<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED): March 17, 1998
SPINNAKER INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 000-09559 06-0544125
- -------------- ---------------- -------------------
(State of (Commission File (IRS Employer
incorporation) Number) Identification No.)
600 N. PEARL STREET, SUITE 2160
DALLAS, TEXAS 75201
(Address of principal executive offices)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 214-855-0322
<PAGE>
This Form 8-K/A amends the Registrant's Current Report on Form 8-K filed
by the Registrant on March 30, 1998, with respect to its acquisition (the
"Acquisition") of the pressure sensitive business (the "Pressure Sensitive
Business") of S.D. Warren Company (the "Seller"), to provide the financial
statements and pro forma financial information required under Item 7 of
Form 8-K.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(a) FINANCIAL STATEMENTS OF BUSINESS ACQUIRED.
(i) Balance sheets of the Pressure Sensitive Business as of October 2,
1996 and October 1, 1997 and the related statements of operations,
changes in business unit equity and cash flows for the years then
ended and for the period from December 21, 1994 through September 27,
1995, accompanied by the report of Deloitte & Touche, LLP thereon; and
(ii) Unaudited balance sheets of the Pressure Sensitive Business as of
December 31, 1996 and 1997, and related statements of operations and
cash flows for the three month periods then ended.
(b) PRO FORMA FINANCIAL INFORMATION. Unaudited pro forma financial statements
of the Registrant and the Pressure Sensitive Business as of December 31, 1997,
and the year then ended.
(c) EXHIBITS.
2.1 Asset Purchase Agreement, dated as of November 18, 1997, by and
between the Registrant and S.D. Warren Company ("Seller"). (1)
2.2 First Amendment to Asset Purchase Agreement dated March 17, 1998,
by and between Seller and the Registrant.(1)
4.1 Subordinated Note dated March 17, 1998, issued by the Registrant to
Seller in the original principal amount of $7 million bearing
interest at a rate of 10% per annum.(1)
99.1 Site Separation and Services Agreement dated March 17, 1998, by and
between Seller and the Registrant.(1)
99.2 Lease Agreement dated March 17, 1998, between Seller and the
Registrant.(1)
99.3 Fourth Amendment to the Credit Agreement dated as of October 23,
1996, among Central Products Company, Brown-Bridge Industries,
Inc., Entoleter, Inc., the Registrant, as guarantor, each of the
financial institutions party thereto from time to time, BT
Commercial Corporation, as agent, Transamerica Business Credit
Corporation, as collateral agent, and Bankers Trust Company as
issuing bank (the "Credit Agreement"), made as of December 31,
1997.(1)
99.4 Fifth Amendment to the Credit Agreement.(1)
99.5 Sixth Amendment to the Credit Agreement.(1)
99.6 First Supplemental Indenture dated as of March 17, 1998, among the
Registrant, Central Products Company, Entoleter, Inc., Spinnaker
Coating, Inc., Spinnaker Coating-Maine, Inc. and The Chase
Manhattan Bank, as Trustee.(1)
- ---------------
(1) Previously filed.
2
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the registrant has duly caused this report to be signed on its behalf
by the undersigned hereunto duly authorized.
SPINNAKER INDUSTRIES, INC.
Date: May 29, 1998 By: /s/ Craig J. Jennings
-------------------------------------
Craig J. Jennings
Vice President, Finance and Treasurer
3
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of S.D. Warren Company and subsidiaries:
We have audited the balance sheets of the Pressure Sensitive Business Unit
(the "Business Unit") of S.D. Warren Company (the "Company") as of October 1,
1997 and October 2, 1996, and the related statements of operations, changes in
business unit equity, and cash flows for the years then ended, and for the
period from December 21, 1994 through September 27, 1995. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on the 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 the Business Unit as of October 1, 1997 and
October 2, 1996 and the results of its operations and its cash flows for the
years then ended, and for the period from December 21, 1994 through September
27, 1995 in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared, in part, from the
separate records maintained by the Westbrook Mill of the Company, which includes
the Business Unit and other Company operations, and may not necessarily be
indicative of the conditions that would have existed or the results of
operations if the Business Unit had been operated as an unaffiliated company.
Portions of certain income and expenses represent allocations made from
Westbrook Mill items applicable to the Westbrook Mill complex as a whole and
home-office items applicable to the Company as a whole.
DELOITTE & TOUCHE LLP
January 12, 1998
Boston, Massachusetts
F-1
<PAGE>
PRESSURE SENSITIVE BUSINESS UNIT,
S.D. WARREN COMPANY
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
OCTOBER 2, OCTOBER 1,
1996 1997
----------- -----------
<S> <C> <C>
CURRENT ASSETS:
Accounts receivable.............................................................. $ 1,991,000 $ 1,262,000
Inventories...................................................................... 6,273,000 9,709,000
Deferred income taxes............................................................ 280,000 339,000
Other current assets............................................................. 21,000 95,000
----------- -----------
Total current assets........................................................... 8,565,000 11,405,000
----------- -----------
PLANT ASSETS:
Land and buildings............................................................... 122,000 122,000
Machinery and equipment.......................................................... 2,287,000 2,384,000
----------- -----------
Total plant assets............................................................... 2,409,000 2,506,000
Less accumulated depreciation...................................................... (282,000) (461,000)
----------- -----------
Plant assets, net................................................................ 2,127,000 2,045,000
----------- -----------
GOODWILL, Net...................................................................... 1,834,000 1,755,000
----------- -----------
PATENT, Net........................................................................ 1,843,000 1,722,000
----------- -----------
TOTAL.............................................................................. $14,369,000 $16,927,000
----------- -----------
----------- -----------
LIABILITIES AND BUSINESS UNIT EQUITY
CURRENT LIABILITIES:
Accounts payable................................................................. $ 1,155,000 $ 1,555,000
Accrued salaries, wages and employee benefits.................................... 429,000 705,000
Accrued workers' compensation.................................................... 257,000 128,000
Other current liabilities........................................................ 967,000 1,091,000
----------- -----------
Total current liabilities...................................................... 2,808,000 3,479,000
DEFERRED INCOME TAXES.............................................................. 617,000 740,000
OTHER LIABILITIES.................................................................. 2,822,000 2,553,000
COMMITMENTS AND CONTINGENCIES...................................................... -- --
BUSINESS UNIT EQUITY............................................................... 8,122,000 10,155,000
----------- -----------
TOTAL.............................................................................. $14,369,000 $16,927,000
----------- -----------
----------- -----------
</TABLE>
See notes to financial statements.
