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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
FOR THE TRANSITION PERIOD FROM ______________ TO ______________
COMMISSION FILE NUMBER 1-13961
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SPINNAKER INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 06-0544125
(State of incorporation) (IRS Employer Identification No.)
600 N. PEARL STREET, SUITE 2160, DALLAS, 75201
TX (zip code)
(Address of principal executive offices)
(214) 855-0322
(Registrant's telephone number, including area code)
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Securities registered pursuant to Section 12(b) of the Act:
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<S> <C>
no par
Common Stock......................................................... value
Title of Class
no par
Class A Common Stock................................................. value
Title of Class
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Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulations S-K is not contained herein, and will not be contained, to
the best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K. / /
The total aggregate market value of the 1,327,391 shares of voting stock
held by non-affiliates of the Registrant (669,819 shares of Common Stock and
657,572 shares of Class A Common Stock) was $28,532,783 (based upon the closing
bid of the Registrant's Common Stock and Class A Common Stock in the NASDAQ on
March 27, 1998 of $21.00 per share of Common Stock and $22.00 per share of Class
A Common Stock). The term affiliates is deemed, for this purpose only, to refer
only to directors, officers and principal stockholders of the Registrant.
The number of outstanding shares of the Registrant's Common Stock and Class
A Common Stock was 3,575,680 and 3,566,067, respectively, as of March 30, 1998,
for a total of 7,141,747.
DOCUMENTS INCORPORATED BY REFERENCE
Part III: Proxy Statement for the 1998 Annual Meeting of Stockholders to be
held May 15, 1998.
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PART I
ITEM 1. BUSINESS
A. HISTORICAL OPERATIONS
Spinnaker Industries, Inc., a Delaware corporation (the "Registrant" or the
"Company"), is a leading manufacturer and marketer of adhesive carton sealing
tape and adhesive-backed label stock, primarily for the industrial tape and
pressure sensitive label stock markets. The Registrant's strategy is to focus on
the growing pressure sensitive markets for industrial sealing tape and label
stock applications, while pursuing acquisitions within the adhesive-backed
materials industry that complement its existing businesses. The Company's
businesses are grouped into two principal categories that accounted for the
following percentages of net sales for the year ended December 31, 1997:
industrial tape (51.6%) and adhesive backed label stock (46.0%). For the year
ended December 31, 1997, the Company had net sales of $232.0 million and EBITDA
(as defined) of $17.8 million.
In 1987, Lynch Corporation, an Indiana corporation ("Lynch"), which is
listed on the American Stock Exchange, purchased from a group of investors
approximately 82% of the outstanding common stock of the Registrant. As of
December 31, 1997, Lynch Manufacturing Corporation ("LMC"), a wholly-owned
subsidiary of Lynch, owned 2,237,203 and 2,259,063 shares, or 67.8% and 67.5%,
respectively, of the Registrant's common stock, no par value (the "Common
Stock") and Class A Common Stock, no par value (the "Class A Common Stock").
Prior to June 1994, the Company's principal business activity consisted of the
operations of Entoleter, Inc., a Delaware corporation ("Entoleter"). In June
1994, the Company entered into a management agreement (the "Management
Agreement") with Boyle, Fleming & Co., Inc. ("BF"), pursuant to which BF would
provide 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.
Subsequent to the creation of its management relationship with BF, the Company
redirected its strategic plan and consummated the acquisitions of the operations
at Spinnaker Coating, Inc. (f/k/a Brown-Bridge Industries, Inc.), a Delaware
corporation ("Spinnaker Coating"), and Central Products Company, a Delaware
corporation ("Central Products"), as described below. More recently, the Company
completed the acquisition of the pressure sensitive paper products operations of
(the "Pressure Sensitive Business") of S.D. Warren Company ("Warren"), which is
also described below. The Pressure Sensitive Business is operated by Spinnaker
Coating-Maine, Inc., a Delaware corporation and indirect subsidiary of the
Company ("Coating-Maine"), as part of the Company's adhesive-backed label stock
operations. Although the Management Agreement between BF and the Company was
terminated in August 1996, the principals of BF have continued to be employed as
Chairman of the Board and Chief Executive Officer, and the President,
respectively, of the Company. In May 1997, the President also became the Chief
Operating Officer of the Company.
On October 4, 1995, the Company completed the acquisition (the "Central
Products Acquisition") of the carton sealing tape division of Alco Standard
Corporation ("Alco") through its newly formed Central Products subsidiary.
Central Products, whose operations were 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
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private label supply agreement with Unisource Worldwide, Inc. ("Unisource"), a
subsidiary of Alco which is the largest United States distributor of office
paper products, to supply a complete line of private label carton sealing tape
products. In 1995, Central Products also became a major vendor to xpedx (a
division of International Paper Co.), 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.
On September 19, 1994, the Company completed the acquisition (the "Spinnaker
Coating Acquisition") of its Spinnaker Coating operations in which it, together
with Lynch, certain officers and employees of Spinnaker Coating and affiliates
of BF (the "Minority Stockholders"), purchased the label stock business of
Kimberly-Clark Corporation through its newly formed "Brown-Bridge Industries,
Inc." subsidiary. Spinnaker Coating's operations were 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. Spinnaker
Coating offers a full line of more than 2,000 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. Spinnaker Coating
is the largest supplier of pressure sensitive postage stamp stock for use by the
U.S. Postal Service (the "Postal Service"). In March 1998, the U.S. Bureau of
Engraving and Printing awarded the Company a five-year contract to supply its
requirements for paper stock for pressure sensitive postage stamps. The Company
estimates the value of the foregoing contract to be approximately $75 million.
On March 17, 1998, the Company closed the acquisition (the "Coating-Maine
Acquisition") of the Pressure Sensitive Business from Warren through its newly
formed subsidiary, Coating-Maine. Coating-Maine operates the Pressure Sensitive
Business at a portion of Warren's paper mill near Portland, Maine. The Pressure
Sensitive Business began operations in 1976 and is a major manufacturer and
marketer of pressure sensitive adhesive-backed label stock. The Pressure
Sensitive Business manufactures and markets label stock primarily for the EDP
segment of the label stock market. The Pressure Sensitive Business' EDP products
are used in various labeling end uses, including form printing and product
marking and identification. The Pressure Sensitive Business generated $62.1
million of net sales in the fiscal year ended October 1, 1997, which, on a pro
forma basis, accounted for 21% of the Company's net sales for the year ended
December 31, 1997.
The Company also manufactures and markets industrial process equipment and
air pollution control scrubbers through its Entoleter subsidiary. The Company is
exploring strategic alternatives with respect to Entoleter to improve
shareholder value, including the possible sale of Entoleter or spin-off of
Entoleter through a distribution of the common stock of Entoleter to the
Company's shareholders. There can be no assurance, however, that any transaction
involving Entoleter will occur.
INDUSTRIAL TAPE
The Company's carton sealing tape is used for the packaging of goods for
shipment by a wide variety of manufacturing, retail and distribution companies,
such as UPS and Land's End. The Company 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. The Company believes it is the only
United States supplier to manufacture both pressure sensitive tape and water
sensitive tape, and that it 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. The Company's
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 the Company's 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. The
Company's water sensitive carton sealing tapes are sold under the trade names
Glasseal-Registered Trademark-, Central-Registered Trademark-, Green Core-TM-
and Tru-Seal-TM-.
TAPE DISPENSING MACHINES. The Company also supplies tape dispensing
equipment manufactured by other companies. The Company currently offers a broad
line of carton sealing equipment for pressure sensitive tape, which ranges from
hand held dispensers to automatic random sizing equipment. The Company also
offers two types of table top dispensers for water sensitive tape a manual
dispenser and a more expensive electric dispenser.
ADHESIVE-BACKED LABEL STOCK
The Company 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. The Company's adhesive-backed label stock products are offered in
three primary adhesive categories: pressure sensitive, water sensitive and heat
sensitive. During 1997, pressure sensitive products constituted approximately
87% of the Company's net sales of adhesive-backed label stock products, while
water sensitive products constituted 10% and heat sensitive products constituted
3% of such sales.
PRESSURE SENSITIVE. Pressure sensitive adhesive-backed label stock
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. The Company'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).
WATER SENSITIVE. Water sensitive adhesive-backed label stock products,
which are activated by the application of water, include a broad range of paper
and cloth materials, coated with a variety of adhesives.
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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 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 adhesive-backed label stock 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. The Company's heat sensitive products are sold under the
trade name Heat Seal-Registered Trademark-.
MARKETING AND CUSTOMERS
The Company's marketing strategy focuses not only on products, but also
customer service. The Company has conducted business with its top ten customers
for approximately fifteen years on the average. The Company's relationships with
customers focus on customer service and its ability to research and develop
custom solutions for unique end user applications. The Company's marketing and
customer service provides the Company with new growth opportunities to increase
market share. The Company believes that the breadth of its product line,
commitment to product quality and reputation for innovation will enable it to
increase its market share through the introduction of new products. The Company
markets its broad range of products to a variety of customers. During 1997, no
single customer accounted for more than 10% of the Company's net sales.
The Company's strategy for marketing its tape products is to emphasize
supplying a full line of both water sensitive and pressure sensitive tape
products to the carton sealing tape industry. The Company 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, the Company sells
private-brand carton closure tapes direct to large customers who in turn
distribute the products under their name to end users. The Company provides its
distributor customers with a high level of product education to enable them to
better sell the Company's products. The Company maintains a training center at
its Menasha facility, where it conducts a "Tape School" five times yearly for
educating customers about its products. The Company also provides on-site
training and gives its distributors in-depth product literature and technical
materials.
The Company markets its adhesive-backed label stock products through its own
sales representatives to regional and national printers, converters and
merchants. The majority of sales represent product sold and shipped from the
Company's facilities in Troy, Ohio. However, to broaden its market penetration,
the Company also contracts with seven regional processors throughout the United
States, with whom it stores product until sold. Generally, these processors
perform both slitting and distribution services for the Company.
MANUFACTURING AND RAW MATERIALS
The Company produces 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.
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The Company manufactures each of the three primary adhesive technologies of
pressure sensitive carton sealing tape used within the industry: acrylic, hot
melt and natural rubber. The Company also produces all three types of water
sensitive carton sealing tape: paper, fiberglass reinforced and box tape. The
Company manufactures its pressure sensitive tape at its facilities in Brighton,
Colorado, and manufactures its water sensitive tape at the Company's facilities
in Menasha, Wisconsin. The Company has implemented product and process
improvements at both of its manufacturing facilities that have decreased costs
and increased manufacturing efficiencies, primarily through reductions in down
time and the loss of raw materials in its manufacturing processes. Over the last
two years, the Company has made approximately $12.8 million in capital
improvements to achieve such efficiencies by automating and updating its
processes. In addition, the Company has implemented a progressive team
management approach, which facilitates frequent meetings between supervisors and
team members to discuss ideas for further improving the Company's manufacturing
processes.
The Company manufactures adhesive-backed label stock that is converted by
customers into products for marking, identifying, labeling and decorating
applications. The Company offers its adhesive-label stock products in three
primary categories: pressure sensitive, water sensitive and heat sensitive. The
Company manufactures its adhesive-back label stock products at two plants in
Troy, Ohio. The Company has implemented its C2E program at these facilities,
which is intended to improve throughput, reduce working capital needs and reduce
overall costs. In addition, the Company has made approximately $4.9 million in
capital expenditures at these facilities, including $4.0 million for the
addition of a new production line for silicone coating. During 1996, before the
addition of the new production line, the Company outsourced a portion of its
silicone coated liner requirements. The Company incurred higher costs of sales
(approximately $2.3 million) for the year ended December 31, 1996 as a result of
such outsourcing.
Raw materials are the most significant cost component in the Company's
production process. The material component accounts for approximately 65% 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 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. For this reason, the Company continues to invest resources to improve
operating efficiencies and reduce operating costs. However, 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. The
Company believes the basis of competition in the carton sealing market is
quality of adhesion across a broad spectrum of applications, delivery and
account service,
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and price, although other factors, such as technical support and product
literature, may enhance a company's competitive position. There are a wide range
of participants in the carton sealing industry, including large diversified
corporations (principally in pressure sensitive tape) 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.
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. The Company periodically conducts evaluations
of its environmental compliance and 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, the Company believes that any
noncompliance is unlikely to 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.
The Company has identified possible environmental issues related to portions
of Entoleter's land in Hamden, Connecticut. The appropriate regulatory agencies
have been notified, but to date no action has been taken by any regulatory
agency.
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 $14.2 million, $11.5 million, and $10.4
million in 1997, 1996, and 1995, respectively. Of the $14.2 million in 1997
foreign sales, approximately 86% were represented by exports of Spinnaker
Coating and Central Products adhesive-backed materials. 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.
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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.
INDUSTRIAL PROCESS EQUIPMENT BUSINESS
Entoleter engineers, manufactures and markets a vertically integrated line
of size reduction equipment complemented by a line of air pollution control
equipment. Entoleter's products primarily consist of: (i) Centrimil Milling
Equipment for particle size reduction; (ii) Centrimil granulators for the
plastics molding industry and precision cutters for the film and non-woven
industry; and (iii) Centrifield Scrubbers for the removal of impurities from
air, gases and liquids, and for heat recovery, gas absorption, and other mass
transfer functions.
The Company is exploring strategic alternatives with respect to Entoleter to
improve shareholder value, including the possible sale or spin-off of Entoleter.
There can be no assurance, however, that any transaction involving Entoleter
will occur.
EMPLOYEES
As of December 31, 1997, the Company employed approximately 945 persons, of
which 357 were Spinnaker Coating employees, 542 were Central Products employees
and 36 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 184 hourly
employees at the Menasha, Wisconsin plant. Entoleter's approximately 15
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.
B. PRESSURE SENSITIVE BUSINESS
OVERVIEW
On November 18, 1997, the Company entered into an Asset Purchase Agreement
(the "Asset Purchase Agreement") with Warren to purchase the Pressure Sensitive
Business. Warren is a large pulp and paper producer owned by an indirect wholly
owned subsidiary of SAPPI, Ltd., a public South African conglomerate. The
Pressure Sensitive Business' assets are located in several buildings located
next to Warren's paper mill in Westbrook, Maine, which is near Portland, Maine.
The Coating-Maine Acquisition was closed effective as of March 17, 1998.
Prior to the closing, the Company assigned its rights and obligations under the
Asset Purchase Agreement and related transaction documents to Coating-Maine,
which acquired the Pressure Sensitive Business at the time of the acquisition.
Coating-Maine will operate the Pressure Sensitive Business as a part of the
Company's adhesive-backed label stock operations conducted by Spinnaker Coating.
The Pressure Sensitive Business began operations in 1976 and is a major
manufacturer and marketer of pressure sensitive adhesive-backed label stock. The
Pressure Sensitive Business manufactures and markets label stock primarily for
the EDP segment of the label stock market. The Pressure Sensitive Business' EDP
products are used in various labeling end uses, including form printing and
product marking and identification. The Pressure Sensitive Business generated
$62.1 million of net sales in the
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fiscal year ended October 1, 1997, which, on a pro forma basis, accounted for
21% of the Company's net sales for the year ended December 31, 1997.
The Coating-Maine Acquisition is consistent with Spinnaker's long-term
strategy for expanding its presence in the market for adhesive-backed label
stock. In addition, Spinnaker Coating and the Pressure Sensitive Business are
expected to complement each other by strengthening their respective product
offerings, customer bases and manufacturing capabilities. The Company believes
the addition of the Pressure Sensitive Business to Spinnaker Coating's
adhesive-backed label stock business will make the Company the fifth largest
producer of label stock and the second largest provider of EDP label stock.
