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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K/A
(MARK ONE)
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/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
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FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
OR
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/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
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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)
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DELAWARE 06-0544125
(State of incorporation) (IRS Employer Identification No.)
1700 PACIFIC AVENUE, SUITE 1600, 75201
DALLAS, TX (zip code)
(Address of principal executive
offices)
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(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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no par
Common Stock............................................. value
Title of Class
no par
Class A Common Stock..................................... value
Title of Class
Securities registered pursuant to Section 12(g) of the Act: None
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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. /X/
The total aggregate market value of the 1,314,859 shares of voting stock
held by non-affiliates of the Registrant (677,000 shares of Common Stock and
637,859 shares of Class A Common Stock) was $17,770,167 (based upon the closing
bid of the Registrant's Common Stock and Class A Common Stock in the AMEX on
March 19, 1999 of $14 per share of Common Stock and $13 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 3,775,680 and 3,566,067, respectively, as of March 19, 1999
for a total of 7,341,747.
DOCUMENTS INCORPORATED BY REFERENCE
Part III: Proxy Statement for the 1999Annual Meeting of Stockholders to be
held June 3, 1999
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ITEM 1. BUSINESS
Spinnaker Industries, Inc., a Delaware corporation (the "Registrant" or the
"Company"), is a leading manufacturer and marketer of adhesive-backed materials,
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. However, as announced in November 1998, the Company
continues to examine strategic alternatives, including the possible sale of all
or a portion of the business, merger, or other business combination where deemed
advantageous. The Company's businesses are grouped into two principal categories
that accounted for the following percentages of pro forma net sales for the year
ended December 31, 1998: industrial tape (43%) and adhesive backed label stock
(54%). For the year ended December 31, 1998, the Company had pro forma net sales
of $301.8 million and pro forma EBITDA (as defined in Item 6 "Selected Financial
Data") of $21.7 million, net of charges impacting comparability.
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, 1998, Lynch Manufacturing Corporation ("LMC"), a wholly-owned
subsidiary of Lynch, owned 2,237,203 and 2,259,063 shares, or 59.3% and 63.3%,
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., a Delaware corporation ("Spinnaker Coating"), and
Central Products Company, a Delaware corporation ("Central Products"), as
described below. More recently, in March and July 1998, the Company completed
the acquisitions of the pressure sensitive paper products operations of (the
"Pressure Sensitive Business") of S.D. Warren Company ("Warren") and the
pressure sensitive electrical tape product line and Carbondale, Illinois,
manufacturing plant (the "Electrical Tape Business") of tesa tape, inc.
("tesa"), respectively, which are also described below. Spinnaker Coating-Maine,
Inc., a Delaware corporation and indirect subsidiary of the Company
("Coating-Maine") operates the Pressure Sensitive Business, as part of the
Company's adhesive-backed label stock operations. The tesa acquisition was
through a newly formed, unrestricted subsidiary, Spinnaker Electrical and was
acquired to complement the Company's line of adhesive-backed industrial tapes.
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. 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 connection with the Central Products
Acquisition, Central Products entered into a 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
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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 1995 and again in March 1998, the
Company was selected exclusively to supply Paper Corporation of the U.S. and the
U.S. Bureau of Engraving and Printing ("BEP") the label stock for
pressure-sensitive postage stamps. The March 1998 contract, a five-year supply
contract, is valued at 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 standard, high volume, pressure
sensitive products primarily for the EDP segment of the label stock market,
which complements Spinnaker Coating's custom, low volume, pressure sensitive
products used for specialty applications. The Pressure Sensitive Business'
products are used in various labeling end uses, including form printing and
product marking and identification. The Pressure Sensitive Business generated
approximately $59.1 million of pro forma net sales in the fiscal year ended
December 31, 1998, accounting for 19.6% of the Company's pro forma net sales for
the year 1998.
On July 30, 1998, the Company closed the acquisition (the "Electrical Tape
Acquisition") of the Electrical Tape Business from tesa through its newly
formed, unrestricted subsidiary of the Company ("Spinnaker Electrical").
Spinnaker Electrical operates the Electrical Tape Business at a modern
manufacturing facility, completed in 1995, located in Carbondale, Illinois. The
Electrical Tape Business manufactures and markets pressure sensitive industrial
electrical tapes used for insulation in the production of motors, coils and
transformers. The Company sells into the Eastern European electrical and
industrial tape market through its relationship with the world's largest
distributor of electrical products. The Electrical Tape Business manufactures
laminate, glass cloth, filament, and film, polypropylene and polyester high
temperature industrial electrical tapes. The Electrical Tape Business generated
approximately $13.0 million of pro forma net sales in the year ended December
31, 1998, accounting for approximately 4.3% of the Company's pro forma net sales
for the year 1998.
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.
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INDUSTRIAL TAPE
The Company provides a full range of packaging system solutions 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 markets "system
solutions" by providing carton sealing tape machines in combination with its
tape products, thereby creating a market for its tapes on an on-going basis. The
Company manufactures pressure sensitive carton sealing tape with all three
primary adhesive technologies: acrylic, hot melt and natural rubber. It also
offers three types of water sensitive carton sealing tape: paper tape,
fiberglass reinforced tape and box tape.
The acquisition of Spinnaker Electrical strengthened the Company's
industrial product offering and coating technology. The Electrical Tape Business
manufactures pressure sensitive industrial tapes used for insulation in the
production of motors, coils and transformers. The Company offers multiple types
of tapes including laminate, glass cloth, filament, film, polypropylene, and
polyester and believes it maintains a number three-market share position in high
temperature industrial tapes.
PRESSURE SENSITIVE CARTON SEALING TAPE. Pressure sensitive carton sealing
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 carton sealing tapes are sold under the trade names
Alltac-Registered Trademark- and Central-Registered Trademark-.
WATER SENSITIVE CARTON SEALING TAPE. Water sensitive carton sealing 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-.
PRESSURE SENSITIVE ELECTRICAL TAPE. Pressure sensitive electrical tape is
manufactured through the coating of laminate, glass cloth, filament, and film
backing materials with acrylic, rubber and silicone adhesives. The Company's
electrical tapes are classified by specific insulating characteristics of the
backing material and are categorized by temperature class from up to 105 degrees
to up to 180 degrees Celsius. In addition, the Company's electrical insulating
tapes are approved by Underwriters Laboratories for use in electrical insulating
applications.
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 used in high speed
applications. The Company also offers two types of table top dispensers for
water sensitive tape, a manual dispenser and a more expensive electric
dispenser.
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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 1998, pressure sensitive products constituted approximately
93.4% of the Company's pro forma net sales of adhesive-backed label stock
products, while water sensitive products constituted 5.1% and heat sensitive
products constituted 1.5% 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 sheet
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. 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-.
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) 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.
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MARKETING AND CUSTOMERS
The Company's marketing strategy focuses not only on products, but also
customer service and specific customer applications. 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 1998, 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 primarily 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 high temperature electrical tape products
domestically through its own sales representatives and to Eastern Europe through
a relationship with the world's largest distributor of electrical products. The
Company is developing plans to capitalize on other markets abroad through the
same distributor relationship. Market growth for the Company's high temperature
electrical tape products is driven by the growing use of electronics in consumer
products, the expanded use of motors, and the growth and replacement of
industrial transformers.
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 and Westbrook, Maine. However, to broaden its
market penetration, the Company also contracts with 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 industrial tape and
adhesive-backed label stock. The Company's operations utilize advanced
manufacturing methods and sophisticated equipment to produce industrial 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.
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 carton
sealing 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 material scrap in its manufacturing processes. Over
the last three years, the Company has averaged approximately $5 million per year
in capital improvements to achieve such efficiencies by automating and
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updating its processes. It is these capital improvements that enabled the
Company to transition from a seven day to a five day work week at the Brighton
facility in early January 1999, yet maintain consistent throughput and
manufacturing efficiencies. 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 and the recently acquired facility in Westbrook, Maine. The Company
has made approximately $9 million in capital expenditures at the Ohio
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.
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 carton
sealing 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 carton sealing 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.
The electrical tape manufacturing facility in Carbondale, Illinois was
brought on line in 1995 from a greenfield site. The facility provides the
Company with a full range of coating, slitting and ancillary equipment to serve
customers in the electrical products industry. In addition, the Company believes
the machine's flexibility will enable the Company to produce filament, stepping,
and double backed tape for industrial applications.
COMPETITION
The adhesive-backed materials industry is highly competitive. The Company
competes with national and regional suppliers, as well as Asian and European
imports. 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, 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. 3M Corporation is
the largest manufacturer of pressure sensitive tape in the carton sealing market
in the United States.
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The pressure sensitive industrial electrical tape business competes with
other manufactures, both domestic and foreign, some of which are larger than the
Company. 3M is the largest manufacturer in both North America and Europe.
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.
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.
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 $21.9 million, $14.2 million, and $11.5
million in 1998, 1997, and 1996, respectively. Of the $21.9 million in 1998
foreign sales, approximately 84% were represented by exports of Spinnaker
Coating, Central Products, and Spinnaker Electrical adhesive-backed materials.
The substantial majority of these sales were to Canadian customers and its
European distributor 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.
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.
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EMPLOYEES
As of December 31, 1998, the Company employed approximately 1,099 persons,
of which 474 were Spinnaker Coating employees, 508 were Central Products
employees, 71 were Spinnaker Electrical employees and 37 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
negotiated a five year labor agreement, expiring in 2003, with the Paper,
Allied-Industrial, Chemical and Energy Workers International Union AFL-CIO
(formerly known as the United Paperworkers International Union) covering
approximately 178 hourly employees at the Menasha, Wisconsin plant. Spinnaker
Electrical has a three year labor agreement, expiring in 2001, with the AFL-CIO
union, covering approximately 47 hourly employees at the Carbondale, Illinois
plant. Spinnaker Coating has a labor agreement, expiring in 2002, with the
AFL-CIO union, covering approximately 75 employees at the Westbrook, Maine
plant. Entoleter's approximately 16 hourly 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.
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.
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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:
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<CAPTION>
APPROXIMATE OWNED OR
LOCATION SQUARE FEET LEASED EXPIRATION OF LEASE
- ------------------------------------------------------------------- ------------ ----------- -------------------
<S> <C> <C> <C>
CENTRAL PRODUCTS
Menasha, Wisconsin............................................... 175,000 Owned N/A
Menasha, Wisconsin............................................... 20,000 Owned N/A
Neenah, Wisconsin................................................ 90,000 Leased April 25, 2000
Brighton, Colorado............................................... 211,000 Leased 2014
SPINNAKER ELECTRICAL TAPE
Carbondale, Illinois(1).......................................... 192,000 Leased 2092
SPINNAKER-COATING
Troy, Ohio (Plant One)........................................... 200,000 Owned N/A
Troy, Ohio (Plant Two)(2)........................................ 98,000 Owned N/A
Troy, Ohio....................................................... 58,000 Leased Month-to-Month
COATING-MAINE
Westbrook, Maine(3).............................................. 151,000 Owned March 16, 2097
Westbrook, Maine................................................. 5,000 Leased October 31, 1999
Westbrook, Maine................................................. 15,000 Leased April 1, 2004
ENTOLETER
Hamden, Connecticut.............................................. 72,000 Owned N/A
SPINNAKER INDUSTRIES, INC.
Denver, Colorado(4).............................................. 100,000 Owned N/A
</TABLE>
- ------------------------
(1) The plant is located on 15 acres of a 55 acre site and leases for $1.00 per
year, per acre, until 2092 with a 99 year extension option.
