SPECIALTY PAPERBOARD INC, 8-K/A, 1997-01-14

SPECIALTY PAPERBOARD INC
8-K/A, 1997-01-14
PAPERBOARD MILLS

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

------------------------

FORM 8-K/A

CURRENT REPORT

AMENDMENT NO. 1

PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934

DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED):
OCTOBER 31, 1996

------------------------

SPECIALTY PAPERBOARD, INC.

<TABLE>
<S> <C> <C>
DELAWARE 0-20231 82-0429330
(State or other (Commission File Number) (IRS Employer
jurisdiction of incorporation) Identification
No.)
</TABLE>

161 BRUDIES ROAD, BRATTLEBORO, VERMONT 05302
(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code:
(802) 257-0365

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<PAGE>

The undersigned Company hereby amends the following items, financial
statements, exhibits or other portions of its Current Report on Form 8-K dated
November 13, 1996 as set forth in the pages attached hereto.

ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS

(a) Financial statements of business as acquired.

(b) Pro forma financial information.

<PAGE>

ITEM 7--FINANCIAL STATEMENTS PRO FORMA FINANCIAL INFORMATION AND EXHIBITS

(a) Financial Statements of Business Acquired.

INDEX TO FINANCIAL STATEMENTS

CPG INVESTORS INC. AND SUBSIDIARIES

<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Report of Independent Accountants.......................................................................... F-2
Consolidated Balance Sheet as of October 31, 1996.......................................................... F-3
Consolidated Statement of Income for the ten months ended October 31, 1996................................. F-4
Consolidated Statement of Stockholders' Equity for the ten months ended October 31, 1996................... F-5
Consolidated Statement of Cash Flows for the ten months ended October 31, 1996............................. F-6
Notes to the Consolidated Financial Statements............................................................. F-7
Report of Independent Accountants.......................................................................... F-16
Financial Statements:
Consolidated Balance Sheet as of December 31, 1994 and 1995
and September 30, 1996 (Unaudited)..................................................................... F-17
Consolidated Statement of Income and Retained Earnings for the period November 1, 1993 (commencement of
operations) to December 26, 1993 and for the years ended December 31, 1994 and 1995, and for the nine
months ended September 30, 1995 and 1996 (Unaudited)................................................... F-18
Consolidated Statement of Cash Flows for the period November 1, 1993 (commencement of operations) to
December 26, 1993 and for the years ended December 31, 1994 and 1995, and for the nine months ended
September 30, 1995 and 1996 (Unaudited)................................................................ F-19
Notes to Consolidated Financial Statements (Information as of September 30, 1996 and for the nine months
ended September 30, 1995 and 1996 is Unaudited)........................................................ F-20
</TABLE>

ARCON HOLDINGS CORP. AND SUBSIDIARY

<TABLE>
<S> <C>
Report of Independent Accountants.................................................... F-30
Consolidated Balance Sheet as of October 31, 1996.................................... F-31
Consolidated Statements of Income and Retained Earnings for the year ended
October 31, 1996.................................................................... F-32
Consolidated Statement of Cash Flows for the year ended October 31, 1996............. F-33
Notes to the Consolidated Financial Statements....................................... F-34
Report of Independent Accountants.................................................... F-42
Consolidated Balance Sheet at October 31, 1995 and 1994 and September 30, 1996
(unaudited)......................................................................... F-43
Consolidated Statement of Income and Retained Earnings (Deficit) for the year ended
October 31, 1995, the period from April 14, 1994 (Inception) through October 31,
1994 and the eleven month periods ended September 30, 1996 and 1995 (unaudited)..... F-44
Consolidated Statement of Cash Flows for the year ended October 31, 1995, the period
from April 14, 1994 (Inception) through October 31, 1994 and the eleven month
periods ended September 30, 1996 and 1995........................................... F-45
Notes to Consolidated Financial Statements........................................... F-46
</TABLE>

F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT

The Board of Directors and Stockholders
CPG Investors Inc.:

We have audited the accompanying consolidated balance sheet of CPG Investors
Inc. and subsidiaries (the "Company") as of October 31, 1996, and the related
consolidated statements of income, stockholders' equity and cash flows for the
ten months then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated 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, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of CPG
Investors Inc. and subsidiaries as of October 31, 1996, and the consolidated
results of their operations and their cash flows for the ten months then ended,
in conformity with generally accepted accounting principles.

KPMG PEAT MARWICK LLP

Richmond, Virginia
December 31, 1996

F-2
<PAGE>
CPG INVESTORS INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEET

OCTOBER 31, 1996

(DOLLAR AMOUNTS IN THOUSANDS)
(EXCEPT PER SHARE DATA)

<TABLE>
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents........................................................ $ 146
Accounts receivable, less allowances of $397..................................... 11,328
Inventories...................................................................... 8,604
Income taxes receivable.......................................................... 562
Prepaid expenses................................................................. 269
Deferred income taxes............................................................ 1,194
---------
Total current assets......................................................... 22,103
---------
Property, plant and equipment, net................................................. 20,168
Other assets....................................................................... 1,068
---------
$ 43,339
---------
---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................................. $ 5,085
Current portion of long-term debt................................................ 1,750
Accrued liabilities.............................................................. 6,420
---------
Total current liabilities.................................................... 13,255
---------
Long-term debt, less current portion............................................... 8,030
---------
Other liabilities.................................................................. 4,152
---------
Deferred income taxes.............................................................. 559
---------
Total liabilities............................................................ 25,996
Commitments and contingencies
Stockholders' equity:
Common stock, $.01 par value:
Class A, nonvoting, 462,814 shares authorized, 460,171 shares outstanding.... 5
Class B, voting, 10,101 shares authorized and outstanding.................... --
Class C, nonvoting, 104,286 shares authorized and outstanding................ 1
Additional paid-in capital....................................................... 6,547
Retained earnings................................................................ 10,790
---------
Total stockholders' equity................................................... 17,343
---------
$ 43,339
---------
---------
</TABLE>

The accompanying notes are an integral part of the consolidated financial
statements.

F-3
<PAGE>
CPG INVESTORS INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF INCOME

FOR THE TEN MONTHS ENDED OCTOBER 31, 1996
(DOLLAR AMOUNTS IN THOUSANDS)

<TABLE>
<S> <C>
Net sales.......................................................................... $ 78,875
Costs and expenses:
Cost of goods sold............................................................... 65,662
Selling and administrative expenses.............................................. 5,125
---------
Income from operations......................................................... 8,088
Interest expense................................................................... 891
---------
Income before income taxes..................................................... 7,197
Income tax expense................................................................. 2,873
---------
Net income....................................................................... $ 4,324
---------
---------
</TABLE>

The accompanying notes are an integral part of the consolidated financial
statements.