Management of the Company believes that the strategic benefits of the
Coating-Maine Acquisition will be primarily derived from cross-selling
opportunities, overhead reduction, manufacturing efficiencies and purchasing
savings.
INTEGRATION
Prior to the Coating-Maine Acquisition, the Pressure Sensitive Business was
operated as a division of Warren. Spinnaker is integrating the Pressure
Sensitive Business into its label stock operations, which will be managed by the
current Spinnaker Coating management team and will include certain employees of
Warren. The Company believes that the Pressure Sensitive Business' operations
will be substantially integrated with the Company within 90 days of the
Coating-Maine Acquisition. The Coating-Maine Acquisition and operation of the
Pressure Sensitive Business could affect the amount of certain contingent
payments to be made to certain former stockholders of Spinnaker Coating. See
"Executive Compensation."
STRATEGIC BENEFITS
The Coating-Maine Acquisition strengthens the Company's position in the
adhesive-backed materials market. The Company believes the addition of the
Pressure Sensitive Business to Spinnaker Coating's adhesive-backed label stock
business will make the Company the fifth largest producer of label stock and the
second largest manufacturer of EDP label stock. The strategic benefits of the
Coating-Maine Acquisition will be primarily derived from the following:
- CROSS-SELLING OPPORTUNITIES. Management believes the Company will benefit
from many cross-selling opportunities as a result of the Acquisition.
Spinnaker Coating and the Pressure Sensitive Business have little customer
overlap, as Spinnaker Coating focuses on speciality products for middle
market customers while the Pressure Sensitive Business focuses on
standardized products for large customers. Spinnaker Coating expects to
sell its specialized products to large customers as a result of the
Pressure Sensitive Business' existing strong relationships with such
customers combined with customers' desires to buy products from fewer
suppliers. Similarly, the Pressure Sensitive Business expects to sell its
standardized products to middle market customers due to Spinnaker
Coating's existing strong relationships and customers' desire to
consolidate these purchases. Management believes these cross-selling
opportunities are strengthened because Spinnaker Coating has competitive
advantages in the manufacturing and marketing of specialty products, while
the Pressure Sensitive Business has competitive advantages as a low cost
producer of high quality standardized products.
9
<PAGE>
- OVERHEAD REDUCTION. Historically, Warren allocated certain costs to the
Pressure Sensitive Business that the Company believes are in excess of
those that will be required to operate the Pressure Sensitive Business on
an ongoing basis. These costs included executive, legal, accounting,
purchasing and other corporate overhead functions, as well as other
allocated costs related to maintenance, material handling and security.
- MANUFACTURING EFFICIENCIES. The Coating-Maine Acquisition enhances the
Company's manufacturing capabilities. The Pressure Sensitive Business is
currently running at a high rate of capacity utilization, however,
management believes that its capacity balancing plan will increase
capacity through the efficient allocation of production among its label
stock manufacturing facilities. Management believes that the successful
implementation of this plan at each of its manufacturing facilities will
improve efficiency and operating results after the Coating-Maine
Acquisition by reallocating production among the Company's label stock
manufacturing facilities according to machine design and suitability for
long run or custom applications.
- PURCHASING SAVINGS. The Company expects to benefit from the combined
purchasing power of its businesses. Economies of scale are anticipated in
the purchase of base raw materials and insurance costs, among others.
Historically, the Company has taken advantage of the combined purchasing
power of its industrial tape and adhesive-backed label stock businesses.
ASSETS ACQUIRED
Pursuant to the Asset Purchase Agreement, Coating-Maine purchased from
Warren the following assets relating to the Pressure Sensitive Business: all
machinery, equipment, installations, fixtures, furniture, tools, supplies,
materials and other personal property, inventory, prepaid expenses, leases of
personal property, rights under contracts and agreements, rights under the
collective bargaining agreement between Warren and the United Paperworkers
International Union (the "CBA"), as it relates to employees of the Pressure
Sensitive Business, rights under purchase orders outstanding on the date of
closing, accounts receivable, intellectual property, software, any licenses,
permits, and other authorizations, approvals or registrations from, of or with
any governmental entity, existing records and other miscellaneous assets.
PURCHASE PRICE
The purchase price paid by the Registrant for the Pressure Sensitive
Business was approximately $51.8 million, plus the assumption of certain
liabilities, subject to a working capital adjustment. The purchase price was
paid by the issuance of a 10% subordinated convertible note (the "Note") by the
Registrant to Warren, in the original principal amount of $7.0 million, and the
remainder with funds available under the Registrant's asset-backed working
capital revolving credit facility with BT Commercial Corporation (the "Revolving
Credit Facility"), which was concurrently amended to increase the aggregate
facility amount to $60 million.
The principal amount outstanding under the Note may be prepaid by the
Company at any time without penalty. The Note has a payment-in-kind ("PIK")
feature that allows the Registrant to pay interest accrued during the first year
with an additional subordinated note having substantially similar terms as the
Note, and the Registrant may also issue such a PIK Note if at a future interest
payment date a default or event of default exists, or would be caused by the
payment of interest in cash, under the Revolving Credit Facility. Payments of
principal and interest are subject to restrictions contained in, and in any
event are junior and subordinate in right of payment to, the payment of
indebtedness outstanding under the Revolving Credit Facility and the Registrants
10 3/4% Senior Secured Notes due 2006. The Note matures on January 31, 2002,
however it is expected to be prepaid earlier if certain conditions or events
occur. Prepayments of principal in an amount equal to 30% and 70% of the
original principal amount are due on March 31, 1999 and on March 31, 2000,
respectively, subject to there being sufficient unused availability and no
existing default or event of default under the Revolving Credit Facility. The
Note is convertible for shares the Registrant's common stock, no par value
("Common Stock"), on the basis of 40 shares per $1,000 of the outstanding
principal amount of the Note (or $25.00 per share), subject to adjustment as set
10
<PAGE>
forth in the Note. Upon conversion of the Note, the holder thereof will be
entitled to certain registration rights with respect to the shares of Common
Stock received upon such conversion.
ASSUMED LIABILITIES
Coating-Maine has assumed Warren's obligations and liabilities under
personal property leases, purchase orders, contracts, the CBA, certain employee
benefits liabilities as described below, product warranty claims made after the
first anniversary of the closing of the Asset Purchase Agreement and workmen's
compensation liabilities for work performed prior to the closing (provided such
claims are filed later than six months from the closing). Coating-Maine
specifically agreed not to assume, and Warren agreed to retain, certain
indebtedness and trade payables of Warren, tax liabilities of Warren, liability
under all employee benefit plans (within the meaning of Section 3(3) of the
United States Employee Retirement Security Act of 1974, as amended), or any
other retirement, profit sharing, stock option, stock bonus or other benefit
program, liabilities with respect to severance agreements with its employees,
all liabilities incurred in connection with "stay-put" arrangements implemented
in connection with the sale of the Pressure Sensitive Business, liabilities or
regulatory obligations with respect to certain environmental matters,
liabilities relating to certain claims for workmen's compensation for work
performed by employees of the Pressure Sensitive Business prior to the closing,
inter-company liabilities and warranty liabilities for products sold prior to
the closing (provided such claims are made prior to the first anniversary of the
closing).
REPRESENTATIONS
As part of the Asset Purchase Agreement, Warren has made various
representations regarding the Pressure Sensitive Business and Warren. These
include representations concerning power and authority, no conflicts with laws,
title to assets, financial statements, absence of certain changes, litigation,
labor relations and other employee matters, contracts, intellectual property,
environmental and real estate matters, and other representations customary in
transactions of this type.
SITE LEASE
In connection with the Coating-Maine Acquisition, Coating-Maine and Warren
entered into a Site Lease, which provides for Warren's lease to Coating-Maine of
a portion of the Westbrook facility at which the Pressure Sensitive Business'
operations are currently located. Such lease will be for a term of 99 years,
will provide for nominal rent of $1.00 per year, and will permit Coating-Maine
to lease additional space for expansion at the site. In addition, Coating-Maine
has the option to purchase the leased property, including any additional
property leased in connection with future expansion, for a nominal purchase
price.
SPACE LEASE
Coating-Maine and Warren also entered into a Space Lease in connection with
the Coating-Maine Acquisition. The Space Lease provides for Warren to lease
certain industrial space at its Westbrook facility to be used in connection with
the operation of the Pressure Sensitive Business.
SITE SEPARATION AND SERVICES AGREEMENT
In connection with the Coating-Maine Acquisition, Coating-Maine and Warren
entered into a Site Separation and Services Agreement pursuant to which
Coating-Maine shall obtain utility services from Warren. After five years,
Warren has the right to terminate its obligations as to electricity and
compressed air, and after twenty years, Warren has the right to terminate its
obligations as to steam, process sewer and sanitary sewer upon one year's
notice. In addition, the Site Separation and Services Agreement provides that
Warren will supply to Coating-Maine, for a limited time and at predetermined
costs, shipping, transportation and storage, maintenance and support,
information, and administrative services. Warren has also agreed to supply
certain raw materials used in the Pressure Sensitive Business for up to one
year.
11
<PAGE>
EMPLOYEE AND EMPLOYEE BENEFIT MATTERS
Coating-Maine has agreed (i) to offer employment to 97 of Warren's
employees, including 71 union employees and 26 salaried employees; (ii) to
permit rollovers to Coating-Maine's 401(k) Plan of the amounts distributed by
Warren's 401(k) Plan to certain of Warren's employees hired by Coating-Maine;
(iii) to maintain employee benefit plans and other employee benefits as called
for under the CBA, including an employee pension plan, certain welfare benefit
plans and certain retiree medical and life insurance coverages and Medicare
premium reimbursements; and (iv) for a period of two years to provide for
salaried employees hired from Warren, and their dependents, where applicable,
compensation, employee welfare, employee pension and other employee benefits
substantially comparable in the aggregate to those provided by Warren, although
Coating-Maine is not obligated to provide retiree medical or life insurance
coverages for any salaried employees and dependents and Medicare premium
reimbursements, since Warren has agreed to retain those obligations.
INDEMNIFICATION
The Asset Purchase Agreement provides for indemnification by the parties
thereto for breaches of representations, warranties and covenants, and for
certain environmental matters.
FORWARD LOOKING INFORMATION
This Form 10-K contains certain forward looking information, including
without limitation, "Management's Discussion and Analysis of Financial Condition
and Results of Operation" (Item 7 below). It should be recognized that such
information are estimates or forecasts based upon various assumptions, including
the matters referred to therein, as well as meeting the Registrant's internal
performance assumptions regarding expected operating performance and the
expected performance of the economy as it impacts Registrant's businesses. As a
result, such information is subject to uncertainties and risks.
ITEM 2. 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 EXPIRATION OF
LOCATION SQUARE FEET LEASED 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
Brighton, Colorado................................................. 211,000 Leased 2014
Denver, Colorado................................................... 100,000 Owned N/A
SPINNAKER-COATING
Troy, Ohio (Plant One)............................................. 200,000 Owned N/A
Troy, Ohio (Plant Two)(1).......................................... 98,000 Owned N/A
Troy, Ohio......................................................... 53,500 Leased Month-to-Month
COATING-MAINE
Westbrook, Maine................................................... 151,226 Leased March 16, 2097
Westbrook, Maine................................................... 5,000 Leased October 31, 1999
Westbrook, Maine................................................... 15,000 Leased April 1, 2004
Westbrook, Maine................................................... 869 Leased April 1, 2018
ENTOLETER
Hamden, Connecticut................................................ 72,000 Owned N/A
</TABLE>
- --------------------------
(1) The Company also owns a five-acre tract adjacent to this tract that is
available for expansion.
ITEM 3. LEGAL PROCEEDINGS
None.
12
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On December 16, 1997, a proposed amendment to the Company's certificate of
incorporation, which authorized the issuance of up to 2 million shares of
preferred stock, was approved by the written consent of LMC, the majority
stockholder of the Company. The amendment authorizes the Board of Directors to
issue classes of such preferred stock, in one or more series, with such
designations, preferences and other rights, qualifications, limitations or
restrictions as the Board of Directors may determine. The Company distributed to
its stockholders an information statement describing the amendment and filed a
corresponding Schedule 14C with the Commission on December 30, 1997 (File No.
000-09559). The Company's Board of Directors approved the amendment to the
Company's certificate of incorporation to authorize the preferred stock, but the
amendment has not been filed with the State of Delaware.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
SHAREHOLDER MATTERS
The Registrant's Common Stock and Class A Common Stock have been traded on
the Nasdaq National Market under the symbols "SPNI" and "SPNI-A," respectively,
since September 8, 1997. Prior to that time, the Common Stock and the Class A
Common Stock were traded on the Nasdaq Small-Cap Market and were quoted in the
National Association of Securities Dealers Automated Quotations system. The
Company has received approval to list its shares of Common Stock and Class A
Common Stock on the American Stock Exchange, Inc. ("AMEX"). Although trading has
not yet commenced on AMEX, the Company intends to finalize all outstanding
matters relating to the transition from the Nasdaq National Market and begin
trading on AMEX in less than thirty days from the date of this report. The
following table sets forth, for the calendar quarters indicated, the range of
high and low closing sales prices for the Common Stock and the Class A Common
Stock for the period during which the Common Stock and Class A Common Stock have
been traded on the Nasdaq National Market and the range of high and low bid
prices for the Common Stock and the Class A Common Stock for the period of time
during which the Common Stock and the Class A Common Stock were traded on the
Nasdaq Small-Cap Market, as reported in published financial sources. The
information set forth below has been adjusted to give retroactive effect to the
three-for-two stock split effective on December 29, 1995 and a stock dividend,
which was a stock split (the "Stock Split") on August 16, 1996. In the Stock
Split, the Company's then outstanding common stock, no par value (the "Old
Stock"), was reclassified as "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 newly authorized Common
Stock.
<TABLE>
<CAPTION>
COMMON STOCK CLASS A COMMON
STOCK
------------------ ------------------
HIGH LOW HIGH LOW
------- ------- ------- -------
<S> <C> <C> <C> <C>
1995
First Quarter......................... N/A N/A $ 6 1/2 $ 2 1/2
Second Quarter........................ N/A N/A 15 1/3 6
Third Quarter......................... N/A N/A 21 2/3 16 1/2
Fourth Quarter........................ N/A N/A 26 1/3 15 4/5
1996
First Quarter......................... N/A N/A $25 1/2 $14
Second Quarter........................ N/A N/A 58 1/2 22
Third Quarter......................... $42 $23 53 37
Fourth Quarter........................ 38 24 59 39 3/4
1997
First Quarter......................... $54 $23 $74 $39
Second Quarter........................ 54 25 74 29
Third Quarter......................... 36 23 40 1/8 22 1/8
Fourth Quarter........................ 28 20 28 22
1998
First Quarter (through March 27,
1998)............................... 22 20 1/8 22 5/8 22
</TABLE>
13
<PAGE>
As of December 31, 1997, there were approximately 210 holders of record of
Common Stock and approximately 205 holders of record of Class A Common Stock
(which numbers do not include the number of stockholders whose shares are held
of record by a broker or clearing agency but does include each such brokerage
house or clearing agency as one record holder).
