. DESCRIPTION OF THE BUSINESS AND BASIS OF PRESENTATION
Effective September 30, 1995, Central Products Acquisition Corp., ("CPAC"),
entered into a stock and asset purchase agreement (the "Agreement") with
Unisource Worldwide, Inc. ("Unisource"), and Alco Standard Corporation,
Unisource's parent ("Alco"). CPAC is a newly formed, wholly-owned subsidiary of
Spinnaker Industries, Inc. ("Spinnaker"). Spinnaker is an 83% owned subsidiary
of Lynch Manufacturing Corporation, which is a wholly-owned subsidiary of Lynch
Corporation ("Parent"). Under the sales agreement, CPAC purchased from Unisource
for $80,000,000 all the outstanding capital stock of Central Products Company
("CPC"), and all the assets and certain liabilities in Unisource's Central
Products Division ("Division") (together the "Business Unit"). The Business Unit
manufactures and sells water-activated and pressure-sensitive carton sealing
tapes.
In February 1996, CPC was merged into CPAC and CPAC changed its name to
Central Products Company (the "Company").
Spinnaker has accounted for the business combination as a purchase and
"pushed-down" the purchase accounting to the Company.
Purchase accounting requires that the Company's financial statements reflect
the effects of the acquisition, and thus the Company's financial statements are
based upon the estimated fair value of the assets acquired and liabilities
assumed. These requirements resulted in, among other things, the write-up on the
Company's financial statements of property, plant and equipment, inventory, and
the recording of goodwill, and the subsequent amortization and depreciation
based on such written-up values. The "push-down" method of accounting also
requires that certain long-term debt that is a legal liability of the Company is
included in the financial statements.
2. ACCOUNTING POLICIES
INVENTORIES -- Inventories are stated at the lower of cost or market. Cost
is determined by the last-in, first-out (LIFO) method for substantially all
inventories.
PROPERTY, PLANT AND EQUIPMENT -- Property, plant and equipment are stated at
cost. Depreciation is calculated using the straight-line method over the
estimated useful lives of the assets which range from 2 to 40 years.
GOODWILL -- Goodwill is amortized on a straight-line basis over 25 years.
Accumulated amortization was $279 as of December 31, 1995.
DEFERRED FINANCING COSTS -- Deferred financing costs represent legal and
other direct costs incurred in obtaining debt financing and are being amortized
over the terms of the debt agreements. Accumulated amortization was $71 as of
December 31, 1995.
REVENUE RECOGNITION -- Revenues and costs of products are recognized as the
related products are shipped.
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
income tax provision differs from amounts currently payable or
F-32
<PAGE>
CENTRAL PRODUCTS COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED DECEMBER 31, 1995
(DOLLARS IN THOUSANDS)
2. ACCOUNTING POLICIES (CONTINUED)
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.
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 reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS -- Cash, accounts receivable, short-term
borrowings, accounts payable and accrued liabilities 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.
3. INVENTORIES
Inventories at December 31, 1995 consist of the following:
<TABLE>
<S> <C>
Raw materials.............................................. $ 5,329
Work-in-progress........................................... 1,477
Finished goods............................................. 6,274
---------
$ 13,080
---------
---------
</TABLE>
Inventory was stated at its estimated fair value as of October 1, 1995 in
accordance the purchase accounting.
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at December 31, 1995 consist of the following:
<TABLE>
<S> <C>
Land....................................................... $ 135
Buildings and improvements................................. 4,300
Machinery and equipment.................................... 33,359
---------
37,794
Less accumulated depreciation.............................. (665)
---------
$ 37,129
---------
---------
</TABLE>
F-33
<PAGE>
CENTRAL PRODUCTS COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED DECEMBER 31, 1995
(DOLLARS IN THOUSANDS)
5. DEBT
Debt at December 31, 1995 consists of (all interest rates are at December
31, 1995):
<TABLE>
<S> <C>
Revolving line of credit at interest rate 9.5%, expiring in
2000...................................................... $ 14,126
Term loan at interest rate 9.5%, principal payable in
quarterly installments ranging from $375 in March, 1996 to
$1,500 in September, 2000................................. 19,625
Term loan at interest rate 10%, principal payable in
quarterly installments of $2,000 from December, 2000 to
September 2002............................................ 16,000
Subordinated promissory note due to Alco, interest free to
September, 1996 and at interest rate 8% thereafter,
principal payment of $1,000 due December, 1998 and $4,000
due December, 1999 (unless senior debt is still
outstanding, then $4,000 due December, 2000).............. 5,000
---------
54,751
Less:
Revolving line of credit................................. (14,126)
Current maturities of notes.............................. (1,750)
---------
Long-term debt............................................. $ 38,875
---------
---------
</TABLE>
All capital stock and real and personal property of the Company is pledged
as collateral for the revolving line of credit and term loans. The credit
agreement for the revolving line of credit and term loans include various
covenants including fixed charge and interest coverage ratios, minimum earnings
before interest, taxes, depreciation and amortization, and restrictions on
capital expenditures and incurrence of additional indebtedness.
Interest expense for the three months ended December 31, 1995 was $1,326.
Scheduled principal payments at December 31, 1995 are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
- -------------------------------------------------------------------------
<S> <C>
1996..................................................................... $ 1,750
1997..................................................................... 3,000
1998..................................................................... 5,750
1999..................................................................... 9,625
2000..................................................................... 6,500
Thereafter............................................................... 14,000
---------
$ 40,625
---------
---------
</TABLE>
6. RETIREMENT
Pursuant to the Agreement, the Company assumed sponsorship of a defined
benefit pension plan for union employees per their collective bargaining
agreement. The Company also agreed to establish a new
F-34
<PAGE>
CENTRAL PRODUCTS COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED DECEMBER 31, 1995
(DOLLARS IN THOUSANDS)
6. RETIREMENT (CONTINUED)
defined benefit plan for non-union employees hired by the Company. Alco retained
the defined benefit pension obligation for non-union retirees as of September
30, 1995 and any non-union employees not hired by the Company.
The Agreement requires Alco to transfer assets to Company 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,
the Company has not recorded the unfunded projected benefit obligation as a
liability when recording the purchase accounting entries.
The Company had not established a plan for the nonunion employees as of
December 31, 1995. The Company intends to establish a plan early in 1996 with
the same benefits provided by the Alco plan. Pursuant to the Agreement, the
Company will grant credit to the employees for all service with Alco through
September 30, 1995, plus the benefits they accrue under the new plan from
October 1, 1995 through their retirement or termination. The net periodic
pension cost and benefit obligation 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.
The net periodic pension cost for the three months ended December 31, 1995
is:
<TABLE>
<CAPTION>
NONUNION
UNION PLAN PLAN TOTAL
----------- ----------- ---------
<S> <C> <C> <C>
Service cost........................................................... $ 35 $ 93 $ 128
Interest cost.......................................................... 85 59 144
Actual return on assets................................................ (34) (35) (69)
Net amortization and deferral.......................................... (55) (19) (74)
----- ----- ---------
Net periodic pension cost.............................................. $ 31 $ 98 $ 129
----- ----- ---------
----- ----- ---------
</TABLE>
The following table sets forth the funded status of the plans as of December
31, 1995:
<TABLE>
<CAPTION>
UNION NONUNION
PLAN PLAN TOTAL
--------- ----------- ---------
<S> <C> <C> <C>
Accumulated benefit obligation:
Vested........................................................... $ 3,974 $ 1,835 $ 5,809
Nonvested........................................................ 505 215 720
--------- ----------- ---------
Total.......................................................... 4,479 2,050 6,529
Additional benefits based on estimated future salary levels........ -- 1,135 1,135
--------- ----------- ---------
Projected benefit obligation....................................... 4,479 3,185 7,664
Fair value of assets............................................... 4,498 2,705 7,203
--------- ----------- ---------
Unfunded projected benefit obligation.............................. (19) 480 461
Unrecognized net loss.............................................. (52) (15) (67)
--------- ----------- ---------
Unrecorded pension liability (asset)............................... $ (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
nonunion plan as of December 31, 1995 is based on a calculation of assets to be
transferred per the Agreement.
F-35
<PAGE>
CENTRAL PRODUCTS COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED DECEMBER 31, 1995
(DOLLARS IN THOUSANDS)
6. RETIREMENT (CONTINUED)
The weighted average discount rate used in calculating the projected benefit
obligation was 7.75%, the expected return on plan assets was 8% and the rate of
compensation increase for the nonunion plan was 4%.
The Company assumed sponsorship of a 401(k) plan for union employees. This
plan does not require any contributions from the Company. The Company intends to
establish a defined contribution plan for nonunion employees in 1996.
7. INCOME TAXES
Income tax expense (benefit) (calculated in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes") consists
of the following:
<TABLE>
<S> <C>
Currently payable:
Federal.................................................... $ 268
State...................................................... 52
---------
320
---------
Deferred:
Federal.................................................... (79)
State...................................................... (32)
---------
(111)
---------
$ 209
---------
---------
</TABLE>
A reconciliation of the statutory United States Federal income tax rate to
the Company's effective income tax rate follows:
<TABLE>
<S> <C>
Statutory rate............................................ 34.0%
Nondeductible goodwill amortization....................... 4.1
State income taxes, net of Federal benefit................ 4.1
Other -- net.............................................. 1.6
---
43.8%
---
---
</TABLE>
Deferred income taxes relate primarily to temporary differences in the
recording and tax deductibility of the, excess of book basis of property, plant
and equipment over tax basis, allowance for doubtful accounts, compensation and
other employee benefits, accruals, and excess tax over book depreciation.
The totals of all deferred tax assets and liabilities at December 31, 1995
were as follows:
<TABLE>
<S> <C>
Total deferred tax assets................................ $ 111
Total deferred tax liabilities........................... (6,242)
---------
Net deferred income tax liability........................ $ (6,131)
---------
---------
</TABLE>
F-36
<PAGE>
CENTRAL PRODUCTS COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED DECEMBER 31, 1995
(DOLLARS IN THOUSANDS)
8. COMMITMENTS AND CONTINGENCIES
Future minimum rental payments under long-term operating leases are as
follows at December 31, 1995:
<TABLE>
<S> <C>
YEAR ENDED DECEMBER 31,
- ------------------------------------------------------------
1996........................................................ $ 967
1997........................................................ 974
1998........................................................ 862
1999........................................................ 595
2000........................................................ 595
Thereafter.................................................. 4,710
---------
$ 8,703
---------
---------
</TABLE>
Rental payments under operating leases were $385 for the three months ended
December 31, 1995.
In connection with and contemporaneously with the Agreement, the Company
entered into an agreement to purchase a warehouse facility in Denver, Colorado
for $1,750 from Unisource. This transaction is expected to close in April, 1996.
At closing, the Company will pay $1,000 in cash and issue Unisource a promissory
note in the amount of $750. There is no formal lease agreement between the
Company and Unisource and the Company was not required to make any rent payments
for the three months ended December 31, 1995.
The Company is involved in various claims, including those related to
environmental matters and litigation arising in the normal course of business.
As provided in the purchase agreement, Alco has retained any liabilities
incurred on or before September 30, 1995. In the opinion of management, the
resolution of these claims will not have a material adverse effect on the
financial statements of the Company.
* * * * * *
F-37
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
Spinnaker Industries, Inc.:
We have audited the accompanying combined balance sheets of the Central
Products Company, a Business Unit ('Business Unit') of Unisource Worldwide, Inc.
(a wholly-owned subsidiary of Alco Standard Corporation) as of September 30,
1995 and 1994 and the related combined statements of operations and division
equity and cash flows for each of the three years ended in the period September
30, 1995. These financial statements are the responsibility of the Business
Unit's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
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 provide a reasonable basis for our opinion.
The accompanying combined financial statements have been prepared from the
separate records maintained by the Business Unit and may not necessarily be
indicative of the conditions that would have existed or the results of
operations if the Business Unit had been operated as an independent company.
Portions of certain expenses represent allocations made by Unisource Worldwide,
Inc. of items applicable to the company as a whole.
In our opinion, such combined financial statements present fairly, in all
material respects, the combined financial position of the Central Products
Company, a Business Unit of Unisource Worldwide, Inc. as of September 30, 1995
and 1994 and the results of its operations and its cash flows for each of the
three years in the period ended September 30, 1995 in conformity with generally
accepted accounting principles.
Deloitte & Touche LLP
Milwaukee, Wisconsin
December 8, 1995
F-38
<PAGE>
CENTRAL PRODUCTS COMPANY,
A BUSINESS UNIT OF UNISOURCE WORLDWIDE, INC.
COMBINED BALANCE SHEETS
SEPTEMBER 30, 1995 AND 1994
ASSETS
<TABLE>
<CAPTION>
1995 1994
--------- ---------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
CURRENT ASSETS:
Cash (overdraft).......................................................................... $ 450 $ (59)
Accounts receivable, net of allowance for doubtful accounts of $1,160 in 1995 and $507 in
1994..................................................................................... 11,265 14,014
Receivables from related parties (Note 5)................................................. 346 1,224
Inventories (Note 3)...................................................................... 13,876 9,863
Prepaid expenses and other assets......................................................... 1,232 1,299
--------- ---------
Total current assets.................................................................... 27,169 26,341
PROPERTY, PLANT AND EQUIPMENT -- net (Note 4)............................................... 21,659 24,702
OTHER ASSETS................................................................................ 213 733
--------- ---------
TOTAL ASSETS................................................................................ $ 49,041 $ 51,776
--------- ---------
--------- ---------
LIABILITIES AND BUSINESS UNIT EQUITY
CURRENT LIABILITIES:
Accounts payable.......................................................................... $ 5,829 $ 5,000
Accrued compensation and benefits......................................................... 1,075 1,500
Other current liabilities................................................................. 1,239 1,071
Current portion of long-term debt......................................................... -- 80
--------- ---------
Total current liabilities............................................................... 8,143 7,651
LONG-TERM DEBT, less current portion........................................................ -- 405
--------- ---------
TOTAL LIABILITIES........................................................................... 8,143 8,056
COMMITMENTS AND CONTINGENCIES (Note 7)
BUSINESS UNIT EQUITY (Notes 6 and 7)........................................................ 40,898 43,720
--------- ---------
TOTAL LIABILITIES & BUSINESS UNIT EQUITY.................................................... $ 49,041 $ 51,776
--------- ---------
--------- ---------
</TABLE>
See notes to combined financial statements.
F-39
<PAGE>
CENTRAL PRODUCTS COMPANY,
A BUSINESS UNIT OF UNISOURCE WORLDWIDE, INC.