F-2
<PAGE>
PRESSURE SENSITIVE BUSINESS UNIT,
S.D. WARREN COMPANY
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD
DECEMBER 21,
1994 THROUGH YEAR ENDED YEAR ENDED
SEPTEMBER 27, OCTOBER 2, OCTOBER 1,
1995 1996 1997
------------ ----------- -----------
<S> <C> <C> <C>
SALES............................................................... $48,350,000 $68,655,000 $62,080,000
----------- ----------- -----------
COST OF GOODS SOLD:
Bodystock......................................................... 27,348,000 36,619,000 33,801,000
Allocation of Westbrook Mill costs................................ 3,413,000 4,356,000 4,187,000
Other costs....................................................... 13,792,000 20,769,000 15,234,000
----------- ----------- -----------
Total cost of goods sold........................................ 44,553,000 61,744,000 53,222,000
----------- ----------- -----------
GROSS PROFIT........................................................ 3,797,000 6,911,000 8,858,000
----------- ----------- -----------
SELLING, GENERAL AND ADMINISTRATIVE COSTS:
Allocated selling costs........................................... 1,439,000 1,647,000 1,488,000
Allocation of other corporate costs............................... 854,000 1,512,000 1,527,000
----------- ----------- -----------
Total selling, general and administrative costs................. 2,293,000 3,159,000 3,015,000
----------- ----------- -----------
INCOME FROM OPERATIONS.............................................. 1,504,000 3,752,000 5,843,000
INCOME TAX EXPENSE.................................................. 617,000 1,538,000 2,396,000
----------- ----------- -----------
NET INCOME........................................................ $ 887,000 $ 2,214,000 $ 3,447,000
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
See notes to financial statements.
F-3
<PAGE>
PRESSURE SENSITIVE BUSINESS UNIT,
S.D. WARREN COMPANY
STATEMENTS OF CHANGES IN BUSINESS UNIT EQUITY
<TABLE>
<S> <C>
BALANCE AT ACQUISITION, DECEMBER 20, 1994...................................... $10,429,000
Net income................................................................... 887,000
Capital infusion--net........................................................ 962,000
-----------
BALANCE AT SEPTEMBER 27, 1995.................................................. 12,278,000
Net income................................................................... 2,214,000
Capital withdrawal--net...................................................... (6,370,000)
-----------
BALANCE AT OCTOBER 2, 1996..................................................... 8,122,000
Net income................................................................... 3,447,000
Capital withdrawal--net...................................................... (1,414,000)
-----------
BALANCE AT OCTOBER 1, 1997..................................................... $10,155,000
-----------
-----------
</TABLE>
See notes to financial statements.
F-4
<PAGE>
PRESSURE SENSITIVE BUSINESS UNIT,
S.D. WARREN COMPANY
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD
DECEMBER 21,
1994 THROUGH YEAR ENDED YEAR ENDED
SEPTEMBER 27, OCTOBER 2, OCTOBER 1,
1995 1996 1997
------------- ------------- -------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income......................................................... $ 887,000 $ 2,214,000 $ 3,447,000
Adjustments to reconcile net income to net cash provided by (used
in) operating activities:
Depreciation..................................................... 119,000 163,000 179,000
Amortization of intangibles...................................... 159,000 200,000 200,000
Deferred income taxes............................................ 306,000 31,000 64,000
Changes in assets and liabilities:
Accounts receivable.............................................. (290,000) 3,663,000 729,000
Inventories...................................................... (1,724,000) 1,120,000 (3,436,000)
Accounts payable, accrued and other current liabilities.......... (274,000) (204,000) 671,000
Other assets and liabilities..................................... (28,000) (464,000) (343,000)
----------- ----------- -----------
Net cash provided by (used in) operating activities............ (845,000) 6,723,000 1,511,000
CASH FLOWS FROM INVESTING ACTIVITIES--Investments in plant assets.... (117,000) (353,000) (97,000)
CASH FLOWS FROM FINANCING ACTIVITIES--
Parent company capital infusion (withdrawals)--net................. 962,000 (6,370,000) (1,414,000)
----------- ----------- -----------
NET CASH............................................................. $ -- $ -- $ --
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
See notes to financial statements.
F-5
<PAGE>
PRESSURE SENSITIVE BUSINESS UNIT,
S.D. WARREN COMPANY
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS
The Pressure Sensitive Business Unit (the "Business Unit") of S.D. Warren
Company (the "Company") manufactures and sells pressure sensitive paper products
in roll form. These products are generally sold to label printers that produce
products used primarily for informational labels and product identification.
Pressure sensitive products are manufactured at the Company's Westbrook, Maine,
manufacturing facility (the "Westbrook Mill") with a four element construction
consisting of a paper face stock, adhesive coating, silicone coating and release
liner. The accompanying financial statements include income and expense accounts
and assets and liabilities associated with the manufacture and sale of pressure
sensitive products, including the Company's undivided interest in pressure
sensitive trade receivables which have been sold under a securitization
arrangement to S. D. Warren Finance Co. ("SDWF"), a wholly owned subsidiary of
the Company (see Note 6).
The Company is a wholly owned subsidiary of SDW Holdings Corporation
("Holdings"). Holdings is a wholly owned subsidiary of Sappi Limited ("Sappi").
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION--The accompanying financial statements of the Business
Unit have been prepared on the accrual basis of accounting and reflect the
results of operations and financial position of the Business Unit, including
allocations of certain amounts from the Company as described below.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Significant estimates used by management include the
allocations of certain assets, liabilities, revenues and expenses to the
Business Unit's financial statements. Significant estimates also include
realization of certain allocated assets such as trade and other accounts
receivable, inventory, goodwill and deferred tax assets, as well as estimates of
exposure and certain allocated liabilities of the Business Unit. Actual results
could differ from those estimates.
FISCAL YEAR--The Business Unit's fiscal year ends on the Wednesday closest
to the last day of September. The year ended October 2, 1996 ("fiscal year
1996") included 53 weeks. The period December 21, 1994 through September 27,
1995 (the "nine months ended September 27, 1995") included 40 weeks.
CASH MANAGEMENT--As an operating business unit of the Company, the Business
Unit participated in the Company's centralized cash management system.
Accordingly, cash received from the Business Unit's operations was administered
centrally while the Company financed operational and working capital
requirements as well as capital expenditures. The Business Unit has no external
sources of financing, such as available lines of credit, as may be necessary to
operate as a separate entity.
The statement of cash flows is prepared as though the cash received and
disbursed on behalf of the Company and by the Company, respectively, was
transacted through the Business Unit.
INVENTORIES--Inventories are valued at the lower of cost or market, using
the first-in, first-out ("FIFO") cost method. The primary source of bodystock,
the most significant raw material used in the manufacture of pressure sensitive
products, is the Westbrook Mill or other Company manufacturing
F-6
<PAGE>
PRESSURE SENSITIVE BUSINESS UNIT,
S.D. WARREN COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
facilities. Bodystock is transferred to the Business Unit at the actual cost of
production. Inventories of maintenance parts and other supplies are recorded at
purchase cost.