Since the beginning of Lynch's involvement with the Company, the Company has
not declared or paid any cash dividends on its Common Stock or Class A Common
Stock and does not currently anticipate paying any cash dividends on its Common
Stock or Class A Common Stock in the foreseeable future. The Company intends to
retain future earnings for use in its business. Spinnaker's sole source of cash
from which to make dividend payments will be dividends distributed or other
payments made to it by its subsidiaries. The right of Spinnaker to participate
in any distribution of earnings or assets of its subsidiaries is subject to the
prior claims of the creditors of its subsidiaries. Under the terms of the
Revolving Credit Facility and the Indenture governing the Senior Notes (as
defined), the Company's ability to pay cash dividends to its stockholders is
limited.
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
1997 1996 1995(1) 1994(2) 1993
---------- ---------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Net sales............................................... $ 231,976 $ 246,536 $ 135,289 $ 33,632 $ 6,371
Operating profit(3)..................................... 10,879 10,222 5,789 722 56
Income (loss) before income taxes, minority interest and
extraordinary item, net of tax........................ 2,247 (363) 953 78 119
Income (loss) before extraordinary item................. (1,787) (625) 561 (90) 119
Extraordinary charge net of tax......................... -- (1,843) -- -- --
Net income (loss)....................................... (1,787) (2,468) 561 (90) 119
Income (loss) per common share before extraordinary
item.................................................. (0.28) (0.11) 0.10 (0.02) 0.02
Income (loss) per common share before extraordinary
item-assuming dilution................................ (0.28) (0.11) 0.08 (0.02) 0.02
Net income (loss) per common share(4)................... (0.28) (0.42) 0.10 (0.02) 0.02
Net income (loss) per common share--assuming dilution... (0.28) (0.42) 0.08 (0.02) 0.02
Dividends per share..................................... -- -- -- -- --
Total assets............................................ 156,718 157,716 137,584 41,329 8,209
Long-term obligations including related party notes..... 115,049 115,113 71,225 9,149 1,015
Shareholders' equity.................................... 10,269 11,236 7,062 6,501 6,591
Weighted average common and common equivalent shares
outstanding(4)........................................ 6,321 5,931 6,702 5,626 5,432
</TABLE>
- ------------------------
(1) Includes the October 4, 1995 acquisition of Central Products Company--see
Note 2--Notes to Consolidated Financial Statements.
(2) Includes the September 19, 1994 acquisition of Spinnaker Coating Industries,
Inc.--see Note 2-- Notes to Consolidated Financial Statements.
(3) Operating profit is net sales less operating expenses which exclude other
income-net (investment income and interest expense) and income taxes and
includes restructuring and litigation expense in 1994.
(4) Adjusted to reflect a stock dividend, an effective 2-for-1 stock split,
effective August 16, 1996 and 3-for-2 stock splits effective December 29,
1995 and December 30, 1994.
14
<PAGE>
See Management's Discussion and Analysis of Financial Condition and Results
of Operation for additional information concerning the Registrant's financial
performance.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
GENERAL
The Registrant considers the U.S. adhesive-backed materials industry to be
over $10.5 billion, consisting of the approximately $4.2 billion total tape
market and the approximately $6.3 billion adhesive-backed label stock market
(includes adhesive-backed label stock revenues plus estimated revenues added by
printing, cutting and other converting and finishing operations). The Registrant
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. Spinnaker Coating offers a full line of more than 2,000 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 Registrant also
manufactures and markets industrial process equipment and air pollution control
scrubbers through Entoleter.
Since June 1994, the Registrant has experienced rapid growth, which has been
accomplished through the Registrant's acquisition of its carton sealing tape and
label stock manufacturing operations and the Registrant's subsequent internal
growth. The internal growth is a result of the Registrant's implementation of
its core competencies to the operations after they were acquired by the
Registrant, including refocused sales and marketing strategy and additional
capital investment at all subsidiaries. The Company invested approximately $10
million over the last two years to improve manufacturing efficiencies, which has
lowered manufacturing costs and improved production efficiencies, while
simultaneously increasing production capacity. The investments included an
expansion in coating capacity for label stock production, which lowered
manufacturing costs, and enhancements in its film line, which increased tape
production capacity. With the acquisition of Spinnaker Coating in 1994, the
Registrant entered the adhesive-backed materials industry. The Central Products
Acquisition in 1995 provided the Registrant with a leading position in the
carton sealing tape market of the adhesive-backed materials industry. As a
result of the foregoing acquisitions, the Registrant became a manufacturer of
the broadest line of adhesive-backed label stock and carton sealing tape
products in the adhesive-backed materials industry. The Coating-Maine
Acquisition (See Note 15 in Notes to Consolidated Financial Statements), further
strengthens the Registrant's position in the adhesive-backed materials market.
The Registrant believes the combination of Coating-Maine with Spinnaker
Coating's adhesive-backed label stock business will make the Registrant the
fifth largest producer of label stock and the second largest manufacturer of EDP
label stock.
Subsequent to each of the foregoing acquisitions, the Registrant implemented
cost reduction measures, including more effective management, rationalization of
raw materials and component purchasing, improved materials flow and improved
management information systems. The Registrant believes such measures
contributed to improved operating profits at the Registrant's carton sealing
tape and label stock manufacturing operations during 1997.
The Registrant has historically operated at a high level of capacity
utilization and has increased capacity of the acquired plant facilities through
operating efficiency improvements. For example, in order to meet production
capacity requirements under the postage stamp stock agreements awarded to
Spinnaker Coating in 1995 and 1996, Spinnaker Coating invested approximately
$4.0 million to add a production
15
<PAGE>
line for silicone coating. During 1996, before the addition of the new
production line, Spinnaker Coating outsourced a portion of its silicone coated
liner requirement. The Registrant incurred higher costs of sales (approximately
$2.3 million) for the year ended December 31, 1996, as a result of such
outsourcing. The installation of the additional production line was completed by
the end of the fourth quarter of 1996 and became fully operational in January
1997, which enabled the Registrant to meet its future silicone liner production
requirements and eliminate the costs that were historically associated with
outsourcing for the silicone liner.
The cost of the Registrant'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 resulted in the Registrant
instituting higher prices, consistent with the increases instituted by its
competitors, for its carton sealing tape and adhesive-backed label stock
products. The increases in raw material costs during fiscal 1995 for the
Registrant's products did not materially impact the Registrant's gross profit
because the Registrant was generally able to pass along its raw material cost
increases without negatively impacting sales of its products.
During fiscal 1996 and 1997, the Registrant's principal raw material costs
generally remained stable or declined. The agreements under which the
Registrant's carton sealing tape products and its other adhesive-backed label
stock products are sold generally do not contain adjustment mechanisms for
fluctuations in the cost of raw materials. However, the Registrant has generally
passed along raw material price changes for products sold under such agreements,
as well as for products sold to other customers. The exception to the foregoing
is the Registrant's supply agreement relating to pressure sensitive label stock
used by the Postal Service, which provides for pre-determined annual price
increases. The Postal Service agreement gives the Registrant protection against
limited price increases to the extent that increases in costs of raw materials
are no more than the increases provided by such agreement. In order to protect
against raw material price increases that exceed the annual price increases
under the Postal Service agreement, the Registrant has entered into supply
agreements with its raw material suppliers that have ceilings on future price
increases.
The future impact of a change in raw material costs on the Registrant's
profitability is based in part on pricing by the Registrant's competitors.
Although historically the Registrant has generally been able to pass through raw
material cost fluctuations, the Registrant cannot be assured that future raw
material cost increases can be passed through to its customers or that such cost
increases will not negatively impact the Registrant's gross profit.
FISCAL 1997 COMPARED TO FISCAL 1996
NET SALES. The Registrant's 1997 net sales were $232.0 million compared to
$246.5 million in 1996. Net sales of carton sealing tapes were impacted by the
Registrant's decision to terminate a relationship with an existing customer of
the Registrant's reinforced and box tape products which reduced year-to-year net
sales by approximately $8 million. Unit sales of carton sealing products,
excluding the terminated agreement, increased from 1996 levels, which more than
offset lower average selling prices resulting from changes in product mix and
increased market competition. Unit sales of pressure sensitive adhesive-backed
label stock were impacted by the delayed release of certain orders by the U.S.
Bureau of Engraving and Printing until late December 1997, and inventory level
adjustments by key consumer and converter product customers, while lower average
selling prices of pressure sensitive adhesive-backed label stock were a result
of market competition to maintain certain unit sales volumes. The decrease in
net sales for 1997 also reflects a decline of $2.5 million in sales of
industrial equipment and higher freight costs.
GROSS MARGIN. Gross margin as a percentage of net sales increased to 13.9%
in 1997 from 13.2% in 1996. The improvement in gross margins is attributable to
lower average unit manufacturing costs of adhesive-backed material products and
improved manufacturing variances.
16
<PAGE>
The installation of a new silicone coater at the Registrant's
adhesive-backed label stock manufacturing facility, which became operational in
January 1997, enabled the Registrant to significantly increase internal silicone
coating capacity and eliminate the need to outsource a portion of its silicone
coater requirements, resulting in savings during 1997. In 1996, the Registrant
incurred approximately $2.3 million of outsourcing costs attributable to
silicone coating capacity constraints.
The Registrant's tape production operations steadily improved throughout
1997 in comparison to 1996, and showed significant improvement with respect to
manufacturing variances experienced as recently as the first quarter of 1997.
The Registrant attributes these improvements in manufacturing variances to
efficiencies gained through reductions of manufacturing personnel, material
process and handling modifications and capital investments made over the past
twelve to fifteen months which has enabled the Registrant to increase output and
reduce manufacturing downtime. The Registrant is continuing to focus its
management efforts and capital investments on improving manufacturing
efficiencies and increasing capacity.
INCOME FROM OPERATIONS. Income from operations was approximately $10.9
million or 4.7% of net sales in 1997 compared to $10.2 million or 4.1% of net
sales in 1996. The improved operating results are attributable to capital
investments in manufacturing and MIS processes, and lower administrative
expenses, which offset year-to-year increases in depreciation and amortization
expenses of approximately $1 million.
INTEREST EXPENSE. Interest expense for 1997 totaled $13.2 million, of which
approximately $624 thousand relates to amortization of deferred financing costs.
In 1996, interest expense totaled $9.9 million, of which approximately $158
thousand related to amortization of deferred financing costs. The increase in
cash interest is attributable to higher average outstanding debt obligations and
related interest rates for the 1997 fiscal year.
INCOME TAXES. The 1997 income tax benefit for federal and state income
taxes is at an effective rate of 20.5%. The Registrant's tax rate is impacted by
permanent tax differences, primarily non-deductible goodwill amortization
associated with the Central Products Acquisition (amortized over 25 years).
Cash income taxes are currently limited to state income taxes, as the
Registrant has net operating loss carry-forwards of approximately $9.5 million
available to offset future taxable income.
NET INCOME. The Registrant recorded a net loss of $1.8 million or $0.28 per
share for 1997, versus a net loss of $2.5 million or $0.42 per share in 1996. In
1996, the Registrant recorded an extraordinary charge of approximately $1.8
million net of income taxes, or a $0.31 loss per share. The charge was
attributed to the extinguishment of the Registrant's previously existing credit
facilities and the write-off of related deferred financing costs.
FISCAL 1996 COMPARED TO FISCAL 1995
Fiscal 1996 was highlighted by several transactions unique to operations as
compared to previous fiscal years. During 1996, the Registrant completed a
financial reorganization to improve the Registrant's capital structure and
provide a source of long-term financing.
In the fourth quarter of 1996 the Registrant issued $115 million of senior
secured notes ("Senior Notes"). The Senior Notes require semi-annual interest
payments and mature October 2006. Proceeds from the sale of the Senior Notes
were used to extinguish certain long-term obligations and all working capital
revolver obligations then outstanding. In addition, the Registrant established
its Revolving Credit Facility. A portion of the Revolving Credit Facility may be
used to fund acquisitions.
In the same quarter, concurrent with the issuance of the Senior Notes, the
Registrant acquired the minority interest in its Spinnaker Coating subsidiary.
The terms of the acquisition involved a cash payment, issuance of Registrant
Common Stock and a right to a contingent payment.
17
<PAGE>
Fiscal 1996 was the first full year of operations to include Central
Products, as on October 4, 1995, the Registrant, through its wholly-owned
subsidiary, purchased in the Central Products Acquisition the stock and assets
of Alco's Central Products operation, which manufactures a variety of carton
sealing tapes. Therefore, 1996 includes twelve months of operations at Central
Products compared to three months in 1995.
NET SALES. The Registrant's 1996 net sales were $246.5 million, an increase
of 82% when compared with net sales in 1995. The increase in net sales was the
result of the Central Products Acquisition, improved marketing efforts at
Central Products and the growth at Spinnaker Coating. Spinnaker Coating's units
increased approximately 12% on the strength of a refocused sales and marketing
strategy inclusive of two long-term contracts with the Postal Service for the
supply of postage stamp paper stock. Central Products' improved marketing
efforts and relationships with its national accounts, in an extremely
competitive pricing market, increased pressure sensitive tape units
approximately 13%. The Central Products Acquisition accounts for approximately
$91.3 million of the year on year increase based on historical 1995 pro forma
operating data.
GROSS MARGIN. Gross margin as a percentage of net sales increased to 13.2%
in 1996 from 13.0% in 1995. These favorable results were achieved despite the
negative impact to gross margin of approximately $2.3 million of outsourcing
penalties associated with the capacity constraints at Spinnaker Coating
attributable to its overall growth, in particular, the growth from two
pressure-sensitive postage contracts with the Postal Service. In the future,
these capacity constraints should be eliminated through the installation of a
new silicone coater, which became fully operational in January 1997. The
Registrant believes that the new silicone coater will enable it to substantially
reduce costs associated with its current level of outsourcing silicone liner. In
addition, 1996 results include $531 thousand of costs associated with changes
and improvements in management personnel and reductions of personnel in certain
manufacturing functions as the Registrant continues to focus on internal
efficiencies.
INCOME FROM OPERATIONS. Income from operations was $10.2 million or 4.1% of
net sales for 1996 compared to $5.8 million or 4.3% net sales in 1995. These
operating results reflect the inclusion of Central Products for a full year and
$205 thousand of costs associated with changes and improvements in management
personnel at Spinnaker Coating. Included in corporate office expenses are
charges from the Registrant's corporate parent, Lynch Corporation, for certain
management fees and other direct services. The 1995 income from operations
included a charge of approximately $600 thousand for fees paid to a consulting
firm assisting Spinnaker Coating to improve its operations and manufacturing
processes. This consulting engagement began in 1994 and was completed in 1995.
INTEREST EXPENSE. Interest expense for 1996 totaled $9.9 million, of which
$158 thousand relates to amortization of deferred financing costs capitalized in
connection with the Registrant's $115 million Senior Notes and $40 million
Revolving Credit Facility. The Senior Notes require semi-annual interest
payments each April 15 and October 15 through maturity in October 2006. As a
result of the acquisition of Central Products and a full year's interest accrued
on the debt incurred, and higher average working capital needs from the growth
of the Registrant's businesses, total interest expense for 1996 increased by
approximately $5.4 million, versus 1995.
OTHER INCOME (EXPENSE)--GUARANTEE FEE. In the first quarter of 1996, the
Registrant accrued a $375 thousand charge for guarantee fees due to Lynch
Corporation 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 March 31, 1996) of the Registrant. The indebtedness
was extinguished with the proceeds generated from the Senior Note issuance. See
Note 4 of Notes to Consolidated Financial Statements.