COMBINED STATEMENTS OF OPERATIONS AND BUSINESS UNIT EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 1995, 1994 AND 1993
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
NET SALES (Note 5)........................................................... $ 120,219 $ 108,842 $ 105,631
COST OF GOODS SOLD........................................................... (99,129) (90,239) (86,376)
---------- ---------- ----------
GROSS PROFIT................................................................. 21,090 18,603 19,255
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES................................. (13,823) (11,608) (11,853)
ROYALTY AND MANAGEMENT FEES PAID TO PARENT (NOTE 5).......................... (1,677) (2,251) (2,464)
---------- ---------- ----------
OPERATING INCOME............................................................. 5,590 4,744 4,938
OTHER INCOME (EXPENSE) -- Net................................................ (20) (65) 26
---------- ---------- ----------
INCOME BEFORE INCOME TAXES................................................... 5,570 4,679 4,964
INCOME TAXES................................................................. (2,204) (1,825) (1,902)
---------- ---------- ----------
NET INCOME................................................................... 3,366 2,854 3,062
BUSINESS UNIT EQUITY, Beginning of year...................................... 43,720 44,941 47,106
NET CASH TRANSFERRED TO ALCO................................................. (5,231) (4,075) (5,227)
NET ASSETS RETAINED BY ALCO.................................................. (957) -- --
---------- ---------- ----------
BUSINESS UNIT EQUITY, End of year............................................ $ 40,898 $ 43,720 $ 44,941
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
See notes to combined financial statements.
F-40
<PAGE>
CENTRAL PRODUCTS COMPANY,
A BUSINESS UNIT OF UNISOURCE WORLDWIDE, INC.
COMBINED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30, 1995, 1994 AND 1993
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income...................................................................... $ 3,366 $ 2,854 $ 3,062
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation.................................................................. 2,980 3,248 3,318
Loss (gain) on sale of fixed assets........................................... 71 (24) 11
Changes in current assets and liabilities:
Accounts receivable........................................................... 2,749 (1,676) 1,036
Inventories................................................................... (4,173) 1,218 2,501
Prepaid expenses and other assets............................................. 21 29 (20)
Accounts payable.............................................................. 829 1,082 (2,867)
Accrued compensation and benefits............................................. 243 (7) (405)
Other current liabilities..................................................... 168 348 (180)
--------- --------- ---------
Cash provided by operating activities....................................... 6,254 7,072 6,456
INVESTING ACTIVITIES:
Purchases of property, plant and equipment...................................... (1,339) (2,104) (2,296)
Proceeds from sale of property, plant and equipment............................. 27 35 8
Net (increase) decrease in receivable from related parties...................... 878 (897) 292
--------- --------- ---------
Cash used in investing activities........................................... (434) (2,966) (1,996)
FINANCING ACTIVITIES:
Net cash transferred to Alco.................................................... (5,231) (4,075) (5,227)
Principal payments on note payable.............................................. (80) (115) --
--------- --------- ---------
Cash used in financing activities........................................... (5,311) (4,190) (5,227)
NET INCREASE (DECREASE) IN CASH................................................... 509 (84) (767)
CASH, Beginning of year........................................................... (59) 25 792
--------- --------- ---------
CASH, End of year................................................................. $ 450 $ (59) $ 25
--------- --------- ---------
--------- --------- ---------
NONCASH INVESTING AND FINANCING ACTIVITIES:
Assets (liabilities) retained by Alco:
Inventory..................................................................... $ 160
Prepaid expenses.............................................................. 36
Property, plant and equipment, net............................................ 1,304
Patent........................................................................ 530
Note payable.................................................................. (405)
Pension liability............................................................. (668)
---------
$ 957
---------
---------
NOTE PAYABLE ISSUED FOR PATENT.................................................... $ 600
---------
---------
</TABLE>
See notes to combined financial statements.
F-41
<PAGE>
CENTRAL PRODUCTS COMPANY,
A BUSINESS UNIT OF UNISOURCE WORLDWIDE, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 1995, 1994 AND 1993
(DOLLARS IN THOUSANDS)
1. DESCRIPTION OF THE BUSINESS AND BASIS OF PRESENTATION
Effective September 30, 1995, Central Products Acquisition Corp., ("CPAC"),
entered into a stock and asset purchase agreement with Unisource Worldwide, Inc.
("Unisource"), and Alco Standard Corporation, Unisource's parent ("Alco"). CPAC
is a newly formed, wholly-owned subsidiary of Spinnaker Industries, Inc.
("Spinnaker"). Under the sales agreement, CPAC purchased from Unisource all the
outstanding capital stock of Central Products Company ("CPC"), and all the
assets and certain liabilities in Unisource's Central Products Division
("Division") (together the "Business Unit"). The Business Unit manufactures and
sells water-activated and pressure-sensitive carton sealing tapes.
The accompanying combined financial statements reflect the financial
position, results of operations and cash flows of the Business Unit prior to its
acquisition by Spinnaker. The assets, liabilities and results of operations
specifically related to the Business Unit have been included in the financial
statements. Transactions between CPC and Division have been eliminated in the
combined financial statements. Certain corporate, general and administrative
expenses of Unisource have been allocated to the Business Unit. Such expenses
are not necessarily indicative of, and it is not practicable for management to
estimate the level of expenses which might have been incurred had the Business
Unit been operated as an independent company.
2. ACCOUNTING POLICIES
INVENTORIES -- Substantially all inventories are stated at the lower of cost
(last in, first out method) or market.
PROPERTY, PLANT AND EQUIPMENT -- Property, plant an equipment is stated at
cost. Depreciation is calculated using the straight-line method over the
estimated useful lives of the assets which range from 2 to 40 years.
INCOME TAXES -- For federal and state income tax purposes, taxable income of
the Business Unit was included in the consolidated tax returns of Alco. Income
taxes have been provided in the statement of operations on a separate return
basis. Because the tax attributes associated with the Operations of the Business
Unit were retained by Alco, the liability for current and deferred taxes has
been recognized as a component of business unit equity in the balance sheet. The
effective income tax rate differs from the federal statutory rate as a result of
state income taxes.
3. INVENTORIES
Inventories at September 30, 1995 and 1994 consist of the following:
<TABLE>
<CAPTION>
1995 1994
--------- ---------
<S> <C> <C>
Raw materials............................................................... $ 4,512 $ 4,097
Work-in-progress............................................................ 2,685 2,550
Finished goods.............................................................. 8,622 4,589
--------- ---------
15,819 11,236
Less LIFO reserve........................................................... (1,943) (1,373)
--------- ---------
$ 13,876 $ 9,863
--------- ---------
--------- ---------
</TABLE>
F-42
<PAGE>
CENTRAL PRODUCTS COMPANY,
A BUSINESS UNIT OF UNISOURCE WORLDWIDE, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED SEPTEMBER 30, 1995, 1994 AND 1993
(DOLLARS IN THOUSANDS)
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at September 30, 1995 and 1994 consists of the
following:
<TABLE>
<CAPTION>
1995 1994
--------- ---------
<S> <C> <C>
Land........................................................................ $ 182 $ 182
Buildings and improvements.................................................. 6,818 6,853
Machinery and equipment..................................................... 39,271 46,538
--------- ---------
46,271 53,573
Less accumulated depreciation............................................... 24,612 28,871
--------- ---------
$ 21,659 $ 24,702
--------- ---------
--------- ---------
</TABLE>
5. RELATED PARTY TRANSACTIONS
Management fees allocated by Alco to the Business Unit were $1,140, $1,764
and $1,764 for the years ended September 30, 1995, 1994 and 1993, respectively.
Royalty expense allocated to the Business Unit by Alco was $537, $487 and $700
for the years ended September 30, 1995, 1994 and 1993, respectively. No
allocation of interest income (expense) on the receivable from or payable to
Alco has been recorded in the accompanying financial statements.
Sales to other units of Alco were $10,878, $11,139 and $7,835 for the years
ended September 30, 1995, 1994 and 1993, respectively. Purchases from other
units of Alco were not significant in any of the three years.
6. RETIREMENT
Employees of the Business Unit participated in one of three defined benefit
pension plans, depending on their location and employee status (hourly or
salary), sponsored by Alco. Pension expense under these plans allocated to the
Business Unit was $663, $593 and $402 for the years ended September 30, 1995,
1994 and 1993, respectively. The Business Unit also participated in two defined
contribution plans which collectively covered substantially all employees of the
Business Unit. Contributions to the plans were based on matching employee
contributions. Plan expense allocated to the Business Unit was $471, $353 and
$331 for the years ended September 30, 1995, 1994 and 1993, respectively.
The liabilities for these obligations have been retained by Alco as of the
acquisition date and accordingly, are not included in the balance sheet as of
September 30, 1995.
7. COMMITMENTS AND CONTINGENCIES
Future minimum rental payments under long-term operating leases are as
follows at September 30, 1995:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
- ------------------------------------------------------------------------
<S> <C>
1996.................................................................... $ 967
1997.................................................................... 967
1998.................................................................... 784
1999.................................................................... 595
2000.................................................................... 595
Thereafter.............................................................. 4,710
---------
$ 8,618
---------
---------
</TABLE>
F-43
<PAGE>
CENTRAL PRODUCTS COMPANY,
A BUSINESS UNIT OF UNISOURCE WORLDWIDE, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED SEPTEMBER 30, 1995, 1994 AND 1993
(DOLLARS IN THOUSANDS)
7. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Rental payments under operating leases were $1,703, $1,814 and $1,632 for
the years ended September 30, 1995, 1994 and 1993, respectively.
The Business Unit is involved in various claims, including those related to
environmental matters and litigation arising in the normal course of business.
As provided in the purchase agreement, the liabilities, if any, related to these
obligations as of September 30, 1995 have been retained by Alco.
* * * * * *
F-44
<PAGE>
- ------------------------------------------------
------------------------------------------------
- ------------------------------------------------
------------------------------------------------
NO DEALER, SALESPERSON, OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THE OFFER
CONTAINED HEREIN OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR THE INITIAL PURCHASER. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY ANY SECURITY
OTHER THAN THOSE TO WHICH IT RELATES, NOR DOES IT CONSTITUTE AN OFFER TO SELL,
OR THE SOLICITATION OF AN OFFER TO BUY, TO ANY PERSON IN ANY JURISDICTION IN
WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON
MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO
WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF
THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES,
CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE
COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
--------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Prospectus Summary.............................. 1
Risk Factors.................................... 14
Recapitalization Plan........................... 20
Use of Proceeds of the New Notes................ 21
The Exchange Offer.............................. 22
Capitalization.................................. 29
Unaudited Pro Forma Financial Data.............. 30
Selected Historical Financial Data.............. 38
Management's Discussion and Analysis of
Financial Condition and Results of
Operations..................................... 39
Industry........................................ 44
Business........................................ 46
Management...................................... 53
Security Ownership of Management................ 59
Principal Stockholders.......................... 60
Description of the New Credit Facility.......... 61
Description of the Notes........................ 62
Old Notes Registration Rights................... 84
Certain United States Federal Income Tax
Consequences................................... 86
Book-Entry; Delivery and Form................... 88
Plan of Distribution............................ 89
Legal Matters................................... 90
Experts......................................... 90
Available Information........................... 91
Index to Consolidated Financial Statements...... F-1
</TABLE>
--------------------------------------
PROSPECTUS
-----------------------------
[LOGO]
SPINNAKER INDUSTRIES, INC.
OFFER TO EXCHANGE ITS
10 3/4% SENIOR SECURED NOTES
DUE 2006, SERIES B
WHICH HAVE BEEN REGISTERED
UNDER THE SECURITIES ACT FOR
ANY AND ALL OF ITS OUTSTANDING
10 3/4% SENIOR SECURED NOTES
DUE 2006, SERIES A
FEBRUARY 10, 1997
- ------------------------------------------------
------------------------------------------------
- ------------------------------------------------
------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the General Corporation Law of the State of Delaware provides
generally and in pertinent part that a Delaware corporation may indemnify its
directors and officers against expenses, judgments, fines and amounts paid in
settlement actually and reasonably incurred by them in connection with any suit
or proceeding, whether civil, criminal, administrative or investigative (other
than an action by or in the right of the corporation) if, in connection with the
matters in issue, they acted in good faith and in a manner they reasonably
believed to be in, or not opposed to, the best interests of the corporation,
and, in connection with any criminal suit or proceeding, if in connection with
the matters in issue, they had no reasonable cause to believe their conduct was
unlawful. Section 145 further provides that in connection with the defense or
settlement of any action by or in the right of the corporation, a Delaware
corporation may indemnify its directors and officers against expenses actually
and reasonably incurred by them if, in connection with the matters in issue,
they acted in good faith and in a manner they reasonably believed to be in, or
not opposed to, the best interests of the corporation, except that no
indemnification shall be made in respect of any claim, issue or matter as to
which such person shall have been adjudged to be liable to the corporation
unless and only to the extent that the court in which such action or suit was
brought shall determine upon application that, despite the adjudication of
liability but in view of all the circumstances of the case, such person is
fairly and reasonably entitled to indemnity for such expenses which the court
shall deem proper. Section 145 permits a Delaware corporation to grant its
directors and officers additional rights of indemnification through bylaw
provisions and otherwise and to purchase indemnity insurance on behalf of its
directors and officers.
The Company's Certificate of Incorporation, as amended, eliminates to the
fullest extent permissible under the General Corporation Law of Delaware the
liability of directors to the Company and the stockholders for monetary damages
for breach of fiduciary duty as a director. This provision states that it does
not eliminate liability of a director (a) for any breach of a director's duty of
loyalty to the Company or its stockholders; (b) for acts or omissions not in
good faith or which involve intentional misconduct or a knowing violation of the
law; (c) in connection with payment of any illegal dividend or illegal stock
repurchase; or (d) for any transaction from which the director derives an
improper personal benefit.
The Bylaws of the Company provide that indemnification of directors and
officers shall be provided to the fullest extent permitted under Delaware law
and the Company's Certificate of Incorporation. Lynch, the Company's controlling
stockholder, has obtained an insurance policy insuring the directors and
officers of the Company against certain liabilities, if any, that arise in
connection with the performance of their duties on behalf of the Company and its
subsidiaries.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(A) EXHIBITS
<TABLE>
<C> <S>
3.1 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).
3.2 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).
4.1 Purchase Agreement dated October 18, 1996, among the Registrant,
Brown-Bridge Industries, Inc., Central Products Company, and Entoleter,
Inc., and BT Securities Corporation (filed as Exhibit 4.1 to the
Registrant's Current Report on Form 8-K dated November 7, 1996).
</TABLE>
II-1
<PAGE>
<TABLE>
<C> <S>
4.2 Registration Rights Agreement dated October 18, 1996, among the
Registrant, Brown-Bridge Industries, Inc., Central Products Company, and
Entoleter, Inc., and BT Securities Corporation (filed as Exhibit 4.2 to
the Registrant's Current Report on Form 8-K dated November 7, 1996).
4.3 Indenture dated October 23, 1996, among the Registrant, Brown-Bridge
Industries, Inc., Central Products Company, and Entoleter, Inc., and The
Chase Manhattan Bank, as Trustee (filed as Exhibit 4.3 to the
Registrant's Current Report on Form 8-K dated November 7, 1996).
4.4 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).
5.1 Opinion of Crouch & Hallett, L.L.P. regarding the legality of the New
Notes.
8.1 Opinion of Crouch & Hallett, L.L.P. regarding certain tax matters.
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 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).
</TABLE>
II-2
<PAGE>
<TABLE>
<C> <S>
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 61, 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
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).