(2) The Company also owns a five-acre tract adjacent to this tract that is
available for expansion.
(3) The Company owns the building and improvements and has an option to purchase
the underlying land for $1.00
(4) Central Products through an intercompany lease arrangement utilize this
warehouse facility.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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 American Stock Exchange, Inc. ("AMEX") under the symbols SKK and SKK.A,
respectively, since April 2, 1998. Prior to that time, the Common Stock and
Class A Common Stock were traded on the NASDAQ National Market and the NASDAQ
Small Cap Market. The following table sets forth, for the calendar quarters
indicated, the range of high and low closing prices for the Common Stock and
Class A Common Stock for
10
<PAGE>
the period during which the Common Stock and Class A Common Stock were traded on
the AMEX and the NASDAQ National Market, and the range of high and low bid
prices for the Common Stock and Class A Common, prior to September 8, 1997,
during which time the Common Stock and Class A Common Stock were traded on the
NASDAQ Small Cap Market, as reported in published financial sources.
<TABLE>
<CAPTION>
CLASS A COMMON
COMMON STOCK STOCK
------------------ ------------------
HIGH LOW HIGH LOW
------- ------- ------- -------
<S> <C> <C> <C> <C>
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......................... 23 20 1/4 24 1/2 21 1/2
Second Quarter........................ 22 1/4 18 1/2 22 1/2 19 1/4
Third Quarter......................... 19 18 19 3/8 18
Fourth Quarter........................ 19 1/4 17 3/4 19 5/8 18
1999
First Quarter (through March 19,
1999)............................... 17 1/2 14 17 1/2 13
</TABLE>
As of December 31, 1998, there were approximately 200 holders of record of
Common Stock and 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
Spinnaker Credit Facility and the Indenture governing the Senior Notes (as
defined), the Company's ability to pay cash dividends to its stockholders is
limited.
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<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
1998(1) 1997 1996 1995(2) 1994(3)
---------- ---------- ---------- ---------- ---------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales............................................. $ 280,941 $ 231,976 $ 246,536 $ 135,289 $ 33,632
Operating profit(4)................................... 8,567 10,879 10,222 5,789 722
Income (loss) before income taxes, minority interest
and extraordinary item, net of tax.................. (8,495) (2,247) (363) 953 78
Income (loss) before extraordinary item............... (6,619) (1,787) (625) 561 (90)
Extraordinary charge, net of tax...................... -- -- (1,843) -- --
Net income (loss)..................................... (6,619) (1,787) (2,468) 561 (90)
SHARE DATA:
Income (loss) per common share before extraordinary
item................................................ (0.92) (0.28) (0.11) 0.10 (0.02)
Income (loss) per common share before extraordinary
item-assuming dilution.............................. (0.92) (0.28) (0.11) 0.08 (0.02)
Net income (loss) per common share.................... (0.92) (0.28) (0.42) 0.10 (0.02)
Net income (loss) per common share-assuming
dilution............................................ (0.92) (0.28) (0.42) 0.08 (0.02)
Dividends per share................................... -- -- -- -- --
Weighted average common and common equivalent shares
outstanding(5)...................................... 7,199 6,321 5,931 6,702 5,626
BALANCE SHEET DATA:
Total assets.......................................... 227,919 156,718 157,716 137,584 41,329
Long-term obligations including related party notes... 126,086 115,049 115,113 71,225 9,149
Shareholders' equity.................................. 7,704 10,269 11,236 7,062 6,501
OTHER FINANCIAL DATA:
EBITDA(6)............................................. 18,895 17,826 16,334 7,940 1,133
Net cash provided by operating activities............. 11,271 5,193 6,227 9,192 2,503
Capital expenditures.................................. 7,182 8,837 8,979 1,620 450
</TABLE>
- ------------------------
(1) Includes the March 17, 1998 and July 30, 1998 acquisitions of the Pressure
Sensitive Business and Spinnaker Electrical, respectively--see Note 2 in
Notes to Consolidated Financial Statements.
(2) Includes the October 4, 1995 acquisition of Central Products Company--see
Note 2 in Notes to Consolidated Financial Statements.
(3) Includes the September 19, 1994 acquisition of Spinnaker Coating Industries,
Inc.--see Note 2 in Notes to Consolidated Financial Statements.
(4) Operating profit includes restructuring and litigation expense of $0.4
million in 1994 and inventory charges, primarily associated with a new hot
melt tape product, of $1.2 million in 1998.
(5) Adjusted to reflect a stock dividend, an effective 2-for-1 stock split,
effective August 16, 1996 and 3-for-2 stock split effective December 29,
1995.
(6) EBITDA represents the sum of income (loss) before extraordinary charge,
minority interest, income taxes, interest expense, other income (expense)
and depreciation and amortization. EBITDA is presented because it is a
widely accepted financial indicator of a company's ability to incur or
service indebtedness. However, EBITDA is not a measure of performance
calculated in accordance with generally accepted accounting principles and
should not be considered as an alternative to net income as a measure of the
Company's operating results or cash flows as a measure of its liquidity.
EBITDA, as determined above, may not be comparable to EBITDA reported by
other companies.
12
<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 Company 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 Company is one of
the leading manufacturers and marketers of adhesive-backed materials, primarily
for the industrial tape and pressure sensitive label stock markets. 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 Electrical manufactures and markets pressure
sensitive industrial electrical tapes used for insulation in the production of
motors, coils and transformers. Spinnaker Electrical sells domestically through
its own sales organization and into Eastern Europe through a relationship with
the world's largest distributor of electrical products. 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 Company also manufactures and markets industrial process
equipment and air pollution control scrubbers through Entoleter.
Since June 1994, the Company has experienced rapid growth, which has been
accomplished through the Company's acquisition of its industrial tape and
adhesive-backed label stock manufacturing operations and the Company's
subsequent internal growth. The internal growth is a result of the Company's
implementation of its core competencies to the operations, including refocused
sales and marketing strategy and additional capital investment at all
subsidiaries. Over the last three years, the Company has averaged approximately
$5 million per year in capital expenditures 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
and coating lines, which increased tape production capacity and efficiency
enabling the Company to transition from a seven day to a five day work week at
its Brighton manufacturing facility. With the acquisition of Spinnaker Coating
in 1994, the Company entered the adhesive-backed materials industry. The Central
Products Acquisition in 1995 provided the Company with a leading position in the
carton sealing tape market of the adhesive-backed materials industry. As a
result of the foregoing acquisitions, the Company became a manufacturer of the
broadest line of adhesive-backed label stock and carton sealing tape products in
the adhesive-backed materials industry. The Coating-Maine Acquisition and the
Electrical Tape Acquisition further strengthen the Company's position in the
adhesive-backed materials market. The Company believes the combination of
Coating-Maine with Spinnaker Coating's adhesive-backed label stock business
makes the Company the fifth largest producer of label stock and the second
largest manufacturer of EDP label stock. The Electrical Tape Acquisition
strengthens the Company's industrial tape product offering and coating
technology. The Company believes the acquisition of the Electrical Tape Business
positions the Company as the third largest manufacturer and marketer of high
temperature industrial tape.
Subsequent to each of the foregoing acquisitions, the Company implemented
cost reduction measures, including more effective management, rationalization of
raw materials and component purchasing, improved materials flow and improved
management information systems. The Company believes such
13
<PAGE>
measures contributed to improved operating profits at the Company's carton
sealing tape and label stock manufacturing operations in 1997, and softened the
impact of heightened market competition and Asian imports during 1998.
The Company 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, early in 1999 Central Products
completed the transition from a seven-day to a five-day workweek at its
Brighton, Colorado facility. The capital investments over the past twelve to
eighteen months have improved manufacturing efficiencies to a point that enables
the Company to meet current production requirements with fewer man-hours,
thereby saving approximately $2.0 to $2.3 million on an annual basis through the
elimination of approximately fifty manufacturing personnel. Another example is
the silicone coating production line at Spinnaker Coating. 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 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 Company
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 Company to
meet its future silicone liner production requirements and eliminated the costs
that were associated with outsourcing.
The cost of the Company's principal raw materials, polypropylene resin and
paper, have generally remained stable or declined over the past several years.
Historically, any raw material cost increases have resulted in the Company
instituting higher prices, consistent with the increases instituted by its
competitors, for its industrial tape and adhesive-backed label stock products.
The increases in raw material costs for the Company's products have not
materially impacted the Company's gross profit because the Company has generally
been able to pass along its raw material cost increases without negatively
impacting sales of its products. In 1998, the Company's principal raw material
costs generally declined as a result of scale economies associated with the
combined operations of Spinnaker Coating, Coating-Maine and Central Products.
The agreements under which the Company's industrial 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 Company has generally passed along raw material price changes for products
sold under such agreements, as well as for products sold to other customers. The
exception to the foregoing is the Company'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
Company 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 Company 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 Company's
profitability is based in part on pricing by the Company's competitors. Although
historically the Company has generally been able to pass through raw material
cost fluctuations, the Company cannot be assured that future raw material cost
increases can be passed through to its customers or that such cost increases
will not negatively impact the Company's gross profit.
FISCAL 1998 COMPARED TO FISCAL 1997
NET SALES. The Company's net sales were $280.9 million, compared to $232.0
million in 1997. The increase in net sales for 1998 is attributed to
approximately $51.2 million in sales from the recent acquisitions of
Coating-Maine and Spinnaker Electrical, in addition to increased unit sales of
water
14
<PAGE>
activated carton sealing tape and certain label stocks from 1997 levels. These
increases partially offset lower unit sales of pressure sensitive carton sealing
tape products and pressure sensitive postage paper stock. Sales of industrial
tape products have been impacted by the significant slow-down in Asian "growth
consumption" which resulted in an increase of imports from Asia and Europe into
the U.S., increasing domestic competition. These factors resulted in lower sales
volumes of certain pressure sensitive tapes and affected product mix. Unit sales
of pressure sensitive postage paper stock, which were impacted by the timing of
orders by the BEP earlier in the year, increased significantly during the last
half of the year to near 1997 levels.
GROSS MARGINS. Gross margin as a percentage of net sales in 1998 was
approximately 12.1% compared to approximately 13.9% in 1997. The 1998 gross
margins were lower due to changes in sales mix, competitive pricing in
adhesive-backed materials industry, the timing and new pricing of postage paper
stock business, and a charge associated with a new hot melt tape product
developed during the latter half of the year.
The impact of Asian imports and increased global capacity for certain tape
products, lowered average selling prices of certain product categories. These
factors lead to product substitution and changes in product mix. The timing of
postage paper stock business contributed to marginally lower units and a new
five year $75 million contract for the supply of postage paper stock resulted in
lower average selling prices in 1998. The remaining variance is attributed to
inventory charges totaling approximately $1.2 million, primarily associated with
a new hot melt tape product developed in the latter half of 1998 in response to
certain market demands. While the product tested well, it was found not to
consistently perform and was discontinued.
The Company has offset a portion of the margin pressures by continuing to
improve manufacturing efficiencies, lowering average unit manufacturing costs,
personnel reductions, and introducing new cost efficient products that meet
market demands. The Company attributes the improved manufacturing to
efficiencies gained through reductions of manufacturing personnel, material
process and handling modifications and recent capital investments which have
enabled the Company to increase output and reduce manufacturing downtime.
These efforts have continued into 1999, as in early January the Company
completed a transition of its Brighton, Colorado manufacturing facility from a
seven-day to a five-day work week, resulting in reduced headcount and
manufacturing overhead. The annual savings from this action are estimated to be
approximately $2.0 million.