In the fourth quarter of 1996, the Registrant donated land held in "other
assets" to a charity in Atlanta, Georgia. The book value of the land was $248
thousand.
18
<PAGE>
INCOME TAXES. The 1996 income tax benefit for federal and state income
taxes is at an effective rate of 10%. The Registrant's tax rate is impacted by
permanent tax differences, primarily non-deductible goodwill amortization
associated with the Central Products acquisition (amortized over 25 years). The
1995 income tax provision was reduced by $279 thousand due to the reversal of
the Registrant's valuation allowance related to net deferred taxes. See Note 7
of Notes to Consolidated Financial Statements.
EXTRAORDINARY CHARGE. The Registrant recorded a fourth quarter
extraordinary charge of approximately $1.8 million, net of income taxes, or a
$0.31 loss per share. The charge was attributable to the extinguishment of the
Registrant's previously existing credit facilities and the write-off of related
deferred financing costs.
NET INCOME. The Registrant recorded a net loss of $2.5 million or $0.42 per
share for 1996, versus net income of $561 thousand, or $0.08 per share, in 1995.
The earnings per share have been adjusted to reflect a stock dividend, an
effective two for one stock split, on August 16, 1996.
LIQUIDITY AND CAPITAL RESOURCES
RECENT DEVELOPMENTS
Effective March 17, 1998, Spinnaker closed the Coating-Maine Acquisition,
whereby Coating-Maine acquired the Pressure Sensitive Business from SDW. SDW, a
large pulp and paper producer, is an indirect wholly owned subsidiary of SAPPI,
Ltd., a public South African conglomerate. Coating-Maine is a wholly owned
subsidiary of Spinnaker Coating, Inc. (most recently known as Brown-Bridge
Industries, Inc., a wholly owned subsidiary of the Registrant) and was formed to
acquire the Pressure Sensitive Business which manufactures and markets label
stock primarily for the EDP segment of the label stock market. The Pressure
Sensitive Business' EDP products are used in various labeling end uses,
including form printing and product marking and identification.
The Coating-Maine Acquisition is consistent with the Registrant's long-term
strategy of pursuing acquisitions which complement its position in the
adhesive-backed materials industry. The purchase price under the agreement was
approximately $51.8 million, plus the assumption of certain liabilities
(excluding substantially all trade payables), and was funded with approximately
$44.8 million from availability under the Registrant's recently amended $60
million Revolving Credit Facility and the issuance of the Note by the Registrant
to SDW in the original principal amount of $7.0 million. The Pressure Sensitive
Business generated $62.1 million of net sales and, on a historical basis, $6.2
million of EBITDA (as defined) for the fiscal year ended October 1, 1997. On a
pro forma basis, EBITDA for the fiscal year ended October 1, 1997 was $8.4
million, which reflects pro forma adjustments to eliminate certain allocated
costs from SDW in excess of those that will be required to operate the business.
These costs included executive, legal, accounting, purchasing and other
corporate overhead functions, as well as other allocated costs related to
maintenance, material handling and security.
The Note bears interest at the rate of 10%. The Note includes a
payment-in-kind ("PIK") feature that allows the Registrant to pay the first
year's interest payment by issuing an additional subordinated note under similar
terms as the Note, and the Registrant may also issue such a PIK note if at a
future interest payment date a default or event of default exists, or would be
covered by the payment of such interest in cash, under the Revolving Credit
Facility. Payments of principal and interest are subject to restrictions
contained in, and in any event are junior and subordinate in right of payment
to, the payment of indebtedness outstanding under the Revolving Credit Facility
and the Senior Notes. The Note matures on January 31, 2002, however, it is
expected to be prepaid earlier if certain conditions or events occur.
Prepayments of principal of 30% and 70% of the original principal amount are due
on March 31, 1999 and March 31, 2000, respectively, subject to there being
sufficient unused availability and no existing default or event of default under
the Revolving Credit Facility.
19
<PAGE>
In conjunction with the Coating-Maine Acquisition, the Registrant's
Revolving Credit Facility was amended to increase the aggregate facility amount
to $60 million, subject to certain variables, including inventory and
receivables eligible to be included in the borrowing base.
GENERAL
The Registrant's principal source of liquidity is cash flow from operations
and availability under the amended $60 million Revolving Credit Facility. The
Registrant has historically provided working capital, financed capital
expenditures and met debt service requirements through cash flows from
operations--a form of "self-financing." The Registrant expects to continue to
manage its business in this manner based upon current operations and anticipated
cost savings and future growth. The Revolving Credit Facility is available to
fund acquisitions and support periodic fluctuations in the working capital. On
March 18, 1998, immediately before the Coating-Maine Acquisition, there was cash
and availability under the Revolving Credit Facility of approximately $51
million. The Registrant's ability to fund its April 15, 1998 Senior Note
interest payment of approximately $6.2 million is dependent upon its
availability under the Revolving Credit Facility. The Registrant anticipates
having sufficient availability under the Revolving Credit Facility based on
current operations.
The Senior Notes are redeemable, in whole or in part, at the option of the
Registrant on or after October 15, 2001, at various redemption prices beginning
at 105.375% of the principal amount plus accrued and unpaid interest. In
addition, at any time or from time to time on or prior to October 31, 1999, the
Registrant, at its option, may redeem up to 33 1/3% of the aggregate principal
amount of the Senior Notes with net cash proceeds from public equity offerings
at a redemption price equal to 110.75% of the principal amount plus accrued an
unpaid interest. The Senior Notes are unconditionally guaranteed, jointly and
severally, by the subsidiaries of the Registrant.
On October 23, 1996, concurrent with the issuance of the Senior Notes, the
Registrant acquired the approximately 25% minority interest in its Spinnaker
Coating subsidiary. The terms of the Spinnaker Coating acquisition provided that
the minority stockholders of Spinnaker Coating would receive an aggregate cash
payment of approximately $2.3 million, issuance of 9,613 shares of Common Stock
and a right to a contingent payment. The contingent payment is exercisable at
any time from October 1, 1998 through September 30, 2000. The value of the
contingent payment is equal to the percentage of the capital stock of the former
Spinnaker Coating entity owned by such minority stockholder at the time of the
merger multiplied by 75% of the fair value of the capital stock of Spinnaker
Coating, as determined in accordance with certain economic assumptions, as of
the date such right is exercised, less the consideration received at closing.
The contingent price is payable through the issuance of Common Stock of the
Registrant, unless the Registrant elects to pay the contingent price in cash. If
such payments are made in cash, they could give rise to a default under the
Senior Notes, unless there is sufficient availability under provisions regarding
restricted payments contained in the Senior Notes.
The Registrant's December 31, 1997 cash balance was approximately $5.9
million, which reflects the October 15, 1997 Senior Notes semi-annual interest
payment of $6.2 million.
Net cash used in investing activities was $9.1 million in 1997 compared to
$12.2 million in 1996. Investing activities in 1997 were primarily focused on
providing increased capacity and improved manufacturing efficiencies in the
Registrant's tape production facilities, while investments in 1996 included a
new silicone and adhesive coater for the Registrant's label stock business. In
addition, in 1996 the Registrant acquired its tape production facility in
Brighton, Colorado, and funded financing costs associated with the Registrant's
October 1996 issuance of $115 million of Senior Notes.
Financing activities during 1997 generated approximately $213 thousand,
which includes the issuance of approximately 263,000 shares of Common Stock and
263,000 shares of Class A Common Stock upon the exercise of warrants held by BF
at a total price of $702 thousand offset by $240 thousand of reductions in
borrowings under the Revolving Credit Facility and $249 thousand of payments on
long-term debt and capital leases. Cash generated from financing activities in
1996 included net working capital borrowings of $8.9 million offset by $1.7
million of deferred financing costs. In addition, on April 5, 1996, the
Registrant
20
<PAGE>
issued approximately 187,000 shares of Old Stock upon the exercise of warrants
held by BF at a total price of approximately $500 thousand.
On January 8, 1998, the Registrant issued 228,499 shares of Common Stock and
228,499 shares of Class A Common Stock upon the exercise of the remaining Class
A warrants held by BF at a total price of $610 thousand.
The amended $60 million Revolving Credit Facility will expire October 2001,
which is consistent with the maturity date of the original $40 million revolver.
The Registrant is charged an unused credit fee every month of 0.375% per annum.
Interest on outstanding borrowings bears interest at variable rates related to
the prime interest rate or the lender's base rate. At December 31, 1997, the
interest rate in effect was 10.25%.
The Registrant's 1997 operating activities and available cash balances have
funded interest payments of the Senior Notes of approximately $12.4 million, the
latest semi-annual payment being October 15, 1997, and approximately $8.0
million in capital investments, while Revolving Credit Facility borrowings have
declined to less than $0.5 million at December 31, 1997.
The Registrant has identified possible environmental issues related to
portions of its land in Hamden, Connecticut. The appropriate regulatory agencies
have been notified, but to date no action has been required by any regulatory
agency.
The Registrant continues to investigate the possibility of pursuing an
offering of common stock or other equity securities. However, there can be no
assurance that an offering will be accomplished on terms satisfactory to the
Registrant.
YEAR 2000
Until recently, computer programs were written to store only two digits of
date-related information in order to more efficiently handle and store data. As
a result, these programs were unable to properly distinguish between the year
1900 and the year 2000. This is frequently referred to as the "Year 2000
Problem." The Registrant recognizes the need to ensure its operations will not
be adversely impacted by Year 2000 software failures.
The Registrant began addressing Year 2000 compliance in early 1995 in
conjunction with the implementation of a new management information system at
Spinnaker Coating, a task which was successfully completed in 1996. The system
implementation, which provided improved functionality and internal processing,
was necessitated to transition from the former parent's information system.
Central Products Company is in the process of implementing a new information
system with significantly improved functionality which the Registrant believes
will also address the Year 2000 computer program issue. The Registrant expects
the implementation project to be completed in 1998.
Beginning later in 1998, the Registrant's industrial equipment manufacturer,
Entoleter, will begin the process of defining, assessing and converting or
replacing, various programs, hardware and instrumentation systems to make them
Year 2000 compatible. The Registrant does not expect the Year 2000 compliance to
have a significant effect on operations, nor does it expect the cost to be
material to the Registrant's consolidated results of operations or financial
position.
The costs of Year 2000 modifications and the date of completion will be
closely monitored and are based on management's best estimates. Actual results,
however, could differ from those anticipated.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See Item 14(a).
21
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Previously reported on the Registrant's Current Report on Form 8-K filed on
August 25, 1997.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item 10 is included under the caption
"Election of Directors" of the Registrant's Proxy Statement for its Annual
Meeting of Stockholders to be held on May 15, 1998, which information is
incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item 11 is included under the captions
"Executive Compensation," "Compensation of Directors," and "Certain
Transactions," of the Registrant's Proxy Statement for its Annual Meeting of
Stockholders to be held on May 15, 1998, which information is incorporated
herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item 12 is included under the captions
"Security Ownership of Certain Beneficial Owners" and "Security Ownership of
Management," of the Registrant's Proxy Statement for its Annual Meeting of
Stockholders to be held on May 15, 1998, which information is incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item 13 is included under the caption
"Certain Transactions" of the Registrant's Proxy Statement for its Annual
Meeting of Stockholders to be held on May 15, 1998, which information is
incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES, AND REPORTS ON FORM 8-K
<TABLE>
<S> <C> <C>
(A) THE FOLLOWING DOCUMENTS ARE FILED AS PART OF THIS FORM 10-K ANNUAL REPORT:
(1) Financial Statements:
The Report of Independent Auditors and the following consolidated Financial Statements of
the Registrant are included herein:
Consolidated Balance Sheets--December 31, 1997 and 1996
Consolidated Statements of Operations--Years ended December 31, 1997, 1996, and 1995.
Consolidated Statements of Stockholders' Equity--Years ended December 31, 1997, 1996 and
1995.
Consolidated Statements of Cash Flows--Years ended December 31, 1997, 1996 and 1995
Notes to Consolidated Financial Statements
(2) Financial Statement Schedules:
Schedule I - Condensed Financial Information of Registrant
</TABLE>
22
<PAGE>
<TABLE>
<S> <C> <C>
All other schedules to the Consolidated Financial Statements are omitted because the
required information is inapplicable or has been presented in the Financial Statements or
Related Notes thereto.
(3) Exhibits:
3.1 Restated Certificate of Incorporation of the Registrant (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 Indenture dated October 23, 1996, among the Registrant, Spinnaker Coating, Inc.
(f/k/a Brown-Bridge Industries, Inc.), Central Products Company ("CPC"), 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).
4.2 Supplemental Indenture dated March 17, 1998, among the Registrant, Spinnaker
Coating, CPC, Entoleter and Spinnaker Coating-Maine, Inc. (filed as Exhibit 99.6
to the Registrant's Current Report on Form 8-K dated March 30, 1998).
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 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).
10.3 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).
10.4 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).
10.5 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).
10.6 Credit Agreement (the "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).
10.7 Fifth Amendment to the Credit Agreement (filed as Exhibit 99.4 to the
Registrant's Current Report on Form 8-K dated March 30, 1998).
10.8 Sixth Amendment to the Credit Agreement (filed as Exhibit 99.5 to the
Registrant's Current Report on Form 8-K dated March 30, 1998).
10.9 Asset Purchase Agreement, dated as of November 18, 1997, by and between the
Registrant and S.D. Warren Company ("SDW") (filed as Exhibit 2.1 to the
Registrant's Current Report on Form 8-K dated March 30, 1998).
</TABLE>
23
<PAGE>
<TABLE>
<S> <C> <C>
10.10 First Amendment to Asset Purchase Agreement, dated March 17, 1998 by and between
the Registrant and SDW (filed as Exhibit 2.2 to the Registrant's Current Report
on Form 8-K dated March 30, 1998).
10.11 Subordinated Note issued to SDW in the original principal amount of $7 million,
dated March 17, 1998, bearing interest at a rate of 10% per annum (filed as
Exhibit 4.1 to the Registrant's Current Report on Form 8-K dated March 30, 1998).
10.12 Site Lease Agreement, dated March 17, 1998, between the Registrant and SDW (filed
as Exhibit 99.2 to the Registrant's Current Report on Form 8-K dated March 30,
1997).
10.13 Site Separation and Services Agreement, dated March 17, 1998, by and between the
Registrant and SDW (filed as Exhibit 99.1 to the Registrant's Current Report on
Form 8-K dated March 30, 1998).
21 Subsidiaries of the Registrant.(1)
23.1 Consent of Ernst & Young LLP.(1)
23.2 Consent of Deloitte & Touche LLP.(1)
27.1 Financial Data Schedule.(1)
27.2 Restated Financial Data Schedule.(1)
27.3 Restated Financial Data Schedule.(1)
</TABLE>
- ------------------------
(1) Filed herewith.
(B) REPORTS ON FORM 8-K.
None.
The Registrant will furnish copies of the foregoing exhibits or filings upon
request and the payment of $.20 per page. Requests should be addressed to Carol
Allen, c/o Spinnaker Industries, Inc., 600 N. Pearl Street, Suite 2160, Dallas,
Texas 75201.
24
<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 as of December 31, 1997 and 1996, and the
related consolidated statements of operations, shareholders equity, and cash
flows for each of the three years in the period ended December 31, 1997. Our
audits also included the financial statement schedule listed in the Index at
Item 14(a). These financial statements and schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits. In 1996 and 1995 we did
not audit the financial statements of Central Products Company, a wholly-owned
subsidiary, which statements reflect total assets of $97,300,000 as of December
31, 1996, and total revenues of $126,383,000 and $30,581,000 for the year ended
December 31, 1996 and the three month period ended December 31, 1995,
respectively. 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 for those periods, 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.