</TABLE>
II-3
<PAGE>
<TABLE>
<C> <S>
10.22 Credit Agreement among Central Products Company, Brown-Bridge Industries,
Inc. and Entoleter, Inc. as Borrowers, the Registrant, as Guarantor,
each of the financial institutions listed on Schedule 1 thereto, BT
Commercial Corporation, as Agent, Transamerica Business Credit
Corporation, as Collateral Agent, and Bankers Trust Company, as Issuing
Bank (filed as Exhibit 99.1 to the Registrant's Current Report on Form
8-K dated November 7, 1996).
10.23 Agreement and Plan of Merger (Brown-Bridge Minority Interest), by and
among the Registrant, BB Merger Corp., Brown-Bridge Industries, Inc.,
and the stockholders of Brown-Bridge Industries, Inc. listed on Exhibit
A thereto (filed as Exhibit 99.2 to the Registrant's Current Report on
Form 8-K dated November 7, 1996).
11.1* Computation of Per Share Earnings.
21.1* Subsidiaries of the Registrant.
23.1 Consent of Ernst & Young LLP.
23.2 Consent of Deloitte & Touche LLP.
23.3 Consent of Crouch & Hallett, L.L.P. (included in Exhibit 5.1).
24.1* Power of Attorney.
25.1 Statement of Eligibility and Qualification on Form T-1 under the Trust
Indenture Act of 1939 of The Chase Manhattan Bank, as Trustee of the
Indenture relating to the 10 3/4% Senior Secured Notes due 2006, Series
B.
99.1 Form of Letter of Transmittal.
99.2 Form of Notice of Guaranteed Delivery.
99.3 Form of Letter to Brokers.
99.4 Form of Letter to Clients.
99.5 Instruction to Registered Holder and/or Book-Entry Transfer Participant
from Beneficial Owner.
99.6 Guidelines for Certification of Taxpayer Identification Number on
substitute Form W-9.
</TABLE>
- ------------------------
* Previously Filed
II-4
<PAGE>
(B) FINANCIAL STATEMENT SCHEDULES
<TABLE>
<S> <C>
Schedule I -- Condensed Financial Information of Registrant
Schedule II -- Valuation and Qualifying Accounts
</TABLE>
All other schedules are omitted as the required information is inapplicable
or the information is presented in the financial statements, related notes or
other schedules.
ITEM 22. UNDERTAKINGS.
(a) The registrant hereby undertakes that, for purposes of determining any
liability under the Securities Act of 1933, each filing of the registrant's
annual report pursuant to section 13(a) or section 15(d) of the Securities
Exchange Act of 1934 (and, where applicable, each filing of an employee benefit
plan's annual report pursuant to section 15(d) of the Securities Exchange Act of
1934) that is incorporated by reference in the Registration Statement shall be
deemed to be a new Registration Statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(b) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer, or controlling person of the registrant in the
successful defense of any action, suit, or proceeding) is asserted by such
director, officer, or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
(c) The undersigned registrant hereby undertakes as follows: that prior to
any public reoffering of the securities registered hereunder through use of a
prospectus which is a part of this registration statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c), the
issuer undertakes that such reoffering prospectus will contain the information
called for by the applicable registration form with respect to reofferings by
persons who may be deemed underwriters, in addition to the information called
for by the other Items of the applicable form.
(d) The registrant undertakes that every prospectus (i) that is filed
pursuant to paragraph (c) immediately preceding, or (ii) that purports to meet
the requirements of Section 10(a)(3) of the Act and is used in connection with
an offering of securities subject to Rule 415, will be filed as a part of an
amendment to the registration statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(e) The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Items 4, 10(b), 11 or 13 in this Form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
(f) The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Dallas and State of Texas
on the 7th day of February, 1997.
SPINNAKER INDUSTRIES, INC.
By: /s/ NED N. FLEMING, III
-----------------------------------------
Ned N. Fleming, III, PRESIDENT
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities on the 7th day of February, 1997.
<TABLE>
<CAPTION>
NAME TITLE
- ------------------------------------------------------ ---------------------------------------------------
<C> <S>
*
------------------------------------------- Chairman of the Board and Chief Executive Officer
Richard J. Boyle (Principal Executive Officer)
/s/ NED N. FLEMING, III
------------------------------------------- President and Director
Ned N. Fleming, III
*
------------------------------------------- Controller and Assistant Secretary (Principal
James W. Toman Financial and Accounting Officer)
*
------------------------------------------- Director
Philip Wm. Colburn
------------------------------------------- Director
Robert E. Dolan
------------------------------------------- Director
Frank E. Grzelecki
------------------------------------------- Director
Joseph P. Rhein
</TABLE>
II-6
<PAGE>
<TABLE>
<CAPTION>
NAME TITLE
- ------------------------------------------------------ ---------------------------------------------------
<C> <S>
*
------------------------------------------- Director
Anthonie C. van Ekris
*By: /s/ NED N. FLEMING, III
--------------------------------------
Ned N. Fleming, III
ATTORNEY-IN-FACT
</TABLE>
II-7
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Dallas and State of Texas
on the 7th day of February, 1997.
BROWN-BRIDGE INDUSTRIES, INC.
By: /s/ NED N. FLEMING, III
-----------------------------------------
Ned N. Fleming, III
VICE PRESIDENT
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities on the 7th day of February, 1997.
<TABLE>
<CAPTION>
NAME TITLE
- ------------------------------------------------------ ---------------------------------------------------
<C> <S>
* Chairman of the Board,
------------------------------------------- Chief Executive Officer and President
K.C. Caldabaugh (Principal Executive Officer)
* Executive Vice President and Chief Financial
------------------------------------------- Officer (Principal Financial and Accounting
Richard T. Ray Officer)
*
------------------------------------------- Vice President and Director
Ned N. Fleming, III
*
------------------------------------------- Director
Richard J. Boyle
*By: /s/ NED N. FLEMING, III
--------------------------------------
Ned N. Fleming, III
ATTORNEY-IN-FACT
</TABLE>
II-8
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Dallas and State of Texas
on the 7th day of February, 1997.
CENTRAL PRODUCTS COMPANY
By: /s/ NED N. FLEMING, III
-----------------------------------------
Ned N. Fleming, III
CHIEF OPERATING OFFICER
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities on the 7th day of February, 1997.
<TABLE>
<CAPTION>
NAME TITLE
- ------------------------------------------------------ ---------------------------------------------------
<C> <S>
*
------------------------------------------- Chairman of the Board
Richard J. Boyle
*
------------------------------------------- Chief Operating Officer and Director
Ned N. Fleming, III
*
------------------------------------------- President (Principal Executive Officer)
John R. Powers
*
------------------------------------------- Vice President, Secretary and Treasurer (Principal
Alan G. Johnson Financial and Accounting Officer)
*By: /s/ NED N. FLEMING, III
---------------------------------------
Ned N. Fleming, III
ATTORNEY-IN-FACT
</TABLE>
II-9
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Dallas and State of Texas
on the 7th day of February, 1997.
ENTOLETER, INC.
By: /s/ MARK R. MATTESON
-----------------------------------------
Mark R. Matteson, VICE PRESIDENT
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities on the 7th day of February, 1997.
<TABLE>
<CAPTION>
NAME TITLE
- ------------------------------------------------------ ---------------------------------------------------
<C> <S>
*
------------------------------------------- President (Principal Executive Officer and
Robert P. Wentzel Director)
*
------------------------------------------- Vice President and Director
Mark R. Matteson
*
------------------------------------------- Director
Ned N. Fleming, III
*
------------------------------------------- Controller and Secretary (Principal Financial and
Robert Hladick Accounting Officer)
*By: /s/ NED N. FLEMING, III
--------------------------------------
Ned N. Fleming, III
ATTORNEY-IN-FACT
</TABLE>
II-10
<PAGE>
SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
SPINNAKER INDUSTRIES, INC.
(PARENT COMPANY)
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1995 1994
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
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, CURRENT............................ 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>
S-1
<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 Expense.............................. 1,100 673 202
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>
S-2
<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>
S-3
<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.
S-4
<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
--------- --------- ---------
<S> <C> <C> <C>
(IN THOUSANDS)
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
S-5
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------ --------------------------------------------------------------------------
<C> <S>
3.1 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).
3.2 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).
4.1 Purchase Agreement dated October 18, 1996, among the Registrant,
Brown-Bridge Industries, Inc., Central Products Company, and Entoleter,
Inc., and BT Securities Corporation (filed as Exhibit 4.1 to the
Registrant's Current Report on Form 8-K dated November 7, 1996).
4.2 Registration Rights Agreement dated October 18, 1996, among the
Registrant, Brown-Bridge Industries, Inc., Central Products Company, and
Entoleter, Inc., and BT Securities Corporation (filed as Exhibit 4.2 to
the Registrant's Current Report on Form 8-K dated November 7, 1996).
4.3 Indenture dated October 23, 1996, among the Registrant, Brown-Bridge
Industries, Inc., Central Products Company, and Entoleter, Inc., and The
Chase Manhattan Bank, as Trustee (filed as Exhibit 4.3 to the
Registrant's Current Report on Form 8-K dated November 7, 1996).
4.4 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).
5.1 Opinion of Crouch & Hallett, L.L.P. regarding the legality of the New
Notes.
8.1 Opinion of Crouch & Hallett, L.L.P. regarding certain tax matters.
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).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------ --------------------------------------------------------------------------
<C> <S>
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 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 61, 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
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).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------ --------------------------------------------------------------------------
<C> <S>
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 Credit Agreement among Central Products Company, Brown-Bridge Industries,
Inc. and Entoleter, Inc. as Borrowers, the Registrant, as Guarantor,
each of the financial institutions listed on Schedule 1 thereto, BT
Commercial Corporation, as Agent, Transamerica Business Credit
Corporation, as Collateral Agent, and Bankers Trust Company, as Issuing
Bank (filed as Exhibit 99.1 to the Registrant's Current Report on Form
8-K dated November 7, 1996).
10.23 Agreement and Plan of Merger (Brown-Bridge Minority Interest), by and
among the Registrant, BB Merger Corp., Brown-Bridge Industries, Inc.,
and the stockholders of Brown-Bridge Industries, Inc. listed on Exhibit
A thereto (filed as Exhibit 99.2 to the Registrant's Current Report on
Form 8-K dated November 7, 1996).
11.1* Computation of Per Share Earnings.
21.1* Subsidiaries of the Registrant.
23.1 Consent of Ernst & Young LLP.
23.2 Consent of Deloitte & Touche LLP.
23.3 Consent of Crouch & Hallett, L.L.P. (included in Exhibit 5.1).
24.1* Power of Attorney
25.1 Statement of Eligibility and Qualification on Form T-1 under the Trust
Indenture Act of 1939 of The Chase Manhattan Bank, as Trustee of the
Indenture relating to the 10 3/4% Senior Secured Notes due 2006, Series
B.
99.1 Form of Letter of Transmittal.
99.2 Form of Notice of Guaranteed Delivery.
99.3 Form of Letter to Brokers.
99.4 Form of Letter to Clients.
99.5 Instruction to Registered Holder and/or Book-Entry Transfer Participant
from Beneficial Owner.
99.6 Guidelines for Certification of Taxpayer Identification Number on
substitute Form W-9.
</TABLE>
- ------------------------
* Previously Filed
<PAGE>
EXHIBIT 5.1
February 7, 1997
Spinnaker Industries, Inc.
600 N. Pearl Street
Suite 2160
Dallas, Texas 75201
Gentlemen:
We have served as counsel for Spinnaker Industries, Inc., a Delaware
corporation (the "Company"), and its subsidiaries (the "Guarantors"), in
connection with preparation of the Registration Statement on Form S-4
(Registration No. 333-18789) (the "Registration Statement") to be filed by the
Company and the Guarantors with the Securities and Exchange Commission (the
"Commission") relating to the registration of $115,000,000 aggregate principal
amount of the Company's 10 3/4% Senior Secured Notes due 2006, Series B (the
"New Notes") and the Guarantees thereof by the Guarantors, which are to be
offered in exchange for an equivalent principal amount of the Company's
currently outstanding 10 3/4% Senior Secured Notes due 2006, Series A (the "Old
Notes"), all as more fully described in the Registration Statement. The New
Notes will be issued by the Company under the terms of the Indenture dated as of
October 23, 1996 (the "Indenture"), among the Company, the Guarantors, BT
Securities Corporation, as the Initial Purchaser, and The Chase Manhattan Bank,
as Trustee. Capitalized terms not otherwise defined herein shall have the
meanings assigned to such terms in the prospectus ("Prospectus") contained in
the Registration Statement.
In connection with this opinion, we have examined and are familiar with
originals or copies, certified or otherwise identified to our satisfaction, of
(i) the Registration Statement, in the form initially filed with the Commission,
(ii) the certificates of incorporation, as currently in effect, of the Company
and each of the Guarantors, (iii) the bylaws, as currently in effect, of the
Company and each of the Guarantors, and (iv) the Indenture. We have also
examined such documents and questions of law as we have deemed necessary to
render the opinions expressed herein.
In our examination, we have assumed the legal capacity of all natural
persons, the genuineness of all signatures, the authenticity of all documents
submitted to us as originals, the conformity to original documents of all
documents submitted to us as copies, and the authenticity of such latter
documents. As to certain facts material to this opinion, we have relied without
independent verification upon oral or written statements and representations of
officers and other representatives of the Company and the Guarantors.
Based upon and subject to the foregoing, we are of the opinion that
1. The issuance and exchange of the New Notes for the Old Notes and the
issuance of the Guarantees have been in each case duly authorized by all
requisite corporate action on the part of the Company and the Guarantors,
respectively.
2. The New Notes and the Guarantees will be valid and binding obligations of
the Company and the Guarantors, respectively, entitled to the benefits of
the Indenture and enforceable against the Company and the Guarantors,
respectively, in accordance with their respective terms, when (a) the
Registration Statement, as finally amended (including all necessary
post-effective amendments), shall have become effective under the Securities
Act, (b) a Prospectus with respect to the New Notes shall have been filed with
the Commission pursuant to Rule 424 under the Securities Act, (c) the New Notes
have been duly executed and authenticated in accordance with the provisions of
the Indenture, and (d) the New Notes have been issued and delivered in exchange
for Old Notes pursuant to the terms set forth in the Prospectus, except to the
extent that the enforceability thereof may be limited (y) by bankruptcy laws,
insolvency laws or other similar laws generally affecting creditors' rights and
(z) by equitable principles of general application.
We consent to the use of this opinion as an exhibit to the Registration
Statement and to the use of our name in the Registration Statement and in the
Prospectus included therein under the heading "Legal Matters."
Very truly yours,
CROUCH & HALLETT, L.L.P.
<PAGE>
EXHIBIT 8.1
February 7, 1997
Spinnaker Industries, Inc.