F-4
<PAGE>
CPG INVESTORS INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

FOR THE TEN MONTHS ENDED OCTOBER 31, 1996

(DOLLAR AMOUNTS IN THOUSANDS)

<TABLE>
<CAPTION>
COMMON STOCK
--------------------------------------------------
CLASS A CLASS B CLASS C ADDITIONAL
--------------- -------------- --------------- PAID-IN RETAINED MINIMUM PENSION
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS LIABILITY ADJUSTMENT TOTAL
------- ------ ------ ------ ------- ------ ---------- -------- -------------------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December
31, 1995........ 405,671 $ 4 10,101 $-- 104,286 $ 1 $4,565 $ 6,466 $(156) $10,880
Net income........ -- -- -- -- -- -- -- 4,324 -- 4,324
Exercise of stock
options......... 54,500 1 -- -- -- -- 558 -- -- 559
Tax benefit of
option
exercise........ -- -- -- -- -- -- 1,424 -- -- 1,424
Minimum pension
liability
adjustment...... -- -- -- -- -- -- -- -- 156 156
------- ------ ------ ------ ------- ------ ---------- -------- ----- -------
Balance, October
31, 1996........ 460,171 $ 5 10,101 $-- 104,286 $ 1 $6,547 $ 10,790 $ -- $17,343
------- ------ ------ ------ ------- ------ ---------- -------- ----- -------
------- ------ ------ ------ ------- ------ ---------- -------- ----- -------
</TABLE>

The accompanying notes are an integral part of the consolidated financial
statements.

F-5
<PAGE>
CPG INVESTORS INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CASH FLOWS

FOR THE TEN MONTHS ENDED OCTOBER 31, 1996

(DOLLAR AMOUNTS IN THOUSANDS)

<TABLE>
<S> <C>
Cash provided by (used in) operating activities:
Net income....................................................................... $ 4,324
Items not affecting cash:
Depreciation................................................................... 1,265
Amortization................................................................... 188
Deferred income taxes.......................................................... 176
Postretirement benefits........................................................ 181
Changes in operating assets and liabilities:
Accounts receivable............................................................ (2,137)
Inventories.................................................................... (371)
Income taxes receivable........................................................ (360)
Prepaid expenses............................................................... 134
Accounts payable............................................................... (413)
Accrued liabilities............................................................ 2,640
Other, net..................................................................... (355)
---------
Cash provided by operating activities........................................ 5,272
---------
Cash used in investing activities -- expenditures for property, plant and
equipment........................................................................ (4,150)
---------
Cash provided by (used in) financing activities:
Proceeds from exercise of stock options........................................ 559
Net reduction in revolving debt................................................ (1,365)
Payments on term debt.......................................................... (750)
---------
Cash used in financing activities............................................ (1,556)
---------
Decrease in cash and cash equivalents.............................................. (434)
Cash and cash equivalents, beginning of period..................................... 580
---------
Cash and cash equivalents, end of period........................................... $ 146
---------
---------
</TABLE>

The accompanying notes are an integral part of the consolidated financial
statements.

F-6
<PAGE>
CPG INVESTORS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

OCTOBER 31, 1996

1. ORGANIZATION AND ACQUISITION:

On November 5, 1993, CPG Investors Inc. ("CPG"), through its wholly owned
subsidiary, CPG Holdings Inc. ("Holdings"), acquired selected net operating
assets of Custom Papers Group Inc. and its subsidiaries from Rexam Inc.
("Rexam"), a wholly owned subsidiary of Rexam plc (the "Acquisition").

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include
the accounts of CPG and its wholly owned subsidiaries (collectively, the
"Company"). All significant intercompany balances and transactions have been
eliminated in consolidation.

ACCOUNTING PERIOD: The accompanying consolidated financial statements are
as of and for the ten-month period ended October 31, 1996, when all of the
issued and outstanding common stock of the Company was purchased by Specialty
Paperboard, Inc. (See note 13.) No adjustments related to this transaction have
been reflected in these consolidated financial statements.

CASH AND CASH EQUIVALENTS: Cash equivalents consists of cash which is
temporarily invested in U.S. Government securities with original maturities not
exceeding three months as part of the Company's management of day-to-day
operating cash receipts and disbursements.

INVENTORIES: Inventory values include all costs directly associated with
making products: materials, labor and manufacturing overhead including certain
general and administrative costs at mill locations. Inventory values are
presented at the lower of cost or market, with the cost of substantially all
inventories determined by the last-in, first-out ("LIFO") cost flow assumption.
(See Note 3.)

PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment are stated at
cost, less accumulated depreciation. Plant and equipment are depreciated over
the estimated useful lives of the assets using the straight-line method for
financial reporting purposes and accelerated methods for income tax purposes.

Maintenance and repair costs are charged to expense as incurred, and
expenditures that increase the capacity, efficiency or useful lives of existing
assets are capitalized. When assets are sold or retired, their cost and
accumulated depreciation are removed from the accounts and any gain or loss is
included in income.

REVENUE RECOGNITION: The Company recognizes revenue from product sales at
the time of shipment to the customer.

INTEREST EXPENSE: The Company capitalizes interest expense as part of the
cost of constructing certain facilities and equipment. No interest expense was
capitalized in 1996. Interest paid during the ten months ended October 31, 1996
totaled $727,166.

INCOME TAXES: Income taxes are accounted for under the asset and liability
method. Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.

F-7
<PAGE>
CPG INVESTORS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

OCTOBER 31, 1996

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
RESEARCH AND DEVELOPMENT EXPENSES: Research and development expenses, which
are expensed as incurred, were $1,423,803 for the ten months ended October 31,
1996.

DEFERRED FINANCING COSTS: The Company capitalized the costs associated with
obtaining the necessary financing for its 1993 acquisition. These costs, which
totaled $195,371 at October 31, 1996, net of $565,698 of accumulated
amortization, are included in other assets on the consolidated balance sheet and
are being amortized on a straight-line basis over the terms of the loan
commitments provided in the credit agreement.

BUSINESS SEGMENT INFORMATION: The Company's operations involve a single
industry segment--the manufacture and sale of specialty paper products. All
operations are located within the United States. Export sales are not
significant. Sales to one customer amounted to $11,046,392 (14.0% of net sales)
for the ten months ended October 31, 1996. No other individual customer
accounted for more than 10% of the Company's net sales during this period.