INCOME FROM OPERATIONS. Income from operations was approximately $8.6
million, which net of charges impacting comparability, resulted in $9.8 million
for 1998 compared to $10.9 million in 1997. The 1998 operating results reflect
lower gross margins on increased net sales and lower selling, general and
administrative ("SG&A") expenses as a percentage of net sales, offset by
approximately $3.4 million of increased depreciation and amortization expense
associated with the acquisitions of Coating-Maine and Spinnaker Electrical.
These acquisitions increased net sales approximately $51.2 million, however the
Company's SG&A expenses (excluding depreciation and amortization) declined from
approximately 8.6% of net sales in 1997 to 8.1% in 1998. The Company has
continued to rationalize administrative overhead and leverage the knowledge
within and between the subsidiaries, which has enabled it to reduce selling and
administrative costs.
INTEREST EXPENSE. Interest expense for 1998 totaled approximately $17.0
million, of which approximately $1.3 million relates to amortization of deferred
financing costs and payment-in-kind ("PIK") interest expense. In 1997, interest
expense totaled approximately $13.2 million, of which approximately $624,000
related to deferred financing costs. The increase is primarily attributed to the
financing associated with the Company's acquisition of Coating-Maine and
Spinnaker Electrical, and the increase in the Spinnaker Credit Facility from $40
million to $60 million.
15
<PAGE>
INCOME TAXES. The 1998 income tax benefit for federal and state income
taxes is at an effective rate of 22.1%. The Company's tax rate is impacted by
permanent tax differences, primarily non-deductible goodwill amortization
associated with the Central Products Acquisition (amortized over 25 years) and
the write-off of certain unrealizable deferred tax assets.
The Company has net operating loss carry-forwards of approximately $20
million available to offset future taxable income. These carry-forwards begin to
expire in the year 2011.
NET INCOME. The Company recorded a net loss of $6.6 million or $0.92 per
share, which net of charges impacting comparability, resulted in a net loss of
$5.7 million or $0.79 per share for 1998, compared to a net loss of $1.8 million
or $0.28 per share in 1997.
FISCAL 1997 COMPARED TO FISCAL 1996
NET SALES. The Company'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
Company's decision to terminate a relationship with an existing customer of the
Company'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 BEP
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.
The installation of a new silicone coater at the Company's adhesive-backed
label stock manufacturing facility, which became operational in January 1997,
enabled the Company 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 Company incurred
approximately $2.3 million of outsourcing costs attributable to silicone coating
capacity constraints.
The Company'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 Company 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 have enabled the Company to increase output and
reduce manufacturing downtime. The Company 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
16
<PAGE>
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 Company'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
Company has net operating loss carry-forwards of approximately $9.5 million
available to offset future taxable income.
NET INCOME. The Company 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 Company 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 Company's previously existing credit facilities and the
write-off of related deferred financing costs.
LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY. The principal sources of liquidity for the Company and its
subsidiaries (other than Spinnaker Electrical) have historically been cash flow
from operations, proceeds from the 1996 issuance of the Company's Senior Notes
and availability under the Company's $60 million revolving credit facility
("Spinnaker Credit Facility").
The Company's cash provided by operating activities for 1998 was $11.3
million compared to $5.2 million in 1997. The increase was largely attributed to
improved cash management and the exclusion of substantially all trade payables
in the Coating-Maine acquisition. These factors were the basis for the increase
in accounts payable and accrued liabilities from prior year.
The Company's ability to fund its April 15, 1999 Senior Note interest
payment of approximately $6.2 million is dependent upon its availability under
the Spinnaker Credit Facility. The Company anticipates having sufficient
availability under the Spinnaker Credit Facility based on current operations.
The Spinnaker Credit Facility is available to fund acquisitions and support
periodic fluctuations in working capital. Credit availability under the
Spinnaker Credit Facility is subject to certain variables, such as inventory and
receivables eligible to be included in the borrowing base. The Spinnaker Credit
Facility will expire October 2001. The Company is charged an unused credit fee
every month of 0.375% per annum. Outstanding borrowings bear interest at
variable rates related to the prime interest rate or LIBOR. At December 31,
1998, the interest rate in effect was 8.1%. The funding for the Coating-Maine
Acquisition was the Company's initial borrowing under the Spinnaker Credit
Facility with the exception of periodic working capital borrowings by Entoleter.
As of March 19, 1999, aggregate availability under the Spinnaker Credit Facility
was approximately $45.3 million, of which approximately $36.5 million was
outstanding.
The other principal sources of liquidity for the Company during 1998 was the
issuance of the Company's promissory note ("Warren Note") to Warren in the
original principal amount of $7.0 million in connection with the Coating-Maine
Acquisition and the issuance of 228,499 shares of Common Stock and 228,499
shares of Class A Common Stock, no par value, upon the exercise of the remaining
Class A Warrants held by Boyle Fleming at a total price of $0.6 million.
The Warren Note bears interest at the rate of 10%, and 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
as the Warren Note. The Company 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 such interest in cash, under the Spinnaker 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 Spinnaker Credit Facility and the Company's
10 3/4% Senior Notes
17
<PAGE>
due 2006 ("Senior Notes"). The Warren Note matures on January 31, 2002, however,
it can 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 Spinnaker
Credit Facility. The Company does not anticipate having sufficient unused
availability under the terms of the Spinnaker Credit Facility to allow a
prepayment on March 31, 1999.
The principal source of liquidity for Spinnaker Electrical is cash flow from
operations and availability under its $5 million revolving credit agreement
("Electrical Credit Facility"). The Electrical Credit Facility is separate and
independent of the of the Spinnaker Credit Facility, and is secured by the
inventory and receivables of Spinnaker Electrical. The Electrical Credit
Facility is subject to certain variables, such as inventory and receivables
eligible to be included in the borrowing base. As of March 19, 1999, aggregate
availability was approximately $2.2 million, of which approximately $1.9 million
was outstanding. The other sources of liquidity for Spinnaker Electrical during
1998 were $4.5 million in term debt and a $0.5 million subordinated note issued
by Spinnaker Electrical to tesa. In addition, in connection with this
acquisition, the Company issued 200,000 shares of its Common Stock to tesa.
CAPITAL RESOURCES. The Company budgeted capital expenditures of
approximately $4 to $4.5 million during 1999, however, at December 31, 1998 the
Company had commitments for a minor portion of such capital expenditures. The
Company anticipates that it will have sufficient cash flow from operations and
availability under the Spinnaker Credit Facility to fund its commitments for
such capital expenditures at December 31, 1998, as well as the additional
capital expenditures budgeted for 1999.
OTHER
In February 1999, Spinnaker Coating terminated approximately 20 indirect
manufacturing personnel, which is estimated to eliminate approximately $1.4
million of costs on an annual basis. The first quarter 1999 restructuring charge
for severance and termination benefits is approximately $0.5 million.
On April 12, 1999, the Company agreed to sell its two industrial tape units,
Central Products Company and Spinnaker Electrical Tape Company, which comprise
its industrial tape segment, to Intertape Polymer Group, Inc. for approximately
$105 million and a seven-year warrant to purchase 300,000 shares of Intertape
common stock at $35 per share. The transactions are subject to certain
conditions, including U.S. government approval.
YEAR 2000
The Year 2000 issue is the result of computer programs being written using
two digits (rather than four) to define the applicable year. When the year 2000
begins, this issue may cause some hardware and software to interpret "00" as the
year 1900 and either stop processing date-related computations or process them
incorrectly. All computer hardware and software, building facilities and
equipment utilized by the Company require assessment to determine that they will
continue to operate accurately when they encounter a Year 2000 date before and
after January 1, 2000. For this purpose, the term "computer hardware and
software" includes systems that are commonly thought of as information
technology ("IT") systems, including accounting, data processing, telephone/PBX
systems, computerized manufacturing equipment and other miscellaneous systems.
Both IT and non-IT systems may contain imbedded technology, which complicates
the Company's Year 2000 identification, assessment, remediation and testing
efforts.
The Company has undertaken various initiatives intended to ensure that its
IT and non-IT systems will function properly with respect to dates in the Year
2000 and thereafter. The Company's Year 2000 initiatives are being performed
primarily by internal staff, and in certain operations, are supplemented by
outside consultants. No independent verification consultants have been hired by
the Company.
18
<PAGE>
The Company's external agent assurance initiative is approximately 60%
complete. Within each business segment, there is a concentration of critical
suppliers. Identifying, querying and processing responses from critical groups
has been the main thrust of the Company's assurance initiative. However,
responses received from mailings to substantially all vendors, suppliers and
subcontractors that do not share information systems with the Company are being
processed and additional inquiries are being made as necessary. To date, the
Company is not aware of any external agent with a Year 2000 issue that would
materially impact the Company's results of operations, liquidity, or capital
resources. However, the Company has no means of ensuring that external agents
will be Year 2000 ready. The inability of external agents to complete their Year
2000 resolution process in a timely manner could materially impact the Company.
The Company's assessment initiative is approximately 80% complete. Based
upon its identification and assessment efforts to date, the Company believes
that certain of the computer equipment and software it currently uses will
require replacement or modification. The Company expects the assessment phase to
be complete in June of 1999. Beginning in 1994, with the replacement of
manufacturing and accounting systems at certain subsidiaries, the Company
obtains replacements in the ordinary course of improving manufacturing and
reporting performance that are Year 2000 compliant. Certain phases of major
capital improvements related to accounting and manufacturing systems will be
completed by September 1999. The Company's testing and remediation initiatives
are approximately 60% complete and are expected to be 100% complete in September
of 1999. The remaining 40% relates primarily to the completion of system
conversions. No capital projects have been deferred or delayed due to Year 2000
efforts.
Most Year 2000 issues have been or will be eliminated by the normal
upgrading process of computer systems and manufacturing equipment. Therefore,
the incremental cost of addressing Year 2000 issues has been and will continue
to be funded from operating cash flows. Beginning with the major system
conversion projects in 1994, the Company has spent $5.5 million on IT system
replacements and upgrades to improve manufacturing and reporting performance to
date. The total incremental cost of addressing Year 2000 issues on IT and non-IT
systems is estimated to be less than $100,000. Future spending on system
conversion projects is estimated to be approximately $1.1 million, of which,
approximately $400,000 will be directly related to addressing Year 2000
compliance.
The estimated costs and projected dates of completion for the Company's Year
2000 program are based on management's estimates and were developed using
numerous assumptions of future events, some of which are beyond the Company's
control. The effect of non-compliance by external agents is not determinable.
The Company presently believes that with modifications to existing systems and
converting to new systems, the Year 2000 issue will not pose significant
operational problems for the Company as a whole. Due to the general uncertainty
inherent in the Year 2000 process, resulting in part from the incertitude
surrounding the state of readiness of third party suppliers and vendors, the
Company is unable to determine a reasonable worst case scenario at this time.
However, the Company is currently assessing the impact of a worst case scenario
in conjunction with the development of contingency plans, which are expected to
be complete by June of 1999. If such modifications and conversions are not
completed timely or are ineffective, the Year 2000 issue may materially and
adversely impact the Company's financial condition, results of operations and
cash flows.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The information required by this Item 7a is included under the captions
"Manufacturing and Raw Materials", "Competition", "International Sales" and
"Liquidity and Capital Resources" in Item 1, "Management's Discussion and
Analysis of Financial Condition and Results of Operation" in Item 7, and the
Company's Notes to Consolidated Financial Statements in this Form 10-K.