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, 1997 and December 31, 1996, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
ERNST & YOUNG LLP
Dallas, Texas
February 27, 1998, except for Note 15,
as to which the date is March 26, 1998
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
Spinnaker Industries, Inc.:
We have audited the balance sheet of Central Products Company (a
wholly-owned subsidiary of Spinnaker Industries, Inc.) as of December 31, 1996
and the related statements of operations and retained earnings (accumulated
deficit) and cash flows for the year ended December 31, 1996 and the three
months ended December 31, 1995. These financial statements (not presented
separately herein) 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 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.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Central Products Company as of December 31,
1996 and the results of its operations and its cash flows for the year ended
December 31, 1996 and three months ended December 31, 1995 in conformity with
generally accepted accounting principles.
Deloitte & Touche LLP
Milwaukee, Wisconsin
February 21, 1997
F-2
<PAGE>
SPINNAKER INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1997 1996
---------- ----------
(IN THOUSANDS, EXCEPT
SHARE DATA)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............................................................. $ 5,977 $ 9,699
Accounts receivable, less allowance for doubtful accounts and cash discounts of $734 in
1997 and $979 in 1996................................................................ 24,886 21,995
Inventories............................................................................ 30,745 32,638
Prepaid expenses and other............................................................. 2,594 2,266
Deferred income taxes.................................................................. 1,922 1,590
---------- ----------
Total current assets................................................................. 66,124 68,188
Property, plant and equipment:
Land................................................................................... 583 583
Buildings and improvements............................................................. 13,402 12,606
Machinery and equipment................................................................ 61,262 53,261
Accumulated depreciation............................................................... (14,913) (9,155)
---------- ----------
60,334 57,295
Goodwill, net............................................................................ 24,025 25,062
Other assets............................................................................. 6,235 6,631
---------- ----------
Total assets......................................................................... $ 156,718 $ 157,176
---------- ----------
---------- ----------
</TABLE>
See accompanying notes, which are an integral part of these financial
statements.
F-3
<PAGE>
SPINNAKER INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1997 1996
---------- ----------
(IN THOUSANDS, EXCEPT
SHARE DATA)
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable....................................................................... $ 14,529 $ 13,356
Accrued liabilities.................................................................... 6,319 6,632
Current portion of long-term debt...................................................... 864 1,049
Working capital revolver............................................................... 446 686
Accrued interest....................................................................... 2,591 2,301
---------- ----------
Total current liabilities............................................................ 24,749 24,024
Long-term debt, less current portion..................................................... 115,049 115,113
Net deferred income taxes................................................................ 5,554 5,911
Pension liabilities...................................................................... 1,097 892
Shareholders' equity:
Class A Common Stock, no par or stated value, authorized 10,000,000 shares; issued
3,432,900 shares in 1997 and 3,169,930 shares in 1996 and Common Stock, no par or
stated value, authorized 15,000,000 shares; issued 3,442,513 in 1997 and 3,179,543 in
1996 at designated value............................................................. 3,124 3,124
Additional paid-in capital............................................................... 11,557 10,631
Retained earnings (accumulated deficit).................................................. (3,914) (2,127)
Adjustment for minimum pension liability................................................. (386) (280)
Less cost of common stock in treasury, 95,332 shares each of Class A Common Stock and
Common Stock in 1997 and 1996........................................................ (112) (112)
---------- ----------
Total shareholders' equity........................................................... 10,269 11,236
---------- ----------
Total liabilities and shareholders' equity......................................... $ 156,718 $ 157,176
---------- ----------
---------- ----------
</TABLE>
See accompanying notes, which are an integral part of these financial
statements.
F-4
<PAGE>
SPINNAKER INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------------
1997 1996 1995
----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Net sales.................................................................. $ 231,976 $ 246,536 $ 135,289
Cost of sales.............................................................. (199,647) (213,942) (117,737)
----------- ----------- -----------
Gross profit............................................................... 32,329 32,594 17,552
Selling, general and administrative expenses............................... (21,450) (22,372) (11,763)
----------- ----------- -----------
Operating profit........................................................... 10,879 10,222 5,789
Interest expense........................................................... (13,238) (9,872) (4,468)
Guarantee fee to parent.................................................... -- (375) (375)
Other income (expense)--net................................................ 112 (338) 7
----------- ----------- -----------
Income (loss) before income taxes, minority interest and extraordinary
charge, net of tax....................................................... (2,247) (363) 953
Income tax (provision) benefit............................................. 460 37 (112)
Minority interest.......................................................... -- (299) (280)
----------- ----------- -----------
Income (loss) before extraordinary charge.................................. (1,787) (625) $ 561
Extraordinary charge on early extinguishment of debt, net of income tax
benefit of $953.......................................................... -- (1,843) --
----------- ----------- -----------
Net income (loss).......................................................... $ (1,787) $ (2,468) $ 561
----------- ----------- -----------
----------- ----------- -----------
Earnings per common share:
Income (loss) before extraordinary item.................................... $ (0.28) $ (0.11) $ 0.10
Extraordinary charge....................................................... -- (0.31) --
----------- ----------- -----------
Net income (loss) per common share......................................... $ (0.28) $ (0.42) $ 0.10
----------- ----------- -----------
----------- ----------- -----------
Earnings per common share--assuming dilution:
Income (loss) before extraordinary item.................................... $ (0.28) $ (0.11) $ 0.08
Extraordinary charge....................................................... -- (0.31) --
----------- ----------- -----------
Net income (loss) per common share assuming dilution....................... $ (0.28) $ (0.42) $ 0.08
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
See accompanying notes, which are an integral part of these financial
statements.
F-5
<PAGE>
SPINNAKER INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
CLASS A ADDITIONAL RETAINED ADJUSTMENT FOR
COMMON STOCK COMMON STOCK COMMON PAID-IN- EARNINGS MINIMUM PENSION
OUTSTANDING OUTSTANDING STOCK CAPITAL (DEFICIT) LIABILITY
------------- ------------- ----------- ----------- ----------- ---------------
<S> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS EXCEPT SHARE DATA)
Balance at December 31, 1994........ 2,715,694 -- $ 3,124 $ 3,709 $ (220) $ --
Net income.......................... -- -- -- -- 561 --
------------- ------------- ----------- ----------- ----------- -----
Balance at December 31, 1995........ 2,715,694 -- 3,124 3,709 341 --
Exercise of warrants................ 187,476 -- -- 500 -- --
Conversion of debt.................. 171,428 -- -- 6,000 -- --
Stock dividend...................... -- 3,074,598 -- -- -- --
Tax benefit from exercise of
subsidiary stock options.......... -- -- -- 86 -- --
Stock issued for acquisition of
Spinnaker Coating minority
interest.......................... -- 9,613 -- 336 -- --
Adjustment for minimum pension
liability......................... -- -- -- -- -- (280)
Net loss............................ -- -- -- -- (2,468) --
------------- ------------- ----------- ----------- ----------- -----
Balance at December 31, 1996........ 3,074,598 3,084,211 3,124 10,631 (2,127) (280)
Exercise of warrants................ 262,970 262,970 -- 702 -- --
Adjustment for minimum pension
liability......................... -- -- -- -- (106)
Other............................... -- -- -- 224 -- --
Net loss............................ -- -- -- -- (1,787) --
------------- ------------- ----------- ----------- ----------- -----
Balance at December 31, 1997........ 3,337,568 3,347,181 $ 3,124 $ 11,557 $ (3,914) $ (386)
------------- ------------- ----------- ----------- ----------- -----
------------- ------------- ----------- ----------- ----------- -----
<CAPTION>
TREASURY
STOCK TOTAL
----------- ---------
<S> <C> <C>
Balance at December 31, 1994........ $ (112) $ 6,501
Net income.......................... -- 561
----- ---------
Balance at December 31, 1995........ (112) 7,062
Exercise of warrants................ -- 500
Conversion of debt.................. -- 6,000
Stock dividend...................... -- --
Tax benefit from exercise of
subsidiary stock options.......... -- 86
Stock issued for acquisition of
Spinnaker Coating minority
interest.......................... -- 336
Adjustment for minimum pension
liability......................... -- (280)
Net loss............................ -- (2,468)
----- ---------
Balance at December 31, 1996........ (112) 11,236
Exercise of warrants................ -- 702
Adjustment for minimum pension
liability......................... -- (106)
Other............................... -- 224
Net loss............................ -- (1,787)
----- ---------
Balance at December 31, 1997........ $ (112) $ 10,269
----- ---------
----- ---------
</TABLE>
See accompanying notes, which are an integral part of these financial
statements.
F-6
<PAGE>
SPINNAKER INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1997 1996 1995
--------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss).............................................................. $ (1,787) $ (2,468) $ 561
Adjustments to reconcile net income (loss) to net cash used in operating
activities:
Extraordinary charge on early extinguishment of debt, net of tax............. -- 1,843 --
Depreciation................................................................. 5,786 4,631 1,745
Amortization of deferred financing costs and goodwill........................ 1,795 1,639 406
Contribution of other assets to charitable organization...................... -- 248 --
Minority interest............................................................ -- 299 280
Deferred income taxes........................................................ (689) (556) (312)
Accrued interest on notes payable to related parties......................... -- 168 231
Changes in operating assets and liabilities:
Accounts receivable........................................................ (2,891) 2,794 241
Inventories................................................................ 1,893 (5,697) 2,959
Income taxes due from Parent............................................... -- -- 70
Prepaid expenses and other................................................. (328) 52 (985)
Accounts payable and accrued liabilities................................... 1,414 3,274 3,996
--------- ---------- ----------
Net cash provided by operating activities...................................... 5,193 6,227 9,192
INVESTING ACTIVITIES
Acquisition of Spinnaker Coating minority interest........................... -- (2,295) --
Acquisition of Central Products Company, net of cash acquired................ -- -- (79,550)
Purchases of property, plant, and equipment.................................. (8,837) (8,979) (1,620)
Additions to other assets.................................................... (291) (974) (643)
--------- ---------- ----------
Net cash used in investing activities.......................................... (9,128) (12,248) (81,813)
FINANCING ACTIVITIES
Payments on working capital revolvers, net................................... (240) (26,463) (2,015)
Proceeds from long-term debt................................................. -- 123,500 81,984
Principal payments on long-term debt......................................... (249) (76,645) (2,706)
Deferred financing costs..................................................... -- (7,139) (2,078)
Exercise of stock warrants and subsidiary options............................ 702 1,170 --
Payments of notes payable to related parties................................. -- (1,751) --
--------- ---------- ----------
Net cash provided by financing activities...................................... 213 12,672 75,185
--------- ---------- ----------
Increase (decrease) in cash and cash equivalents............................... (3,722) 6,651 2,564
Cash and cash equivalents at beginning of year................................. 9,699 3,048 484
--------- ---------- ----------
Cash and cash equivalents at end of year....................................... $ 5,977 $ 9,699 $ 3,048
--------- ---------- ----------
--------- ---------- ----------
</TABLE>
See accompanying notes, which are an integral part of these financial
statements.
F-7
<PAGE>
SPINNAKER INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
OWNERSHIP
Spinnaker Industries, Inc., ("Spinnaker") is a 67% 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 and
its wholly owned subsidiaries, Spinnaker Coating, Inc. (formerly known as
Brown-Bridge Industries, Inc.) ("Spinnaker Coating"), Central Products Company
("CPC"), and Entoleter, Inc. ("Entoleter"), (collectively referred to
hereinafter as the "Company"). All significant intercompany accounts and
transactions have been eliminated in consolidation.
NATURE OF OPERATIONS
Spinnaker's operations include the adhesive backed materials and industrial
processing equipment industries. The Company competes in the carton sealing tape
and adhesive coated label markets within the adhesive-backed materials industry.
Spinnaker Coating and CPC operate in the adhesive coated materials industry
where Spinnaker Coating 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. CPC manufactures and sells water-
activated and pressure-sensitive carton sealing tapes. Entoleter designs,
manufactures, and sells industrial processing, and air pollution equipment. The
Company's operations are primarily in the U.S., however, $14.2 million, $11.5
million, and $10.4 million of the Company's sales were export sales for the
years ended December 31, 1997, 1996, and 1995, 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.
CASH EQUIVALENTS
Cash equivalents consist of highly liquid investments with a maturity of
less than three months when purchased.
ACCOUNTS RECEIVABLE
Accounts receivable at Spinnaker Coating 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
50% of total accounts receivable and consist principally of amounts due from
paper distributors. Accounts receivable of Entoleter, which comprise the
remaining 4% 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 1997, 1996, and 1995, no
customer exceeded 10% of the Company's net sales. In relation to export sales,
the Company requires letters of credit supporting a significant portion
F-8
<PAGE>
SPINNAKER INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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. Spinnaker Coating's
inventory, which comprises 49% of total inventory, is valued using the specific
identification method. CPC's inventory, which comprises 47% of total inventory,
is valued using the last-in, first-out (LIFO) method. Entoleter's inventory,
which comprises 4% of total inventory, is valued using the first-in, first-out
(FIFO) method. The FIFO cost and LIFO cost of CPC's inventory were materially
the same at December 31, 1997.
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 generally amortized on a straight-line basis over 25 years.
Accumulated amortization at December 31, 1997 and 1996 totaled $2,411,000 and
$1,344,000, respectively. 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 Company utilizes the liability method to account for income taxes as
required by Statement of Financial Accounting Standards ("SFAS") 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.
Prior to April 5, 1996, the accounts of the Company were 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 provided 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.
During 1996, the Parent's ownership of the Company became less than 80%.
Thus, the Company was required to file a separate consolidated return from April
5, 1996 forward.
F-9
<PAGE>
SPINNAKER INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RESEARCH AND DEVELOPMENT
Research and development expenses were $826,000, $838,000, and $603,000, in
1997, 1996, and 1995, respectively.
SHAREHOLDERS' EQUITY
During 1997, Boyle Fleming & Company ("BF") exercised Class "A" warrants
pursuant to which the Company issued to BF 262,970 shares of Common Stock and
262,970 shares of Class A Common Stock.
Richard J. Boyle and Ned N. Fleming III, the Company's Chairman and Chief
Executive Officer, and President and Chief Operating Officer, respectively, are
shareholders, directors and officers of BF.
On July 19, 1996, the Company's Board of Directors adopted a resolution to
amend the articles of incorporation to increase the number of authorized shares
to 25 million shares. The new authorized shares are designated as 15 million
shares of Common Stock and 10 million shares of Class A Common Stock which
replaced the existing common stock. The Common Stock has a 1/10 per share voting
right compared to one vote per share for the Class A Common Stock.
The Directors of the Company declared a dividend on the Class A Common Stock
payable in Common Stock on the basis of one share of Common Stock for each share
of Class A Common Stock outstanding. The distribution was essentially a
two-for-one stock split. The record date for the distribution was August 5,
1996, with a distribution date of August 16, 1996.
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, except those
appearing in the Consolidated Statements of Shareholder's Equity, have been
restated to reflect the stock splits.
At December 31, 1997, the Company had 258,499 shares of Class A Common Stock
and 268,499 shares of Common Stock reserved for future issuance for Class "A"
Warrants and the directors' stock option plan.