PLANT ASSETS--Plant assets are recorded at cost. For financial accounting
purposes, depreciation is principally calculated on a straight-line basis over
the estimated useful lives of the assets, which range from twelve to forty-five
years. The buildings occupied by the Business Unit are a part of a complex
comprising the Westbrook Mill. The cost of buildings included in the
accompanying financial statements has been determined based upon an allocation
using the square footage occupied by the Business Unit.
Expenditures for renewals and improvements which increase the useful life or
capacity of plant assets are capitalized. Upon the retirement or sale of assets
which have not been fully depreciated, the cost of plant assets and the related
accumulated depreciation are removed from the asset account. The Business Unit
records gains and losses on the retirement or sale of plant assets when
realized.
GOODWILL--On December 20, 1994, SDW Acquisition Corporation ("SDW
Acquisition"), a direct wholly owned subsidiary of Holdings, acquired (the
"Acquisition") from Scott Paper Company ("Scott") all of the outstanding capital
stock of the Company, and certain related affiliates of Scott. Immediately
following the Acquisition, SDW Acquisition merged with and into Holdings, with
Holdings surviving. Goodwill on the accompanying balance sheets represents the
Business Unit's allocated share of goodwill resulting from the Acquisition, and
is being amortized for financial statement purposes on a straight-line basis
over 25 years. On an ongoing basis, the carrying value of goodwill is evaluated
on the basis of whether anticipated undiscounted operating cash flows generated
by the acquired business are adequate to recover the recorded asset balance over
its estimated useful life. The goodwill balance at October 2, 1996 and October
1, 1997 was $1,834,000 and $1,755,000, net of accumulated amortization of
approximately $142,000 and $221,000, respectively.
PATENT--The Business Unit has a patent directly associated with its pressure
sensitive business. The cost of this patent of $2,060,000 arose as part of the
Acquisition purchase price allocation. The patent is being amortized over its
estimated useful life of approximately seventeen years and is stated net of
accumulated amortization of approximately $217,000 and $338,000 in the
accompanying balance sheets at October 2, 1996 and October 1, 1997,
respectively.
INCOME TAXES--The Business Unit accounts for deferred income taxes in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 109,
"Accounting for Income Taxes," which requires recognition of deferred tax
liabilities and assets for the expected future tax consequences of events that
have been included in the financial statements or tax returns. Under this
approach, deferred income taxes are determined based on the difference between
the financial statements and income tax bases of assets and liabilities using
enacted tax rates in effect for the year in which the differences are expected
to reverse. Valuation allowances are established when necessary to reduce
deferred tax assets to the amounts expected to be realized. The Business Unit is
not a separate tax paying entity. Accordingly, its results of operations have
been included in tax returns filed by Holdings. The accompanying financial
statements include a charge in lieu of tax which approximates the tax provision
assuming the Business Unit filed separate returns. Amounts which would represent
current income taxes payable are included in Unit Equity as no amounts are
actually advanced from the Business Unit to the Company for the payment of its
current income tax expense.
F-7
<PAGE>
PRESSURE SENSITIVE BUSINESS UNIT,
S.D. WARREN COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
WORKERS' COMPENSATION INSURANCE--The Company has a combination of
self-insured and insured workers' compensation programs. The self-insurance
claim liability of the Business Unit for workers' compensation is based on
claims reported and actuarial estimates of adverse developments and claims
incurred but not reported for employees of the Business Unit. The Company's
workers' compensation liability is discounted to reflect the passage of several
years before the claims related to a particular year are paid in full. The
liability has been determined based on an actuarial valuation as the timing of
payments associated therewith are reasonably estimable. The present value of
such claims was determined using a discount rate of 5.5% for the nine months
ended September 27, 1995, fiscal year 1996 and fiscal year 1997. The discounted
liability was $1,300,000 and $1,200,000 at October 2, 1996 and October 1, 1997,
respectively.
RESEARCH AND DEVELOPMENT EXPENDITURES--Expenditures for research and
development are charged to expense as incurred. Research and development costs
were approximately $541,000, $403,000, and $123,000 for the nine months ended
September 27, 1995, fiscal year 1996 and fiscal year 1997, respectively.
3. RELATED-PARTY TRANSACTIONS
As described elsewhere, the financial statements include allocations by the
Company for certain corporate administrative and benefit costs incurred for the
benefit of all operating divisions and certain operating costs related to the
Westbrook Mill. These costs are allocated to operating divisions on a variety of
methodologies as follows:
a) Specific identification--based on estimates of time and services
provided.
b) Relative identification--based on relevant criteria that establishes the
division's relationship to the entire pool of beneficiaries.
c) Formula driven--nonidentifiable to division but incurred for the benefit
of all.
Allocated costs included in selling, general and administrative costs were
$2,293,000, $3,159,000 and $3,015,000 for the nine months ended September 27,
1995, fiscal year 1996 and fiscal year 1997, respectively. Selling costs are
allocated based upon an individual's time dedicated to the sale of the Business
Unit's product. Other allocated corporate costs include executive, legal,
accounting, tax, auditing, cash management, purchasing, safety, human resources,
health and environmental, and employee benefits. Management believes these
allocations are reasonable under the circumstances. However, they may not
represent the cost of similar activities on a stand-alone basis.
In addition, certain costs of operating the Westbrook Mill such as
utilities, maintenance and supplies and other support services are common to the
entire Westbrook Mill complex and are allocated to cost of goods sold based upon
estimates of amounts relating to the Business Unit's operations, generally based
upon actual usage or tons of production. Utilities, maintenance and supplies
that were allocated based upon estimated usage aggregated $2,039,000, $2,412,000
and $2,315,000 for the nine months ended September 27, 1995, fiscal year 1996
and fiscal year 1997, respectively. Other support services were $1,374,000,
$1,944,000 and $1,872,000 for the nine months ended September 27, 1995, fiscal
year 1996 and fiscal year 1997, respectively. Management believes these
allocations are reasonable under the circumstances; however, they may not be
indicative of amounts that would be required to be incurred if the Business Unit
operated on a stand-alone basis.
F-8
<PAGE>
PRESSURE SENSITIVE BUSINESS UNIT,
S.D. WARREN COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. RELATED-PARTY TRANSACTIONS (CONTINUED)
No debt or related interest expense of the Company related to the
Acquisition or ongoing financing activities have been allocated to the Business
Unit's financial statements. Substantially all of the Business Units assets are
pledged as collateral to various debt agreements of the Company. Upon
consummation of the proposed transaction discussed in Note 4, such collateral
arrangements, as they relate to the Business Unit, will be released.