RISKS AND UNCERTAINTIES: The Company operates five paper mills--four in the
eastern United States and one in the midwest--producing a diversity of specialty
paper products. The Company is not dependent on any single customer, group of
customers, market, geographic area or supplier of materials, labor or services.
The consolidated financial statements include, where necessary, amounts based on
judgments of management. These estimates include allowances for doubtful
accounts and customer returns, accruals for self-insured medical benefits and
workers' compensation insurance, environmental compliance costs, income taxes
and determinations of discount and other rate assumptions for pensions and
postretirement benefits expenses. Actual results could differ from these
estimates.

STOCK OPTION PLAN: Prior to January 1, 1996, the Company accounted for its
stock option plan in accordance with the provisions of Accounting Principles
Board ("APB") Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and
related interpretations. As such, compensation expense would be recorded on the
date of grant only if the current market price of the underlying stock exceeded
the exercise price. On January 1, 1996, the Company adopted Statement of
Financial Accounting Standards No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION,
which permits entities to recognize as expense over the vesting period the fair
value of all stock-based awards on the date of grant. As this statement only
applies to options granted subsequent to December 31, 1994, adoption of this
statement did not have a material impact on the Company's consolidated financial
statements.

3. INVENTORIES:

The Company uses the LIFO method of determining the cost of substantially
all of its inventories. Under the LIFO method, the most recent additions to
inventory are assumed to be the first items of inventory used in production or
sold to customers. The Company uses the LIFO method in order to more properly
match current costs against current revenues. If inventories were valued using
the first-in, first-out method, the inventory amounts would have been
approximately $1,306,000 higher than those reported at October 31, 1996. If the
FIFO method of inventory valuation had been utilized, reported net income would
have been approximately $705,742 lower for the ten months ended October 31,
1996.

F-8
<PAGE>
CPG INVESTORS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

OCTOBER 31, 1996

3. INVENTORIES: (CONTINUED)
Inventories by major category were (in thousands):

<TABLE>
<S> <C>
Raw materials...................................................... $ 3,514
Work-in-process.................................................... 1,421
Finished goods..................................................... 4,347
Operating supplies................................................. 628
---------
9,910
Subtraction to state inventories at LIFO cost...................... (1,306)
---------
$ 8,604
---------
---------
</TABLE>

4. LONG-TERM DEBT:

Long-term debt consisted of the following (in thousands):

<TABLE>
<S> <C>
Revolving loans.................................................... $ 1,530
Term loans......................................................... 8,250
---------
9,780
Less current portion............................................... (1,750)
---------
$ 8,030
---------
---------
</TABLE>

Scheduled maturities for the term loans in the four years after October 31,
1997 are as follows: 1998-- $2,000,000; 1999--$2,000,000; 2000--$2,000,000; and
2001--$500,000.

Holdings has a credit agreement with two banks which provides for borrowings
of up to $13,000,000 under a revolving loan commitment and $8,250,000 under a
term loan commitment. Substantially all of the Company's assets are pledged as
collateral for borrowings under the credit agreement. The terms of the credit
agreement include various covenants which require, among other things, the
maintenance of certain financial ratios and a certain minimum net worth, as
defined in the agreement. Holdings is not permitted to pay dividends to CPG
until its debt to total capital, as defined in the agreement, is reduced to 50%
and maintained after any dividend is declared.

The maximum outstanding borrowings for the ten months ended October 31, 1996
were $13,600,000. The average outstanding borrowings were approximately
$11,626,400 for the ten months ended October 31, 1996 and the weighted average
interest rate, excluding commitment fees, was 6.75%. Borrowings bear interest
which is payable monthly at a defined base rate or LIBOR (5.5% at October 31,
1996), plus 1%, at the Company's option. At October 31, 1996, the weighted
average interest rate was 6.73%. There are annual commitment fees of 3/16% on
the aggregate loan commitment. The revolving loan commitment is available
through November 5, 1998. The term loan commitment requires quarterly principal
payments of $250,000 through December 31, 1996 and quarterly principal payments
of $500,000 commencing March 31, 1997, with the final payment due December 31,
2000.

The recorded value of the Company's long-term debt at October 31, 1996
approximates its fair value due to the variable nature of this debt.

F-9
<PAGE>
CPG INVESTORS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

OCTOBER 31, 1996

4. LONG-TERM DEBT: (CONTINUED)

In 1994, in order to reduce its exposure to fluctuations in interest rates
on its long term debt, the Company purchased an interest rate collar contract
from a bank. The collar contract covered $10,000,000 of the Company's bank debt
in 1996. The amount of bank debt covered by the collar contract is reduced to
$8,000,000 in 1997 and $6,000,000 in 1998. Pursuant to the agreement, the
Company will receive quarterly payments in 1997 and 1998 equal to the amount of
debt covered times the amount by which LIBOR exceeds 6.5%. Should LIBOR be less
than 4.5% in 1997 and 1998, the Company is obligated to make quarterly payments
equal to the amount of debt covered times the amount that LIBOR is less than
4.5%. As LIBOR, for the ten months ended October 31, 1996, ranged from 5.2% to
5.6%, this contract had no impact on the accompanying consolidated statement of
income.

The cost of this contract, totaling $79,404 at October 31, 1996, net of
accumulated amortization of $72,596, is included in other assets on the
consolidated balance sheet. It is being amortized on a straight-line basis over
the life of the contract. The estimated fair value of the collar contract at
October 31, 1996 was $27,967 and is based on a market quote obtained from a
broker. The Company believes that the risk of loss due to nonperformance by the
counterparty to this contract is not significant.