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, 1996, and the fair
value of long-term debt at December 31, 1997, was approximately $119,600,000 (or
104% of face value).
STOCK BASED COMPENSATION
The Company has adopted the required provisions of SFAS No. 123, ACCOUNTING
FOR STOCK BASED COMPENSATION. SFAS No. 123 establishes a fair value method of
accounting and reporting standards for stock based compensation plans. However,
as permitted by SFAS No. 123, the Company has elected to
F-10
<PAGE>
SPINNAKER INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
continue to apply the provisions of Accounting Principles Board Opinion ("APB")
No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES and related interpretations.
Under APB No. 25, because the exercise price of the Company's director stock
options were not less than the market price of the underlying stock on the date
of grant, no compensation expense is recognized. The Company is required to
disclose the pro forma net income (loss) and net income (loss) per share as if
the fair value method defined in SFAS No. 123 had been applied. See Note 10 for
pro forma disclosures.
NEW ACCOUNTING STANDARDS
In February of 1997, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 128, EARNINGS PER SHARE, which replaced the calculation of
primary and fully diluted earnings per share with basic and diluted earnings per
share. Under SFAS No. 128, the dilutive effect of outstanding stock options and
warrants are excluded from the calculation of basic earnings per share. All
earnings per share amounts, where appropriate, have been restated to conform to
the requirements of SFAS No. 128.
In June of 1997, the FASB issued SFAS No. 130, REPORTING COMPREHENSIVE
INCOME, which requires the Company to present an additional statement including
all items required to be recognized under accounting standards as components of
comprehensive income. Management believes that the adoption of SFAS No. 130 in
fiscal 1998 will not have a material affect on the Company's consolidated
financial statements.
In June of 1997, the FASB issued SFAS No. 131, DISCLOSURE ABOUT SEGMENTS OF
AN ENTERPRISE AND RELATED INFORMATION, which establishes standards for the way
that public business enterprises report information about operating results in
annual financial statements and selected information in interim financial
statements issued to shareholders. The Company is evaluating the effect of
adopting SFAS No. 131 on its segment reporting information.
In February of 1998, the FASB issued SFAS No. 132, EMPLOYERS' DISCLOSURES
ABOUT PENSIONS AND OTHER POSTRETIREMENT BENEFITS, which is an amendment to SFAS
No.'s 87, 88 and 106. This SFAS revises employers' disclosures about pension and
other postretirement benefit plans. It does not change the measurement or
recognition of those plans. Management believes that adoption of SFAS No. 132 in
fiscal 1998 will not have a material affect on the Company's consolidated
financial statements.
RECLASSIFICATIONS
Certain reclassifications have been made to the prior year financial
statements to conform to the current year's presentation.
2. ACQUISITIONS
ACQUISITION OF SPINNAKER COATING MINORITY INTEREST
In October 1996, concurrent with the issuance of the $115 million Senior
Notes (see Note 4), the Company acquired the approximately 25% minority interest
in its Spinnaker Coating subsidiary. The terms of the acquisition involved a
cash payment of approximately $2.3 million and the issuance of 9,613 shares of
Spinnaker Common Stock. In addition, as part of the consideration for the shares
of capital stock of Spinnaker Coating, the minority shareholders received the
right to a contingent payment, which is exercisable at any time during the
period beginning October 1, 1998, and ending September 30, 2000. The value of
the contingent payment is equal to the percentage of the capital stock of the
former Spinnaker
F-11
<PAGE>
SPINNAKER INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. ACQUISITIONS (CONTINUED)
Coating entity owned by such stockholder at the time of the merger multiplied by
75% of the fair value of the capital stock of Spinnaker Coating, less the
consideration received at closing. The contingent price is 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 Senior Notes, unless there is sufficient
availability under provisions regarding restricted payments contained in the
Senior Notes.
The purchase of the Spinnaker Coating minority interest was recorded using
the purchase method of accounting. In accordance with APB No. 16 BUSINESS
COMBINATIONS, the acquisition was "pushed-down" to the subsidiary level. The
fair value of the minority interest approximated book value at the date of
acquisition, as a result no significant purchase accounting adjustments were
recorded. Any contingent consideration paid in the future will be allocated to
goodwill.
In connection with the acquisition of the Spinnaker Coating minority
interest, all Spinnaker Coating options were accelerated and in turn certain key
executives of Spinnaker Coating management exercised those options to purchase
71,065 shares of Spinnaker Coating common stock at various prices between $7.16
and $14.69 per share, for a total of approximately $670,000. The options were
originally granted in 1994 and were issued at exercise prices not less than the
fair market value of the common stock at the date of grant.
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, a wholly owned subsidiary of Spinnaker
Industries, Inc., was formed to acquire 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 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
CPC's results are included in the consolidated statements of operations from
the acquisition date. The following unaudited combined pro forma information
shows the results of the Company's operations for
F-12
<PAGE>
SPINNAKER INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. ACQUISITIONS (CONTINUED)
the fiscal year ended December 31, 1995, as though the CPC acquisition had
occurred at the beginning of 1995 (in thousands).
<TABLE>
<S> <C>
Net sales......................................................... $ 226,558
Net income........................................................ 512
Net income per common share....................................... .09
Net income per common share-assuming dilution..................... .08
</TABLE>
3. INVENTORIES
Inventories are comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1996
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Finished goods.......................................................... $ 18,028 $ 18,769
Work-in-process......................................................... 2,770 3,518
Raw materials and supplies.............................................. 9,947 10,351
--------- ---------
$ 30,745 $ 32,638
--------- ---------
--------- ---------
</TABLE>
4. LONG-TERM DEBT AND WORKING CAPITAL REVOLVERS
On October 23, 1996, the Company issued $115,000,000 of 10 3/4% Senior
Secured Notes ("Notes or Senior Notes") due 2006. The Note proceeds were used to
retire the outstanding term and revolver obligations described below, except the
mortgage note at Entoleter and various capital lease obligations. The early
extinguishment of debt resulted in an extraordinary charge to fourth quarter
earnings of $1,843,000, net of applicable income tax, related to the write off
of related existing deferred financing costs.
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 beginning at 105.375% of
the principal amount declining to 100% of the principal amount on October 15,
2005, plus accrued and unpaid interest. 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 with net cash proceeds
from public equity offerings at a redemption price equal to 110.75% of the
principal amount plus accrued and unpaid interest. The Notes are unconditionally
guaranteed, jointly and severally, by Spinnaker Coating, CPC and Entoleter. The
corporate office has no separate operations and its assets primarily relate to
cash, deferred taxes, and deferred financing costs.
On April 5, 1996, the Company refinanced the $25 and $5 million subordinated
notes, issued to Alco Standard Company as part of the Spinnaker acquisition of
CPC, and in connection with the refinancing borrowed $8,500,000 ("Bridge Loan")
from a bank. Concurrently with the closing of the Bridge Loan, the Company paid
Alco a total of $7.5 million, which represented $5.5 million of principal
reduction, $1.0 million of accrued interest and $1.0 million towards the
purchase of a warehouse facility. The unpaid balance of the $25 million
subordinated note, together with a $750,000 balance owed on a warehouse
F-13
<PAGE>
SPINNAKER INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. LONG-TERM DEBT AND WORKING CAPITAL REVOLVERS (CONTINUED)
facility acquired from Alco was restructured into a series of new convertible
subordinated notes aggregating $20.25 million (Convertible Notes). In May 1996,
$6.0 million of the Convertible Notes was converted into 171,428 shares of the
Company's common stock at a conversion price of approximately $35 per share. The
Bridge Loan, Convertible Notes and the $5 million subordinated note were retired
with the proceeds from the Senior Notes.
Long-term debt at December 31, 1997 and 1996 consisted of the following:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
10 3/4% Senior Secured Notes, due 2006 with interest payable semi-annually each
April 15 and October 15....................................................... $ 115,000 $ 115,000
9 1/4% mortgage note from bank, payable on demand. Secured by certain property
of Entoleter.................................................................. 777 969
Capital lease obligations....................................................... 136 193
---------- ----------
115,913 116,162
Less current maturities......................................................... (864) (1,049)
---------- ----------
$ 115,049 $ 115,113
---------- ----------
---------- ----------
</TABLE>
Scheduled principal payments on the long-term debt and capital lease
obligations over the next five years are as follows (in thousands):
<TABLE>
<S> <C>
1998...................................................... $ 864
1999...................................................... 33
2000...................................................... 7
2001...................................................... 6
2002...................................................... 3
Thereafter................................................ 115,000
---------
$ 115,913
---------
---------
</TABLE>
The Company also maintains short-term lines of credit with banks for working
capital needs at each subsidiary that aggregate $40 million. The Company had
cash advances of approximately $446,000 outstanding under the lines of credit
and available borrowings of approximately $34.5 million as of December 31, 1997.
Credit availability under the lines of credit is subject to certain variables,
such as the amount of inventory and receivables eligible to be included in the
borrowing base. The Company is charged an unused line of credit fee every month
based on an annual rate of 0.375%. Interest on all outstanding borrowings bear
interest at variable rates related to the prime interest rate or the lenders
base rate. At December 31, 1997, the interest rate in effect was 10.25 %. At
December 31, 1996, the Company had cash advances outstanding of approximately
$686,000 under the lines of credit at an interest rate of 10%.
The lines of credit 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, and minimum levels of current ratio,
interest coverage, and net worth, as well as various other
F-14
<PAGE>
SPINNAKER INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. LONG-TERM DEBT AND WORKING CAPITAL REVOLVERS (CONTINUED)
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 Company's line of credit agreement expires in
October 2001. (See Note 15).
Certain agreements with its lenders impose restrictions on the ability of
the Company or the Company's subsidiaries to pay dividends. At December 31,
1997, there were no amounts available for the payment of dividends to
Spinnaker's shareholders or Spinnaker.
Financing costs were incurred by the Company in conjunction with the
issuance of the 10 3/4% Senior Secured Notes. These financing costs are deferred
and amortized over the term of the related debt. Unamortized financing costs of
approximately $5,700,000 and $6,200,000 at December 31, 1997 and 1996,
respectively, are included in other assets.
Interest paid in 1997, 1996, and 1995 on all outstanding borrowings amounted
to approximately $12.4 million, $8 million, and $3.6 million, respectively.
The Company capitalized approximately $300,000 of interest expense in 1996.
5. ACCRUED LIABILITIES
Accrued liabilities consist of the following at December 31:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Vacation................................................................... $ 1,846 $ 1,585
Salaries, wages, and bonus................................................. 487 796
Commissions................................................................ 318 533
Worker's compensation and health insurance................................. 640 662
Real estate and property taxes payable..................................... 536 718
Promotion allowance........................................................ 773 441
Warranty allowance......................................................... 408 376
Pension liabilities........................................................ 494 349
Other...................................................................... 817 1,172
--------- ---------
$ 6,319 $ 6,632
--------- ---------
--------- ---------
</TABLE>
6. EMPLOYEE BENEFIT PLANS
CENTRAL PRODUCTS COMPANY
Pursuant to the CPC acquisition agreement, CPC assumed sponsorship of a
defined benefit pension plan for union employees per their collective bargaining
agreement and also agreed to establish a new defined benefit plan for non-union
employees hired by CPC. The seller retained the defined benefit pension
obligation for non-union retirees as of September 30, 1995 and any non-union
employees not hired by CPC.
The acquisition agreement required 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.
F-15
<PAGE>
SPINNAKER INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. EMPLOYEE BENEFIT PLANS (CONTINUED)
In January 1997, CPC established a plan for non-union employees. Pursuant to
the acquisition agreement, CPC granted 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 year ended December 31, 1997 and 1996 and 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. CPC's funding policy is to contribute funds
necessary to meet future benefit obligations.
The following table sets forth the salaried and hourly plans funded status
as of December 31, 1997 and 1996:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------
1997 1996
---------------------- ----------------------
UNION NON-UNION UNION NON-UNION
--------- ----------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Actuarial present value of accumulated benefit obligation, including
vested benefits of $4,800 and $2,953 for 1997 and $4,291 and $2,294
for 1996............................................................ $ 5,406 $ 3,313 $ 4,837 $ 2,562
--------- ----------- --------- -----------
--------- ----------- --------- -----------
Projected benefit obligation.......................................... 5,406 4,568 4,837 3,817
Plan assets at fair value............................................. 4,779 3,468 4,490 2,847
--------- ----------- --------- -----------
Plan assets less than projected benefit obligation.................... 627 1,100 347 970
Unrecognized net loss................................................. (386) (136) (280) (76)
Adjustment to recognize minimum liability............................. 386 -- 280 --
--------- ----------- --------- -----------
Pension liability..................................................... $ 627 $ 964 $ 347 $ 894
--------- ----------- --------- -----------
--------- ----------- --------- -----------
</TABLE>
The fair value of assets for the union plan is based on the actual plan
assets as of December 31, 1997 and 1996. The fair value of the assets for the
non-union plan is based on actual plan assets at December 31, 1997 and on a
calculation of assets, to be transferred per the acquisition agreement, as of
December 31, 1996. At December 31, 1996 and 1997, plan assets consist primarily
of equity, bond, and bank money market funds.
The net periodic pension cost for the year ended December 31, 1997 and 1996,
included the following components:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------
1997 1996
---------------------- ----------------------
UNION NON-UNION UNION NON-UNION
--------- ----------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Service cost--benefits earned during the period.............. $ 155 $ 420 $ 151 $ 398
Interest cost on projected benefit obligation................ 370 285 342 246
Actual return on plan assets................................. (475) (286) (145) (142)
Net amortization and deferral................................ 123 41 (210) (73)
--------- ----- --------- -----
Net periodic pension cost.................................... $ 173 $ 460 $ 138 $ 429
--------- ----- --------- -----
--------- ----- --------- -----
</TABLE>
F-16
<PAGE>
SPINNAKER INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. EMPLOYEE BENEFIT PLANS (CONTINUED)
The weighted average discount rate was 7.5% and 7.75% , respectively, at
December 31, 1997 and 1996. The rate of increase in future compensation levels
and expected long-term rate of return on plan assets for both plans was 4% and
8%, respectively, in 1997 and 1996.
Pursuant to the acquisition agreement, CPC assumed sponsorship of a 401(k)
plan for union employees. On January 1, 1996, the Company established a 401(k)
plan for non-union employees. CPC is not required to match employee
contributions under the union plan, however the non-union plan provides matching
up to 50% of employee contributions not exceeding 8% of the employee's
compensation. Effective June 1, 1997, the 401(k) plan was amended to allow the
Company's Corporate employees to participate. Amounts contributed to the plan by
CPC or the Company, in the case of Corporate employees, are 20% vested each year
for five years. CPC recorded expense for its contributions under the non-union
plan of approximately $367,000 and $398,000 during 1997 and 1996, respectively.
ENTOLETER
Entoleter has a defined-benefit pension plan for all salaried and full-time
hourly employees. Benefits for the plan are based on compensation and years of
service with Entoleter. Entoleter's funding policy is to contribute funds
necessary to meet future benefit obligations.
The following table sets forth the funded status as of December 31, 1997 and
1996:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1996
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Actuarial present value of accumulated benefit obligation, including vested benefits
of $1,018 in 1997 and $938 in 1996................................................. $ 1,108 $ 1,004
--------- ---------
--------- ---------
Projected benefit obligation for service rendered to date............................ 1,132 1,035
Plan assets at fair value............................................................ 1,349 1,229
--------- ---------
Plan assets in excess of projected benefit obligation................................ 217 194
Unrecognized net actuarial (gain) loss............................................... (22) 22
Unrecognized net asset............................................................... (33) (41)
--------- ---------
Net pension asset included in other assets........................................... $ 162 $ 175
--------- ---------
--------- ---------
</TABLE>
At December 31, 1997 and 1996, plan assets consist primarily of equity, bond
and bank money market funds.