The Business Unit ships products to certain Sappi subsidiaries (Sappi
Europe, SA, Specialty Pulp Services and U.S. Paper). These subsidiaries then
sell the Business Unit's products to external customers at market prices and
remit the proceeds from such sales to the Business Unit, net of a sales
commission. Business Unit products shipped to Sappi subsidiaries and any
resulting accounts receivable were not material for the nine months ended
September 27, 1995, fiscal year 1996 and fiscal year 1997. The Company has
formalized certain of these agreements and is in the process of formalizing the
remainder.
4. PROPOSED SALE OF THE BUSINESS UNIT
On November 18, 1997, the Company entered into an Asset Purchase Agreement
(the "Agreement") to sell the Business Unit to Spinnaker Industries, Inc.
("Spinnaker"). The Agreement is anticipated to close in the first calendar
quarter of 1998, and is subject to the satisfaction of various conditions. In
connection with the Agreement, the Company and Spinnaker are required to execute
a Site Lease and a Site Separation and Service Agreement.
The Site Lease provides Spinnaker a portion of the Westbrook Mill for a term
of 99 years at a nominal rental amount of $1 per year. Under the Site Separation
and Service Agreement, the Company will provide Spinnaker, for a limited time at
predetermined costs, shipping, transportation and storage, maintenance and
support, information and administrative services. In addition, such agreement
will require the Company to supply certain raw materials, primarily bodystock,
for up to one year at predetermined amounts on a per-unit basis.
5. FORCE MAJEURE EVENT
Due to exceptionally heavy rains, the Presumpscot River flooded the
Westbrook Mill on October 21, 1996. The flooding resulted in the temporary
closure of the mill. There was no damage to Business Unit related equipment but
normal operating conditions of the Business Unit were impacted. During fiscal
year 1997 the Company received $11,800,000 related to business interruption
claims, of which $2,000,000 was allocated to the Business Unit based upon an
estimate of lost sales tons of the Business Unit. All claims were submitted and
finalized as of October 1, 1997.
6. ACCOUNTS RECEIVABLE AND MAJOR CUSTOMER INFORMATION
Accounts receivable consisted of the following:
<TABLE>
<CAPTION>
OCTOBER 2, OCTOBER 1,
1996 1997
------------ ------------
<S> <C> <C>
Accounts receivable......................................................... $2,061,000 $1,327,000
Allowance for doubtful accounts............................................. (70,000) (65,000)
---------- ----------
$1,991,000 $1,262,000
---------- ----------
---------- ----------
</TABLE>
F-9
<PAGE>
PRESSURE SENSITIVE BUSINESS UNIT,
S.D. WARREN COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. ACCOUNTS RECEIVABLE AND MAJOR CUSTOMER INFORMATION (CONTINUED)
In April 1996, the Company, through a bankruptcy remote subsidiary, SDWF,
entered into a receivables sales agreement that provides the Company with a
five-year $110 million revolving accounts receivable securitization facility
(the "A/R Facility"). Under this facility and pursuant to a purchase and
contribution agreement between the Company and SDWF, the Company sells to SDWF,
on a non-recourse basis, all rights and interests in the majority of its
accounts receivable. Pursuant to the receivables purchase agreement, SDWF, in
turn, sells certain interests in the accounts receivable pool owned by SDWF
under similar terms to a third-party purchaser.
The Business Unit's accounts receivable, shown in the table above, represent
the undivided interest in the accounts receivable pool related to customers of
the Business Unit. Gross accounts receivable of the Business Unit's customers
are net of $5,383,000 and $4,705,000 at October 2, 1996 and October 1, 1997,
respectively, which represent accounts receivable of the Business Unit that were
securitized and sold under the A/R Facility.
Sales to unaffiliated customers which individually exceed 10% of total sales
amounted to approximately 50.3%, 30.0% and 34.1% for the nine months ended
September 27, 1995, fiscal year 1996 and fiscal year 1997, respectively. The
loss of any of these customers could have a material effect on the Business
Unit's business and results of operations. Approximate sales to each such
customer are indicated below:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED YEAR ENDED YEAR ENDED
SEPTEMBER 27, OCTOBER 2, OCTOBER 1,
CUSTOMER 1995 1996 1997
- ---------------------------------------------------------- ------------- ------------- -------------
<S> <C> <C> <C>
1....................................................... $10,400,000 $10,700,000 $10,500,000
2....................................................... 8,700,000 10,000,000 10,700,000
3....................................................... 5,200,000 -- --
</TABLE>
At October 2, 1996 and October 1, 1997, approximately 36.5% and 26.5%,
respectively, of the Business Unit's net receivables, including those
receivables which are securitized and sold, were concentrated in these
customers.