5. SUPPLEMENTAL BALANCE SHEET INFORMATION:

Property, plant and equipment consisted of the following (in thousands):

<TABLE>
<S> <C>
Land............................................................... $ 2,093
Buildings.......................................................... 2,444
Machinery and equipment............................................ 15,392
Construction-in-process............................................ 3,754
---------
23,683
Less accumulated depreciation...................................... 3,515
---------
$ 20,168
---------
---------
</TABLE>

Accrued liabilities consisted of (in thousands):

<TABLE>
<S> <C>
Compensation........................................................ $ 4,045
Utilities........................................................... 911
Employee benefits................................................... 436
Customer volume discounts........................................... 377
Interest payable.................................................... 75
Other............................................................... 576
---------
$ 6,420
---------
---------
</TABLE>

F-10
<PAGE>
CPG INVESTORS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

OCTOBER 31, 1996

6. INCOME TAXES:

The components of the provision for income taxes were (in thousands):

<TABLE>
<S> <C>
Current income tax provision:
Federal........................................................... $ 2,127
State............................................................. 570
---------
2,697
Deferred income tax provision
Federal........................................................... 141
State............................................................. 35
---------
176
$ 2,873
---------
---------
</TABLE>

A reconciliation of income tax expense using the statutory federal income
tax rate of 34% compared to the Company's actual income tax expense follows (in
thousands):

<TABLE>
<S> <C>
Income tax expense at federal statutory rate........................ $ 2,447
Increase resulting from:
State, net of federal income tax benefit.......................... 376
Other, net........................................................ 50
---------
Income tax expense.............................................. $ 2,873
---------
---------
</TABLE>

The tax effects of temporary differences that gave rise to the deferred tax
assets and liabilities are presented below (in thousands):

<TABLE>
<S> <C>
Deferred tax assets:
Postretirement benefits........................................... $ 889
Pension benefits.................................................. 406
Other employee benefits........................................... 1,099
Other............................................................. 338
---------
2,732
---------
Deferred tax liabilities:
Property, plant and equipment..................................... 2,097
---------
Net deferred tax assets......................................... $ 635
---------
---------
</TABLE>

The net current and noncurrent components of the deferred income taxes
recognized on the consolidated balance sheet are as follows (in thousands):

<TABLE>
<S> <C>
Net current assets.................................................. $ 1,194
Net noncurrent...................................................... (559)
---------
$ 635
---------
---------
</TABLE>

F-11
<PAGE>
CPG INVESTORS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

OCTOBER 31, 1996

6. INCOME TAXES: (CONTINUED)

The Company has determined, based on the predecessor company's operating
earnings, CPG's operating earnings since its inception and CPG's expectations
for the future, that future taxable income of the Company will more likely than
not be sufficient to recognize fully these net deferred tax assets. Accordingly,
the Company has not recorded a valuation allowance for the net deferred tax
assets at October 31, 1996.

The Company made income tax payments of $1,788,701 for the ten months ended
October 31, 1996.

7. RETIREMENT PLANS:

The Company has a noncontributory defined benefit pension plan for hourly
employees covered by collective bargaining agreements. Benefits are based on
stated amounts for each year of credited service. The Company's funding policy
is consistent with the funding requirements of the Employee Retirement Income
Security Act of 1974, as amended. The plan's assets consist principally of
equity securities, government and corporate debt securities and other fixed
income obligations.

Net periodic pension cost for the ten months ended October 31, 1996 included
the following components (in thousands):

<TABLE>
<S> <C>
Service cost......................................................... $ 211
Interest cost on projected benefit obligation........................ 416
Actual return on plan assets......................................... (287)
Net amortization and deferral........................................ (41)
---------
Net periodic pension cost........................................ $ 299
---------
---------
</TABLE>

Pension expense is determined using assumptions as of the beginning of each
period. The funded status of the pension plan is determined using assumptions as
of the end of each period.

The following table presents the funded status of the Company's pension plan
and the net pension liability included in the consolidated balance sheet (in
thousands):

<TABLE>
<S> <C>
Actuarial present value of benefit obligations:
Vested benefits.................................................. $ (6,552)
Nonvested benefits............................................... (494)
---------
Projected benefit obligation................................... (7,046)
Fair value of plan assets.......................................... 5,505
---------
Funded status.................................................. (1,541)
Unrecognized net gain.............................................. (110)
Unrecognized prior service cost.................................... 630
Additional minimum liability....................................... (520)
---------
Net pension liability.......................................... $ (1,541)
---------
---------
</TABLE>

F-12
<PAGE>
CPG INVESTORS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

OCTOBER 31, 1996

7. RETIREMENT PLANS: (CONTINUED)

The assumptions used in accounting for pension cost and the funded status of
the plan were as follows:

<TABLE>
<CAPTION>
1995 1996
----- ---------
<S> <C> <C>
Discount rate................................................................... 7.4% 7.75%
Expected long-term return on plan assets........................................ 9.0% 9.0%
</TABLE>

Pension expense is determined using assumptions as of the beginning of each
period. The funded status of the pension plan is determined using assumptions as
of the end of each period.

Pursuant to the provisions of Statement of Financial Accounting Standards
No. 87, "Employers' Accounting for Pensions," the Company recorded in other
liabilities an additional minimum pension liability adjustment of approximately
$520,000 as of October 31, 1996, representing the amount by which the projected
benefit obligation exceeded the fair value of plan assets plus accrued amounts
previously recorded. The additional liability has been offset by an intangible
asset to the extent of previously unrecognized prior service cost.

The Company also sponsors qualified defined contribution plans for its
salaried and hourly employees. Participation in these plans is voluntary;
however, the Company encourages participation by matching 50% of a portion of
each employee's voluntary contribution. The Company's expense for the ten months
ended October 31, 1996 totaled $118,423.

8. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS:

The Company has benefit plans which provide certain health care and life
insurance benefits to eligible employees when they retire. Salaried employees
generally become eligible for retiree medical benefits after reaching age 62
with 15 years of service or after reaching age 65. The medical plan for salaried
employees provides for an allowance, which must be used towards the purchase of
a Medicare supplemental insurance policy, based on a retiree's length of
service. The allowance may be adjusted to reflect annual changes in the Consumer
Price Index ("CPI"); however, once the initial allowance has doubled, there will
be no further increases. Salaried employees hired after January 1, 1993 are not
eligible to participate in this retiree medical plan. Upon satisfying certain
eligibility requirements, approximately 45% of the hourly employees are eligible
upon retirement to receive a medical benefit, which is an allowance to be used
toward the purchase of a Medicare supplemental insurance policy and cannot
exceed a specified annual amount. The postretirement benefit obligations related
to employees who retired prior to the Acquisition were not assumed by the
Company and remain the responsibility of Rexam.