600 N. Pearl Street
Suite 2160
Dallas, Texas 75201
Ladies and Gentlemen:
We have acted as your special counsel in connection with the transactions
described in the Registration Statement on Form S-4 (Registration No. 333 -
18789) ( the "Registration Statement") filed with the Securities and Exchange
Commission (the "Commission") pursuant to the Securities Act of 1933, as amended
(the "Securities Act"), on December 24, 1996 by Spinnaker Industries, Inc., a
Delaware corporation (the "Company"), and described in the Company's Offer to
Exchange 10 3/4% Senior Secured Notes due 2006, Series B (the "New Notes"), for
all outstanding 10 3/4% Senior Secured Notes due 2006, Series A (the "Old
Notes"), set forth in the Prospectus (the "Prospectus") contained within the
Registration Statement. Capitalized terms used but not otherwise defined herein
shall have the meaning ascribed thereto in the Registration Statement.
Our opinion is based on an examination of the Registration Statement, the
Prospectus, and such other documents, corporate records and materials as we have
deemed necessary or appropriate for the purposes of this opinion. We assume that
all transactions relating to the exchange pursuant to the Exchange Offer will be
carried out in accordance with the terms of the governing documents without any
amendments thereto or a waiver of any terms thereof, and that such documents
represent the entire agreement of the parties thereto. We understand the
relevant facts to be as follows:
The Old Notes were originally issued and sold on October 23, 1996 in a
transaction not registered under the Securities Act, in reliance upon the
exemption provided in Rule 144A and Regulation D under the Securities Act.
Accordingly, the Old Notes are generally subject to substantial transfer
restrictions unless such notes are registered or unless an applicable exemption
from the registration requirements of the Securities Act is available. Pursuant
to a Registration Rights Agreement dated October 18, 1996 (the "Registration
Rights Agreement") among the Company, the Guarantors and the initial purchaser
of the Old Notes (the "Initial Purchaser"), the Company agreed to use its best
efforts to consummate by June 5, 1997 the registered Exchange Offer pursuant to
which holders of the Old Notes would be offered an opportunity to exchange their
Old Notes for the New Notes which would be issued without legends restricting
the transfer thereof. If the Company is unable to effect the Exchange Offer or
in certain other circumstances, the Company agreed to file a Shelf Registration
statement covering resales of the Old Notes and to cause such Shelf Registration
statement to be declared effective under the Securities Act. Failure of the
Company to comply with the requirements of the Registration Rights Agreement
could result in additional interest payable with respect to the Old Notes. The
New Notes will not be subject to such contingent additional interest. In
general, the New Notes will be freely transferable after the Exchange Offer
without further registration under the Securities Act. Except as noted above,
the terms of the New Notes are identical to those of the Old Notes.
Based on the foregoing and subject to the assumptions, qualifications
limitations contained herein, we hereby confirm that the statements set forth in
the Prospectus under the heading "Certain United States Federal Income Tax
Consequences" constitute or opinion with respect to the material United States
Federal income tax consequences of the (i) the exchange of the Old Notes for the
New Notes pursuant to the Exchange Offer, and (ii) the ownership and disposition
of the Old Notes or the New Notes by holders who hold such notes as capital
assets. The Internal Revenue Service may take a contrary position and a court
may agree with such contrary position.
<PAGE>
The foregoing opinion is specific to the transactions and the documents
referred to herein, and is based upon the facts known to us as of the date
hereof.
The foregoing opinion is predicated upon the Code, the regulations
thereunder, the administrative and judicial interpretations of the Code and
regulations, in each case as in effect on the date hereof. Any change in
applicable law or in any of the facts other assumptions upon which we have
relied, may adversely affect such opinion.
We hereby consent to the filing with the Securities and Exchange Commission
of this opinion as an exhibit to Spinnaker Industries, Inc.'s Registration
Statement on Form S-4 relating to the exchange of the Old Notes for the New
Notes and to the reference to our firm under the heading "Certain United States
Federal Income Tax Consequences" in the Prospectus. In giving such consent, we
do not thereby admit that we are in the category of persons whose consent is
required under Section 7 of the Securities Act.
Very truly yours,
CROUCH & HALLETT, L.L.P.
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated February 29, 1996, except for Note 4, as to which
the date is April 8, 1996 in Amendment No. 1 to the Registration Statement (Form
S-4 No. 333-18789) and related Prospectus of Spinnaker Industries, Inc. dated
February 10, 1997.
ERNST & YOUNG LLP
Dallas, Texas
February 5, 1997
<PAGE>
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement No. 333-18789 of
Spinnaker Industries, Inc. on Form S-4 of our reports dated February 26, 1996
and December 8, 1995, appearing in the Prospectus, which is part of this
Registration Statement.
We also consent to the reference to us under the heading "Experts" in such
Prospectus.
Deloitte & Touche LLP
Milwaukee, Wisconsin
February 6, 1997
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM T-1
STATEMENT OF ELIGIBILITY
UNDER THE TRUST INDENTURE ACT OF 1939 OF
A CORPORATION DESIGNATED TO ACT AS TRUSTEE
---------------------
CHECK IF AN APPLICATION TO DETERMINE ELIGIBILITY OF
A TRUSTEE PURSUANT TO SECTION 305(B)(2)
---------------------
THE CHASE MANHATTAN BANK
(Exact name of trustee as specified in its charter)
<TABLE>
<S> <C>
NEW YORK 13-4994650
(State of incorporation (I.R.S. employer
if not a national bank) identification No.)
270 PARK AVENUE
NEW YORK, NEW YORK 10017
(Address of principal executive offices) (Zip Code)
</TABLE>
William H. McDavid
General Counsel
270 Park Avenue
New York, New York 10017
Tel: (212) 270-2611
(Name, address and telephone number of agent for service)
------------------------
SPINNAKER INDUSTRIES, INC.
(Exact name of obligor as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 06-0544125
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification No.)
600 N. PEARL STREET, SUITE 2160
DALLAS, TEXAS 75201
(Address of principal executive offices) (Zip Code)
</TABLE>
------------------------
SENIOR SECURED NOTES DUE 2006
(Title of the indenture securities)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
GENERAL
ITEM 1. GENERAL INFORMATION.
Furnish the following information as to the trustee:
(a) Name and address of each examining or supervising authority to which it
is subject.
New York State Banking Department, State House, Albany, New York 12110.
Board of Governors of the Federal Reserve System, Washington, D.C.,
20551
Federal Reserve Bank of New York, District No. 2, 33 Liberty Street, New
York, N.Y.
Federal Deposit Insurance Corporation, Washington, D.C., 20429.
(b) Whether it is authorized to exercise corporate trust powers.
Yes.
ITEM 2. AFFILIATIONS WITH THE OBLIGOR.
If the obligor is an affiliate of the trustee, describe each such
affiliation.
None.
2
<PAGE>
ITEM 16. LIST OF EXHIBITS
List below all exhibits filed as a part of this Statement of Eligibility.
1. A copy of the Articles of Association of the Trustee as now in effect,
including the Organization Certificate and the Certificates of Amendment dated
February 17, 1969, August 31, 1977, December 31, 1980, September 9, 1982,
February 28, 1985, December 2, 1991 and July 10, 1996 (see Exhibit 1 to Form T-1
filed in connection with Registration Statement No. 333-06249, which is
incorporated by reference).
2. A copy of the Certificate of Authority of the Trustee to Commence
Business (see Exhibit 2 to Form T-1 filed in connection with Registration
Statement No. 33-50010, which is incorporated by reference. On July 14, 1996, in
connection with the merger of Chemical Bank and The Chase Manhattan Bank
(National Association), Chemical Bank, the surviving corporation, was renamed
The Chase Manhattan Bank).
3. None, authorization to exercise corporate trust powers being contained
in the documents identified above as Exhibits 1 and 2.
4. A copy of the existing By-Laws of the Trustee (see Exhibit 4 to Form T-1
filed in connection with Registration Statement No. 333-06249, which is
incorporated by reference).
5. Not applicable.
6. The consent of the Trustee required by Section 321(b) of the Act (see
Exhibit 6 to Form T-1 filed in connection with Registration Statement No.
33-50010, which is incorporated by reference. On July 14, 1996, in connection
with the merger of Chemical Bank and The Chase Manhattan Bank (National
Association), Chemical Bank, the surviving corporation, was renamed The Chase
Manhattan Bank).
7. A copy of the latest report of condition of the Trustee, published
pursuant to law or the requirements of its supervising or examining authority.
8. Not applicable.
9. Not applicable.
SIGNATURE
Pursuant to the requirements of the Trust Indenture Act of 1939 the Trustee,
The Chase Manhattan Bank, a corporation organized and existing under the laws of
the State of New York, has duly caused this statement of eligibility to be
signed on its behalf by the undersigned, thereunto duly authorized, all in the
City of New York and State of New York, on the 31st day of January, 1997.
THE CHASE MANHATTAN BANK
By /s/ GLENN G. MCKEEVER
-----------------------------------------
Glenn G. McKeever
SENIOR TRUST OFFICER
3
<PAGE>
EXHIBIT 7 TO FORM T-1
BANK CALL NOTICE
RESERVE DISTRICT NO. 2
CONSOLIDATED REPORT OF CONDITION OF
THE CHASE MANHATTAN BANK
OF 270 PARK AVENUE, NEW YORK, NEW YORK 10017
AND FOREIGN AND DOMESTIC SUBSIDIARIES,
A MEMBER OF THE FEDERAL RESERVE SYSTEM,
AT THE CLOSE OF BUSINESS SEPTEMBER 30, 1996, IN
ACCORDANCE WITH A CALL MADE BY THE FEDERAL RESERVE BANK OF THIS
DISTRICT PURSUANT TO THE PROVISIONS OF THE FEDERAL RESERVE ACT.
ASSETS
<TABLE>
<CAPTION>
DOLLAR AMOUNTS
IN MILLIONS
--------------
<S> <C>
Cash and balances due from depository institutions:
Noninterest-bearing balances and currency and coin.............................................. $ 11,095
Interest-bearing balances....................................................................... 4,998
Securities:.......................................................................................
Held to maturity securities....................................................................... 3,231
Available for sale securities..................................................................... 38,078
Federal Funds sold and securities purchased under agreements to resell in domestic offices of the
bank and of its Edge and Agreement subsidiaries, and in IBF's:
Federal funds sold.............................................................................. 8,018
Securities purchased under agreements to resell................................................. 731
Loans and lease financing receivables:
Loans and leases, net of unearned income........................................................ $ 130,513
Less: Allowance for loan and lease losses....................................................... 2,938
Less: Allocated transfer risk reserve........................................................... 27
--------------
Loans and leases, net of unearned income, allowance, and reserve................................ 127,548
Trading Assets.................................................................................... 48,576
Premises and fixed assets (including capitalized leases).......................................... 2,850
Other real estate owned........................................................................... 300
Investments in unconsolidated subsidiaries and associated companies............................... 92
Customer's liability to this bank on acceptances outstanding...................................... 2,777
Intangible assets................................................................................. 1,361
Other assets...................................................................................... 12,204
--------------
TOTAL ASSETS...................................................................................... $ 261,859
--------------
--------------
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
DOLLAR AMOUNTS
IN MILLIONS
--------------
<S> <C>
LIABILITIES
Deposits
In domestic offices............................................................................. $ 80,163
Noninterest-bearing............................................................................. $ 30,596
Interest-bearing................................................................................ 49,567
--------------
In foreign offices, Edge and Agreement subsidiaries, and IBF's.................................. 65,173
Noninterest-bearing............................................................................. $ 3,616
Interest-bearing................................................................................ 61,557
Federal funds purchased and securities sold under agreements to repurchase in domestic offices of
the bank and of its Edge and Agreement subsidiaries, and in IBF's Federal funds purchased....... 14,594
Securities sold under agreements to repurchase.................................................. 14,110
Demand notes issued to the U.S. Treasury.......................................................... 2,200
Trading liabilities............................................................................... 30,136
Other Borrowed money:
With a remaining maturity of one year or less................................................... 16,895
With a remaining maturity of more than one year................................................. 449
Mortgage indebtedness and obligations under capitalized leases.................................... 49
Bank's liability on acceptances executed and outstanding.......................................... 2,764
Subordinated notes and debentures................................................................. 5,471
Other liabilities................................................................................. 13,997
TOTAL LIABILITIES................................................................................. 246,001
--------------
Limited-Life Preferred stock and related surplus.................................................. 550
EQUITY CAPITAL
Common stock...................................................................................... 1,209
Surplus........................................................................................... 10,176
Undivided profits and capital reserves............................................................ 4,385
Net unrealized holding gains (Losses) on available-for-sale securities............................ (481)
Cumulative foreign currency translation adjustments............................................... 19
TOTAL EQUITY CAPITAL.............................................................................. 15,308
--------------
TOTAL LIABILITIES, LIMITED-LIFE PREFERRED STOCK AND EQUITY CAPITAL................................ $ 261,859
--------------
--------------
</TABLE>
I, Joseph L. Sclafani, S.V.P. & Controller of the above-named bank, do
hereby declare that this Report of Condition has been prepared in conformance
with the instructions issued by the appropriate Federal regulatory authority and
is true to the best of my knowledge and belief.
JOSEPH L. SCLAFANI
We, the undersigned directors, attest to the correctness of this Report of
Condition and declare that it has been examined by us, and to the best of our
knowledge and belief has been prepared in conformance with the instructions
issued by the appropriate Federal regulatory authority and is true and correct.
<TABLE>
<S> <C> <C>
WALTER V. SHIPLEY
EDWARD D. MILLER Directors
THOMAS G. LABRECQUE
</TABLE>
5
<PAGE>
EXHIBIT 99.1
LETTER OF TRANSMITTAL
FOR
TENDER OF 10 3/4% SENIOR SECURED NOTES DUE 2006, SERIES A
IN EXCHANGE FOR
10 3/4% SENIOR SECURED NOTES DUE 2006, SERIES B
SPINNAKER INDUSTRIES, INC.
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME,
ON MARCH 14, 1997, UNLESS EXTENDED (THE "EXPIRATION DATE").
OLD NOTES TENDERED IN THE EXCHANGE OFFER MAY BE WITHDRAWN
AT ANY TIME PRIOR TO THE EXPIRATION DATE
DELIVER TO THE EXCHANGE AGENT
THE CHASE MANHATTAN BANK
By Registered or Certified
Mail, Hand or Overnight Courier:
The Chase Manhattan Bank
Attn: Sharon Lewis
55 Water Street, Room 234
North Building
New York, New York 10041
BY FACSIMILE:
(FOR ELIGIBLE INSTITUTIONS ONLY)
(212) 638-7380
(212) 638-7381
CONFIRM BY TELEPHONE:
(212)638-0454
DELIVERY OF THIS INSTRUMENT TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE OR
TRANSMISSION OF INSTRUCTIONS VIA A FACSIMILE NUMBER OTHER THAN THE ONE LISTED
ABOVE WILL NOT CONSTITUTE A VALID DELIVERY. THE INSTRUCTIONS ACCOMPANYING THIS
LETTER OF TRANSMITTAL SHOULD BE READ CAREFULLY BEFORE THIS LETTER OF TRANSMITTAL
IS COMPLETED.