7. INVENTORIES
Inventories consisted of the following:
<TABLE>
<CAPTION>
OCTOBER 2, OCTOBER 1,
1996 1997
------------ ------------
<S> <C> <C>
Raw materials............................................................... $1,140,000 $ 968,000
Work in progress............................................................ 2,048,000 3,272,000
Finished goods.............................................................. 3,085,000 5,469,000
---------- ----------
$6,273,000 $9,709,000
---------- ----------
---------- ----------
</TABLE>
F-10
<PAGE>
PRESSURE SENSITIVE BUSINESS UNIT,
S.D. WARREN COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. OTHER LIABILITIES
Other current liabilities consisted of the following:
<TABLE>
<CAPTION>
OCTOBER 2, OCTOBER 1,
1996 1997
---------- ------------
<S> <C> <C>
Accrued freight............................................................... $201,000 $ 331,000
Accrued utilities............................................................. 201,000 167,000
Accrued employee costs........................................................ 292,000 250,000
Other......................................................................... 273,000 343,000
-------- ----------
$967,000 $1,091,000
-------- ----------
-------- ----------
</TABLE>
Other liabilities consisted of the following:
<TABLE>
<CAPTION>
1996 1997
---------- ----------
<S> <C> <C>
Accrued workers' compensation............................................... $1,043,000 $1,071,000
Accrued pension and other postretirement benefits........................... 1,529,000 1,482,000
Other accrued liabilities................................................... 250,000 --
---------- ----------
$2,822,000 $2,553,000
---------- ----------
---------- ----------
</TABLE>
9. INCOME TAXES
The components of the tax provisions are as follows:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED YEAR ENDED YEAR ENDED
SEPTEMBER 27, OCTOBER 2, OCTOBER 1,
1995 1996 1997
------------- ------------ ------------
<S> <C> <C> <C>
Current:
Federal.................................................... $243,000 $1,175,000 $1,819,000
State and local............................................ 68,000 332,000 513,000
-------- ---------- ----------
Total current................................................ 311,000 1,507,000 2,332,000
-------- ---------- ----------
Deferred:
Federal.................................................... 237,000 24,000 50,000
State and local............................................ 69,000 7,000 14,000
-------- ---------- ----------
Total deferred............................................... 306,000 31,000 64,000
-------- ---------- ----------
$617,000 $1,538,000 $2,396,000
-------- ---------- ----------
-------- ---------- ----------
</TABLE>
F-11
<PAGE>
PRESSURE SENSITIVE BUSINESS UNIT,
S.D. WARREN COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. INCOME TAXES (CONTINUED)
The components of the deferred tax assets and (liabilities) are as follows:
<TABLE>
<CAPTION>
OCTOBER 2, OCTOBER 1,
1996 1997
------------- -------------
<S> <C> <C>
Current:
Deferred tax assets:
Prepaids and other current assets..................................... $ 28,000 $ 26,000
Accrued and other liabilities......................................... 213,000 313,000
Inventory............................................................. 39,000 --
----------- -----------
Total current deferred tax assets....................................... 280,000 339,000
----------- -----------
Noncurrent:
Deferred tax assets:
Pension benefits...................................................... 311,000 218,000
Postretirement benefits............................................... 380,000 435,000
Workers' compensation................................................. 257,000 279,000
Other................................................................. 113,000 10,000
----------- -----------
Total noncurrent deferred tax assets.................................... 1,061,000 942,000
----------- -----------
Deferred tax liabilities:
Property, plant and equipment......................................... (211,000) (295,000)
Patents............................................................... (735,000) (687,000)
Goodwill.............................................................. (732,000) (700,000)
----------- -----------
Total noncurrent deferred tax liabilities............................... (1,678,000) (1,682,000)
----------- -----------
Net noncurrent deferred tax liabilities................................... (617,000) (740,000)
----------- -----------
Net deferred tax liabilities.............................................. $ (337,000) $ (401,000)
----------- -----------
----------- -----------
</TABLE>
The differences between the U.S. statutory income tax rate and the Business
Unit's effective income tax rate are as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEAR ENDED YEAR ENDED
SEPTEMBER 27, OCTOBER 2, OCTOBER 1,
1995 1996 1997
----------------- ------------- -------------
<S> <C> <C> <C>
U.S. statutory income tax rate................................... 34.0% 34.0% 34.0%
State income taxes, net of federal benefit....................... 5.9 5.9 5.9
Other............................................................ 1.1 1.1 1.1
---- ---- ----
Effective tax rate............................................... 41.0% 41.0% 41.0%
---- ---- ----
---- ---- ----
</TABLE>
10. FINANCIAL INSTRUMENTS AND CONCENTRATIONS OF CREDIT RISK
The Business Unit's financial instruments consist mainly of accounts
receivable and accounts payable. The carrying amounts of accounts receivable and
accounts payable approximate fair value due to the short-term nature of these
instruments.
F-12
<PAGE>
PRESSURE SENSITIVE BUSINESS UNIT,
S.D. WARREN COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
10. FINANCIAL INSTRUMENTS AND CONCENTRATIONS OF CREDIT RISK (CONTINUED)
At October 2, 1996 and October 1, 1997, the total carrying amounts of
accounts receivable reflect approximately $5,383,000 and $4,705,000,
respectively, of reductions related to the A/R Facility. There are no unrealized
losses on the A/R Facility at October 1, 1997.
A significant portion of the Business Unit's sales and accounts receivable
are from major customers (Note 5). None of the Business Unit's other financial
instruments represent a concentration of credit risk because the Company has
dealings with a variety of major banks and customers worldwide. None of the
Business Unit's off-balance sheet financial instruments would result in a
significant loss to the Business Unit if the other party failed to perform
according to the terms of its agreement, as any such loss would generally be
limited to the unrealized gain in any contract.
11. LEASES
The Business Unit leases certain office and warehouse space and
manufacturing equipment under operating leases. Rental expense for the nine
months ended September 27, 1995, fiscal year 1996 and fiscal year 1997 and any
future lease payments at October 1, 1997 were not material.
12. ENVIRONMENTAL, SAFETY AND OTHER MATTERS
The Business Unit is subject to a wide variety of environmental, safety and
other laws and regulations relating to matters including air emissions and
hazardous waste management. From time to time, the Business Unit may be involved
in various lawsuits and administrative proceedings relating to these matters.
The relief sought in such lawsuits and proceedings may include injunctions,
damages and penalties. At the present time, there are no such proceedings or
other legal matters which, after consulting with legal counsel, management
believes will have a material effect on the Business Unit's financial position,
results of operations or cash flows.
13. RETIREMENT BENEFITS
PENSION PLANS--The Company has four defined-benefit, trusteed pension plans
that provide retirement benefits for substantially all employees, including
employees of the Business Unit. Benefits provided are primarily based on
employees' years of service and compensation. The Company's funding policy
complies with the requirements of federal law and regulations. Plan assets
consist of equity securities, bonds and short-term investments. The current
portion of the net pension liability relating to employees of the Business Unit,
detailed below, is $61,000 and $324,000 at October 2, 1996 and October 1, 1997,
respectively.
F-13
<PAGE>
PRESSURE SENSITIVE BUSINESS UNIT,
S.D. WARREN COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
13. RETIREMENT BENEFITS (CONTINUED)
The funded status of the pension plans relating to employees of the Business
Unit is as follows:
<TABLE>
<CAPTION>
OCTOBER 2, OCTOBER 1,
1996 1997
------------ ------------
<S> <C> <C>
Projected benefit obligation................................................ $4,103,000 $4,894,000
Plan assets at fair value................................................... 3,723,000 4,476,000
---------- ----------
Projected benefit obligation in excess of plan assets....................... 380,000 418,000
Unrecognized prior service costs............................................ -- (320,000)
Unrecognized loss........................................................... 259,000 616,000
---------- ----------
Net pension liability....................................................... $ 639,000 $ 714,000
---------- ----------
---------- ----------
</TABLE>
The net pension cost attributable to the Business Unit includes the
following components:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED YEAR ENDED YEAR ENDED
SEPTEMBER 27, OCTOBER 2, OCTOBER 1,
1995 1996 1997
------------- ----------- -----------
<S> <C> <C> <C>
Service cost-benefits earned during the period................ $ 119,000 $ 169,000 $ 153,000
Interest cost on projected benefit obligation................. 194,000 283,000 318,000
Return on plan assets......................................... (194,000) (288,000) (335,000)
--------- --------- ---------
Net pension cost.............................................. $ 119,000 $ 164,000 $ 136,000
--------- --------- ---------
--------- --------- ---------
</TABLE>
The actuarial amounts incurred above relate solely to employees of the
Business Unit and do not include any amounts for employees that are part of
allocations to the Business Unit's financial statements for corporate selling,
general, and administrative costs or for allocations from the Westbrook Mill.