19
<PAGE>
The Company has $115 million of Senior Notes with a fixed interest rate and
approximately $42.7 million of revolving credit debt with an interest rate that
fluctuates with the market. An increase or decrease of 0.5% in the revolver
interest rate would impact interest expense approximately $215,000.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See Item 14(a).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Previously reported on the Company's Current Report on Form 8-K filed on
August 25, 1997.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The information required by this Item 10 is included under the caption
"Election of Directors" of the Company's Proxy Statement for its Annual Meeting
of Stockholders to be held on June 3, 1999, 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 Company's Proxy Statement for its Annual Meeting of
Stockholders to be held on June 3, 1999, 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 Company's Proxy Statement for its Annual Meeting of
Stockholders to be held on June 3, 1999, 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 Company's Proxy Statement for its Annual Meeting
of Stockholders to be held on June 3, 1999, which information is incorporated
herein by reference.
20
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES, AND REPORTS ON FORM 8-K
(A) THE FOLLOWING DOCUMENTS ARE FILED AS PART OF THIS FORM 10-K ANNUAL
REPORT:
(1) Financial Statements:
The Report of Independent Auditors and the following consolidated
Financial Statements of the Company are included herein:
Consolidated Balance Sheets-December 31, 1998 and 1997
Consolidated Statements of Operations-Years ended December 31, 1998,
1997, and 1996.
Consolidated Statements of Stockholders' Equity-Years ended December 31,
1998, 1997 and 1996.
Consolidated Statements of Cash Flows-Years ended December 31, 1998,
1997 and 1996
Notes to Consolidated Financial Statements
(2) Financial Statement Schedules:
Schedule I - Condensed Financial Information of Company
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:
<TABLE>
<S> <C> <C>
3.1 Restated Certificate of Incorporation of the Company (filed as Exhibit
3(i) to the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1994).
3.2 Bylaws of the Company (filed as Exhibit 3(ii) to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1994).
4.1 Indenture dated October 23, 1996, among the Company, 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 Company's Current Report on Form 8-K dated
November 7, 1996).
4.2 Supplemental Indenture dated March 17, 1998, among the Company, Spinnaker
Coating, CPC, Entoleter and Spinnaker Coating-Maine, Inc. (filed as
Exhibit 99.6 to the Company'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 Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1994).
10.2 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 Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1994).
10.3 Agreement, dated October 3, 1995, between Spinnaker Industries, Inc. and
Lynch Corporation (filed as Exhibit 7.8 to the Company's Current Report
on Form 8-K dated October 18, 1995).
</TABLE>
21
<PAGE>
<TABLE>
<S> <C> <C>
10.4 Agreement and Plan of Merger (Brown-Bridge Minority Interest), by and
among the Company, 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 Company's Current Report on Form
8-K dated November 7, 1996).
10.5 Credit Agreement (the Credit Agreement) among Central Products Company,
Brown-Bridge Industries, Inc. and Entoleter, Inc. as Borrowers, the
Company, 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 Company's Current
Report on Form 8-K dated November 7, 1996).
10.6 Fifth Amendment to the Credit Agreement (filed as Exhibit 99.4 to the
Company's Current Report on Form 8-K dated March 30, 1998).
10.7 Sixth Amendment to the Credit Agreement (filed as Exhibit 99.5 to the
Company's Current Report on Form 8-K dated March 30, 1998).
10.8 Asset Purchase Agreement, dated as of November 18, 1997, by and between
the Company and S.D. Warren Company (SDW) (filed as Exhibit 2.1 to the
Company's Current Report on Form 8-K dated March 30, 1998).
10.9 First Amendment to Asset Purchase Agreement, dated March 17, 1998 by and
between the Company and SDW (filed as Exhibit 2.2 to the Company's
Current Report on Form 8-K dated March 30, 1998).
10.10 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 Company's Current Report on Form 8-K
dated March 30, 1998).
10.11 Site Lease Agreement, dated March 17, 1998, between the Company and SDW
(filed as Exhibit 99.2 to the Company's Current Report on Form 8-K dated
March 30, 1997).
10.12 Site Separation and Services Agreement, dated March 17, 1998, by and
between the Company and SDW (filed as Exhibit 99.1 to the Company's
Current Report on Form 8-K dated March 30, 1998).
21 Subsidiaries of the Company.(1)
23.1 Consent of Ernst & Young LLP.(1)
23.2 Consent of Deloitte & Touche LLP.(1)
27.1 Financial Data Schedule.(1)
</TABLE>
- ------------------------
(1) Filed herewith.
(b) Reports on Form 8-K.
None.
The Company will furnish copies of the foregoing exhibits or filings upon
request and the payment of $.20 per page. Requests should be addressed to
Investor Relations, c/o Spinnaker Industries, Inc., 1700 Pacific Avenue, Suite
1600, Dallas, Texas 75201.
22
<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, 1998 and 1997, and the
related consolidated statements of operations, shareholders equity, and cash
flows for each of the three years in the period ended December 31, 1998. 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, we did not audit
the financial statements of Central Products Company, a wholly-owned subsidiary,
which statements reflect total revenues of $126,383,000 for the year ended
December 31, 1996. 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 that period, 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, 1998 and December 31, 1997, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1998, 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
March 26, 1999
23
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
Spinnaker Industries, Inc.:
We have audited the statements of operations and retained earnings
(accumulated deficit) and cash flows of Central Products Company (a wholly-owned
subsidiary of Spinnaker Industries, Inc.) as of December 31, 1996. 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 audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the results of its operations and its cash flows of Central Products
Company for the year ended December 31, 1996 in conformity with generally
accepted accounting principles.
Deloitte & Touche LLP
Milwaukee, Wisconsin
February 21, 1997
24
<PAGE>
SPINNAKER INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1998 1997
---------- ----------
(IN THOUSANDS, EXCEPT
SHARE DATA)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................................................. $ -- $ 5,977
Accounts receivable, less allowance for doubtful accounts and cash discounts of $820
in 1998 and $734 in 1997............................................................ 36,254 24,886
Inventories........................................................................... 42,384 30,745
Prepaid expenses and other............................................................ 4,258 2,594
Deferred income taxes................................................................. 3,590 1,922
---------- ----------
Total current assets................................................................ 86,486 66,124
Property, plant and equipment:
Land.................................................................................. 708 583
Buildings and improvements............................................................ 17,818 13,402
Machinery and equipment............................................................... 94,092 61,262
Accumulated depreciation.............................................................. (22,788) (14,913)
---------- ----------
89,830 60,334
Goodwill, net........................................................................... 43,780 24,025
Other assets............................................................................ 7,835 6,235
---------- ----------
Total assets........................................................................ $ 227,931 $ 156,718
---------- ----------
---------- ----------
</TABLE>
See accompanying notes, which are an integral part of these financial
statements.
25
<PAGE>
SPINNAKER INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1998 1997
---------- ----------
(IN THOUSANDS, EXCEPT
SHARE DATA)
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable...................................................................... $ 30,503 $ 14,529
Accrued liabilities................................................................... 7,547 6,319
Current portion of long-term debt..................................................... 1,691 864
Working capital revolver.............................................................. 42,731 446
Accrued interest...................................................................... 2,575 2,591
---------- ----------
Total current liabilities........................................................... 85,047 24,749
Long-term debt, less current portion.................................................... 126,086 115,049
Net deferred income taxes............................................................... 4,814 5,554
Pension liabilities..................................................................... 4,280 1,097
Shareholders' equity:
Class A Common Stock, no par or stated value, authorized 10,000,000 shares; issued
3,661,399 shares in 1998 and 3,432,900 shares in 1997 and Common Stock, no par or
stated value, authorized 15,000,000 shares; issued 3,871,012 in 1998 and 3,442,513
in 1997 at designated value......................................................... 3,124 3,124
Additional paid-in capital.............................................................. 15,867 11,557
Retained earnings (accumulated deficit)................................................. (10,533) (3,914)
Adjustment for minimum pension liability................................................ (642) (386)
Less cost of common stock in treasury, 95,332 shares each of Class A Common Stock and
Common Stock in 1998 and 1997....................................................... (112) (112)
---------- ----------
Total shareholders' equity.......................................................... 7,704 10,269
---------- ----------
Total liabilities and shareholders' equity........................................ $ 227,931 $ 156,718
---------- ----------
---------- ----------
</TABLE>
See accompanying notes, which are an integral part of these financial
statements.
26
<PAGE>
SPINNAKER INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------------
1998 1997 1996
---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE
DATA)
<S> <C> <C> <C>
Net sales.................................................................... $ 280,941 $ 231,976 $ 246,536
Cost of sales................................................................ 247,071 199,647 213,942
---------- ---------- ----------
Gross profit................................................................. 33,870 32,329 32,594
Selling, general and administrative expenses................................. 25,303 21,450 22,372
---------- ---------- ----------
Operating profit............................................................. 8,567 10,879 10,222
Interest expense............................................................. 16,976 13,238 9,872
Guarantee fee to parent...................................................... -- -- 375
Other income (expense)--net.................................................. (86) 112 (338)
---------- ---------- ----------
Loss before income taxes, minority interest and extraordinary charge, net of
tax........................................................................ (8,495) (2,247) (363)
Income tax benefit........................................................... 1,876 460 37
Minority interest............................................................ -- -- (299)
---------- ---------- ----------
Loss before extraordinary charge............................................. (6,619) (1,787) (625)
Extraordinary charge on early extinguishment of debt, net of income tax
benefit of $953............................................................ -- -- (1,843)
---------- ---------- ----------
Net loss..................................................................... $ (6,619) $ (1,787) $ (2,468)
---------- ---------- ----------
---------- ---------- ----------
Earnings per common share:
Loss before extraordinary item............................................... $ (0.92) $ (0.28) $ (0.11)
Extraordinary charge......................................................... -- -- (0.31)
---------- ---------- ----------
Net loss per common share.................................................... $ (0.92) $ (0.28) $ (0.42)
---------- ---------- ----------
---------- ---------- ----------
Earnings per common share-assuming dilution:
Loss before extraordinary item............................................... $ (0.92) $ (0.28) $ (0.11)
Extraordinary charge......................................................... -- -- (0.31)
---------- ---------- ----------
Net loss per common share assuming dilution.................................. $ (0.92) $ (0.28) $ (0.42)
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
See accompanying notes, which are an integral part of these financial
statements.
27
<PAGE>
SPINNAKER INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
CLASS A ADJUSTMENT
COMMON COMMON ADDITIONAL RETAINED FOR MINIMUM
STOCK STOCK COMMON PAID-IN- EARNINGS PENSION TREASURY
OUTSTANDING OUTSTANDING STOCK CAPITAL (DEFICIT) LIABILITY STOCK
----------- ----------- ----------- ----------- ----------- ------------- -----------
(IN THOUSANDS EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995... 2,715,694 -- $ 3,124 $ 3,709 $ 341 $ -- $ (112)
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 -- -- --
Comprehensive loss:
Net loss..................... -- -- -- -- (2,468) -- --
Other comprehensive loss, net
of tax..................... -- -- -- -- -- (280) --
Comprehensive loss.............
----------- ----------- ----------- ----------- ----------- ----- -----
Balance at December 31, 1996... 3,074,598 3,084,211 3,124 10,631 (2,127) (280) (112)
Exercise of warrants........... 262,970 262,970 -- 702 -- -- --
Other.......................... -- -- -- 224 -- -- --
Comprehensive loss:
Net loss..................... -- -- -- -- (1,787) -- --
Other comprehensive loss, net
of tax..................... -- -- -- -- -- (106) --
Comprehensive loss.............