The undersigned hereby acknowledges receipt and review of the Prospectus
dated February 10, 1997 (the "Prospectus") of Spinnaker Industries, Inc. (the
"Company") and this Letter of Transmittal (the "Letter of Transmittal"), which
together describe the Company's offer (the "Exchange Offer") to exchange its
10 3/4% Senior Secured Notes due October 15, 2006, Series B (the "New Notes"),
which have been registered under the Securities Act of 1933, as amended (the
"Securities Act"), pursuant to a Registration Statement of which the Prospectus
is a part, for a like principal amount of its issued and outstanding 10 3/4%
Senior Secured Notes due October 15, 2006, Series A (the "Old Notes").
Capitalized terms used but not defined herein have the respective meaning given
to them in the Prospectus.
The Company reserves the right, at any time or from time to time, to extend
the Exchange Offer at its discretion, in which event the term "Expiration Date"
shall mean the latest time and date in which the Exchange Offer is extended. The
Company shall notify the holders of the Old Notes of any extension by oral or
written notice prior to 9:00 A.M., New York City time, on the next business day
after the previously scheduled Expiration Date.
<PAGE>
This Letter of Transmittal is to be used by a Holder of Old Notes either if
original Old Notes are to be forwarded herewith or if delivery of Old Notes, if
available, is to be made by book-entry transfer to the account maintained by the
Exchange Agent at The Depository Trust Company (the "Book-Entry Transfer
Facility") pursuant to the procedures set forth in the Prospectus under the
caption "The Exchange Offer-- Book-Entry Transfer." Holders of Old Notes whose
Old Notes are not immediately available, or who are unable to deliver their Old
Notes and all other documents required by this Letter of Transmittal to the
Exchange Agent on or prior to the Expiration Date, or who are unable to complete
the procedure for book-entry transfer on a timely basis, must tender their Old
Notes according to the guaranteed delivery procedures set forth in the
Prospectus under the caption "The Exchange Offer--Guaranteed Delivery
Procedures." See Instruction 1. Delivery of documents to the Book-Entry Transfer
Facility does not constitute delivery to the Exchange Agent.
The term "Holder" with respect to the Exchange Offer means any person in
whose name Old Notes are registered on the books of the Company or any other
person who has obtained a properly completed bond power from the registered
Holder. The undersigned has completed, executed and delivered this Letter of
Transmittal to indicate the action the undersigned desires to take with respect
to the Exchange Offer. Holders who wish to tender their Old Notes must complete
this Letter of Transmittal in its entirety.
The undersigned has checked the appropriate boxes below and signed this
Letter of Transmittal to indicate the action the undersigned desires to take
with respect to the Exchange Offer.
PLEASE READ THE ENTIRE LETTER OF TRANSMITTAL AND THE PROSPECTUS CAREFULLY
BEFORE CHECKING ANY BOX BELOW.
THE INSTRUCTIONS INCLUDED WITH THIS LETTER OF TRANSMITTAL MUST BE FOLLOWED.
QUESTIONS AND REQUESTS FOR ASSISTANCE OR FOR ADDITIONAL COPIES OF THE PROSPECTUS
AND THIS LETTER OF TRANSMITTAL MAY BE DIRECTED TO THE EXCHANGE AGENT.
List below the Old Notes to which this Letter of Transmittal relates. If the
space below is inadequate, list the registered numbers and principal amounts on
a separate signed schedule and affix the list to this Letter of Transmittal.
<TABLE>
<S> <C> <C> <C>
DESCRIPTION OF OLD NOTES TENDERED
<CAPTION>
AGGREGATE
PRINCIPAL
NAME(S) AND ADDRESS(ES) OF REGISTERED HOLDER(S), AMOUNT PRINCIPAL
EXACTLY AS NAME(S) APPEAR(S) ON OLD NOTES REGISTERED REPRESENTED BY AMOUNT
(PLEASE FILL IN IF BLANK) NUMBERS* NOTE(S) TENDERED
<S> <C> <C> <C>
---------------------------------------
---------------------------------------
---------------------------------------
---------------------------------------
---------------------------------------
---------------------------------------
Total
* Need not be completed by book-entry Holders.
** Unless otherwise indicated, any tendering Holder of Old Notes will be deemed to have
tendered the entire aggregate principal amount represented by such Old Notes. All
tenders must be in integral multiples of $1,000.
</TABLE>
/ / CHECK HERE IF TENDERED OLD NOTES ARE ENCLOSED HEREWITH.
/ / CHECK HERE IF TENDERED OLD NOTES ARE BEING DELIVERED BY BOOK-ENTRY TRANSFER
MADE TO THIS ACCOUNT MAINTAINED BY THE EXCHANGE AGENT WITH THE BOOK-ENTRY
TRANSFER FACILITY AND COMPLETE THE FOLLOWING (FOR USE BY ELIGIBLE
INSTITUTIONS ONLY):
Name of Tendering Institution:
---------------------------------------------------------------
<PAGE>
Account Number:
--------------------------------------------------------------------------
Transaction Code Number:
------------------------------------------------------------------
/ / CHECK HERE IF TENDERED OLD NOTES ARE BEING DELIVERED PURSUANT TO A NOTICE
OF GUARANTEED DELIVERY ENCLOSED HEREWITH AND COMPLETE THE FOLLOWING (FOR
USE BY ELIGIBLE INSTITUTIONS ONLY):
Name(s) of Registered Holder(s) of Old Notes:
- --------------------------------------------------------------------------------
Date of Execution of Notice of Guaranteed Delivery:
-------------------------------------------
Window Ticket Number (if available):
---------------------------------------------------------
Name of Eligible Institution that Guaranteed Delivery:
- --------------------------------------------------------------------------------
Account Number (if delivered by book-entry transfer):
- --------------------------------------------------------------------------------
/ / CHECK HERE IF YOU ARE A BROKER-DEALER AND WISH TO RECEIVE 10 ADDITIONAL
COPIES OF THE PROSPECTUS AND 10 COPIES OF ANY AMENDMENTS OR SUPPLEMENTS
THERETO.
Name:
- --------------------------------------------------------------------------------
Address:
- --------------------------------------------------------------------------------
If the undersigned is not a broker-dealer, the undersigned represents that
it is not engaged in, and does not intend to engage in, a distribution of New
Notes. If the undersigned is a broker-dealer that will receive New Notes for its
own account in exchange for Old Notes, it acknowledges that the Old Notes were
acquired as a result of market-making activities or other trading activities and
that it will deliver a prospectus in connection with any resale of such New
Notes; however, by so acknowledging and by delivering a prospectus, the
undersigned will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act.
SIGNATURES MUST BE PROVIDED BELOW
PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY
Ladies and Gentlemen:
Subject to the terms and conditions of the Exchange Offer, the undersigned
hereby tenders to the Company for exchange the principal amount of Old Notes
indicated above. Subject to and effective upon the acceptance for exchange of
the principal amount of Old Notes tendered in accordance with this Letter of
Transmittal, the undersigned hereby exchanges, assigns, and transfers to the
Company all right, title and interest in and to the Old Notes tendered for
exchange hereby. The undersigned hereby irrevocably constitutes and appoints the
Exchange Agent as the agent and attorney-in-fact of the undersigned (with full
knowledge that the Exchange Agent also acts as the agent of the Company in
connection with the Exchange Offer) with respect to the tendered Old Notes with
full power of substitution to (i) deliver such Old Notes, or transfer ownership
of such Old Notes on the account books maintained by the Book-Entry Transfer
Facility to the Company and deliver all accompanying evidences of transfer and
authenticity, and (ii) present such Old Notes for transfer on the books of the
Company and receive all benefits and otherwise exercise all rights of beneficial
ownership of such Old Notes, all in accordance with the terms of the Exchange
Offer. The power of attorney granted in this paragraph shall be deemed to be
irrevocable and coupled with an interest.
The undersigned hereby represents and warrants that the undersigned has full
power and authority to tender, exchange, assign and transfer the Old Notes
tendered hereby and to acquire the New Notes issuable upon the exchange of such
tendered Old Notes and that the Company will acquire good and unencumbered title
thereto, free and clear of all liens, restrictions, charges and encumbrances and
not subject to any adverse claim, when the same are accepted for exchange by the
Company.
<PAGE>
The undersigned acknowledge(s) that this Exchange Offer is being made in
reliance upon interpretations contained in no-action letters issued to third
parties by the staff of the Securities and Exchange Commission (the
"Commission") that the New Notes issued in exchange for the Old Notes pursuant
to the Exchange Offer may be offered for resale, resold and otherwise
transferred by Holders thereof (other than any such Holder that is an
"affiliate" of the Company within the meaning of Rule 405 under the Securities
Act), without compliance with the registration and prospectus delivery
provisions of the Securities Act, provided that such New Notes are acquired in
the ordinary course of such Holders' business and such Holders are not engaging
in and do not intend to engage in a distribution of the New Notes and have no
arrangement or understanding with any person to participate in a distribution of
such New Notes. The undersigned hereby further represent(s) to the Company that
(i) any New Notes acquired in exchange for Old Notes tendered hereby are being
acquired in the ordinary course of business of the person receiving such New
Notes, (ii) neither the undersigned nor any such other person is engaging in or
intends to engage in a distribution of the New Notes, (iii) neither the
undersigned nor any such other person has an arrangement or understanding with
any person to participate in the distribution of such New Notes, and (iv)
neither the Holder nor any such other person is an "affiliate" as defined in
Rule 405 under the Securities Act, of the Company or, if it is an affiliate, it
will comply with the registration and prospectus delivery requirements of the
Securities Act to the extent applicable.
If the undersigned or the person receiving the New Notes is a broker-dealer
that is receiving New Notes for its own account in exchange for Old Notes that
were acquired as a result of market-making activities or other trading
activities, the undersigned acknowledges that it or such other person will
deliver a prospectus in connection with any resale of such New Notes; however,
by so acknowledging and by delivering a prospectus, the undersigned will not be
deemed to admit that the undersigned or such other person is an "underwriter"
within the meaning of the Securities Act. The undersigned acknowledges that if
the undersigned is participating in the Exchange Offer for the purpose of
distributing the New Notes (i) the undersigned cannot rely on the position of
the staff of the Commission in certain no-action letters and, in the absence of
an exemption therefrom must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with a secondary resale
transaction of the New Notes, in which case the registration statement must
contain the selling security holder information required by Item 507 or Item
508, as applicable, of Regulation S-K of the Securities Act and (ii) failure to
comply with such requirements in such instance could result in the undersigned
incurring liability under the Securities Act for which the undersigned is not
indemnified by the Company.
If the undersigned or the person receiving the New Notes is an "affiliate"
(as defined in Rule 405 under the Securities Act) of the Company, the
undersigned represents to the Company that the undersigned understands and
acknowledges that the New Notes may not be offered for resale, resold or
otherwise transferred by the undersigned or such other person without
registration under the Securities Act or an exemption therefrom.
The undersigned will, upon request, execute and deliver any additional
documents deemed by the Exchange Agent or the Company to be necessary or
desirable to complete the exchange, assignment and transfer of the Old Notes
tendered hereby, including the transfer of such Old Notes on the account books
maintained by the Book-Entry Transfer Facility.
For purposes of the Exchange Offer, the Company shall be deemed to have
accepted for exchange validly tendered Old Notes when, as and if the Company
gives oral or written notice thereof to the Exchange Agent. Any tendered Old
Notes that are not accepted for exchange pursuant to the Exchange Offer for any
reason will be returned, without expense to the undersigned, at the address
shown below or at a different address as may be indicated herein under "Special
Delivery Instructions" as promptly as practicable after the Expiration Date.
All authority conferred or agreed to be conferred by this Letter of
Transmittal shall survive the death, incapacity or dissolution of the
undersigned, and every obligation of the undersigned under this Letter of
Transmittal shall be binding upon the undersigned's heirs, personal
representatives, successors and assigns.
The undersigned acknowledges that the Company's acceptance of properly
tendered Old Notes pursuant to the procedures described under the caption "The
Exchange Offer--Procedures for Tendering" in the Prospectus and in the
instructions hereto will constitute a binding agreement between the undersigned
and the Company upon the terms and subject to the conditions of the Exchange
Offer.
<PAGE>
Unless otherwise indicated under "Special Issuance Instructions," please
issue the New Notes issued in exchange for the Old Notes accepted for exchange
and return any Old Notes not tendered or not exchanged in the name(s) of the
undersigned. Similarly, unless otherwise indicated under "Special Delivery
Instructions," please mail or deliver the New Notes issued in exchange for the
Old Notes accepted for exchange and any Old Notes not tendered or not exchanged
(and accompanying documents, as appropriate) to the undersigned at the address
shown below the undersigned's signature(s). In the event that both "Special
Issuance Instructions" and "Special Delivery Instructions" are completed, please
issue the New Notes issued in exchange for the Old Notes accepted for exchange
in the name(s) of, and return any Old Notes not tendered or not exchanged to,
the person(s) so indicated. The undersigned recognizes that the Company has no
obligation pursuant to the "Special Issuance Instructions" and "Special Delivery
Instructions" to transfer any Old Notes from the name of the registered
holder(s) thereof if the Company does not accept for exchange any of the Old
Notes so tendered for exchange.
<PAGE>
<TABLE>
<S> <C>
SPECIAL ISSUANCE INSTRUCTIONS
(SEE INSTRUCTIONS 5 AND 6)
To be completed ONLY (i) if Old Notes in a principal amount not tendered, or New
Notes issued in exchange for Old Notes accepted for exchange, are to be issued in the
name of someone other than the undersigned, or (ii) if Old Notes tendered by book-entry
transfer that are not exchanged are to be returned by credit to an account maintained at
the Book-Entry Transfer Facility. Issue New Notes and/or Old Notes to:
Name(s): -------------------------------------------------------------------------------
(Please Type or Print)
Address: --------------------------------------------------------------------------------
------------------------------------------------------------------------------------------
(Include Zip Code)
---------------------------------------------------------------------------------------
(Tax Identification or Social Security Number)
(Complete Substitute Form W-9)
/ / Credit unexchanged Old Notes delivered by book-entry transfer to the Book-Entry
Transfer Facility set forth below:
------------------------------------------------------------------------------------------
(Book-Entry Transfer Facility Account Number, if applicable)
PLEASE SIGN HERE WHETHER OR NOT
OLD NOTES ARE BEING PHYSICALLY TENDERED HEREBY
(COMPLETE ACCOMPANYING SUBSTITUTE FORM W-9)
</TABLE>
<TABLE>
<S> <C>
-------------------------------------------------------------------------- ------------
Date
--------------------------------------------------------------------------
------------
Date
</TABLE>
<TABLE>
<S> <C>
Area Code and Telephone Number
----------------------------
The above lines must be signed by the registered Holder(s) of Old Notes as name(s)
appear(s) on the Old Notes or on a security position listing or by person(s) authorized
to become registered Holder(s) by a properly completed bond power from the registered
Holder(s), a copy of which must be transmitted with this Letter of Transmittal. If Old
Notes to which this Letter of Transmittal relate are held of record by two or more joint
Holders, then all such Holders must sign this Letter of Transmittal. If signature is by a
trustee, executor, administrator, guardian, attorney-in-fact, officer of a corporation or
other person acting in a fiduciary or representative capacity, then such person must (i)
set forth his or her full title below and (ii) unless waived by the Company, submit
evidence satisfactory to the Company of such person's authority so to act. See
Instruction 5 regarding the completion of this Letter of Transmittal, printed below.