A separate pool of assets attributable to employees of the Business Unit
does not exist. The above funded status and return on plan assets was determined
by the Company's actuary as if the assets were split from the existing plans
based on the Business Unit's share of the total projected benefit obligation.
The projected benefit obligation at October 2, 1996 and October 1, 1997 was
determined using assumed discount rates of 8.25% and 7.75%, respectively, and
assumed long-term rates of compensation increases of 4.75% and 4.5%,
respectively. The assumed rate of return on plan assets (on an annualized basis)
was 9.0% for both fiscal years 1996 and 1997.
SAVINGS PLANS--The Company currently sponsors two 401(k) defined
contribution plans covering substantially all Business Unit employees pursuant
to which the Company is obligated to match employee contributions, up to
specified amounts. Contributions to these plans for Business Unit employees
totaled approximately $72,000, $98,000 and $108,000 for the nine months ended
September 27, 1995, fiscal year 1996 and fiscal year 1997, respectively.
14. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
The Company sponsors a defined benefit postretirement plan that provides
health care and life insurance benefits to eligible retired employees. Employees
of the Business Unit participate in the Plan
F-14
<PAGE>
PRESSURE SENSITIVE BUSINESS UNIT,
S.D. WARREN COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
14. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS (CONTINUED)
and are generally eligible for benefits upon retirement and completion of a
specified number of years of service. The net postretirement liability detailed
below is noncurrent.
The funded status and obligations of the plan attributable to the Business
Unit are as follows:
<TABLE>
<CAPTION>
OCTOBER 2, OCTOBER 1,
1996 1997
---------- ------------
<S> <C> <C>
Accumulated postretirement benefit obligation ("APBO")........................ $951,000 $1,064,000
Plan assets at fair value..................................................... -- --
-------- ----------
APBO in excess of plan assets................................................. 951,000 1,064,000
Unrecognized prior service cost............................................... -- 27,000
-------- ----------
Net postretirement liability.................................................. $951,000 $1,091,000
-------- ----------
-------- ----------
</TABLE>
Components of the net periodic postretirement benefit expense attributable
to the Business Unit are as follows:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED YEAR ENDED YEAR ENDED
SEPTEMBER 27, OCTOBER 2, OCTOBER 1,
1995 1996 1997
------------- ---------- ----------
<S> <C> <C> <C>
Service cost.................................................... $54,000 $ 73,000 $ 69,000
Interest cost on APBO........................................... 42,000 63,000 73,000
Unrecognized prior service cost................................. -- -- (2,000)
------- -------- --------
Net postretirement benefit cost................................. $96,000 $136,000 $140,000
------- -------- --------
------- -------- --------
</TABLE>
The actuarial amounts incurred above relate solely to employees of the
Business Unit and do not include any amounts for employees that are part of
allocations to the Business Unit's financial statements for corporate selling,
general, and administrative costs or for allocations from the Westbrook Mill.
The discount rates used to estimate the accumulated benefit obligations as
of October 2, 1996 and October 1, 1997 were 8.25% and 7.75%, respectively. The
initial health care cost trend rates used to value the APBO were 9.0% at both
September 27, 1995 and October 2, 1996 and 6.75% at October 1, 1997, decreasing
gradually to an ultimate rate of 5.0%, 5.25%, and 4.75%, respectively, in the
year 2007. A one-percentage point increase in the assumed health care trend rate
for each future year would increase the APBO by approximately 8.4% at October 1,
1997 and would increase the sum of the benefits earned and interest cost
components of net postretirement benefit cost for fiscal 1997 by approximately
10.8%.
F-15
<PAGE>
PRESSURE SENSITIVE BUSINESS UNIT,
S.D. WARREN COMPANY
CONDENSED BALANCE SHEETS
ASSETS
<TABLE>
December 31, December 31,
1996 1997
------------- -------------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Accounts receivable $ 1,480,000 $ 1,184,000
Inventories 8,844,000 10,410,000
Deferred income taxes 280,000 339,000
Other current assets 50,000 50,000
------------ ------------
Total current assets 10,654,000 11,983,000
PLANT ASSETS, Net 2,107,000 2,025,000
GOODWILL, Net 1,814,000 1,735,000
PATENT, Net 1,813,000 1,692,000
------------ ------------
TOTAL $ 16,388,000 $ 17,435,000
------------ ------------
------------ ------------
LIABILITIES AND BUSINESS UNIT EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,627,000 $ 1,666,000
Accrued salaries, wages and employee benefits 1,389,000 603,000
Accrued workers' compensation 250,000 150,000
Other current liabilities 1,000,000 1,100,000
------------ ------------
Total current liabilities 4,266,000 3,519,000
DEFERRED INCOME TAXES 617,000 740,000
OTHER LIABILITIES 2,815,000 2,553,000
COMMITMENTS AND CONTINGENCIES ---- ----
BUSINESS UNIT EQUITY 8,690,000 10,623,000
------------ ------------
TOTAL $ 16,388,000 $ 17,435,000
------------ ------------
------------ ------------
</TABLE>
See notes to condensed financial statements.
F-16
<PAGE>
PRESSURE SENSITIVE BUSINESS UNIT,
S.D. WARREN COMPANY
CONDENSED STATEMENTS OF OPERATIONS
<TABLE>
Three Months Ended
----------------------------
December 31, December 31,
1996 1997
------------ -------------
(Unaudited)
<S> <C> <C>
SALES $ 12,759,000 $ 14,559,000
COST OF GOODS SOLD:
Bodystock 6,947,000 7,961,000
Allocation of Westbrook Mill costs 979,000 1,047,000
Other costs 3,131,000 4,005,000
------------ ------------
Total cost of goods sold 11,057,000 13,013,000
GROSS PROFIT 1,702,000 1,546,000
SELLING, GENERAL AND ADMINISTRATIVE COSTS:
Allocated selling costs 360,000 372,000
Allocation of other corporate costs 380,000 381,000
------------ ------------
Total selling, general and administrative costs 740,000 753,000
INCOME FROM OPERATIONS 962,000 793,000
INCOME TAX EXPENSE 394,000 325,000
------------ ------------
NET INCOME $ 568,000 $ 468,000
------------ ------------
------------ ------------
</TABLE>
See notes to condensed financial statements
F-17
<PAGE>
PRESSURE SENSITIVE BUSINESS UNIT,
S.D. WARREN COMPANY
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
Three Months Ended
----------------------------
December 31, December 31,
1996 1997
------------ ------------
(Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 568,000 $ 468,000
Adjustments to reconcile net income to net
cash provided By (used in) operating activities:
Depreciation 45,000 45,000
Amortization of intangibles 50,000 50,000
Changes in assets and liabilities:
Accounts receivable 511,000 78,000
Inventories (2,571,000) (701,000)
Accounts payable, accrued & other
liabilities 1,465,000 40,000
Other assets (29,000) 45,000
----------- ---------
Net cash provided by operating activities 25,000 25,000
CASH FLOWS FROM INVESTING ACTIVITIES -
Investments in plant assets (25,000) (25,000)
CASH FLOWS FROM FINANCING ACTIVITIES ---- ----
----------- ---------
NET CASH $ ---- $ ----
----------- ---------
----------- ---------
</TABLE>
See notes to condensed financial statements
F-18
<PAGE>
PRESSURE SENSITIVE BUSINESS UNIT,
S.D. WARREN COMPANY
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
1. The Business Unit of the Company manufactures and sells pressure sensitive
paper products in roll form. These products are generally sold to label
printers that produce products used primarily for informational labels and
product identification. Pressure sensitive products are manufactured at
the Company's Westbrook Mill with a four element construction consisting of
a paper face stock, adhesive coating, silicone coating and release liner.