----------- ----------- ----------- ----------- ----------- ----- -----
Balance at December 31, 1997... 3,337,568 3,347,181 3,124 11,557 (3,914) (386) (112)
Exercise of warrants........... 228,499 228,499 -- 610 -- -- --
Stock issued for acquisition of
Spinnaker Electrical......... -- 200,000 -- 3,700 -- -- --
Comprehensive loss:
Net loss..................... -- -- -- -- (6,619) -- --
Other comprehensive loss, net
of tax..................... -- -- -- -- -- (256) --
Comprehensive loss.............
----------- ----------- ----------- ----------- ----------- ----- -----
Balance at December 31, 1998... 3,566,067 3,775,680 $ 3,124 $ 15,867 $ (10,533) $ (642) $ (112)
----------- ----------- ----------- ----------- ----------- ----- -----
----------- ----------- ----------- ----------- ----------- ----- -----
<CAPTION>
TOTAL
---------
<S> <C>
Balance at December 31, 1995... $ 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
Comprehensive loss:
Net loss..................... (2,468)
Other comprehensive loss, net
of tax..................... (280)
---------
Comprehensive loss............. (2,748)
---------
Balance at December 31, 1996... 11,236
Exercise of warrants........... 702
Other.......................... 224
Comprehensive loss:
Net loss..................... (1,787)
Other comprehensive loss, net
of tax..................... (106)
---------
Comprehensive loss............. (1,893)
---------
Balance at December 31, 1997... 10,269
Exercise of warrants........... 610
Stock issued for acquisition of
Spinnaker Electrical......... 3,700
Comprehensive loss:
Net loss..................... (6,619)
Other comprehensive loss, net
of tax..................... (256)
---------
Comprehensive loss............. (6,873)
---------
Balance at December 31, 1998... $ 7,704
---------
---------
</TABLE>
See accompanying notes, which are an integral part of these financial
statements.
28
<PAGE>
SPINNAKER INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1998 1997 1996
---------- --------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss....................................................................... $ (6,619) $ (1,787) $ (2,468)
Adjustments to reconcile net loss to net cash provided by operating activities:
Extraordinary charge on early extinguishment of debt, net of tax............. -- -- 1,843
Depreciation................................................................. 8,667 5,786 4,631
Amortization of deferred financing costs and goodwill........................ 2,432 1,795 1,639
Contribution of other assets to charitable organization...................... -- -- 248
Minority interest and accrued interest on notes payable to related parties... -- -- 467
Deferred income taxes........................................................ (1,876) (689) (556)
Changes in operating assets and liabilities:
Accounts receivable........................................................ (6,769) (2,891) 2,794
Inventories................................................................ (269) 1,893 (5,697)
Prepaid expenses and other................................................. (1,645) (328) 52
Accounts payable and accrued liabilities................................... 17,350 1,414 3,274
---------- --------- ----------
Net cash provided by operating activities...................................... 11,271 5,193 6,227
INVESTING ACTIVITIES
Acquisition of Spinnaker Coating minority interest........................... -- -- (2,295)
Acquisition of Spinnaker Coating--Maine...................................... (47,933) -- --
Acquisition of Spinnaker Electrical.......................................... (7,267) -- --
Purchases of property, plant, and equipment.................................. (7,182) (8,837) (8,979)
Additions to other assets.................................................... (1,199) (291) (974)
---------- --------- ----------
Net cash used in investing activities.......................................... (63,581) (9,128) (12,248)
--
FINANCING ACTIVITIES --
Borrowings (payments) on working capital revolvers, net...................... 42,085 (240) (26,463)
Proceeds from long-term debt................................................. 4,500 -- 123,500
Principal payments on long-term debt and leases.............................. (136) (249) (76,645)
Deferred financing costs..................................................... (726) -- (7,139)
Exercise of stock warrants and subsidiary options............................ 610 702 1,170
Payments of notes payable to related parties................................. -- -- (1,751)
---------- --------- ----------
Net cash provided by financing activities...................................... 46,333 213 12,672
---------- --------- ----------
Increase (decrease) in cash and cash equivalents............................... (5,977) (3,722) 6,651
Cash and cash equivalents at beginning of year................................. 5,977 9,699 3,048
---------- --------- ----------
Cash and cash equivalents at end of year....................................... $ -- $ 5,977 $ 9,699
---------- --------- ----------
---------- --------- ----------
</TABLE>
See accompanying notes, which are an integral part of these financial
statements.
29
<PAGE>
SPINNAKER INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
OWNERSHIP
Spinnaker Industries, Inc., ("Spinnaker") is a 61% owned subsidiary of Lynch
Manufacturing Corporation, which is a wholly-owned subsidiary of Lynch
Corporation ("Lynch" or "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"), Spinnaker Electrical Tape Company ("Spinnaker Electrical") 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 is a manufacturer and marketer of adhesive-backed materials,
primarily for the industrial tape and pressure sensitive label stock markets.
Spinnaker's industrial tape operations consist of CPC and Spinnaker Electrical.
The industrial tape operations manufacture and sell water activated and pressure
sensitive industrial tapes used for carton sealing applications and insulation
in the production of motors, coils and transformers. The adhesive-backed label
stock operations, Spinnaker Coating, develop, manufacture, and market a broad
line of standard and custom adhesive-backed label stock products for masking,
labeling, promoting, decorating and identifying applications. These two
operations account for over 97% of the Company's pro forma net sales for 1998
and 1997.
Spinnaker also manufactures and markets industrial process equipment and air
pollution control scrubbers through its Entoleter subsidiary.
The Company's operations are primarily in the U.S; however, $21.9 million,
$14.2 million and $11.5 million of the Company's sales were export sales for the
years ended December 31, 1998, 1997, and 1996, 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 58% of total accounts receivable. Accounts receivable of CPC comprise
33% of total accounts receivable and consist principally of amounts due from
paper distributors. Accounts receivable of Spinnaker Electrical comprise 8% of
total accounts receivable and consist principally of amounts due from electrical
insulation material distributors. Accounts
30
<PAGE>
SPINNAKER INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
receivable of Entoleter, which comprise the remainder 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 1998, 1997 and 1996, 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 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 55% of total inventory, is valued using the specific
identification method. CPC's inventory, which comprises 36% of total inventory,
is valued using the last-in, first-out (LIFO) method. Spinnaker Electrical's
inventory, which comprises 7% of total inventory, is valued using the first-in,
first-out (FIFO) method. Entoleter's inventory, which comprises the remaining 2%
of total inventory, is valued using the FIFO method. The excess of current
replacement over LIFO cost of CPC inventory was $211,000 at December 31, 1998
and 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 to 30
years. Accumulated amortization at December 31, 1998 and 1997 totaled $4,012,000
and $2,411,000, 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. A valuation allowance is
recorded to reduce a deferred tax asset to that portion that is expected to more
likely than not be realized.
31
<PAGE>
SPINNAKER INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
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.
RESEARCH AND DEVELOPMENT
Research and development expenses were $683,000, $826,000 and $838,000 in
1998, 1997 and 1996, respectively.
SHAREHOLDERS' EQUITY
During 1998 and 1997, Boyle Fleming & Company ("BF") exercised Class "A"
warrants pursuant to which the Company issued to BF 228,499 shares of Common
Stock and 228,499 shares of Class A Common Stock, and 262,970 shares of Common
Stock and 262,970 shares of Class A Common Stock, respectively.
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.
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, 1998, the Company had 30,000 shares of Class A Common Stock
and 40,000 shares of Common Stock reserved for future issuance for 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 fair value of long-term debt at
December 31, 1998 and 1997 was approximately $100,050,000 (or 87% of face value)
and $119,600,000 (or 104% of face value), respectively.
32
<PAGE>
SPINNAKER INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 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
As of March 31, 1998, the Company adopted SFAS No. 130, REPORTING
COMPREHENSIVE INCOME, issued in September of 1997. SFAS No. 130 requires the
reporting and display of comprehensive income, which is composed of net income
and other comprehensive income items, in a full set of general purpose financial
statements. Other comprehensive income items are revenues, expenses, gains and
losses that under generally accepted accounting principles are excluded from net
income and reflected as components of equity; such as currency translation and
minimum pension liability adjustments. The only comprehensive income item
excluded from net income and included as a component of equity in the periods
ended December 31, 1998, 1997 and 1996 was a minimum pension liability
adjustment of $256,000, $106,000 and $280,000, respectively.
As of December 31, 1998, the Company adopted SFAS No. 131, DISCLOSURE ABOUT
SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION, which was issued in June of
1997. SFAS No. 131 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. See Note 12 for disclosure of segments.
As of December 31, 1998, the Company adopted SFAS No. 132, EMPLOYERS'
DISCLOSURES ABOUT PENSIONS AND OTHER POSTRETIREMENT BENEFITS, which was issued
in February of 1998. SFAS No. 132 is an amendment to SFAS No.'s 87, 88 and 106
and revises employers' disclosures about pension and other postretirement
benefit plans. It does not change the measurement or recognition of those plans.
See Note 6 for disclosures of pensions and other postretirement benefits.
RECLASSIFICATIONS
Certain reclassifications have been made to the prior year financial
statements to conform to the current year's presentation.
2. ACQUISITIONS
ACQUISITION OF COATING--MAINE
Effective March 17, 1998, the Company acquired the assets of the pressure
sensitive business ("Pressure Sensitive Business") of S. D. Warren ("Warren").
Warren is a large pulp and paper producer owned by an indirect wholly-owned
subsidiary of SAPPI, Ltd., a public South African conglomerate. The
33
<PAGE>
SPINNAKER INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. ACQUISITIONS (CONTINUED)
acquired pressure sensitive business, renamed Spinnaker Coating--Maine, Inc.
("Coating--Maine") effective with the acquisition, manufactures and markets
label stock primarily for the EDP segment of the label stock market.
Coating--Maine 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 $51.8 million, plus the assumption of certain
liabilities and related acquisition costs. The purchase price was funded from
availability under the Company's amended $60 million revolving credit facility
(the "Spinnaker Credit Facility") and the issuance of a subordinated convertible
note (the "Warren Note") by the Company to Warren in the amount of $7.0 million.
The acquisition was accounted for as a purchase with the purchase price
allocated to the assets acquired and the liabilities assumed as follows:
<TABLE>
<S> <C>
Current assets..................................... $ 13,869
Property, plant and equipment...................... 20,000
Goodwill........................................... 21,287
Acquisition costs.................................. 1,479
Current liabilities................................ (262)
Non-current liabilities............................ (1,440)
---------
$ 54,933
---------
---------
</TABLE>
Goodwill arising from the Coating--Maine acquisition is amortized using the
straight-line method over a period of 30 years.
ACQUISITION OF SPINNAKER ELECTRICAL
Effective July 30, 1998, the Company completed its acquisition of tesa tape,
inc.'s pressure sensitive electrical tape product line and manufacturing plant
("Electrical Tape Business"). The Electrical Tape Business, renamed Spinnaker
Electrical Tape Company effective with the acquisition, produces electrical tape
for insulating motors, coils and transformers for major customers in Europe,
Canada and the U.S. The purchase price under the agreement was approximately
$10.7 million plus related acquisition costs. The purchase price was comprised
of $3.7 million in Company common stock, $4.5 million in term debt, $2.0 million
in cash and a $0.5 million subordinated note (the "tesa note") by Spinnaker
Electrical to tesa tape, inc.