Name(s): -------------------------------------------------------------------------------
(Please Type or Print)
Capacity: -------------------------------------------------------------------------------
Address: --------------------------------------------------------------------------------
------------------------------------------------------------------------------------------
(Include Zip Code)
</TABLE>
<PAGE>
<TABLE>
<S> <C>
MEDALLION SIGNATURE GUARANTEE
(IF REQUIRED BY INSTRUCTION 5)
Certain signatures must be Guaranteed by an Eligible Institution.
Signature(s) Guaranteed by an Eligible Institution:
- ----------------------------------------------------------------------------------------
(Authorized Signature)
- -----------------------------------------------------------------------------------------
(Title)
- -----------------------------------------------------------------------------------------
(Name of Firm)
- -----------------------------------------------------------------------------------------
(Address, Including Zip Code)
- -----------------------------------------------------------------------------------------
(Area Code and Telephone Number)
Date: ----------------------- , 19------
SPECIAL DELIVERY INSTRUCTIONS
(SEE INSTRUCTIONS 5 AND 6)
To be completed ONLY if Old Notes in a principal amount not tendered, or New Notes
issued in exchange for Old Notes accepted for exchange, are to be mailed or delivered to
someone other than the undersigned, or to the undersigned at an address other than that
shown below the undersigned's signature.
Mail or deliver New Notes and/or Old Notes to:
Name: ----------------------------------------------------------------------------------
(Please Type or Print)
Address: --------------------------------------------------------------------------------
(Include Zip Code)
---------------------------------------------------------------------------------------
(Tax Identification or Social Security Number)
</TABLE>
<PAGE>
INSTRUCTIONS
FORMING PART OF THE TERMS AND
CONDITIONS OF THE EXCHANGE OFFER
1. DELIVERY OF THIS LETTER OF TRANSMITTAL AND OLD NOTES OR BOOK-ENTRY
CONFIRMATIONS. All physically delivered Old Notes or any confirmation of a
book-entry transfer to the Exchange Agent's account at the Book-Entry Transfer
Facility of Old Notes tendered by book-entry transfer (a "Book-Entry
Confirmation"), as well as a properly completed and duly executed copy of this
Letter of Transmittal or facsimile hereof and any other documents required by
this Letter of Transmittal must be received by the Exchange Agent at its address
set forth herein prior to 5:00 p.m., New York City time, on the Expiration Date.
The method of delivery of the tendered Old Notes, this Letter of Transmittal and
all other required documents to the Exchange Agent is at the election and risk
of the Holder and, except as otherwise provided below, the delivery will be
deemed made only when actually received or confirmed by the Exchange Agent.
Instead of delivery by mail, it is recommended that the Holder use an overnight
or hand delivery service. In all cases, sufficient time should be allowed to
assure delivery to the Exchange Agent before the Expiration Date. No Letter of
Transmittal or Old Notes should be sent to the Company.
2. GUARANTEED DELIVERY PROCEDURES. Holders who wish to tender their Old
Notes and (a) whose Old Notes are not immediately available, (b) who cannot
deliver their Old Notes, this Letter of Transmittal or any other documents
required hereby to the Exchange Agent prior to the Expiration Date or (c) who
are unable to complete the procedure for book-entry transfer on a timely basis,
must tender their Old Notes according to the guaranteed delivery procedures set
forth in the Prospectus. Pursuant to such procedures (i) such tender must be
made by or through a firm which is a member of a registered national securities
exchange or of the National Association of Securities Dealers, Inc. or a
commercial bank or a trust company having an office or correspondent in the
United States (an "Eligible Institution"), (ii) prior to the Expiration Date,
the Exchange Agent must have received from the Eligible Institution a properly
completed and duly executed Notice of Guaranteed Delivery (by facsimile
transmission, mail or hand delivery) setting forth the name and address of the
Holder of the Old Notes, the registration number(s) of such Old Notes and the
principal amount of Old Notes tendered, stating that the tender is being made
thereby and guaranteeing that, within three (3) New York Stock Exchange, Inc.
("NYSE") trading days after the Expiration Date, the Letter of Transmittal (or
facsimile hereof) together with the Old Notes (or a Book-Entry Confirmation) in
proper form for transfer, will be received by the Exchange Agent and (iii) the
certificates for all physically tendered shares of Old Notes, in proper form for
transfer, or Book-Entry Confirmation as the case may be, and all other documents
required by this Letter must be received by the Exchange Agent within three (3)
NYSE trading days after the date of execution of the Notice of Guaranteed
Delivery.
Any Holder of Old Notes who wishes to tender Old Notes pursuant to the
guaranteed delivery procedures described above must ensure that the Exchange
Agent receives the Notice of Guaranteed Delivery prior to 5:00 p.m, New York
City time, on the Expiration Date. Upon request of the Exchange Agent, a Notice
of Guaranteed Delivery will be sent to Holders who wish to tender their Old
Notes according to the guaranteed delivery procedures set forth above.
See "The Exchange Offer--Guaranteed Delivery Procedures" section of the
Prospectus.
3. TENDER BY HOLDER. Only a Holder of Old Notes may tender such Old Notes
in the Exchange Offer. Any beneficial Holder of Old Notes who is not the
registered Holder and who wishes to tender should arrange with the registered
Holder to execute and deliver this Letter of Transmittal on his behalf or must,
prior to completing and executing this Letter of Transmittal and delivering his
Old Notes, either make appropriate arrangements to register ownership of the Old
Notes in such Holder's name or obtain a properly completed bond power from the
registered Holder.
4. PARTIAL TENDERS. Tenders of Old Notes will be accepted only in integral
multiples of $1,000. If less than the entire principal amount of any Old Notes
is tendered, the tendering Holder should fill in the principal amount tendered
in the third column of the box entitled "Description of Old Notes" above. The
entire principal amount of Old Notes delivered to the Exchange Agent will be
deemed to have been
<PAGE>
tendered unless otherwise indicated. If the entire principal amount of all Old
Notes is not tendered, then Old Notes, for the principal amount of Old Notes not
tendered, and New Notes issued in exchange for any Old Notes accepted will be
sent to the Holder at his or her registered address, unless a different address
is provided in the appropriate box on this Letter of Transmittal, promptly after
the Old Notes are accepted for exchange.
5. SIGNATURES ON THIS LETTER OF TRANSMITTAL; BOND POWERS AND ENDORSEMENTS;
MEDALLION GUARANTEE OF SIGNATURES. If this Letter of Transmittal (or facsimile
hereof) is signed by the record Holder(s) of the Old Notes tendered hereby, the
signature must correspond with the name(s) as written on the face of the Old
Notes without alteration, enlargement or any change whatsoever. If this Letter
of Transmittal is signed by a participant in the Book-Entry Transfer Facility,
the signature must correspond with the name as it appears on the security
position listing as the Holder of the Old Notes.
If this Letter of Transmittal (or facsimile hereof) is signed by the
registered Holder or Holders of any Old Notes listed, such Old Notes must be
endorsed or accompanied by appropriate bond powers, in each case signed as the
name of the registered Holder or Holders appears on the Old Notes.
If this Letter of Transmittal (or facsimile hereof) or any Old Notes of bond
powers are signed by trustees, executors, administrators, guardians,
attorneys-in-fact, or officers of corporations or others acting in a fiduciary
or representative capacity, such persons should so indicate when signing and,
unless waived by the Company, evidence satisfactory to the Company of their
authority so to act must be submitted with this Letter of Transmittal.
Endorsements on Old Notes or signatures on bond powers required by this
Instruction 5 must be guaranteed by an Eligible Institution.
No signature guarantee is required if (i) this Letter of Transmittal is
signed by the registered holder(s) of the Old Notes tendered herewith (or by a
participant in the Book-Entry Transfer Facility whose name appears on a security
position listing as the owner of the tendered Old Notes) and the issuance of New
Notes (and any Old Notes not tendered or not accepted) are to be issued directly
to such registered holder(s) (or, if signed by a participant in the Book-Entry
Transfer Facility, any New Notes or Old Notes not tendered or not accepted are
to be deposited to such participant's account at such Book-Entry Transfer
Facility) and neither the box entitled "Special Delivery Instructions" nor the
box entitled "Special Registration Instructions" has been completed, or (ii)
such Old Notes are tendered for the account of an Eligible Institution. In all
other cases, all signatures on this Letter of Transmittal must be guaranteed by
an Eligible Institution.
6. SPECIAL REGISTRATION AND DELIVERY INSTRUCTIONS. Tendering holders should
indicate, in the applicable box or boxes, the name and address (or account at
the Book-Entry Transfer Facility) to which New Notes or substitute Old Notes for
principal amounts not tendered or not accepted for exchange are to be issued or
sent, if different from the name and address of the person signing this Letter
of Transmittal. In the case of issuance in a different name, the taxpayer
identification or social security number of the person named must also be
indicated.
7. TRANSFER TAXES. The Company will pay all transfer taxes, if any,
applicable to the exchange of Old Notes pursuant to the Exchange Offer. If,
however, New Notes or Old Notes for principal amounts not tendered or accepted
for exchange are to be delivered to, or are to be registered or issued in the
name of, any person, other than the registered Holder of the Old Notes tendered
hereby, or if tendered Old Notes are registered in the name of any person other
than the person signing this Letter of Transmittal, or if a transfer tax is
imposed for any reason other than the exchange of Old Notes pursuant to the
Exchange Offer, then the amount of any such transfer taxes (whether imposed on
the registered Holder or any other persons) will be payable by the tendering
Holder. If satisfactory evidence of payment of such taxes or exemption therefrom
is not submitted with this Letter of Transmittal, the amount of such transfer
taxes will be billed directly to such tendering Holder.
EXCEPT AS PROVIDED IN THIS INSTRUCTION 7, IT WILL NOT BE NECESSARY FOR
TRANSFER TAX STAMPS TO BE AFFIXED TO THE OLD NOTES LISTED IN THIS LETTER OF
TRANSMITTAL.
<PAGE>
8. TAX IDENTIFICATION NUMBER. Federal income tax law requires that a holder
of any Old Notes which are accepted for exchange must provide the Company (as
payer) with its correct taxpayer identification number ("TIN") which, in the
case of a holder who is an individual, is his or her social security number. If
the Company is not provided with the correct TIN, the Holder may be subject to a
$50 penalty imposed by the Internal Revenue Service. (If withholding results in
an over-payment of taxes, a refund may be obtained.) Certain holders (including,
among others, all corporations and certain foreign individuals) are not subject
to these backup withholding and reporting requirements. See the enclosed
"Guidelines for Certificate of Taxpayer Identification Number on Substitute Form
W-9" for additional instructions.
To prevent backup withholding, each tendering holder must provide such
holder's correct TIN by completing the Substitute Form W-9 set forth herein,
certifying that the TIN provided is correct (or that such holder is awaiting a
TIN), and that (i) the holder has not been notified by the Internal Revenue
Service that such holder is subject to backup withholding as a result of failure
to report all interest or dividends or (ii) the Internal Revenue Service has
notified the holder that such holder is no longer subject to backup withholding.
If the Old Notes are registered in more than one name or are not in the name of
the actual owner, see the enclosed "Guidelines for Certification of Taxpayer
Identification Number of Substitute Form W-9" for information on which TIN to
report.
The Company reserves the right in its sole discretion to take whatever steps
are necessary to comply with the Company's obligation regarding backup
withholding.
9. VALIDITY OF TENDERS. All questions as to the validity, form, eligibility
(including time of receipt), and acceptance of tendered Old Notes will be
determined by the Company, in its sole discretion, which determination will be
final and binding. The Company reserves the right to reject any and all Old
Notes not validly tendered or any Old Notes, the Company's acceptance of which
would, in the opinion of the Company or its counsel, be unlawful. The Company
also reserves the right to waive any conditions of the Exchange Offer or defects
or irregularities in tenders of Old Notes as to any ineligibility of any holder
who seeks to tender Old Notes in the Exchange Offer. The interpretation of the
terms and conditions of the Exchange Offer (including this Letter of Transmittal
and the instructions hereto) by the Company shall be final and binding on all
parties. Unless waived, any defects or irregularities in connection with tenders
of Old Notes must be cured within such time as the Company shall determine. The
Company will use reasonable efforts to give notification of defects or
irregularities with respect to tenders of Old Notes, but shall not incur any
liability for failure to give such notification.
10. WAIVER OF CONDITIONS. The Company reserves the absolute right to waive,
in whole or in part, any of the conditions to the Exchange Offer set forth in
the Prospectus.
11. NO CONDITIONAL TENDER. No alternative conditional, irregular or
contingent tender of Old Notes on transmittal of this Letter of Transmittal will
be accepted.
12. MUTILATED, LOST, STOLEN OR DESTROYED OLD NOTES. Any Holder whose Old
Notes have been mutilated, lost, stolen or destroyed should contact the Exchange
Agent at the address indicated above for further instructions.
13. REQUESTS FOR ASSISTANCE OR ADDITIONAL COPIES. Requests for assistance or
for additional copies of the Prospectus or this Letter of Transmittal may be
directed to the Exchange Agent at the address or telephone number set forth on
the cover page of this Letter of Transmittal. Holders may also contact their
broker, dealer, commercial bank, trust company or other nominee for assistance
concerning the Exchange Offer.
14. ACCEPTANCE OF TENDERED OLD NOTES AND ISSUANCE OF NEW NOTES; RETURN OF
OLD NOTES. Subject to the terms and conditions of the Exchange Offer, the
Company will accept for exchange all validly tendered Old Notes as soon as
practicable after the Exchange Date and will issue New Notes therefor as soon as
practicable thereafter. For purposes of the Exchange Offer, the Company shall be
deemed to have accepted tendered Old Notes when, as and if the Company has given
written or oral notice thereof to the Exchange Agent. If any tendered Old Notes
are not exchanged pursuant to the Exchange Offer for any reason, such
unexchanged Old Notes will be returned, without expense, to the undersigned at
the address
<PAGE>
shown above (or credited to the undersigned's account at the Book-Entry Transfer
Facility designated above) or at a different address as may be indicated under
the box entitled "Special Delivery Instructions."
15. WITHDRAWAL. Tenders may be withdrawn only pursuant to the limited
withdrawal rights set forth in the Prospectus under the caption "The Exchange
Offer--Withdrawal of Tenders."
IMPORTANT: THIS LETTER OF TRANSMITTAL OR A MANUALLY SIGNED FACSIMILE HEREOF
TOGETHER WITH THE OLD NOTES WHICH MUST BE DELIVERED BY BOOK-ENTRY TRANSFER OR IN
ORIGINAL HARD COPY FROM OR THE NOTICE OF GUARANTEED DELIVERY MUST BE RECEIVED BY
THE EXCHANGE AGENT PRIOR TO THE EXPIRATION TIME.