The accompanying condensed financial statements include income and expense
accounts and assets and liabilities associated with the manufacture and
sale of pressure sensitive products, including the Company's undivided
interest in pressure sensitive trade receivables which have been sold under
a securitization arrangement to SDWF, a wholly owned subsidiary of the
Company.
The Company is a wholly owned subsidiary of Holdings. Holdings is a wholly
owned subsidiary of Sappi.
2. The accompanying unaudited condensed financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. Operating
results for the period ended December 31, 1997 are not necessarily
indicative of the results that may be expected for the year ended September
30, 1998.
3. The condensed financial statements include allocations by the Company for
certain corporate administrative and benefit costs incurred for the benefit
of all operating divisions and certain operating costs related to the
Westbrook Mill. These costs are allocated to operating divisions on a
variety of methodologies as follows:
a) Specific identification - based on estimates of time and services
provided.
b) Relative identification - based on relevant criteria that establishes
the division's relationship to the entire pool of beneficiaries.
c) Formula driven - nonidentifiable to division but incurred for the
benefit of all.
Allocated costs included in selling, general and administrative costs were
approximately $740,000 and $753,000 for the three months ended December 31,
1996 and 1997, respectively. Selling costs are allocated based upon an
individual's time dedicated to the sale of the Business Unit's product.
Other allocated corporate costs include executive, legal, accounting, tax,
auditing, cash management, purchasing, safety, human resources, health and
environmental, and employee benefits. Management believes these
allocations are reasonable under the circumstances. However, they may not
represent the cost of similar activities on a stand-alone basis.
F-19
<PAGE>
In addition, certain costs of operating the Westbrook Mill such as
utilities, maintenance and supplies and other support services are common
to the entire Westbrook Mill complex and are allocated to cost of goods
sold based upon estimates of amounts relating to the Business Unit's
operations, generally based upon actual usage or tons of production.
Utilities, maintenance and supplies that were allocated based upon
estimated usage aggregated approximately $538,000 and $576,000 for the
three months ended December 31, 1996 and 1997, respectively. Other support
services were approximately $441,000 and $471,000 for the three months
ended December 31, 1996 and 1997, respectively. Management believes these
allocations are reasonable under the circumstances; however, they may not
be indicative of amounts that would be required to be incurred if the
Business Unit operated on a stand-alone basis.
No debt or related interest expense of the Company related to the
Acquisition or ongoing financing activities have been allocated to the
Business Unit's financial statements. Substantially all of the Business
Units assets are pledged as collateral to various debt agreements of the
Company. Upon consummation of the proposed transaction discussed in Note
4, such collateral arrangements, as they relate to the Business Unit, will
be released.
4. On November 18, 1997, the Company entered into an Agreement to sell the
Business Unit to Spinnaker. The Agreement is anticipated to close in the
first calendar quarter of 1998, and is subject to the satisfaction of
various conditions. In connection with the Agreement, the Company and
Spinnaker are required to execute a Site Lease and a Site Separation and
Service Agreement.
The Site Lease provides Spinnaker a portion of the Westbrook Mill for a
term of 99 years at a nominal rental amount of $1 per year. Under the Site
Separation and Service Agreement, the Company will provide Spinnaker, for a
limited time at predetermined costs, shipping, transportation and storage,
maintenance and support, information and administrative services. In
addition, such agreement will require the Company to supply certain raw
materials primarily bodystock, for up to one year at predetermined amount
on a per-unit basis.
5. Due to exceptionally heavy rains, the Presumpscot River flooded the
Westbrook Mill on October 21, 1996. The flooding resulted in the temporary
closure of the mill. There was no damage to business Unit related
equipment but normal operating conditions of the Business Unit were
impacted. During fiscal year 1997 the Company received $11,800,000 related
to business interruption claims, of which $2,000,000 was allocated to the
Business Unit based upon an estimate of lost sales tons of the Business
Unit. All claims were submitted and finalized as of October 1, 1997.
F-20
[CIRCLE 4-5]
<PAGE>
UNAUDITED PRO FORMA FINANCIAL DATA
The following unaudited pro forma financial information of the Registrant
is based on the historical consolidated financial statements of the Registrant
and has been prepared to illustrate the effects of the Acquisition as though it
had occurred as of the beginning of the period presented for the pro forma
statement of operations. Defined terms herein have the meanings
given to them in the Form 8-K/A of which this is a part.
The pro forma adjustments include, in the opinion of management, all
adjustments necessary to give pro forma effect to the Acquisition as though such
transaction had occurred as of the beginning of the period presented for the pro
forma statement of operations and as if it had occurred on December 31, 1997 for
the pro forma balance sheet.
The unaudited pro forma financial information is not necessarily
indicative of how the Registrant's balance sheet and results of operations
would have been presented had the Acquisition actually been consummated at
the assumed date, nor is it necessarily indicative of presentation of the
Registrant's balance sheet and results of operations for any future period.
The unaudited pro forma financial information should be read in conjunction
with the historical consolidated financial statements and related notes
thereto included in the Registrant's Annual Report on Form 10-K for the
period ended December 31, 1997 and the Registrant's Quarterly Report on Form
10-Q for the period ended March 31, 1998.
The pro forma adjustments are based upon available information. These
adjustments are directly attributable to the Acquisition and are expected to
have a continuing impact on the Registrant's business, results of operations,
and financial position. The Acquisition was accounted for using the purchase
method of accounting, pursuant to which the total purchase cost of the
Acquisition was allocated to the tangible and intangible assets and
liabilities acquired based upon their estimated fair values. The final
allocation of the purchase price will be based upon the fair market valuation
of the acquired assets and the assumed liabilities; however, such allocation
is not expected to differ materially from the preliminary allocation.