Net periodic postretirement benefits cost for the ten months ended October
31, 1996 included the following components (in thousands):

<TABLE>
<S> <C>
Service cost......................................................... $ 71
Interest cost on accumulated postretirement benefit obligation....... 113
Net amortizations and deferral....................................... (2)
---------
Postretirement benefits cost....................................... $ 182
---------
---------
</TABLE>

F-13
<PAGE>
CPG INVESTORS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

OCTOBER 31, 1996

8. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS: (CONTINUED)

The following table sets forth the accumulated postretirement benefit
obligation included in other liabilities on the Company's consolidated balance
sheet (in thousands):

<TABLE>
<S> <C>
Accumulated postretirement benefit obligation:
Fully eligible participants...................................... $ (225)
Retirees......................................................... (190)
Other active plan participants................................... (1,496)
---------
Accumulated postretirement benefit obligation...................... (1,911)
Unrecognized net gain............................................ (325)
---------
Accrued postretirement benefit liability........................... $ (2,236)
---------
---------
</TABLE>

The assumed health care cost trend rate used in measuring future benefit
costs was 9%, gradually declining to 6% by 1999 and remaining at that level
thereafter. A 1% increase in this annual trend rate would increase the
accumulated postretirement benefit obligation at October 31, 1996 by $81,368 and
the postretirement benefits expense for the ten months ended October 31, 1996 by
less than $11,000. The assumed discount rate used in determining the accumulated
postretirement benefit obligation was 7.4% in 1995 and 7.75% in 1996. The
assumed annual increase in the CPI was 3%. Post retirement benefits expense is
determined using assumptions as of the beginning of each period. The funded
status of the post retirement benefit plan is determined using assumptions as of
the end of each period.

9. COMMON STOCK:

In connection with its organization and the acquisition of its business in
1993, the Company issued 400,000 shares of its Class A common stock for an
aggregate consideration of $4,000,000 and 10,000 shares of its Class B common
stock for an aggregate consideration of $1,000. In addition, the Company issued
104,286 shares of its Class C common stock to two founders for nominal
consideration. In 1994, the Company sold 5,671 shares of Class A common stock
and 101 shares of Class B common stock to two customers for an aggregate
consideration of $577,190.

The Class A stockholders have preference over the Class B and Class C
stockholders for dividends and other distributions until the Class A
stockholders have received distributions aggregating $10 per share. Thereafter,
Class B and Class C stockholders are entitled to such distributions until each
Class B and Class C stockholder has received $10 per share and thereafter all
classes of common stock receive dividends and other distributions at the same
rate per share.

10. STOCK OPTION PLAN:

Certain employees have been granted options to purchase shares of the Class
A common stock under a nonqualified stock option plan adopted in December 1993.
The exercise price of options granted to employees is the estimated fair value
of the Company's Class A common stock at the dates of grant. Options become
partially exercisable on the date of the grant and vest ratably over the three
years thereafter and expire if not exercised in ten years.

The Company's stock option plan had 54,500 options outstanding on December
31, 1995 at a weighted average exercise price of $10.25 per option. All 54,500
options were exercised during the ten month period

F-14
<PAGE>
CPG INVESTORS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

OCTOBER 31, 1996

10. STOCK OPTION PLAN: (CONTINUED)

ended October 31, 1996. The estimated fair value of the options at the time of
exercise was approximately $79.00 per option.

11. RELATED PARTY TRANSACTIONS:

Two of CPG's directors are the principal stockholders of SCI Investors Inc.,
a privately held corporation which provides management, consulting and financial
services to the Company. Payments and expenses for such services for the ten
months ended October 31, 1996 totaled $150,294.

Four of the Company's customers are owned by persons who are stockholders of
CPG and, in one case, a director of CPG. Sales to these customers aggregated
$4,912,133 for the ten months ended October 31, 1996. Accounts receivable from
these customers aggregated $675,549 at October 31, 1996.

In management's opinion, all related party transactions are conducted under
normal business conditions, with no preferential treatment given to related
parties.

12. COMMITMENTS, CONTINGENCIES AND OTHER MATTERS:

LEASES: The Company has commitments under operating leases for certain
machinery, equipment and facilities used in various operations. Rental expense
was $760,988 for the ten months ended October 31, 1996. As of October 31, 1996,
obligations to make future minimum lease payments were as follows (in
thousands):

<TABLE>
<CAPTION>
PAYMENTS TO BE MADE IN THE YEARS ENDING OCTOBER 31:
- -------------------------------------------------------------------------------------
<S> <C>
1997................................................................................. $ 887
1998................................................................................. 735
1999................................................................................. 700
2000................................................................................. 509
2001................................................................................. 283
Thereafter........................................................................... 1,020
---------
$ 4,134
---------
---------
</TABLE>

LETTERS OF CREDIT: At October 31, 1996, the Company had outstanding letters
of credit of $1,108,000 as collateral for one of its insurance policies.

CONTINGENCIES: In the ordinary course of conducting business, the Company
becomes involved in various environmental issues, investigations and
administrative proceedings. While any such investigation or proceeding has an
element of uncertainty, the Company believes that the outcome of any pending or
threatened claim will not have a material adverse effect on its business or
financial condition.

13. SUBSEQUENT EVENT:

On October 31, 1996, Specialty Paperboard, Inc. ("SPI"), through a
subsidiary, purchased all of the issued and outstanding common stock of CPG for
approximately $44 million, subject to certain closing adjustments.

F-15
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS

To the Officers and Directors of
CPG Investors Inc.:

We have audited the accompanying consolidated balance sheet of CPG Investors
Inc. and Subsidiaries (the "Company") as of December 31, 1994 and 1995, and the
related consolidated statements of income and retained earnings and cash flows
for the eight-week period from November 1, 1993 (commencement of operations) to
December 26, 1993, and for the years ended December 31, 1994 and 1995. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of CPG Investors
Inc. and Subsidiaries as of December 31, 1994 and 1995, and the consolidated
results of their operations and their cash flows for the eight-week period ended
December 26, 1993, and for the years ended December 31, 1994 and 1995 in
conformity with generally accepted accounting principles.

As discussed in Note 3 to the consolidated financial statements, the Company
changed its method of accounting for inventories in 1994.

COOPERS & LYBRAND L.L.P.

Richmond, Virginia
February 29, 1996,
except as to Note 13,
as to which the date is
August 28, 1996

F-16
<PAGE>
CPG INVESTORS INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEET

(DOLLAR AMOUNTS IN THOUSANDS)