<TABLE>
<S> <C> <C>
TO BE COMPLETED BY ALL TENDERING HOLDERS (SEE INSTRUCTION 5)
PAYER'S NAME: THE CHASE MANHATTAN BANK
SUBSTITUTE PART I--Taxpayer Identification No.--For all Social Security
FORM W-9 accounts enter your taxpayer identification Number
DEPARTMENT OF THE number in the appropriate box. For most
TREASURY, individuals and sole proprietors, this is your OR
INTERNAL REVENUE social security number. For other entities, it
SERVICE is your Employer Identification Number. If you Employer
do not have a taxpayer identification number, Identification
see How To Obtain a TIN in the enclosed Number
Guidelines. Note: If the account is in more than
one name, see Employer Identification Number the
chart on page 2 of the enclosed Guidelines to
determine what number to enter.
Part II--For Payees Exempt From Backup Withholding (see enclosed
Guidelines)
CERTIFICATION--Under penalties of perjury, I certify that:
(1) The number shown on this form is my correct Taxpayer
Identification Number or I am waiting for a number to be issued to me,
Payer's Request and either (a) I have mailed or delivered an application to
for receive a taxpayer identification number to the appropriate
Taxpayer Internal Revenue Service Center or Social Security Administration
Identification
Number:
Office or (b) I intend to mail or deliver an application in the
near future. I understand that if I do not provide a taxpayer
identification number within sixty (60) days, 31% of all
reportable payments made to me thereafter will be withheld until I
provide a number;
(2) I am not subject to backup withholding either because (a) I am
exempt from backup withholding or (b) I have not been notified by the
Internal Revenue Service (IRS) that I am subject to backup
withholding as a result of a failure to report all interest or
dividends or (c) the IRS has notified me that I am no longer
subject to backup withholding; and
(3) Any other information provided on this form is true, correct and
complete.
SIGNATURE: DATE:
</TABLE>
<PAGE>
EXHIBIT 99.2
NOTICE OF GUARANTEED DELIVERY
FOR
TENDER OF 10 3/4% SENIOR SECURED NOTES DUE 2006, SERIES A
IN EXCHANGE FOR
10 3/4% SENIOR SECURED NOTES DUE 2006, SERIES B
SPINNAKER INDUSTRIES, INC.
This form or one substantially equivalent hereto must be used by a holder to
accept the Exchange Offer of Spinnaker Industries, Inc., a Delaware corporation
(the "Company"), who wishes to tender 10 3/4% Senior Secured Notes due 2006 (the
"Old Notes") to the Exchange Agent pursuant to the guaranteed delivery
procedures described in "The Exchange Offer--Guaranteed Delivery Procedures" of
the Company's Prospectus, dated February 10, 1997 (the "Prospectus") and in
Instruction 2 to the related Letter of Transmittal. Any holder who wishes to
tender Old Notes pursuant to such guaranteed delivery procedures must ensure
that the Exchange Agent receives this Notice of Guaranteed Delivery prior to the
Expiration Date (as defined below) of the Exchange Offer. Capitalized terms used
but not defined herein have the meanings ascribed to them in the Prospectus or
the Letter of Transmittal.
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON MARCH
14, 1997, UNLESS EXTENDED (THE "EXPIRATION DATE"). OLD NOTES TENDERED IN THE
EXCHANGE OFFER MAY BE WITHDRAWN AT ANY TIME PRIOR TO THE EXPIRATION DATE.
The Exchange Agent for the Exchange Offer is:
THE CHASE MANHATTAN BANK
By Registered or Certified
Mail, Hand or Overnight Courier:
The Chase Manhattan Bank
Attn: Sharon Lewis
55 Water Street, Room 234
North Building
New York, New York 10041
BY FACSIMILE:
(FOR ELIGIBLE INSTITUTIONS ONLY)
(212) 638-7380
(212) 638-7381
CONFIRM BY TELEPHONE:
(212) 638-0454
DELIVERY OF THIS NOTICE OF GUARANTEED DELIVERY TO AN ADDRESS OTHER THAN AS
SET FORTH ABOVE, OR TRANSMISSION OF INSTRUCTIONS VIA FACSIMILE OTHER THAN AS SET
FORTH ABOVE, WILL NOT CONSTITUTE A VALID DELIVERY.
THIS NOTICE OF GUARANTEED DELIVERY IS NOT TO BE USED TO GUARANTEE
SIGNATURES. IF A SIGNATURE ON A LETTER OF TRANSMITTAL IS REQUIRED TO BE
GUARANTEED BY AN "ELIGIBLE INSTITUTION" UNDER THE INSTRUCTIONS THERETO, SUCH
SIGNATURE GUARANTEE MUST APPEAR IN THE APPLICABLE SPACE PROVIDED BOX ON THE
LETTER OF TRANSMITTAL FOR GUARANTEE OF SIGNATURES.
This Notice of Guaranteed Delivery must be signed by the Holder(s) exactly
as their name(s) appear on certificates for Old Notes or on a security position
listing as the owner of Old Notes, or by person(s)
<PAGE>
authorized to become Holder(s) by endorsements and documents transmitted with
this Notice of Guaranteed Delivery. If signature is by a trustee, executor,
administrator, guardian, attorney-in-fact, officer or other person acting in a
fiduciary or representative capacity, such person must provide the following
information.
PLEASE PRINT NAME(S) AND ADDRESS(ES)
Name(s):
- -------------------------------------------
- -------------------------------------------
- -------------------------------------------
Capacity:
- -------------------------------------------
Address(es):
- -------------------------------------------
- -------------------------------------------
- -------------------------------------------
<PAGE>
INSTRUCTIONS FOR NOTICE OF GUARANTEED DELIVERY
1. DELIVERY OF THIS NOTICE OF GUARANTEED DELIVERY. A properly completed and
duly executed copy of this Notice of Guaranteed Delivery and any other documents
required by this Notice of Guaranteed Delivery must be received by the Exchange
Agent at its address set forth herein prior to the Expiration Date. The method
of delivery of this Notice of Guaranteed Delivery and any other required
documents to the Exchange Agent is at the election and sole risk of the holder,
and the delivery will be deemed made only when actually received by the Exchange
Agent. If delivery is by mail, registered mail with return receipt requested,
properly insured, is recommended. As an alternative to delivery by mail, the
holders may wish to consider using an overnight or hand delivery service. In all
cases, sufficient time should be allowed to assure timely delivery. For a
description of the guaranteed delivery procedures, see Instruction 2 of the
Letter of Transmittal.
2. SIGNATURES ON THIS NOTICE GUARANTEED DELIVERY. If this Notice of
Guaranteed Delivery is signed by the registered holder(s) of the Old Notes
referred to herein, the signature must correspond with the name(s) written on
the face of the Old Notes without alteration, enlargement, or any change
whatsoever. If this Notice of Guaranteed Delivery is signed by a participant of
the Book-Entry Transfer Facility whose name appears on a security position
listing as the owner of the Old Notes, the signature must correspond with the
name shown on the security listing as the owner of the Old Notes.
If this Notice of Guaranteed Delivery is signed by a person other than the
registered holder(s) of any Old Notes listed or a participant of the
Book-Entry Transfer Facility, this Notice of Guaranteed Delivery must be
accompanied by appropriate bond powers, signed as the name of the registered
holder(s) appear on the Old Notes or signed as the name of the participant
shown on the Book-Entry Transfer Facility's security position listing.
If this Notice of Guaranteed Delivery is signed by a trustee, executor,
administrator, guardian, attorney-in-fact, officer of a corporation, or
other person acting in a fiduciary or representative capacity, such person
should so indicate when signing and submit with the Letter of Transmittal
evidence satisfactory to the Company of such person's authority to so act.
3. REQUESTS FOR ASSISTANCE OR ADDITIONAL COPIES. Questions and requests for
assistance and requests for additional copies of the Prospectus may be directed
to the Exchange Agent at the address specified in the Prospectus. Holders may
also contact their broker, dealer, commercial bank, trust company, or other
nominee for assistance concerning the Exchange Offer.
<PAGE>
GUARANTEES:
(NOT TO BE USED FOR SIGNATURE GUARANTEE)
The undersigned, a firm which is a member of a registered national
securities exchange or of the National Association of Securities Dealers, Inc.,
or is a commercial bank or trust company having an office or correspondent in
the United States, or is otherwise an "eligible guarantor institution" within
the meaning of Rule 17Ad-15 under the Securities Exchange Act of 1934,
guarantees deposit with the Exchange Agent of the Letter of Transmittal (or
facsimile thereof), together with the Old Notes tendered hereby in proper form
for transfer (or confirmation of the book-entry transfer of such Old Notes into
the Exchange Agent's account at the Book-Entry Transfer Facility described in
the Prospectus under the caption "The Exchange Offer--Guaranteed Delivery
Procedures" and in the Letter of Transmittal and any other required documents,
all by 5:00 p.m., New York City time, within three New York Stock Exchange
trading days following the Expiration Date.
<TABLE>
<S> <C>
Name of Firm
- ------------------------------------------- -------------------------------------------
(AUTHORIZED SIGNATURE)
Address: Name:
- ------------------------------------------- -------------------------------------------
(INCLUDE ZIP CODE)
Title:
-------------------------------------------
Area Code and Tel. Number (PLEASE TYPE OR PRINT)
- ------------------------------------------- Date: , 19
</TABLE>
DO NOT SEND OLD NOTES WITH THIS FORM. ACTUAL SURRENDER OF OLD NOTES MUST BE
MADE PURSUANT TO, AND BE ACCOMPANIED BY A PROPERLY COMPLETED AND DULY EXECUTED
LETTER OF TRANSMITTAL AND ANY OTHER REQUIRED DOCUMENTS.
<PAGE>
EXHIBIT 99.3
LETTER TO BROKERS
FOR
TENDER OF 10 3/4% SENIOR SECURED NOTES DUE 2006, SERIES A
IN EXCHANGE FOR
10 3/4% SENIOR SECURED NOTES DUE 2006, SERIES B
SPINNAKER INDUSTRIES, INC.
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME,
ON MARCH 14, 1997, UNLESS EXTENDED (THE "EXPIRATION DATE").
OLD NOTES TENDERED IN THE EXCHANGE OFFER MAY BE WITHDRAWN
AT ANY TIME PRIOR TO THE EXPIRATION DATE
To Registered Holders and Depository
Trust Company Participants:
We are enclosing herewith the material listed below relating to the offer by
Spinnaker Industries, Inc. (the "Company"), a Delaware corporation, to exchange
its 10 3/4% Senior Secured Notes Due 2006, Series B (the "New Notes"), which
have been registered under the Securities Act of 1933, as amended (the
"Securities Act"), for a like principal amount of its issued and outstanding
10 3/4% Senior Secured Notes Due 2006, Series A (the "Old Notes") upon the terms
and subject to the conditions set forth in the Company's Prospectus, dated
February 10, 1997, and the related Letter of Transmittal (which together
constitute the "Exchange Offer").
Enclosed herewith are copies of the following documents:
1. Prospectus dated February 10, 1997;
2. Letter of Transmittal (together with accompanying Substitute Form
W-9 Guidelines);
3. Notice of Guaranteed Delivery; and
4. Letter which may be sent to your clients for whose account you hold
Old Notes in your name or in the name of your nominee, with space provided
for obtaining such client's instruction with regard to the Exchange Offer.
We urge you to contact your clients promptly. Please note that the Exchange
Offer will expire on the Expiration Date unless extended.
The Exchange Offer is not conditioned upon any minimum number of Old Notes
being tendered.
Pursuant to the Letter of Transmittal, each holder of Old Notes will
represent to the Company that (i) the New Notes acquired pursuant to the
Exchange Offer are being acquired in the ordinary course of business of the
undersigned, (ii) neither the undersigned nor any such other person has an
arrangement or understanding with any person to participate in the distribution
within the meaning of the Securities Act of such New Notes, (iii) if the
undersigned is not a broker-dealer, or is a broker-dealer but will not receive
New Notes for its own account in exchange for Old Notes, neither the undersigned
nor any such other person is engaged in or intends to participate in the
distribution of such New Notes and (iv) neither the undersigned nor any such
other person is an "affiliate" of the Company within the meaning of Rule 405
under the Securities Act or, if the undersigned is an "affiliate," that the
undersigned will comply with the registration and prospectus delivery
requirements of the Securities Act to the extent applicable. If the undersigned
is a broker-dealer (whether or not it is also an "affiliate") that will receive
New Notes for its own account in exchange for Old Notes, it represents that such
Old Notes were acquired as a result of market-making activities or other trading
activities, and it acknowledges that it will deliver a prospectus
<PAGE>
meeting the requirements of the Securities Act in connection with any resale of
such New Notes. By acknowledging that it will deliver and by delivering a
prospectus meeting the requirements of the Securities Act in connection with any
resale of such New Notes, the undersigned is not deemed to admit that it is an
"underwriter" within the meaning of the Securities Act.
The enclosed Letter to Clients contains an authorization by the beneficial
owners of the Old Notes for you to make the foregoing representations.
The Company will not pay any fee or commission to any broker or dealer or to
any other persons (other than the Exchange Agent) in connection with the
solicitation of tenders of Old Notes pursuant to the Exchange Offer. The Company
will pay or cause to be paid any transfer taxes payable on the transfer of Old
Notes to it, except as otherwise provided in Instruction 7 of the enclosed
Letter of Transmittal.
Additional copies of the enclosed material may be obtained from the
undersigned.
Very truly yours,
THE CHASE MANHATTAN BANK
2
<PAGE>
EXHIBIT 99.4
LETTER TO CLIENTS
FOR
TENDER OF 10 3/4% SENIOR SECURED NOTES DUE 2006, SERIES A
IN EXCHANGE FOR
10 3/4% SENIOR SECURED NOTES DUE 2006, SERIES B
SPINNAKER INDUSTRIES, INC.
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME,
ON MARCH 14, 1997, UNLESS EXTENDED (THE "EXPIRATION DATE")
OLD NOTES TENDERED IN THE EXCHANGE OFFER MAY BE WITHDRAWN
AT ANY TIME PRIOR TO THE EXPIRATION DATE
To Our Clients:
We are enclosing herewith a Prospectus, dated February 10, 1997, of
Spinnaker Industries, Inc. (the "Company"), a Delaware corporation, and a
related Letter of Transmittal (which together constitute the "Exchange Offer")
relating to the offer by the Company to exchange its 10 3/4% Senior Secured
Notes Due 2006, Series B (the "New Notes"), which have been registered under the
Securities Act of 1933, as amended (the "Securities Act"), for a like principal
amount of its issued and outstanding 10 3/4% Senior Secured Notes Due 2006,
Series A (the "Old Notes"), upon the terms and subject to the conditions set
forth in the Exchange Offer.
The Exchange Offer is not conditioned upon any minimum number of Old Notes
being tendered.
We are the holder of record of Old Notes held by us for your own account. A
tender of such Old Notes can be made only by us as the record holder and
pursuant to your instructions. The Letter of Transmittal is furnished to you for
your information only and cannot be used by you to tender Old Notes held by us
for your account.
We request instructions as to whether you wish to tender any or all of the
Old Notes held by us for your account pursuant to the terms and conditions of
the Exchange Offer. We also request that you confirm that we may on your behalf
make the representations contained in the Letter of Transmittal.