F-21
<PAGE>
SPINNAKER INDUSTRIES, INC.
UNAUDITED PRO FORMA BALANCE SHEET AS OF DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
PRESSURE
SENSITIVE PRO FORMA PRO FORMA
SPINNAKER BUSINESS(15) ADJUSTMENTS TOTAL
--------- ------------ ----------- ---------
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 5,977 $ ---- $ ---- $ 5,977
Accounts receivable, net 24,886 1,262 4,705 (8) 30,853
Inventories, net 30,745 9,709 (273)(9) 40,181
Prepaid expenses and other 2,594 95 ---- 2,689
Deferred income taxes 1,922 339 (339)(10) 1,922
-------- ------- --------- --------
Total current assets 66,124 11,405 4,093 81,622
Property, plant, & equipment, net 60,334 2,045 17,955 (11) 80,334
Goodwill, net 24,025 1,755 18,704 (1) 44,484
Other assets 6,235 1,722 (1,224)(11) 6,733
-------- ------- --------- --------
Total assets $156,718 $16,927 $ 39,528 $213,173
-------- ------- --------- --------
-------- ------- --------- --------
Current liabilities:
Accounts payable $ 14,529 $ 1,555 $ (645)(10) $ 15,439
Accrued liabilities 6,319 833 (128)(10) 7,024
Current portion of long term debt 864 ---- ---- 864
Revolving credit facility 446 ---- 45,268 (12) 45,714
Other current liabilities 2,591 1,091 ---- 3,682
-------- ------- --------- --------
Total current liabilities 24,749 3,479 44,495 72,723
Long term debt, less current portion 115,049 ---- 7,000 (13) 122,049
Other noncurrent liabilities 1,097 2,553 (1,072)(10) 2,578
Deferred income taxes 5,554 740 (740)(10) 5,554
Stockholders' equity:
Common stock 3,124 ---- ---- 3,124
Additional paid in capital 11,557 10,155 (10,155)(14) 11,557
Retained earnings (deficit) (3,914) ---- ---- (3,914)
Minimum pension liability (386) ---- ---- (386)
Less: Common stock in treasury (112) ---- ---- (112)
-------- ------- --------- --------
Total stockholders' equity 10,269 10,155 (10,155) 10,269
-------- ------- --------- --------
Total liabilities and
stockholders' equity $156,718 $16,927 $ 39,528 $213,173
-------- ------- --------- --------
-------- ------- --------- --------
</TABLE>
See accompanying notes.
F-22
[circle 6-8]
<PAGE>
SPINNAKER INDUSTRIES, INC,
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE)
<TABLE>
YEAR ENDED YEAR ENDED PRO FORMA
DECEMBER 31, 1997 OCTOBER 1, 1997 PRO FORMA YEAR ENDED
(SPINNAKER) (PRESSURE SENSITIVE BUSINESS) ADJUSTMENTS DECEMBER 31, 1997
----------- ----------------------------- ----------- -----------------
<S> <C> <C> <C> <C>
Net sales $231,976 $62,080 $294,056
Cost of sales 199,647 53,222 (1,012)(2) 253,216
1,359(3)
-------- ------- ------- --------
Gross profit 32,329 8,858 (347) 40,840
Selling, general
& administrative 21,450 3,015 (1,150)(4) 23,889
574(5)
-------- ------- ------- --------
Income from
operations 10,879 5,843 228 16,950
Interest expense 13,238 ---- 3,399(6) 16,637
Other income 112 ---- 112
Income tax
provision (benefit) (460) 2,396 (1,766)(7) 170
-------- ------- ------- --------
Net income (loss) $ (1,787) $ 3,447 $(1,404) $ 256
-------- ------- ------- --------
-------- ------- ------- --------
Earnings per
common share:
Net income (loss)
per common share $ (0.28) $ 0.04
-------- --------
-------- --------
Net income (loss)
per common share
assuming dilution $ (0.28) $ 0.04
-------- --------
-------- --------
</TABLE>
See accompanying notes.
F-23
<PAGE>
NOTES TO UNAUDITED PRO FORMA FINANCIAL INFORMATION
(1) The Acquisition was accounted for as a purchase combination. The
purchase price, including acquisition costs, was approximately $53
million and has been allocated as follows (in thousands):
<TABLE>
<S> <C>
Tangible assets purchased . . . . $35,498
Liabilities assumed . . . . . . . $ 2,995
Purchase price in excess of
net tangible assets . . . . . . $20,459
</TABLE>
(2) Represents the elimination of maintenance, material handling, and
security costs previously allocated by the Seller, which the Pressure
Sensitive Business will not be subject to under the Site Separation
and Service Agreement, as only the direct charges for such services
will be charged under this agreement.
(3) Represents incremental depreciation expense related to acquired
property, plant, and equipment.
(4) Represents the elimination of corporate overhead previously allocated
by the Seller. The services included executive, legal, accounting,
purchasing, and other corporate overhead functions which will be
provided by the Registrant under its current corporate structure.
(5) Represents amortization of goodwill from the Acquisition.
Amortization period of goodwill is thirty years.
(6) Interest expense on the borrowings under Registrant's $60 million
Revolving Credit Facility in connection with the Acquisition and
amortization of deferred financing costs associated with the
amendment to the Revolving Credit Facility. Interest is calculated
based on an assumed rate of 8.5%. A 1% change in the interest rate
would change interest expense on the Acquisition borrowings in the
amount of approximately $289 annually.
(7) Represents the income tax adjustment required to reflect the estimated
consolidated effective tax rate based on statutory federal and state
tax rates.
(8) Represents off balance sheet Pressure Sensitive Business receivables
previously sold to an affiliate of the Seller under a receivable sales
agreement. In connection with the Acquisition, the agreement was
terminated.
(9) Inventory valuation adjustment to reflect finished goods at estimated
selling price, less costs of disposal and reasonable profit allowance.
(10) Adjustment reflects assets and liabilities retained by the Seller.
(11) Adjustment to property, plant and equipment, and other assets based on
the Registrant's preliminary estimate of fair market value.
F-24
<PAGE>
(12) Represents borrowings under the Revolving Credit Facility in
connection with the Acquisition and deferred financing costs
associated with the amendment to the Revolving Credit Facility.
(13) Represents the issuance of a convertible subordinated note by the
Registrant to Seller in the amount of $7.0 million. The note bears
interest at the rate of 10% per annum.
(14) Elimination of Pressure Sensitive Business equity.
(15) Historical financial statements of Pressure Sensitive Business are
for its fiscal year ended October 1, 1997.
F-25