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1994 1995
--------- --------- SEPTEMBER 30,
1996
-----------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............................................. $ 3 $ 580 $ 3
Accounts receivable, less allowances of $492, $378 and $461............ 11,153 9,191 11,030
Inventories............................................................ 8,603 8,233 8,317
Prepaid expenses....................................................... 347 403 307
Deferred income taxes.................................................. 737 716 716
--------- --------- -------
Total current assets................................................. 20,843 19,123 20,373
--------- --------- -------
Property, plant and equipment, net....................................... 14,101 17,283 19,444
--------- --------- -------
Other assets............................................................. 708 626 1,279
Deferred income taxes.................................................... 502 191 135
--------- --------- -------
$ 36,154 $ 37,223 $ 41,231
--------- --------- -------
--------- --------- -------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable....................................................... $ 4,520 $ 5,498 $ 4,520
Current portion of long-term debt...................................... 1,000 1,000 1,750
Accrued liabilities.................................................... 5,645 5,002 5,396
--------- --------- -------
Total current liabilities............................................ 11,165 11,500 11,666
--------- --------- -------
Long-term debt........................................................... 13,000 10,895 10,540
--------- --------- -------
Other liabilities........................................................ 3,832 3,948 4,380
--------- --------- -------
Commitments and contingencies (Note 11)
Stockholders' equity:
Common stock, $.01 par value:
Class A, nonvoting, 462,814 shares, authorized, 405,671
outstanding........................................................ 4 4 4
Class B, voting, 10,101 shares authorized and outstanding............ -- -- --
Class C, nonvoting, 104,286 shares authorized and outstanding........ 1 1 1
Additional paid-in capital............................................. 4,565 4,565 4,565
Retained earnings...................................................... 3,587 6,466 10,140
Minimum pension liability adjustment................................... -- (156) (65)
--------- --------- -------
8,157 10,880 14,645
--------- --------- -------
$ 36,154 $ 37,223 $ 41,231
--------- --------- -------
--------- --------- -------
</TABLE>

The accompanying notes are an integral part of the consolidated financial
statements.

F-17
<PAGE>
CPG INVESTORS INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF INCOME AND RETAINED EARNINGS

(DOLLAR AMOUNTS IN THOUSANDS)

<TABLE>
<CAPTION>
FOR THE
EIGHT FOR THE YEARS ENDED FOR THE NINE MONTHS
WEEKS ENDED DECEMBER 31, ENDED SEPTEMBER 30,
DECEMBER 26, -------------------- --------------------
1993 1994 1995 1995 1996
------------ --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
UNAUDITED
Net sales.............................................. $ 13,323 $ 95,952 $ 95,795 $ 72,395 $ 69,719

Costs and expenses:
Cost of goods sold................................... 12,396 82,079 84,419 63,674 58,469
Selling and administrative expenses.................. 1,153 6,169 5,310 4,064 4,330
------------ --------- --------- --------- ---------
13,549 88,248 89,729 67,738 62,799
------------ --------- --------- --------- ---------
Income (loss) from operations...................... (226) 7,704 6,066 4,657 6,920
Interest expense....................................... (230) (1,440) (1,345) 1,037 797
------------ --------- --------- --------- ---------
Income (loss) before income taxes.................. (456) 6,264 4,721 3,620 6,123
Income tax benefit (expense)........................... 167 (2,388) (1,842) (1,376) (2,449)
------------ --------- --------- --------- ---------
Net income (loss).................................. (289) 3,876 2,879 $ 2,244 $ 3,674
Retained earnings (deficit), beginning of period....... -- (289) 3,587 3,587 6,466
------------ --------- --------- --------- ---------
Retained earnings (deficit), end of period....... $ (289) $ 3,587 $ 6,466 $ 5,831 $ 10,140
------------ --------- --------- --------- ---------
------------ --------- --------- --------- ---------
</TABLE>

The accompanying notes are an integral part of the consolidated financial
statements.

F-18
<PAGE>
CPG INVESTORS INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CASH FLOWS

(DOLLAR AMOUNTS IN THOUSANDS)

<TABLE>
<CAPTION>
FOR THE
EIGHT WEEKS FOR THE NINE MONTHS
ENDED ENDED SEPTEMBER 30,
DECEMBER 26, --------------------
1993 1994 1995 1995 1996
------------ --------- --------- --------- ---------
UNAUDITED
<S> <C> <C> <C> <C> <C>
Cash provided by (used in) operating activities:
Net income (loss)..................................... $ (289) $ 3,876 $ 2,879 $ 2,244 $ 3,674
Items not affecting cash:
Depreciation........................................ 144 949 1,184 984 1,303
Amortization........................................ 31 194 225 169 169
Deferred income taxes............................... (1,240) -- 428 -- --
Loss on shutdown of paper machine................... -- 701 -- -- --
Postretirement benefits............................. -- 210 181 -- --
Changes in operating assets and liabilities:
Accounts receivable................................. (575) (123) 1,962 936 (1,838)
Inventories......................................... 917 2,844 370 (89) (84)
Prepaid expenses.................................... (125) (45) (56) 76 96
Accounts payable.................................... 2,025 (847) 978 715 (978)
Accrued liabilities................................. 1,461 (317) (644) (1,210) 394
Other, net............................................ 74 71 (459) 263 (244)
------------ --------- --------- --------- ---------
Cash provided by operating activities............. 2,423 7,513 7,048 4,088 2,492
------------ --------- --------- --------- ---------
Cash used in investing activities:
Cash paid for certain assets of Custom Papers Group
Inc., net of liabilities assumed.................. (24,271) -- -- -- --
Expenditures for property, plant and equipment...... (431) (2,888) (4,366) (2,868) (3,464)
------------ --------- --------- --------- ---------
Cash used in investing activities..................... (24,702) (2,888) (4,366) (2,868) (3,464)
------------ --------- --------- --------- ---------
Cash provided by (used in) financing activities:
Proceeds from sale of common stock.................. 4,000 570 -- -- --
Proceeds from issuance of long-term debt, net....... 19,358 0 -- -- --
Net reduction in revolving debt..................... (1,063) (4,208) (1,105) (250) 1,145
Payments on term debt............................... (1,000) (1,000) (750) (750)
------------ --------- --------- --------- ---------
Cash used in financing activities................. 22,295 (4,638) (2,105) (1,000) 395
------------ --------- --------- --------- ---------
Increase (decrease) in cash....................... 16 (13) 577 220 (577)
Cash and cash equivalents, beginning of period.......... -- 16 3 3 580
------------ --------- --------- --------- ---------
Cash and cash equivalents, end of period............ $ 16 $ 3 $ 580 $ 223 $ 3
------------ --------- --------- --------- ---------
------------ --------- --------- --------- ---------
</TABLE>

The accompanying notes are an integral part of the consolidated financial
statements.

F-19
<PAGE>
CPG INVESTORS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. ORGANIZATION AND ACQUISITION:

On November 5, 1993, CPG Investors Inc. ("CPG"), through its wholly-owned
subsidiary, CPG Holdings Inc. ("Holdings"), acquired selected net operating
assets of Custom Papers Group Inc. and its subsidiaries from Rexam Inc.
("Rexam"), a wholly owned subsidiary of Rexam plc (the "Acquisition").