F-17
<PAGE>
SPINNAKER INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. EMPLOYEE BENEFIT PLANS (CONTINUED)
Net pension cost included the following components:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Service cost--benefits earned during the period................................ $ 39 $ 39 $ 40
Interest cost on projected benefit obligation.................................. 78 71 70
Actual return on plan assets................................................... (210) (88) (112)
Net amortization and deferral.................................................. 106 (13) 17
--------- --------- ---------
Net periodic pension cost...................................................... $ 13 $ 9 $ 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 plans were 7.25% and 4.0%, at December 31,
1997 and 1996. The expected long-term rate of return on plan assets for the
plans was 8% in 1997 and 1996.
SPINNAKER COATING
Spinnaker Coating has a defined contribution plan that covers substantially
all of its employees. Under the plan, Spinnaker Coating can match, at its
discretion, up to 50% of employee contributions not exceeding 8% of the
employee's compensation. Amounts contributed to the plan by Spinnaker Coating
are 20% vested each year for five years. On the acquisition date, employees of
Spinnaker Coating who were previously employed by Kimberly-Clark Corporation
received vesting rights based on the years of credited service with
Kimberly-Clark Corporation. Spinnaker Coating recorded expense for its
contributions under the plan of approximately $442,000, $470,000, and $417,000
in 1997, 1996 and 1995, respectively.
7. INCOME TAXES
In prior years, the Company was included in the consolidated income tax
return filed by its Parent. 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.
In April 1996, the Parents ownership of the Company became less than 80%,
thus the Company is required to file a separate consolidated return from April
5, 1996 forward.
During 1997 and 1996, the Company generated approximately $3,617,000 and
$5,888,000, respectively, of net operating loss carryforwards which are
available to offset future taxable income. These carryforwards, which are
expected to be fully utilized, expire in the year 2017 for 1997 amounts and 2011
for 1996 amounts.
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
F-18
<PAGE>
SPINNAKER INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. INCOME TAXES (CONTINUED)
in tax and book depreciation methods and lives and the timing of the
deductibility of certain expenses. Cumulative differences at December 31, 1997
and 1996 are as follows:
<TABLE>
<CAPTION>
1997 1996
DEFERRED TAX DEFERRED TAX
---------------------- ----------------------
ASSET LIABILITY ASSET LIABILITY
--------- ----------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Inventory reserve............................................... $ 356 $ -- $ 367 $ --
Tax over book depreciation...................................... -- 9,115 -- 8,533
Assets deducted for tax purposes................................ -- 658 -- 268
Compensation accruals........................................... 1,008 -- 890 --
Other reserves and accruals..................................... 558 -- 333 --
Other........................................................... 607 -- 653 --
Net operating loss carryforwards................................ 3,612 -- 2,237 --
--------- ----------- --------- -----------
Total deferred income taxes..................................... $ 6,141 $ 9,773 $ 4,480 $ 8,801
--------- ----------- --------- -----------
--------- ----------- --------- -----------
</TABLE>
Significant components of the (provision) benefit for income taxes are as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal........................................................... $ -- $ -- $ (347)
State............................................................. (67) (121) (77)
--------- --------- ---------
Total current....................................................... (67) (121) (424)
Deferred:
Federal........................................................... 627 (11) 312
State............................................................. (100) 169 $ --
--------- --------- ---------
527 158 312
--------- --------- ---------
Income tax (provision) benefit...................................... $ 460 $ 37 $ (112)
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-19
<PAGE>
SPINNAKER INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. INCOME TAXES (CONTINUED)
Reconciliation of the statutory federal income tax rate to the effective
income tax rate follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Statutory federal rate........................................ 34.0% 34.0% 34.0%
Increase (decrease) resulting from:
Goodwill.................................................... (3.8) (22.1) --
Meals and entertainment..................................... (2.6) (9.7) --
Change in valuation allowance............................... -- -- (29.3)
State income taxes (net of federal tax effect).............. (4.9) 8.7 5.3
Other....................................................... (2.2) (0.8) 1.7
----- ----- -----
Effective income tax rate..................................... 20.5% 10.1% 11.7%
----- ----- -----
----- ----- -----
</TABLE>
Income taxes refunded, net of payments was $166,000 in 1997. Cash paid for
income taxes was $585,000 and $703,000 in 1996 and 1995, respectively.
F-20
<PAGE>
SPINNAKER INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. 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 in 1997, 1996 and 1995. In addition, Lynch
Corporation has from time to time allocated additional charges to the Company
for other direct services.
As part of the CPC acquisition, Lynch Corporation agreed to guarantee the
subordinated notes due Alco. Lynch charged the Company a guarantee fee of 0.5%
per month, or $125,000. Total fees charged by Lynch in 1996 and 1995 were
$750,000.
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 had an initial term of one
year, and was automatically renewable for a term of one additional year unless
either party gives notice of termination. Effective August 31, 1996, the
Management Agreement was terminated at which time, Messrs. Boyle, and Fleming
became employees of the Company and continued to be Chairman and Chief Executive
Officer and President and Chief Operating Officer, respectively, of the Company.
BF received management fees of $295,000 and $200,000, in 1996 and 1995,
respectively, plus reimbursement of expenses. The Company and BF also entered
into a Warrant Purchase Agreement in 1994, pursuant to which BF received
warrants to purchase common stock of the Company at any time on or before June
10, 1999, subject to certain restrictions. On April 5, 1996, BF was issued
approximately 187,000 shares of Class A Common Stock upon the exercise of the
warrants at a price of $2.67 per warrant exercised. On August 29, 1997, BF was
issued approximately 150,000 shares of Common Stock and 150,000 shares of Class
A Common Stock upon the exercise of the warrants at a price of $2.67 per warrant
exercised. On September 22, 1997, BF was issued approximately 113,000 shares of
Common Stock and 113,000 shares of Class A Common Stock upon the exercise of the
warrants at a price of $2.67 per warrant exercised. As of December 31, 1997,
there were approximately 228,499 warrants outstanding to purchase one share each
of Class A Common Stock and Common Stock at a total price of $2.67 per warrant
exercised (adjusted for the 3 for 2 stock splits in December 1995 and 1994, and
a stock dividend in August 1996). On January 8, 1998, BF was issued 228,499
shares of Common Stock and 228,499 shares of Class A Common Stock upon the
exercise of the remaining warrants at a price of $2.67 per warrant exercised.
During 1994, Spinnaker Coating granted certain of its key executives options
to purchase up to 71,065 shares of Spinnaker Coating's common stock at various
prices between $7.16 and $14.69 per share. These options were exercised and the
resulting common stock was immediately purchased as part of the Spinnaker
Coating minority interest acquisition in October 1996 (See Note 2).
In 1994, Spinnaker Coating retained the services of a consulting firm to
assist in improving its operations and manufacturing processes. The fees for
such services totaled $39,000 and $872,000 in 1996 and 1995, respectively. The
owner of the consulting firm was a 1% shareholder of Spinnaker Coating, prior to
the minority purchase.
F-21
<PAGE>
SPINNAKER INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. EARNINGS PER SHARE
The following table sets forth the computation of the basic and diluted
earnings per share:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Numerator:
Net income (loss)..................................................... $ (1,787) $ (2,468) $ 561
Denominator
Denominator for basic earnings per share -- weighted-average shares... 6,321 5,931 5,431
Effect of dilutive securities:
Class A Warrants...................................................... -- -- 1,271
--------- --------- ---------
Dilutive potential common shares........................................ 6,321 5,931 6,702
--------- --------- ---------
--------- --------- ---------
Earnings (loss) per common share........................................ $ (0.28) $ (0.42) $ 0.10
--------- --------- ---------
--------- --------- ---------
Earnings (loss) per common share--assuming dilution..................... $ (0.28) $ (0.42) $ 0.08
--------- --------- ---------
--------- --------- ---------
</TABLE>
For additional disclosures regarding the outstanding warrants and the
directors' stock options, see Notes 10 and 11, respectively.
As of December 31, 1997 and 1996, there were 228,499 and 491,469 Class "A"
Warrants outstanding, respectively, to purchase one share each of Class A Common
Stock and Common Stock at a total price of $2.67 per warrant exercised. Shares
related to the warrants were not included in the 1997 and 1996 computation of
diluted earnings per share because the effect would have been antidilutive.
As of December 31, 1997 and 1996, there were 30,000 directors' options
outstanding to purchase one share each of Class A Common Stock and Common Stock
at a total price of $40 per option exercise. During 1997, 10,000 additional
director's options were granted to purchase one share of Common Stock at a price
of $37 per option exercise. Shares related to these options were not included in
the 1997 or 1996 computation of diluted earnings per share because the effect
would be antidilutive.
10. STOCK OPTION PLANS
In accordance with the Company's directors stock option plan, the Company
may grant stock options to directors who are not employees of the Company. In
February 1996, the Company granted 30,000 stock options for the purchase of one
share each of Common Stock and Class A Common Stock at a total price of $40 per
option exercise (adjusted for the stock dividend in August 1996) to qualifying
directors. The options vest over a two year period with 15,000 options becoming
exercisable one year after the grant date and the remaining 15,000 options
becoming exercisable two years after the grant date. The options expire on the
fifth anniversary after the grant date or 30 days after the director ceases to
be a director. In January of 1997, under the same terms, the Company issued
10,000 stock options for the purchase of one share of Common Stock at an
exercise price of $27 per share. As permitted by SFAS No. 123, the Company
elected to account for these options under APB No. 25 and as such no
compensation expense was recorded because the option exercise price was not less
than the market price at the date of grant.
F-22
<PAGE>
SPINNAKER INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. STOCK OPTION PLANS (CONTINUED)
Pro forma information regarding net income and earnings per share is
required by SFAS No. 123, and has been determined as if the Company had
accounted for its employee stock options under the fair value method of that
Statement. The fair value for these options was estimated at the date of grant
using a Black-Scholes option pricing model with the following weighted-average
assumptions: risk-free interest rates of 6.09% and 5.58% for 1997 and 1996,
respectively; dividend yields of 0%; volatility factors of the expected market
price of the Company's common stock of .50; and a weighted-average expected life
of the options of 3 years. For purposes of pro forma disclosures, the estimated
fair value of the options is amortized to expense over the options vesting
period. The estimated weighted-average fair value per option is approximately
$14.62 and $10.40 for the 1997 and 1996 options, respectively. The Company's pro
forma effect on 1997 and 1996 operations is as follows:
<TABLE>
<CAPTION>
1997 1996
------------------------ ------------------------
NET LOSS NET LOSS
NET LOSS PER SHARE NET LOSS PER SHARE
----------- ----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
As reported................................................. $ 1,787 $ 0.28 $ 2,468 $ 0.42
Pro forma................................................... $ 1,890 $ 0.30 $ 2,595 $ 0.44
</TABLE>
11. OTHER INCOME (EXPENSE)--NET
During 1996, the Company contributed land with a net book value of $248,000
to a qualified charitable organization. The expense for this contribution is
included in other income (expense)-net.
12. SEGMENT INFORMATION
The Company competes in two business segments, adhesive coated materials and
industrial processing equipment. Operating profit (loss) is net sales less
operating expenses, excluding unallocated general
F-23
<PAGE>
SPINNAKER INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. SEGMENT INFORMATION (CONTINUED)
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.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1997 1996 1995
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
NET SALES
Adhesive coated materials.................................................. $ 226,526 $ 238,652 $ 127,754
Industrial processing equipment............................................ 5,450 7,884 7,535
---------- ---------- ----------
$ 231,976 $ 246,536 $ 135,289
---------- ---------- ----------
---------- ---------- ----------
OPERATING PROFIT
Adhesive coated materials.................................................. $ 13,692 $ 12,238 $ 6,364
Industrial processing equipment............................................ (534) 64 509
Unallocated corporate expenses............................................. (2,279) (2,080) (1,084)
---------- ---------- ----------
$ 10,879 $ 10,222 $ 5,789
---------- ---------- ----------
---------- ---------- ----------
CAPITAL EXPENDITURES
Adhesive coated materials.................................................. $ 8,614 $ 8,573 $ 1,411
Industrial processing equipment............................................ 104 399 143
General corporate.......................................................... 119 7 66
---------- ---------- ----------
$ 8,837 $ 8,979 $ 1,620
---------- ---------- ----------
---------- ---------- ----------
DEPRECIATION/AMORTIZATION
Adhesive coated materials................................................... $ 6,669 $ 5,773 $ 1,993
Industrial processing equipment............................................ 180 180 151
General corporate.......................................................... 732 317 7
---------- ---------- ----------
$ 7,581 $ 6,270 $ 2,151
---------- ---------- ----------
---------- ---------- ----------
ASSETS
Adhesive coated materials.................................................. $ 144,393 $ 143,884 $ 132,026
Industrial processing equipment............................................ 3,530 4,409 3,676
General corporate.......................................................... 8,795 8,883 1,882
---------- ---------- ----------
$ 156,718 $ 157,176 $ 137,584
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
F-24
<PAGE>
SPINNAKER INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. LEASES
Future minimum rental payments under long-term non-cancelable operating
leases are as follows at December 31, 1997 (in thousands):
<TABLE>
<S> <C>
1998................................................ $ 1,185
1999................................................ 892
2000................................................ 710
2001................................................ 638
2002................................................ 614
Thereafter.......................................... 4,157
---------
$ 8,196
---------
---------
</TABLE>
Rental payments under operating leases were $2,103,000, $1,743,000 and
$419,000 for the years ended December 31, 1997, 1996, and 1995, respectively.
14. CONTINGENCIES
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.
15. SUBSEQUENT EVENTS
Effective March 17, 1998, the Company entered into an asset purchase
agreement with S.D. Warren ("Pressure Sensitive Business" or "Coating--Maine").
S.D. Warren is a large pulp and paper producer owned by an indirect wholly owned
subsidiary of SAPPI, Ltd., a public South African conglomerate. The Pressure
Sensitive Business manufactures and markets label stock primarily for the EDP
segment of the label stock market. The Pressure Sensitive Business' EDP products
are used in various labeling end uses, including form printing and product
marking and identification. The purchase price under the agreement was
approximately $52 million, plus the assumption of certain liabilities, and was
funded from availability under the Company's amended $60 million revolving
credit facility and the issuance of a subordinated convertible note by the
Company to S.D. Warren in the amount of $7.0 million.
The Pressure Sensitive Business generated $62.1 million of net sales for the
fiscal year ended October 1, 1997. The Pressure Sensitive Business was renamed
Spinnaker Coating--Maine, Inc. effective with the acquisition.
The $7.0 million subordinated convertible note bears interest at the rate of
10% per annum. The note includes a payment-in-kind ("PIK") feature that allows
the Company to pay the first year's interest payment by issuing an additional
subordinated note under similar terms; thereafter, interest is payable in cash
provided the Company is not in default, on a pro forma basis, of covenants under
the Revolving Credit Facility. If the Company is prohibited from paying interest
due in cash, the Company will continue
F-25
<PAGE>
SPINNAKER INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. SUBSEQUENT EVENTS (CONTINUED)
to PIK the interest owed. Prepayments of the original principal amount are due
in two installments: 30% on March 31, 1999 and 70% on March 31, 2000, provided
the Company is not in default of covenants under the Revolving Credit Facility
and has pro forma availability in excess of $15 million under the Revolving
Credit Facility. If the Company is prohibited from satisfying the March 31, 1999
principal payment due to insufficient pro forma availability, the unpaid portion
of the payment will be deferred until the next August 15 or March 15 as the
Company could make such payment, subject to the same conditions described above.