The acquisition was accounted for as a purchase with the purchase price
(subject to adjustment upon finalization of certain acquisition costs) allocated
to the assets acquired and the liabilities assumed as follows:
<TABLE>
<S> <C>
Current assets..................................... $ 2,100
Property, plant and equipment...................... 8,800
Acquisition costs.................................. 767
Current liabilities................................ (200)
---------
$ 11,467
---------
---------
</TABLE>
34
<PAGE>
SPINNAKER INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. ACQUISITIONS (CONTINUED)
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 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.
PRO FORMA INFORMATION
The operating results of Coating--Maine and Spinnaker Electrical are
included in the consolidated statements of operations from their respective
acquisition dates. The following unaudited combined pro forma information shows
the results of the Company's operations presented as though both acquisitions
occurred at the beginning of 1997.
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1998 1997
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Net sales............................................................. $ 301,849 $ 312,588
Net loss.............................................................. $ 7,053 $ 1,292
Net loss per common share............................................. $ 0.96 $ 0.20
Net loss per common share-assuming dilution........................... $ 0.96 $ 0.20
</TABLE>
35
<PAGE>
3. INVENTORIES
Inventories are comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1998 1997
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Finished goods.......................................................... $ 28,395 $ 18,677
Work-in-process......................................................... 3,648 2,770
Raw materials and supplies.............................................. 12,103 9,947
Less reserves for obsolete and slow moving inventory.................... (1,762) (649)
--------- ---------
$ 42,384 $ 30,745
--------- ---------
--------- ---------
</TABLE>
During the fourth quarter of 1998, the Company adjusted inventory reserves
by $1.0 million related to certain industrial tape inventory.
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 (the "Senior Notes") due 2006. The Senior Notes proceeds were used
to retire certain outstanding term and revolver obligations. The early
extinguishment of debt resulted in an extraordinary charge to earnings of
$1,843,000, net of applicable income tax, related to the write-off of related
existing deferred financing costs.
The Senior 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 Senior 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. Spinnaker
Coating, CPC and Entoleter ("Guarantors") unconditionally guarantee the Senior
Notes, jointly and severally. Spinnaker Electrical, an unrestricted subsidiary,
is not a guarantor of the Senior Notes. The corporate office has no separate
operations and its assets primarily relate to cash, fixed assets,
36
<PAGE>
4. LONG-TERM DEBT AND WORKING CAPITAL REVOLVERS (CONTINUED)
deferred taxes, and deferred financing costs. Summarized financial information
for the Guarantors, Spinnaker Electrical, and the corporate office is presented
below for the year ended December 31, 1998:
<TABLE>
<CAPTION>
GUARANTORS ELECTRICAL CORPORATE ELIMINATIONS CONSOLIDATED
----------- ----------- ---------- ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Condensed balance sheet
Current assets....................... $ 78,757 $ 5,956 $ 2,826 $ (1,053) $ 86,486
Property, plant and equipment........ 78,665 9,451 1,714 -- 89,830
Goodwill, net and other assets....... 87,331 -- 122,029 (157,745) 51,615
----------- ----------- ---------- ------------ ------------
Total assets....................... $ 244,753 $ 15,407 $ 126,569 $ (158,798) $ 227,931
----------- ----------- ---------- ------------ ------------
----------- ----------- ---------- ------------ ------------
Current liabilities.................. $ 80,914 $ 6,028 $ 2,913 $ (4,808) $ 85,047
Long term debt, less current
portion............................ 121,940 4,071 115,952 (115,877) 126,086
Other non-current liabilities........ 9,094 -- -- -- 9,094
Shareholders' equity................. 32,805 5,308 7,704 (38,113) 7,704
----------- ----------- ---------- ------------ ------------
Total liabilities and
shareholders' equity........... $ 244,753 $ 15,407 $ 126,569 $ (158,798) $ 227,931
----------- ----------- ---------- ------------ ------------
----------- ----------- ---------- ------------ ------------
Condensed statement of operations
Net sales............................ $ 276,705 $ 4,236 $ -- $ -- $ 280,941
Cost of sales........................ 243,065 4,006 -- -- 247,071
----------- ----------- ---------- ------------ ------------
Gross profits...................... 33,640 230 -- -- 33,870
Selling, general and administrative
expenses........................... 21,703 594 3,006 -- 25,303
Interest expense and other income
(expense)--net..................... (19,349) (214) 2,501 -- (17,062)
Income tax benefit................... 1,690 186 -- -- 1,876
----------- ----------- ---------- ------------ ------------
Net loss........................... $ (5,722) $ (392) $ (505) $ -- $ (6,619)
----------- ----------- ---------- ------------ ------------
----------- ----------- ---------- ------------ ------------
</TABLE>
37
<PAGE>
4. LONG-TERM DEBT AND WORKING CAPITAL REVOLVERS (CONTINUED)
Long-term debt at December 31, 1998 and 1997 consisted of the following:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
(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
10% subordinated note with PIK interest and prepayments payable on March 31, 1999 and
2000, subject to certain conditions..................................................... 7,000 --
Term loan with interest at prime plus 0.50% or LIBOR plus 2.5%, interest only for 9
months, 7 year amortization............................................................. 4,500 --
Subordinated note with PIK interest at federal funds rate, principal and interest due July
30, 1999................................................................................ 500 --
9 1/4% mortgage note from bank, payable on demand, secured by certain property of
Entoleter............................................................................... 729 777
Capital lease obligations................................................................. 48 136
---------- ----------
127,777 115,913
Less current maturities................................................................... (1,691) (864)
---------- ----------
$ 126,086 $ 115,049
---------- ----------
---------- ----------
</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>
1999.............................................. $ 1,691
2000.............................................. 7,381
2001.............................................. 381
2002.............................................. 378
2003.............................................. 375
Thereafter........................................ 117,571
---------
$ 127,777
---------
---------
</TABLE>
The Company also maintains short-term lines of credit with banks for working
capital needs at each subsidiary. In conjunction with the acquisition of
Coating-Maine, the Spinnaker Credit Facility was amended to increase the
aggregate facility amount from $40 million to $60 million. In conjunction with
the acquisition of Electrical Tape Business, Spinnaker Electrical entered into a
separate $5 million revolving credit agreement ("Electrical Credit Facility").
Credit availability under the Spinnaker Credit Facility and the Electrical
Credit Facility 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 for each facility, based on an
annual rate of 0.375%. All outstanding borrowings under the Spinnaker Credit
Facility bear interest at the prime interest rate plus 1.75% or LIBOR plus
2.75%. All outstanding borrowings under the Electrical Credit Facility bear
interest at the prime interest rate plus 0.50% or LIBOR plus 2.5%. At December
31, 1998, the combined effective interest rate for each facility's borrowings
was approximately 8.12% and 8.00%, respectively. The Company carries over 90% of
the outstanding Spinnaker Credit Facility Borrowings in LIBOR instruments. The
Company had cash advances outstanding of approximately $40.3 million and $2.4
million and available borrowings of approximately $7.1 million and $1.1 million
under the Spinnaker Credit Facility and Electrical Credit Facility,
respectively, as of December 31, 1998. As there is no right of offset between
the two facilities, cash collections are swept against their respective
facility's outstanding balance. At December 31, 1997, the Company had cash
38
<PAGE>
4. LONG-TERM DEBT AND WORKING CAPITAL REVOLVERS (CONTINUED)
advances outstanding of approximately $446,000 under the lines of credit at an
interest rate of 10.25%. The lines of credit are secured by the operating assets
of the Company's subsidiaries.
In conjunction with the acquisition of Coating--Maine, the Company issued a
Note to Warren with an original principal amount of $7.0 million, bearing
payment-in-kind ("PIK") interest at 10% per annum. The Note is convertible for
shares of the Company's Common Stock on the basis of 40 shares per $1,000 of the
outstanding principal amount of the Note (or $25 per share), subject to
adjustment as set forth below. The Note's PIK feature allows the Company to pay
the first year's interest payment by issuing an additional subordinated
convertible note having similar terms; thereafter, interest is payable in cash
provided the Company is not in default, after giving effect for the payment, of
covenants under the Spinnaker Credit Facility. If the Company is prohibited from
paying interest due in cash, the Company will continue 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 Spinnaker Credit Facility and has availability in excess
of $15 million under the Spinnaker Credit Facility after giving effect for the
payment. 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 Note and remaining unpaid
interest will mature on January 31, 2002.
In conjunction with the acquisition of the Electrical Tape Business,
Spinnaker Electrical issued $4.5 million in term debt which bears interest at
the lower of prime plus 0.50% or LIBOR (London Interbank Offered Rate) plus
2.50% per annum. The term debt is interest only for the first nine months, with
monthly principal payments beginning in May 1999. Principal payments are based
on a seven-year amortization with a balloon payment due July 2003. In addition,
the Company issued a twelve month subordinated seller note to tesa tape, inc.
with an original principal amount of $0.5 million, bearing PIK interest at the
federal funds rate. Principal and interest are payable in cash on July 30, 1999
unless Spinnaker Electrical is in default, after giving effect for the payment,
of covenants under the Electrical Credit Facility. If Spinnaker Electrical is
prohibited from paying accrued interest and principal in cash, the Company will
make payment by issuing Company Common Stock.
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 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. As of December 31, 1998, the Company had approximately $544,000 in
outstanding letters of credit. The Company's line of credit agreement expires in
October 2001.
Certain agreements with its lenders impose restrictions on the ability of
the Company or the Company's subsidiaries to pay dividends. At December 31,
1998, 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 Senior Notes and other financing activities. These financing
costs are deferred and amortized over the term of the related debt. Unamortized
financing costs of approximately $5,800,000 and $5,700,000 at December 31, 1998
and 1997, respectively, are included in other assets.
Interest paid in 1998, 1997 and 1996 on all outstanding borrowings amounted
to approximately $15.0 million, $12.4 million, and $8 million, respectively.
39
<PAGE>
5. ACCRUED LIABILITIES
Accrued liabilities at December 31, 1998 and 1997 consist of employee
related obligations, such as pensions, vacations, commissions, and salaries and
wages; worker's compensation and health insurance; promotion and warranty
allowances; and real estate and property taxes. At both December 31, 1998 and
1997 the largest individual liability included herein was vacation obligation
amounts of $2.5 million and $1.8 million, respectively.
6. EMPLOYEE BENEFIT PLANS
CENTRAL PRODUCTS COMPANY
Central Products has a defined benefit pension plan for union employees per
their collective bargaining agreement and a defined benefit plan for non-union
employees. CPC's funding policy is to contribute funds necessary to meet future
benefit obligations.