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include
the accounts of CPG and its wholly owned subsidiaries (collectively the
"Company"). All significant intercompany balances and transactions have been
eliminated.

ACCOUNTING PERIOD: In 1994, the Company changed its financial reporting
year from a fiscal year ending on the last Sunday in December to a calendar
year. The year ended December 31, 1994 consisted of 53 weeks.

CASH AND CASH EQUIVALENTS: Excess cash is temporarily invested in funds
with original maturities not exceeding three months as part of the Company's
management of day-to-day operating cash receipts and disbursements.

INTEREST EXPENSE: The Company capitalizes interest expense as part of the
cost of constructing certain facilities and equipment. No interest expense was
capitalized in 1993, 1994 or 1995. Interest paid during 1993, 1994 and 1995
totaled $87,911, $1,262,590 and $1,163,774, respectively.

INCOME TAXES: Income tax expense is based on reported earnings before
income taxes. Deferred income taxes reflect the impact of temporary differences
between the amounts of assets and liabilities recognized for financial reporting
purposes and such amounts recognized for tax purposes.

RESEARCH AND DEVELOPMENT EXPENSES: Research and development expenses, which
are expensed as incurred, were $94,070, $1,175,311 and $1,041,129 in 1993, 1994
and 1995, respectively.

DEFERRED FINANCING COSTS: The Company capitalized the costs associated with
obtaining the necessary financing for the Acquisition. These costs, which
amounted to $539,009, net of $222,060 of accumulated amortization at December
31, 1994, and $351,767, net of $409,302 of accumulated amortization at December
31, 1995, are included in other assets on the consolidated balance sheet and are
being amortized on a straight-line basis over the terms of the loan commitments
provided in the credit agreement.

F-20
<PAGE>
CPG INVESTORS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
1994 and $11,560,950 (12.1% of net sales) in 1995. No other individual customer
accounted for more than 10% of the Company's net sales in 1993, 1994 or 1995.

RISKS AND UNCERTAINTIES: The Company operates five paper mills--four in the
eastern United States and one in the midwest--producing a diversity of specialty
paper products. The Company is not dependent on any single customer, group of
customers, market, geographic area or supplier of materials, labor or services.
The financial statements include, where necessary, amounts based on judgments of
management. These estimates include allowances for doubtful accounts and
customer returns, accruals for self-insured medical benefits and workers'
compensation insurance, environmental compliance costs, income taxes and
determinations of discount and other rate assumptions for pensions and
postretirement benefits expenses.

3. INVENTORIES:

In 1994, the Company adopted the LIFO method of determining the cost of
substantially all of its inventories. Under the LIFO method the most recent
additions to inventory are assumed to be the first items of inventory used in
production or sold to customers. The Company uses the LIFO method in order to
more properly match current costs against current revenues. If inventories were
valued at current costs, the inventory amounts would have been $1,210,642 higher
than those reported at December 31, 1994, and $2,482,885 higher than those
reported at December 31, 1995. If the FIFO method of inventory valuation had
been utilized, reported net income would have been $750,598 higher in 1994 and
$788,790 higher in 1995.

Inventories by major category were (in thousands):

<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30, 1996
-------------------- ------------------
<S> <C> <C> <C>
1994 1995 (UNAUDITED)
--------- --------- ------------------
Raw materials....................................... $ 3,312 $ 4,518 $ 3,253
Work-in-process..................................... 1,678 2,057 1,328
Finished goods...................................... 4,098 3,570 4,550
Operating supplies.................................. 726 571 601
--------- --------- -------
9,814 10,716 9,732
Subtraction to state inventories at LIFO cost....... (1,211) (2,483) (1,415)
--------- --------- -------
$ 8,603 $ 8,233 $ 8,317
--------- --------- -------
--------- --------- -------
</TABLE>

4. LONG-TERM DEBT:

Long-term debt consisted of the following (in thousands):

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
<S> <C> <C>
1994 1995
--------- ---------
Revolving loans......................................................... $ 4,000 $ 2,895
Term loans.............................................................. 10,000 9,000
--------- ---------
14,000 11,895
Less current portion.................................................... (1,000) (1,000)
--------- ---------
$ 13,000 $ 10,895
</TABLE>

F-21
<PAGE>
CPG INVESTORS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

4. LONG-TERM DEBT: (CONTINUED)
Scheduled maturities for the term loans in the four years after 1996 are as
follows: 1997--$2,000,000, 1998--$2,000,000; 1999--$2,000,000; and
2000--$2,000,000.

Holdings has a credit agreement with two banks which provides for borrowings
of up to $13,000,000 under a revolving loan commitment and $9,000,000 under a
term loan commitment. Substantially all of the Company's assets are pledged as
collateral for borrowings under the credit agreement. The terms of the credit
agreement include various covenants which require, among other things, the
maintenance of certain financial ratios and a certain minimum net worth, as
defined in the agreement. Holdings is not permitted to pay dividends to CPG
until its debt to total capital, as defined in the agreement, is reduced to 50%
and maintained after any dividend is declared.

The maximum outstanding borrowings during 1993, 1994 and 1995 were
$20,975,000, $19,491,000 and $15,075,000, respectively. The weighted average
outstanding borrowings were $19,758,000 in 1993 $15,158,000 in 1994 and
$13,455,000 in 1995 and the weighted average interest rate, excluding commitment
fees, was 6.28% in 1993, 7.23% in 1994 and 7.56% in 1995. Borrowings bear
interest which is payable monthly at a defined base rate or LIBOR, plus 1%, at
the Company's option. At December 26, 1993, the weighted average interest rate
was 6.35% , at December 31, 1994 and 1995, the weighted average interest rate
was 8.29% and 7.06%, respectively. There are annual commitment fees of 3/16% on
the aggregate loan commitment. The revolving loan commitment is available
through November 5, 1998. The term loan commitment requires quarterly principal
payments of $250,000 through December 31, 1996 and quarterly principal payments
of $500,000 commencing March 31, 1997, with the final payment due December 31,
2000.

The recorded value of the Company's long-term debt at December 31, 1995
approximates its fair value.