Pursuant to the Letter of Transmittal, each holder of Old Notes will
represent to the Company that (i) the New Notes acquired pursuant to the
Exchange Offer are being acquired in the ordinary course of business of the
undersigned, (ii) neither the undersigned nor any such other person has an
arrangement or understanding with any person to participate in the distribution
within the meaning of the Securities Act of such New Notes, (iii) if the
undersigned is not a broker-dealer, or is a broker-dealer but will not receive
New Notes for its own account in exchange for Old Notes, neither the undersigned
nor any such other person is engaged in or intends to participate in the
distribution of such New Notes, and (iv) neither the undersigned nor any such
other person is an "affiliate" of the Company within the meaning of Rule 405
under the Securities Act or, if the undersigned is an "affiliate," that the
undersigned will comply with the registration and prospectus delivery
requirements of the Securities Act to the extent applicable. If the undersigned
is a broker-dealer (whether or not it is also an "affiliate") that will receive
New Notes for its own account in exchange for Old Notes, it represents that such
Old Notes were acquired as a result of market-making activities or other trading
activities, and it acknowledges that it will deliver a prospectus meeting the
requirements of the Securities Act in connection with any resale of such New
Notes. By acknowledging that it will deliver and by delivering a prospectus
meeting the requirements of the Securities Act in connection with any resale of
such New Notes, the undersigned is not deemed to admit that it is an
"underwriter" within the meaning of the Securities Act.
Very truly yours,
<PAGE>
EXHIBIT 99.5
INSTRUCTION TO REGISTERED HOLDER AND/OR BOOK
ENTRY TRANSFER PARTICIPANT FROM BENEFICIAL OWNER
FOR
TENDER OF 10 3/4% SENIOR SECURED NOTES DUE 2006, SERIES A
IN EXCHANGE FOR
10 3/4% SENIOR SECURED NOTES DUE 2006, SERIES B
SPINNAKER INDUSTRIES, INC.
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME,
ON MARCH 14, 1997, UNLESS EXTENDED (THE "EXPIRATION DATE").
OLD NOTES TENDERED IN THE EXCHANGE OFFER MAY BE WITHDRAWN
AT ANY TIME PRIOR TO THE EXPIRATION DATE
To Registered Holder and/or Participant
of the Book-Entry Transfer Facility:
The undersigned hereby acknowledges receipt of the Prospectus dated February
10, 1997 (the "Prospectus") of Spinnaker Industries, Inc., a Delaware
corporation (the "Company"), and the accompanying Letter of Transmittal (the
"Letter of Transmittal"), that together constitute the Company's offer (the
"Exchange Offer") to exchange its 10 3/4% Senior Secured Notes Due 2006, Series
B (the "New Notes") for all of its outstanding 10 3/4% Senior Secured Notes Due
2006, Series A (the "Old Notes"). Capitalized terms used but not defined herein
have the meanings ascribed to them in the Prospectus.
This will instruct you, the registered holder and/or book-entry transfer
facility participant, as to the action to be taken by you relating to the
Exchange Offer with respect to the Old Notes held by you for the account of the
undersigned.
The aggregate face amount of the Old Notes held by you for the account of
the undersigned is (FILL IN AMOUNT):
$ of the 10 3/4% Senior Secured Notes Due 2006, Series A.
With respect to the Exchange Offer, the undersigned hereby instructs you
(CHECK APPROPRIATE BOX).
/ / To TENDER the following Old Notes held by you for the account of the
undersigned [INSERT PRINCIPAL AMOUNT OF OLD NOTES TO BE TENDERED (IF ANY)]:
$
/ / Not to TENDER any Old Notes by you for the account of the undersigned.
If the undersigned instructs you to tender the Old Notes held by you for the
account of the undersigned, it is understood that you are authorized to make, on
behalf of the undersigned (and the undersigned, by its signature below, hereby
makes to you), the representations and warranties contained in the Letter of
Transmittal that are to be made with respect to the undersigned as a beneficial
owner, including, but not limited to, the representations that (i) the New Notes
acquired pursuant to the Exchange Offer are being acquired in the ordinary
course of business of the undersigned, (ii) neither the undersigned nor any such
other person has an arrangement or understanding with any person to participate
in the distribution within the meaning of the Securities Act of 1933, as amended
(the "Securities Act"), of such New Notes, (iii) if the undersigned is not a
broker-dealer, or is a broker-dealer but will not receive New Notes for its own
account in exchange for Old Notes, neither the undersigned nor any such other
person is engaged in or intends to participate in the distribution of such New
Notes and (iv) neither the undersigned nor any such other person is an
"affiliate" of the Company within the meaning of Rule 405 under the Securities
Act or, if the undersigned is an "affiliate," that the undersigned will comply
with the registration
<PAGE>
and prospectus delivery requirements of the Securities Act to the extent
applicable. If the undersigned is a broker-dealer (whether or not it is also an
"affiliate") that will receive New Notes for its own account in exchange for Old
Notes, it represents that such Old Notes were acquired as a result of
market-making activities or other trading activities, and it acknowledges that
it will deliver a prospectus meeting the requirements of the Securities Act in
connection with any resale of such New Notes. By acknowledging that it will
deliver and by delivering a prospectus meeting the requirements of the
Securities Act in connection with any resale of such New Notes, the undersigned
is not deemed to admit that it is an "underwriter" within the meaning of the
Securities Act.
SIGN HERE
Name of beneficial owner(s):
-----------------------------------------------------------------
Signature(s):
-------------------------------------------------------------------------------
Name(s) (please print):
----------------------------------------------------------------------
Address:
- --------------------------------------------------------------------------------
Telephone Number:
-------------------------------------------------------------------------
Taxpayer Identification or Social Security Number:
----------------------------------------------
Date:
- --------------------------------------------------------------------------------
2
<PAGE>
EXHIBIT 99.6
GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION
NUMBER ON SUBSTITUTE FORM W-9
GUIDELINES FOR DETERMINING THE PROPER IDENTIFICATION NUMBER TO GIVE THE
PAYER.--Social Security numbers have nine digits separated by two hyphens: i.e.,
000-00-0000. Employer identification numbers have nine digits separated by only
one hyphen: i.e., 00-000000. The table below will help determine the number to
give the payer.
<TABLE>
<CAPTION>
FOR THIS TYPE OF ACCOUNT: GIVE THE SOCIAL SECURITY NUMBER OF:
- ---------------------------------------------------------------- -----------------------------------------------------
<C> <S> <C>
1. An individual's account The individual
2. Two or more individuals (joint account) The actual owner of the account or, if combined
funds, any one of the individuals(1)
3. Husband and wife (joint account) The actual owner of the account or, if joint funds,
either person(1)
4. Custodian account of a minor (Uniform Gift to Minors The minor(2)
Act)
5. Adult and minor (joint account) The adult or, if the minor is the only contributor,
the minor(1)
6. Account in the name of guardian or committee for a The ward, minor, or incompetent person(3)
designated ward, minor or incompetent person
7. a. The usual revocable savings trust account The grantor-trustee(1)
(grantor is also trustee)
b. So-called trust account that is not a legal The actual owner(1)
or valid trust under state law
8. Sole proprietorship account The owner(4)
9. A valid trust, estate, or pension trust The legal entity (Do not furnish the identification
number of the personal representative or trustee
unless the legal entity itself is not designated in
the account title)(5)
10. Corporate account The corporation
11. Religious, charitable, or educational organization The organization
account
12. Partnership account The partnership
13. Association, club or other tax-exempt organization The organization
14. A broker or registered nominee The broker or nominee
15. Account with the Department of Agriculture in the The public entity
name of a public entity (such as a State or local
government, school district, or prison) that
receives agricultural program payments
</TABLE>
- ------------------------
(1) List first and circle the name of the person whose number you furnish.
(2) Circle the minor's name and furnish the minor's social security number.
<PAGE>
Page 2
(3) Circle the ward's, minor's or incompetent person's name and furnish such
person's social security number.
(4) Show the name of the owner.
(5) List first and circle the name of the legal trust, estate or pension trust.
NOTE: If no name is circled when there is more than one name, the number will
be considered to be that of the first name listed.
OBTAINING A NUMBER:
If you don't have a taxpayer identification number or you don't know your
number, obtain Form SS-5, Application for a Social Security Number Card, or Form
SS-4, Application for Employer Identification Number at the local office of the
Social Security Administration or the Internal Revenue Service and apply for a
number.
PAYEES EXEMPT FROM BACKUP WITHHOLDING
Payees specifically exempted from backup withholding on ALL payments include
the following:
- A corporation.
- A financial institution.
- An organization exempt from tax under section 501(a) of the Internal
Revenue Code of 1986, as amended (the "Code"), or an individual retirement
plan.
- The United States or any agency or instrumentality thereof.
- A State, the District of Columbia, a possession of the United States, or
any subdivision or instrumentality thereof.
- An international organization or any agency or instrumentality thereof.
- A registered dealer in securities or commodities registered in the United
States or a possession of the United States.
- A real estate investment trust.
- A common trust fund operated by a bank under section 584(a) of the Code.
- An exempt charitable remainder trust, or a nonexempt trust described in
section 4947(a)(1) of the Code.
- An entity registered at all times under the Investment Company Act of
1940.
- A foreign central bank of issue.
Payments of dividends and patronage dividends not generally subject to
backup withholding include the following:
- Payments to nonresident aliens subject to withholding under section 1441
of the Code.
- Payments to partnerships not engaged in a trade or business in the Untied
States and which have at least one nonresident partner.
- Payments of patronage dividends where the amount received is not paid in
money.
- Payments made by certain foreign organizations.
- Payments made to a nominee.
<PAGE>
Page 3
Payments of interest not generally subject to backup withholding include the
following:
- Payments of interest on obligations issued by individuals. Note: You may
be subject to backup withholding if this interest is $600 or more and is
paid in the course of the payer's trade or business and you have not
provided your correct taxpayer identification number to the payer.
- Payments of tax-exempt interest (including exempt-interest dividends under
section 852 of the Code).
- Payments described in section 6049(b)(5) of the Code to non-resident
aliens.
- Payments on tax-free covenant bonds under section 1451 of the Code.
- Payments made by certain foreign organizations.
- Payments made to a nominee.
EXEMPT PAYEES DESCRIBED ABOVE MUST STILL COMPLETE THE SUBSTITUTE FORM W-9
ENCLOSED HEREWITH TO AVOID POSSIBLE ERRONEOUS BACKUP WITHHOLDING. FILE
SUBSTITUTE FORM W-9 WITH THE PAYER, REMEMBERING TO CERTIFY YOUR TAXPAYER
IDENTIFICATION NUMBER ON PART III OF THE FORM, WRITE "EXEMPT" ON THE FACE OF THE
FORM AND SIGN AND DATE THE FORM AND RETURN IT TO THE PAYER.
Payments that are not subject to information reporting are also not subject
to backup withholding. For details, see sections 6041, 6041(A)(a), 6042, 6044,
6045, 6049, 6050A, and 6050N of the Code and their regulations.
PRIVACY ACT NOTICE.--Section 6109 requires most recipients of dividends,
interest, or other payments to give taxpayer identification numbers to payers
who must report the payments to IRS. The IRS uses the numbers for identification
purposes and to help verify the accuracy of your tax return. Payers must be
given the numbers whether or not recipients are required to file a tax return.
Payers must generally withhold 31% of taxable interest, dividends and certain
other payments to a payee who does not furnish a taxpayer identification number
to a payer. Certain penalties may also apply.
PENALTIES
(1) PENALTY FOR FAILURE TO FURNISH TAXPAYER IDENTIFICATION NUMBER.--If you
fail to furnish your taxpayer identification number to a payer, you are subject
to a penalty of $50 for each such failure unless your failure is due to
reasonable cause and not to willful neglect.
(2) CIVIL PENALTY FOR FALSE INFORMATION WITH RESPECT TO WITHHOLDING.--If you
make a false statement with no reasonable basis which results in no imposition
of backup withholding, you are subject to a penalty of $500.
(3) CRIMINAL PENALTY FOR FALSIFYING INFORMATION.--Falsifying certifications
or affirmations may subject you to criminal penalties including fines and/or
imprisonment.
FOR ADDITIONAL INFORMATION CONTACT YOUR TAX CONSULTANT OR THE INTERNAL
REVENUE SERVICE.
<PAGE>
Page 4
PAYER'S NAME: THE CHASE MANHATTAN BANK
<TABLE>
<S> <C> <C>
Part I--Please provide your TIN Part III--
in the box at right and certify
by signing and dating below. Social Security Number
OR
SUBSTITUTE Employer Identification
Number
(If awaiting TIN write
"Applied For")
FORM W-9
Part II--For Payees Exempt From Backup Withholding, see the
enclosed Guidelines for Certification of Taxpayer
Identification Number on Substitute Form W-9 and complete as
instructed therein.
Department of the Treasury CERTIFICATION--Under penalties of perjury, I certify that:
Internal Revenue Service (1) The Number shown on this form is my correct Taxpayer
Identification Number (or I am waiting for a number to
be issued to me); and
(2) I am not subject to backup withholding either because I
have not been notified by the Internal Revenue Service (IRS)
that I am subject to backup withholding as a result of a
failure to report all interest or dividends, or the IRS
has notified me that I am no longer subject to backup
withholding.
PAYER'S REQUEST FOR TAXPAYER
IDENTIFICATION NUMBER (TIN)
CERTIFICATE INSTRUCTIONS--You must cross out item (2) above
if you have been notified by the IRS that you are subject to
backup withholding because of under reporting interest or
dividends on your tax return. However, if after being
notified by the IRS that you were subject to backup
withholding, you received another notification from the IRS
that you were no longer subject to backup withholding, do not
cross out item (2). (Also see instructions in the enclosed
Guidelines.)
Name
(Please Print)
SIGNATURE DATE
</TABLE>
NOTE: FAILURE TO COMPLETE AND RETURN THIS SUBSTITUTE FORM W-9 MAY RESULT IN
BACKUP WITHHOLDING OF 31% OF ANY PAYMENTS MADE TO YOU PURSUANT TO THE
OFFER TO PURCHASE. PLEASE REVIEW THE ENCLOSED GUIDELINES FOR
CERTIFICATION OF TAXPAYER IDENTIFICATION NUMBER ON SUBSTITUTE FORM W-9
FOR ADDITIONAL DETAILS.
<PAGE>
Page 5
YOU MUST COMPLETE THE FOLLOWING CERTIFICATE IF YOU ARE AWAITING A TIN.
CERTIFICATE OF AWAITING TAXPAYER IDENTIFICATION NUMBER
I certify under penalties of perjury that a taxpayer identification number
has not been issued to me, and either (1) I have mailed or delivered an
application to receive a taxpayer identification number to the appropriate
Internal Revenue Service Center or Social Security Administration Office or (2)
I intend to mail or deliver an application in the near future. I understand that
if I do not provide a taxpayer identification number with sixty (60) days, 31%
of all payments with respect to the Old Notes or the New Notes made to me
thereafter will be withheld until I provide a number.
SIGNATURE ____________________________________________________ DATE ____________