The net periodic pension cost for the year ended December 31, 1998 and 1997,
included the following components:
<TABLE>
<CAPTION>
1998 1997 1996
---------------------- ---------------------- ----------------------
UNION NON-UNION UNION NON-UNION UNION NON-UNION
--------- ----------- --------- ----------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Service cost-benefits earned during the period.... $ 172 $ 438 $ 155 $ 420 $ 151 $ 398
Interest cost on projected benefit obligation..... 417 333 370 285 342 246
Expected return on plan assets.................... (381) (290) (352) (244) (355) (215)
Prior service cost recognized..................... 17 -- -- -- -- --
--------- ----- --------- ----- --------- -----
Net periodic pension cost......................... $ 225 $ 481 $ 173 $ 460 $ 138 $ 429
--------- ----- --------- ----- --------- -----
--------- ----- --------- ----- --------- -----
The foregoing measurement of net periodic pension
cost is based on the following assumptions:
Weighted-average discount rate.................... 7.50% 7.50% 7.75% 7.75% 7.75% 7.75%
Weighted-average rate of compensation increase.... N/A 4.00% N/A 4.00% N/A 4.00%
Weighted-average expected long-term rate of return
on plan assets.................................. 8.00% 8.00% 8.00% 8.00% 8.00% 8.00%
</TABLE>
As of August 1, 1998, in conjunction with the renewal of CPC's union
contract, the union pension plan was amended to increase the monthly benefit per
year of service each year through July 31, 2003, at which time the union
contract expires. The impact of the amendment is presented in the reconciliation
of the
40
<PAGE>
6. EMPLOYEE BENEFIT PLANS (CONTINUED)
benefit obligation. The following table sets forth the union and non-union
plans' benefit obligation information as of December 31, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
---------------------- ----------------------
UNION NON-UNION UNION NON-UNION
--------- ----------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Benefit obligation at beginning of year............................... $ 5,406 $ 4,568 $ 4,837 $ 3,817
Service cost-benefits earned during the period........................ 172 438 155 420
Interest cost on projected benefit obligation......................... 417 333 370 285
Actuarial losses...................................................... 536 373 229 102
Benefits paid......................................................... (217) (62) (185) (56)
Plan amendments....................................................... 547 -- -- --
--------- ----------- --------- -----------
Benefit obligation at end of year..................................... $ 6,861 $ 5,650 $ 5,406 $ 4,568
--------- ----------- --------- -----------
--------- ----------- --------- -----------
</TABLE>
The following table sets forth the fair value of plan assets for the union
and non-union plans as of December 31, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
---------------------- ----------------------
UNION NON-UNION UNION NON-UNION
--------- ----------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Plan assets at beginning of year...................................... $ 4,779 $ 3,468 $ 4,489 $ 2,847
Actual return on assets............................................... 130 90 475 286
Contributions by employer............................................. 169 368 -- 390
Benefits paid......................................................... (217) (62) (185) (56)
--------- ----------- --------- -----------
Plan assets at end of year............................................ $ 4,861 $ 3,864 $ 4,779 $ 3,468
--------- ----------- --------- -----------
--------- ----------- --------- -----------
</TABLE>
The following table sets forth the union and non-union plans' funded status
as of December 31, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
---------------------- ----------------------
UNION NON-UNION UNION NON-UNION
--------- ----------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Funded status......................................................... $ (2,000) $ (1,787) $ (625) $ (1,100)
Unamortized prior service cost........................................ 529 -- -- --
Unrecognized actuarial gain........................................... 1,174 710 386 136
--------- ----------- --------- -----------
Net amount recognized................................................. $ (297) $ (1,077) $ (239) $ (964)
--------- ----------- --------- -----------
--------- ----------- --------- -----------
Amounts recognized in the balance sheet:
Accrued benefit liability............................................. $ (2,000) $ (1,077) $ (625) $ (964)
Intangible asset...................................................... 529 -- -- --
Accumulated other comprehensive income................................ 1,174 -- 386 --
--------- ----------- --------- -----------
Net amount recognized................................................. $ (297) $ (1,077) $ (239) $ (964)
--------- ----------- --------- -----------
--------- ----------- --------- -----------
</TABLE>
The fair value of assets for the union and non-union plan is based on the
actual plan assets as of December 31, 1998 and 1997. At December 31, 1997 and
1998, plan assets consist primarily of equity, bond, and bank money market
funds.
41
<PAGE>
Central Products also sponsors 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 $334,000 and $367,000
during 1998 and 1997, respectively. The Company recorded expense under the
non-union plan of approximately $30,000 on behalf of its Corporate employees
during 1998.
SPINNAKER COATING
In conjunction with the acquisition of Coating--Maine, Coating--Maine began
to offer a defined benefit pension plan for union employees per their collective
bargaining agreement, and non-union employees. The seller retained the defined
benefit pension obligation for non-union and union retirees.
The net periodic pension cost for the year ended December 31, 1998 included
the following components:
<TABLE>
<CAPTION>
UNION NON-UNION
----------- -------------
(IN THOUSANDS)
<S> <C> <C>
Service cost-benefits earned during the period............................ $ 69 $ 100
Interest cost on projected benefit obligation............................. 11 50
--- -----
Net periodic pension cost................................................. $ 80 $ 150
--- -----
--- -----
The foregoing measurement of net periodic pension cost is based on the
following assumptions:
Weighted-average discount rate............................................ 7.50% 7.50%
Weighted-average rate of compensation increase............................ N/A 4.00%
Weighted-average expected long-term rate of return on plan assets......... 8.00% 8.00%
</TABLE>
The following table sets forth the union and non-union plans' benefit
obligation information as of December 31, 1998:
<TABLE>
<CAPTION>
UNION NON-UNION
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
Benefit obligation at acquisition date.................................... $ 186 $ 835
Service cost-benefits earned during the period............................ 69 100
Interest cost on projected benefit obligation............................. 11 50
Actuarial losses.......................................................... 22 96
----- -----------
Benefit obligation at end of year......................................... $ 288 $ 1,081
----- -----------
----- -----------
</TABLE>
There were no plan assets for the union and non-union plans as of December
31, 1998.
42
<PAGE>
The following table sets forth the union and non-union plans' funded status
as of December 31, 1998:
<TABLE>
<CAPTION>
UNION NON-UNION
--------- -----------
(IN THOUSANDS)
<S> <C> <C>
Funded status............................................................ $ (288) $ (1,081)
Unrecognized actuarial loss.............................................. 22 96
--------- -----------
Net amount recognized.................................................... $ (266) $ (985)
--------- -----------
--------- -----------
Amounts recognized in the balance sheet:
Net amount recognized.................................................... $ (266) $ (985)
--------- -----------
--------- -----------
</TABLE>
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 $559,000, $442,000, and $470,000
in 1998, 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.
Net periodic pension cost for the year ended December 31, 1998, 1997 and
1996 included the following components:
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Service cost-benefits earned during the period....................................... $ 35 $ 39 $ 38
Interest cost on projected benefit obligation........................................ 78 78 71
Expected return on plan assets....................................................... (106) (96) (92)
Net amortization and deferral........................................................ (8) (8) (8)
--------- --------- ---------
Net periodic pension cost............................................................ $ (1) $ 13 $ 9
--------- --------- ---------
--------- --------- ---------
The foregoing measurement of net periodic pension cost is based on the following
assumptions:
Weighted-average discount rate....................................................... 7.00% 7.25% 7.25%
Weighted-average rate of compensation increase....................................... 4.00% 4.00% 4.00%
Weighted-average expected long-term rate of return on plan assets.................... 8.00% 8.00% 8.00%
</TABLE>
43
<PAGE>
The following table sets forth the benefit obligation as of December 31,
1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Benefit obligation at beginning of year........................................................ $ 1,132 $ 1,035
Service cost-benefits earned during the period................................................. 35 39
Interest cost on projected benefit obligation.................................................. 78 78
Contributions by employees..................................................................... 2 1
Actuarial (gain)/loss.......................................................................... (7) 70
Benefits paid.................................................................................. (63) (91)
--------- ---------
Benefit obligation at end of year.............................................................. $ 1,177 $ 1,132
--------- ---------
--------- ---------
</TABLE>
The following table sets forth the fair value of plan assets as of December
31, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Plan assets at beginning of year............................................................... $ 1,349 $ 1,229
Actual return on plan assets................................................................... 17 210
Contributions by employees..................................................................... 2 1
Benefits paid.................................................................................. (63) (91)
--------- ---------
Plan assets at end of year..................................................................... $ 1,305 $ 1,349
--------- ---------
--------- ---------
</TABLE>
At December 31, 1998 and 1999, plan assets consist primarily of equity, bond
and bank money market funds.
The following table sets forth the plan's funded status as of December 31,
1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Funded status.................................................................................. $ 127 $ 217
Unrecognized actuarial gain.................................................................... 59 (22)
Unrecognized net (asset) or obligation......................................................... (25) (33)
--------- ---------
Net amount recognized.......................................................................... $ 161 $ 162
--------- ---------
--------- ---------
Amounts recognized in the balance sheet:
Prepaid benefit liability...................................................................... $ 161 $ 162
--------- ---------
--------- ---------
</TABLE>
7. INCOME TAXES
Prior to April 6, 1996, 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. 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 1998, 1997 and 1996, the Company generated approximately $9,841,000,
$3,617,000 and $5,888,000 respectively, of net operating loss carryforwards for
federal income tax purposes which are available to offset future taxable income.
These carryforwards, which are expected to be fully utilized, expire in the year
2018, 2017 and 2011, respectively.
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
44
<PAGE>
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, 1998
and 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
-------------------- ----------------------
DEFERRED TAX DEFERRED TAX
-------------------- ----------------------
ASSET LIABILITY ASSET LIABILITY
--------- --------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Inventory reserve........................................................ $ 954 $ -- $ 356 $ --
Tax over book depreciation............................................... -- 9,910 -- 9,115
Assets deducted for tax purposes......................................... -- 1,288 -- 658
Compensation accruals.................................................... 1,656 -- 1,008 --
Other reserves and accruals.............................................. 720 -- 1,165 --
Net operating loss carryforwards......................................... 6,644 -- 3,612 --
--------- --------- --------- -----------
Total gross deferred income taxes........................................ $ 9,974 $ 11,198 $ 6,141 $ 9,773
--------- --------- --------- -----------
--------- --------- --------- -----------
</TABLE>
Significant components of the (provision) benefit for income taxes for the
year ended December 31, 1998, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal.............................................................................. $ -- $ -- $ --
State................................................................................ -- (67) (121)
--------- --------- ---------
Total current.......................................................................... -- (67) (121)
Deferred:
Federal.............................................................................. 2,153 627 (11)
State................................................................................ (277) (100) 169
--------- --------- ---------
1,876 527 158
--------- --------- ---------
Income tax benefit..................................................................... $ 1,876 $ 460 $ 37
--------- --------- ---------
--------- --------- ---------
</TABLE>
Reconciliation of the statutory federal income tax rate to the effective
income tax rate for the year ended December 31, 1998, 1997 and 1996 follows:
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Statutory federal rate.............................................................. 34.0% 34.0% 34.0%
Increase (decrease) resulting from:
Goodwill.......................................................................... (1.0) (3.8) (22.1)
Meals and entertainment........................................................... (0.8) (2.6) (9.7)
State income taxes (net of federal tax effect).................................... (2.2) (4.9) 8.7
Write-off of unrealizable deferred tax assets..................................... (6.7) -- --
Other............................................................................. (1.2) (2.2) (0.8)
--- --- -----
Effective income tax rate........................................................... 22.1% 20.5% 10.1%
--- --- -----
--- --- -----
</TABLE>
Income taxes refunded, net of payments was $166,000 in 1997.
45
<PAGE>
8. RELATED PARTY TRANSACTIONS
Lynch 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 1998, 1997 and 1996. 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 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 were $375,000.
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).
46
<PAGE>
9. EARNINGS PER SHARE
The following table sets forth the computation of the basic and diluted
earnings per share for the year ended December 31, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Numerator:
Net loss........................................................................ $ (6,619) $ (1,787) $ (2,468)
Denominator
Denominator for basic earnings per share- weighted-average shares............... 7,199 6,321 5,931
Effect of dilutive securities:
Class A Warrants................................................................ -- -- --
--------- --------- ---------
Dilutive potential common shares.................................................. $ 7,199 $ 6,321 $ 5,931
--------- --------- ---------
--------- --------- ---------
Loss per common share............................................................. $ (0.92) $ (0.28) $ (0.42)
--------- --------- ---------
--------- --------- ---------
Loss per common share-assuming dilution........................................... $ (0.92) $ (0.28) $ (0.42)
--------- --------- ---------
--------- --------- ---------
</TABLE>
For additional disclosures regarding the outstanding directors' stock
options, see Notes 10.