Any unpaid principal outstanding after March 31, 2000 will be considered due on
demand, however, the payment of such amount will still remain restricted under
the conditions described above. In any event, the subordinate note and remaining
unpaid interest will mature on January 31, 2002.
F-26
<PAGE>
SCHEDULE I CONDENSED FINANCIAL INFORMATION OF REGISTRANT
SPINNAKER INDUSTRIES, INC.
(PARENT COMPANY)
CONDENSED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1997 1996
---------- ----------
<S> <C> <C>
(IN THOUSANDS)
Current assets
Cash and cash equivalents............................................................... $ 231 $ 282
Accounts receivable..................................................................... 107 --
Subsidiary receivable, current portion.................................................. 3,127 2,777
Other current assets.................................................................... 1,583 942
---------- ----------
Total current assets.................................................................... 5,048 4,001
Office equipment (net of depreciation).................................................... 159 52
Subsidiary receivable..................................................................... 82,055 81,859
Investment in subsidiaries................................................................ 35,251 37,037
Other assets.............................................................................. 6,715 7,607
---------- ----------
Total assets............................................................................ $ 129,228 $ 130,556
---------- ----------
---------- ----------
LIABILITIES AND SHAREHOLDERS EQUITY
Accounts payable and accrued liabilities.................................................. $ 2,784 $ 2,945
Payable to subsidiaries................................................................... 1,175 1,375
Notes payable, long term.................................................................. 115,000 115,000
Total shareholders equity................................................................. 10,269 11,236
---------- ----------
Total liabilities and shareholders equity............................................... $ 129,228 $ 130,556
---------- ----------
---------- ----------
</TABLE>
F-27
<PAGE>
SCHEDULE I CONDENSED FINANCIAL INFORMATION OF REGISTRANT
SPINNAKER INDUSTRIES, INC.
(PARENT COMPANY)
CONDENSED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
(IN THOUSANDS)
Interest and dividends............................................................ $ 11 $ 11 $ 47
Management fees and interest income from subsidiaries............................. 14,618 3,064 101
--------- --------- ---------
Total income.................................................................. 14,629 3,075 148
Cost and Expenses:
Guarantee fee to parent......................................................... -- 375 375
Unallocated corporate administrative expense.................................... 2,279 2,080 1,084
Interest expense and other...................................................... 12,412 4,596 826
--------- --------- ---------
Total cost and expenses........................................................... 14,691 7,051 2,285
Loss before income taxes, equity in net income of subsidiaries and extraordinary
charge.......................................................................... (62) (3,976) (2,137)
Income tax (provision) benefit.................................................... (130) 1,669 1,083
--------- --------- ---------
Loss before equity in net income (loss) of subsidiaries and extraordinary
charge.......................................................................... (192) (2,307) (1,054)
Equity in net income (loss) of subsidiaries....................................... (1,595) 1,682 1,615
--------- --------- ---------
Income before extraordinary charge................................................ (1,787) (625) 561
Extraordinary charge on early extinguishment of debt, net of tax:
Parent.......................................................................... -- (546) --
Subsidiaries.................................................................... -- (1,297) --
--------- --------- ---------
Net income (loss)................................................................. $ (1,787) $ (2,468) $ 561
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-28
<PAGE>
SCHEDULE I CONDENSED FINANCIAL INFORMATION OF REGISTRANT
SPINNAKER INDUSTRIES, INC.
(PARENT COMPANY)
CONDENSED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1997 1996 1995
--------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash provided by (used in) operating activities.................................. $ 106 $ (4,666) $ 778
Investing activities:
Acquisition of Spinnaker Coating............................................... -- (2,295) --
Investment in Central Products Company......................................... -- -- (25,000)
Advances to subsidiaries....................................................... -- (81,307) --
Purchases of office equipment.................................................. (119) (2) (59)
--------- ---------- ----------
Net cash used in investing activities............................................ (119) (83,604) (25,059)
Financing activities:
Advances to/from subsidiaries, net............................................. (580) 1,375 --
Proceeds from notes payable.................................................... -- 123,500 25,000
Payments on notes payable...................................................... -- (30,962) --
Deferred financing costs....................................................... -- (6,872) --
Exercise of warrants........................................................... 702 500 --
Other.......................................................................... (160) 289 --
--------- ---------- ----------
Net cash provided by financing activities........................................ (38) 87,830 25,000
--------- ---------- ----------
Total increase (decrease) in cash and cash equivalents........................... (51) (440) 719
Cash and cash equivalents at beginning of year................................... 282 722 3
--------- ---------- ----------
Cash and cash equivalents at end of year......................................... $ 231 $ 282 $ 722
--------- ---------- ----------
--------- ---------- ----------
</TABLE>
F-29
<PAGE>
SCHEDULE I 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.
F-30
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
<TABLE>
<S> <C> <C>
SPINNAKER INDUSTRIES, INC.
By: /s/ RICHARD J. BOYLE
-----------------------------------------
Richard J. Boyle
Title: CHAIRMAN OF THE BOARD AND CHIEF
EXECUTIVE OFFICER
Date: March 30, 1997
</TABLE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
Chief Executive Officer
/s/ RICHARD J. BOYLE and Chairman of the
- ------------------------------ Board March 30, 1998
Richard J. Boyle (PRINCIPAL EXECUTIVE
OFFICER)
/s/ NED N. FLEMING, III
- ------------------------------ President, Chief Operating March 30, 1998
Ned N. Fleming, III Officer and Director
/s/ CRAIG J. JENNINGS Vice President, Finance
- ------------------------------ and Treasurer (PRINCIPAL March 30, 1998
Craig J. Jennings FINANCIAL OFFICER)
- ------------------------------ Director March 30, 1998
Anthonie C. van Ekris
/s/ JOSEPH P. RHEIN
- ------------------------------ Director March 30, 1998
Joseph P. Rhein
/s/ ROBERT E. DOLAN
- ------------------------------ Director March 30, 1998
Robert E. Dolan
/s/ PHILLIP W. COLBURN
- ------------------------------ Director March 30, 1998
Phillip W. Colburn
/s/ FRANK E. GRZELECKI
- ------------------------------ Director March 30, 1998
Frank E. Grzelecki
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO.
- ---------
<S> <C>
3.1 Restated Certificate of Incorporation of the Registrant (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 Indenture dated October 23, 1996, among the Registrant, Spinnaker Coating, Inc. (f/k/a Brown-Bridge
Industries, Inc.), Central Products Company ("CPC"), 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).
4.2 Supplemental Indenture dated March 17, 1998, among the Registrant, Spinnaker Coating, CPC, Entoleter and
Spinnaker Coating-Maine, Inc. (filed as Exhibit 99.6 to the Registrant's Current Report on Form 8-K
dated March 30, 1998).
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 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).
10.3 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).
10.4 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).
10.5 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).
10.6 Credit Agreement (the "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).
10.7 Fifth Amendment to the Credit Agreement (filed as Exhibit 99.4 to the Registrant's Current Report on
Form 8-K dated March 30, 1998).
10.8 Sixth Amendment to the Credit Agreement (filed as Exhibit 99.5 to the Registrant's Current Report on
Form 8-K dated March 30, 1998).
10.9 Asset Purchase Agreement, dated as of November 18, 1997, by and between the Registrant and S.D. Warren
Company ("SDW") (filed as Exhibit 2.1 to the Registrant's Current Report on Form 8-K dated March 30,
1998).
10.10 First Amendment to Asset Purchase Agreement, dated March 17, 1998 by and between the Registrant and SDW
(filed as Exhibit 2.2 to the Registrant's Current Report on Form 8-K dated March 30, 1998).
10.11 Subordinated Note issued to SDW in the original principal amount of $7 million, dated March 17, 1998,
bearing interest at a rate of 10% per annum (filed as Exhibit 4.1 to the Registrant's Current Report on
Form 8-K dated March 30, 1998).
10.12 Site Lease Agreement, dated March 17, 1998, between the Registrant and SDW (filed as Exhibit 99.2 to the
Registrant's Current Report on Form 8-K dated March 30, 1997).
</TABLE>
<PAGE>
<TABLE>
<S> <C>
10.13 Site Separation and Services Agreement, dated March 17, 1998, by and between the Registrant and SDW
(filed as Exhibit 99.1 to the Registrant's Current Report on Form 8-K dated March 30, 1998).
21 Subsidiaries of the Registrant.(1)
23.1 Consent of Ernst & Young LLP.(1)
23.2 Consent of Deloitte & Touche LLP.(1)
27 Financial Data Schedule.(1)
</TABLE>
- ------------------------
(1) Filed herewith.
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
NAME STATE OF INCORPORATION
- ------------------------------------------------------------------------------------ ----------------------------
<S> <C>
Central Products Company............................................................ Delaware
Entoleter, Inc...................................................................... Delaware
Spinnaker Coating, Inc. (f/k/a Brown-Bridge Industries, Inc.)....................... Delaware
Spinnaker Coating-Maine, Inc., a wholly owned subsidiary of Spinnaker Coating,
Inc............................................................................... Delaware
</TABLE>
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement (Form
S-3 No. 333-21569) of Spinnaker Industries, Inc. and in the related Prospectus
of our report dated February 27, 1998, except for Note 15, as to which the date
is March 26, 1998, with respect to the consolidated financial statements and
schedule of Spinnaker Industries, Inc. included in this Annual Report (Form
10-K) for the year ended December 31, 1997.
ERNST & YOUNG LLP
Dallas, Texas
March 26, 1998
<PAGE>
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement No.
333-21569 of Spinnaker Industries, Inc. on Form S-3 of our report dated February
21, 1997 relating to the financial statements of Central Products Company (not
presented separately herein), appearing in this Annual Report on Form 10-K of
Spinnaker Industries, Inc. for the year ended December 31, 1997.
Deloitte & Touche LLP
Milwaukee, Wisconsin
March 26, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 5,977
<SECURITIES> 0
<RECEIVABLES> 25,620
<ALLOWANCES> 734
<INVENTORY> 30,745
<CURRENT-ASSETS> 66,124
<PP&E> 75,247
<DEPRECIATION> 14,913
<TOTAL-ASSETS> 156,718
<CURRENT-LIABILITIES> 24,749
<BONDS> 115,049
0
0
<COMMON> 3,124
<OTHER-SE> 7,145
<TOTAL-LIABILITY-AND-EQUITY> 156,718
<SALES> 231,976
<TOTAL-REVENUES> 231,976
<CGS> 199,647
<TOTAL-COSTS> 221,097
<OTHER-EXPENSES> (112)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 13,238
<INCOME-PRETAX> (2,247)
<INCOME-TAX> (460)
<INCOME-CONTINUING> (1,787)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,787)
<EPS-PRIMARY> (0.28)
<EPS-DILUTED> (0.28)
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C> <C> <C>
<C>
<PERIOD-TYPE> YEAR YEAR 3-MOS 3-MOS
3-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1995 DEC-31-1996 DEC-31-1996
DEC-31-1996
<PERIOD-START> JAN-01-1996 JAN-01-1995 JAN-01-1996 APR-01-1996
JUL-01-1996
<PERIOD-END> DEC-31-1996 DEC-31-1995 MAR-31-1996 JUN-30-1996
SEP-30-1996
<CASH> 9,699 3,048 2,305 2,779
3,163
<SECURITIES> 0 0 0 0
0
<RECEIVABLES> 22,974 26,023 27,517 26,297
27,609
<ALLOWANCES> 979 1,234 972 1,003
1,138
<INVENTORY> 32,638 27,041 28,399 32,725
34,183
<CURRENT-ASSETS> 68,188 58,430 60,951 65,705
67,665
<PP&E> 66,450 55,587 56,012 60,394
63,594
<DEPRECIATION> 9,155 4,639 5,619 6,620
7,766
<TOTAL-ASSETS> 157,176 137,584 141,069 147,658
152,501
<CURRENT-LIABILITIES> 24,024 50,442 54,454 64,276
69,790
<BONDS> 115,113 71,225 70,408 60,255
59,642
0 0 0 0
0
0 0 0 0
0
<COMMON> 3,124 3,124 3,124 3,124
3,124
<OTHER-SE> 8,112 3,938 4,127 10,958
10,791
<TOTAL-LIABILITY-AND-EQUITY> 157,176 137,584 141,069 147,658
152,501
<SALES> 246,536 135,289 62,003 60,241
62,114
<TOTAL-REVENUES> 246,536 135,289 62,003 60,241
62,114
<CGS> 213,942 117,737 53,211 51,688
54,310
<TOTAL-COSTS> 236,314 129,500 58,780 57,190
59,836
<OTHER-EXPENSES> 713 368 408 6
13
<LOSS-PROVISION> 0 0 0 0
0
<INTEREST-EXPENSE> 9,872 4,468 2,323 2,334
2,363
<INCOME-PRETAX> (363) 953 492 711
(98)
<INCOME-TAX> (37) 112 202 291
(40)
<INCOME-CONTINUING> (625) 561 189 331
(167)
<DISCONTINUED> 0 0 0 0
0
<EXTRAORDINARY> (1,843) 0 0 0
0
<CHANGES> 0 0 0 0
0
<NET-INCOME> (2,468) 561 189 331
(167)
<EPS-PRIMARY> (0.42) 0.10 0.04 0.06
(0.03)
<EPS-DILUTED> (0.42) 0.08 0.03 0.05
(0.03)
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997 DEC-31-1997
<PERIOD-START> JAN-01-1997 APR-01-1997 JUL-01-1997
<PERIOD-END> MAR-31-1997 JUN-30-1997 SEP-30-1997
<CASH> 8,185 5,627 6,584
<SECURITIES> 0 0 0
<RECEIVABLES> 26,838 26,668 27,112
<ALLOWANCES> 1,058 1,017 1,027
<INVENTORY> 31,096 32,998 31,551
<CURRENT-ASSETS> 68,895 68,264 68,088
<PP&E> 67,945 69,821 72,388
<DEPRECIATION> 10,465 11,842 13,314
<TOTAL-ASSETS> 157,804 157,219 157,720
<CURRENT-LIABILITIES> 26,268 25,350 26,178
<BONDS> 115,117 115,117 115,117
0 0 0
0 0 0
<COMMON> 3,124 3,124 3,124
<OTHER-SE> 7,384 7,717 7,390
<TOTAL-LIABILITY-AND-EQUITY> 157,804 157,219 157,720
<SALES> 57,153 60,243 55,359
<TOTAL-REVENUES> 57,153 60,243 55,359
<CGS> 49,821 50,601 48,138
<TOTAL-COSTS> 55,127 56,403 53,495
<OTHER-EXPENSES> (16) (4) 42
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 3,281 3,278 3,238
<INCOME-PRETAX> (1,239) 566 (1,416)
<INCOME-TAX> (511) 233 (387)
<INCOME-CONTINUING> (728) 333 (1,029)
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> (728) 333 1,029
<EPS-PRIMARY> (0.12) 0.05 (0.16)
<EPS-DILUTED> (0.12) 0.05 (0.16)
</TABLE>