As of December 31, 1997 and 1996, there were 228,499 and 490,000 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, 1998, 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 exercised. In 1997, 10,000 additional
director's options were granted to purchase one share of Common Stock at a price
of $27 per option exercised. Shares related to these options were not included
in the 1998, 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 exercised (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.
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 0.50; 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
47
<PAGE>
10. STOCK OPTION PLANS (CONTINUED)
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 1998,
1997 and 1996 operations is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------------------------ ------------------------ ------------------------
NET LOSS NET LOSS NET LOSS
NET LOSS PER SHARE NET LOSS PER SHARE NET LOSS PER SHARE
----------- ----------- ----------- ----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
As reported....................................... $ 6,619 $ 0.92 $ 1,787 $ 0.28 $ 2,468 $ 0.42
Pro forma......................................... $ 6,670 $ 0.93 $ 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 three business segments, adhesive-backed label
stock, industrial tape and industrial processing equipment. Identifiable assets
of each industry segment are the assets used by the segment in its operations,
excluding general corporate assets and intercompany balances.
For the years ended December 31, 1998, 1997 and 1996, one customer accounted
for $18.4 million, $21.4 million, and $22.2 million, respectively, of the
adhesive-backed label stock segment's net sales. The net sales of the industrial
tape segment included $18.8 million and $12.9 million from its top two customers
48
<PAGE>
12. SEGMENT INFORMATION (CONTINUED)
for the year ended December 31, 1998 and $19.1 million and $14.5 million from
its top customer for the year ended December 31, 1997 and 1996, respectively.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1998 1997 1996
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
NET SALES
Adhesive-backed label stock................................................ $ 151,561 $ 106,787 $ 114,564
Industrial tape............................................................ 121,806 119,739 124,088
Industrial processing equipment............................................ 7,574 5,450 7,884
---------- ---------- ----------
$ 280,941 $ 231,976 $ 246,536
---------- ---------- ----------
---------- ---------- ----------
OPERATING PROFIT (LOSS)
Adhesive-backed label stock................................................ $ 8,104 $ 6,923 $ 6,923
Industrial tape............................................................ 3,289 6,769 5,315
Industrial processing equipment............................................ 180 (534) 64
Unallocated corporate expenses............................................. (3,006) (2,279) (2,080)
---------- ---------- ----------
Total consolidated operating profit...................................... 8,567 10,879 10,222
Interest and other expenses................................................ (17,062) (13,126) (10,585)
---------- ---------- ----------
Total consolidated pretax loss........................................... $ (8,495) $ (2,247) $ (363)
---------- ---------- ----------
---------- ---------- ----------
CAPITAL EXPENDITURES
Adhesive-backed label stock................................................ $ 2,219 $ 1,854 $ 6,875
Industrial tape............................................................ 4,856 6,760 1,703
Industrial processing equipment............................................ 76 104 399
General corporate.......................................................... 31 119 2
---------- ---------- ----------
$ 7,182 $ 8,837 $ 8,979
---------- ---------- ----------
---------- ---------- ----------
DEPRECIATION/AMORTIZATION
Adhesive-back label stock.................................................. $ 3,906 $ 2,104 $ 1,462
Industrial tape............................................................ 6,052 4,565 4,311
Industrial processing equipment............................................ 274 180 180
General corporate.......................................................... 867 732 317
---------- ---------- ----------
$ 11,099 $ 7,581 $ 6,270
---------- ---------- ----------
---------- ---------- ----------
ASSETS
Adhesive-backed label stock................................................ $ 108,133 $ 47,188 $ 46,248
Industrial tape............................................................ 107,586 95,582 95,925
Industrial processing equipment............................................ 2,622 3,530 4,409
General corporate.......................................................... 9,590 10,418 10,594
---------- ---------- ----------
$ 227,931 $ 156,718 $ 157,176
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
49
<PAGE>
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>
1999................................................................ $ 1,216
2000................................................................ 1,093
2001................................................................ 825
2002................................................................ 803
2003................................................................ 835
Thereafter.......................................................... 3,929
</TABLE>
Rent expense under operating leases were $2,562,000, $2,103,000 and
$1,743,000 for the years ended December 31, 1998, 1997 and 1996, respectively.
The Company leases certain property and equipment, including warehousing and
sales and distribution equipment, under operating leases that extend from one to
ten years.
14. MATTERS OCCURRING AFTER THE DATE OF THE FINANCIAL STATEMENTS (UNAUDITED)
On April 12, 1999, the Company agreed to sell its two industrial tape units,
Central Products Company and Spinaker Electrical Tape Company, which comprise
its industrial tape segment, to Intertape Polymer Group, Inc. for approximately
$105 million and a seven-year warrant to purchase 300,000 shares of Intertape
common stock at $35 per share. The transactions are subject to certain
conditions, including U.S. government approval.
50
<PAGE>
SCHEDULE I: CONDENSED FINANCIAL INFORMATION OF REGISTRANT
SPINNAKER INDUSTRIES, INC.
(PARENT COMPANY)
CONDENSED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1998 1997
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Current assets
Cash and cash equivalents............................................................... $ -- $ 231
Accounts receivable..................................................................... 25 107
Subsidiary receivable, current portion.................................................. 570 --
Other current assets.................................................................... 2,231 1,583
---------- ----------
Total current assets.................................................................... 2,826 1,921
Office equipment (net of depreciation).................................................... 1,714 1,782
Subsidiary receivable..................................................................... 84,802 85,182
Investment in subsidiaries................................................................ 31,607 33,628
Other assets.............................................................................. 5,620 6,715
---------- ----------
Total assets............................................................................ $ 126,569 $ 129,228
---------- ----------
---------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable and accrued liabilities.................................................. $ 2,913 $ 2,784
Payable to subsidiaries................................................................... 952 1,175
Senior Notes.............................................................................. 115,000 115,000
Total shareholders' equity................................................................ 7,704 10,269
---------- ----------
Total liabilities and shareholders' equity.............................................. $ 126,569 $ 129,228
---------- ----------
---------- ----------
</TABLE>
51
<PAGE>
SCHEDULE I CONDENSED FINANCIAL INFORMATION OF REGISTRANT
SPINNAKER INDUSTRIES, INC.
(PARENT COMPANY)
CONDENSED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1998 1997 1996
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Interest and dividends........................................................... $ 33 $ 11 $ 11
Management fees and interest income from subsidiaries............................ 15,072 14,618 3,064
--------- --------- ---------
Total income................................................................. 15,105 14,629 3,075
Cost and expenses:
Guarantee fee to parent........................................................ -- -- 375
Unallocated corporate administrative expense................................... 3,006 2,279 2,080
Interest expense and other..................................................... 12,752 12,412 4,596
--------- --------- ---------
Total cost and expenses.......................................................... 15,758 14,691 7,051
--------- --------- ---------
Loss before income taxes, equity in net income of subsidiaries and extraordinary
charge......................................................................... (653) (62) (3,976)
Income tax (provision) benefit................................................... (501) (130) 1,669
--------- --------- ---------
Loss before equity in net income (loss) of subsidiaries and extraordinary
charge......................................................................... (1,154) (192) (2,307)
Equity in net income (loss) of subsidiaries...................................... (5,465) (1,595) 1,682
--------- --------- ---------
Loss before extraordinary charge................................................. (6,619) (1,787) (625)
Extraordinary charge on early extinguishment of debt, net of tax:
Parent......................................................................... -- -- (546)
Subsidiaries................................................................... -- -- (1,297)
--------- --------- ---------
Net loss......................................................................... $ (6,619) $ (1,787) $ (2,468)
--------- --------- ---------
--------- --------- ---------
</TABLE>
52
<PAGE>
SCHEDULE I: CONDENSED FINANCIAL INFORMATION OF REGISTRANT
SPINNAKER INDUSTRIES, INC.
(PARENT COMPANY)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1998 1997 1996
--------- --------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash provided by (used in) operating activities..................................... $ (278) $ 106 $ (4,666)
Investing activities:
Acquisition of Spinnaker Coating minority interest................................ -- -- (2,295)
Advances to subsidiaries.......................................................... -- -- (81,307)
Purchases of office equipment..................................................... (31) (119) (2)
--------- --------- ----------
Net cash used in investing activities............................................... (31) (119) (83,604)
Financing activities:
Advances to/from subsidiaries, net................................................ 194 (580) 1,375
Proceeds from notes payable....................................................... -- -- 123,500
Payments on notes payable......................................................... -- -- (30,962)
Deferred financing costs.......................................................... (726) -- (6,872)
Exercise of warrants.............................................................. 610 702 500
Other............................................................................. -- (160) 289
--------- --------- ----------
Net cash provided by (used in) financing activities................................. 78 (38) 87,830
--------- --------- ----------
Total decrease in cash and cash equivalents......................................... (231) (51) (440)
Cash and cash equivalents at beginning of year...................................... 231 282 722
--------- --------- ----------
Cash and cash equivalents at end of year............................................ $ -- $ 231 $ 282
--------- --------- ----------
--------- --------- ----------
</TABLE>
53
<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 net income (loss) of subsidiaries
since the date of acquisition. The Company's share of net income (loss) of its
unconsolidated subsidiaries is included in consolidated loss using the equity
method. The parent company-only financial statements should be read in
conjunction with the Company's consolidated financial statements.
54
<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
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Date: April 23, 1999
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.
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SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
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Chief Executive Officer
/s/ RICHARD J. BOYLE and Chairman of the
- ------------------------------ Board (PRINCIPAL April 23, 1999
Richard J. Boyle EXECUTIVE OFFICER)
/s/ NED N. FLEMING, III
- ------------------------------ President, Chief Operating April 23, 1999
Ned N. Fleming, III Officer
/s/ CRAIG J. JENNINGS Vice President, Finance
- ------------------------------ and Treasurer (PRINCIPAL April 23, 1999
Craig J. Jennings FINANCIAL OFFICER)
/s/ ANTHONIE C. VAN EKRIS
- ------------------------------ Director April 23, 1999
Anthonie C. van Ekris
- ------------------------------ Director April 23, 1999
Joseph P. Rhein
/s/ ROBERT E. DOLAN
- ------------------------------ Director April 23, 1999
Robert E. Dolan
/s/ FRANK E. GRZELECKI
- ------------------------------ Director April 23, 1999
Frank E. Grzelecki
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55
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INDEX TO EXHIBITS
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EXHIBIT NO.
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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, Central Products,
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 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).
10.3 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).
10.4 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).
10.5 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).
10.6 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).
10.7 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).
10.8 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).
10.9 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).
10.10 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).
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EXHIBIT NO.
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10.11 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).
10.12 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.(2)
23.1 Consent of Ernst & Young LLP.(1)
23.2 Consent of Deloitte & Touche LLP.(1)
27 Financial Data Schedule.(2)
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(1) Filed herewith.
(2) Previously filed.
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the use of our report dated March 26, 1999, included in the
Annual Report on Form 10-K of Spinnaker Industries, Inc. for the year ended
December 31, 1998, with respect to the consolidated financial statements, as
amended, included in this Form 10-K/A.
ERNST & YOUNG LLP
Dallas, Texas
April 20, 1999
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EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
We consent to the use of our report dated February 21, 1997 relating to the
financial statements of Central Products Company (not presented separately
herein), in the Annual Report on Form 10-K/A of Spinnaker Industries, Inc.
DELOITTE & TOUCHE LLP
Milwaukee, Wisconsin
April 20, 1999