In 1994, in order to reduce its exposure to fluctuations in interest rates,
the Company purchased an interest rate collar contract. The collar contract
covered $12,000,000 of the Company's bank debt in 1995. The amount of bank debt
covered by the collar contract is reduced to $10,000,000 in 1996, $8,000,000 in
1997 and $6,000,000 in 1998. During 1995, pursuant to the agreement, the Company
received quarterly payments equal to the amount of debt covered times the amount
by which LIBOR exceeded 6.0%. The Company will receive similar payments in 1996
should LIBOR exceed 6% and in 1997 and 1998 if LIBOR exceeds 6.5%. Should LIBOR
be less than 4.0% in 1996 or 4.5% in 1997 and 1998, the Company is obligated to
make quarterly payments equal to the amount of debt covered times the amount
that LIBOR is less than the specified rate. The cost of this financial
instrument, which is included in other assets, was $152,000 and, beginning in
1995, is being amortized over a four-year period. The estimated fair value of
the collar contract at December 31, 1995 was $42,347. The Company believes that
the risk of loss due to nonperformance by the counterparty to this contract is
not significant.

F-22
<PAGE>
CPG INVESTORS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

5. SUPPLEMENTAL BALANCE SHEET INFORMATION:

Property, plant and equipment consisted of the following (in thousands):

<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30, 1996
-------------------- ------------------
<S> <C> <C> <C>
1994 1995 (UNAUDITED)
--------- --------- ------------------
Land................................................ $ 1,963 $ 2,000 $ 2,038
Buildings........................................... 1,814 2,272 2,393
Machinery and equipment............................. 11,113 14,265 15,106
Construction-in-process............................. 277 996 3,460
--------- --------- -------
15,167 19,533 22,997
Less accumulated depreciation....................... 1,066 2,250 3,553
--------- --------- -------
$ 14,101 $ 17,283 $ 19,444
--------- --------- -------
--------- --------- -------
</TABLE>

Accrued liabilities consisted of (in thousands):

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
<S> <C> <C>
1994 1995
--------- ---------
Compensation............................................................... $ 2,990 $ 2,224
Employee benefits.......................................................... 873 1,084
Utilities.................................................................. 767 770
Customer volume discounts.................................................. 628 537
Interest payable........................................................... 115 94
Other...................................................................... 272 293
--------- ---------
$ 5,645 $ 5,002
--------- ---------
--------- ---------
</TABLE>

6. INCOME TAXES:

The components of the provision for income taxes were (in thousands):

<TABLE>
<CAPTION>
FOR THE YEARS ENDED
FOR THE EIGHT
WEEKS ENDED DECEMBER 31,
DECEMBER 26, --------------------
1993 1994 1995
------------- --------- ---------
<S> <C> <C> <C>
Current income tax provision:
Federal................................................... $ 906 $ 2,042 $ 1,108
State..................................................... 167 346 306
------ --------- ---------
1,073 2,388 1,414
Deferred income tax (benefit) provision..................... (1,240) -- 428
------ --------- ---------
$ (167) $ 2,388 $ 1,842
------ --------- ---------
------ --------- ---------
</TABLE>

F-23
<PAGE>
CPG INVESTORS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

6. INCOME TAXES: (CONTINUED)
The tax effects of temporary differences that gave rise to the deferred tax
assets and liabilities are presented below (in thousands):

<TABLE>
<CAPTION>
DECEMBER 31
--------------------
<S> <C> <C>
1994 1995
--------- ---------
Deferred tax assets:
Postretirement benefits.................................................. $ 718 $ 782
Pension benefits......................................................... 507 556
Other employee benefits.................................................. 704 742
Other.................................................................... 425 497
--------- ---------
2,354 2,577
--------- ---------
Deferred tax liabilities:
Property, plant and equipment............................................ 1,115 1,670
--------- ---------
Net deferred tax assets................................................ $ 1,239 $ 907
--------- ---------
--------- ---------
</TABLE>

The net current and noncurrent current components of the deferred income
taxes recognized in the balance sheet are as follows (in thousands):

<TABLE>
<CAPTION>
DECEMBER 31
--------------------
<S> <C> <C>
1994 1995
--------- ---------
Net current assets........................................................... $ 737 $ 716
Net noncurrent assets........................................................ 502 191
--------- ---------
$ 1,239 $ 907
--------- ---------
</TABLE>

The Company has determined, based on the predecessor company's operating
earnings, CPG's operating earnings in 1994 and 1995 and CPG's expectations for
the future, that operating income of the Company will likely be sufficient to
recognize fully these net deferred tax assets. Accordingly, the Company has not
recorded a valuation allowance for the net deferred tax assets.

The Company made income tax payments of none in 1993, $3,699,838 in 1994 and
$1,410,073 in 1995.

A reconciliation of income tax expense using the statutory federal income
tax rate of 34% compared to the Company's actual income tax expense follows (in
thousands):

<TABLE>
<CAPTION>
FOR THE EIGHT FOR THE YEARS ENDED
WEEKS ENDED DECEMBER 31,
DECEMBER 26, --------------------
1993 1994 1995
----------------- --------- ---------
<S> <C> <C> <C>
Income tax expense (benefit) at federal statutory rate..................... $ (155) $ 2,130 $ 1,605
Increase resulting from:
State.................................................................... (18) 228 229
Other, net............................................................... 6 30 8
----- --------- ---------
Income tax expense (benefit)............................................. $ (167) $ 2,388 $ 1,842
----- --------- ---------
----- --------- ---------
</TABLE>

F-24
<PAGE>
CPG INVESTORS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

7. RETIREMENT PLANS:

The Company has a noncontributory defined benefit pension plan for hourly
employees covered by collective bargaining agreements. Benefits are based on
stated amounts for each year of credited service. The Company's funding policy
is consistent with the funding requirements of ERISA. The plan's assets consist
principally of equity securities, government and corporate debt securities and
other fixed income obligations.

Net periodic pension cost included the following components (in thousands):

<TABLE>
<CAPTION>
FOR THE YEARS ENDED
FOR THE EIGHT
WEEKS ENDED DECEMBER 31,
DECEMBER 26, --------------------
1993 1994 1995
----------------- --------- ---------
<S> <C> <C> <C>
Service cost.............................................. $ 44 $ 259 $ 231
Interest cost on projected benefit obligation............. 65 352 407
Actual return on plan assets.............................. (12) 88 (701)
Net amortization and deferral............................. (52) (435) 320
--- --------- ---------
Net periodic pension cost............................. $ 45 $ 264 $ 257
--- --------- ---------
--- --------- ---------
</TABLE>

The assumptions used in accounting for pension cost and the funded status of
the plan were as follows:

<TABLE>
<CAPTION>
1993 1994 1995
----- ----- -----
<S> <C> <C> <C>
Discount rate............................................................ 7.0% 8.0% 7.4%
Expected long-term return on plan assets................................. 9.0% 9.0% 9.0%
</TABLE>

Pension expense is determined using assumptions as of the beginning of each
year. The funded status of the pension plan is determined using assumptions as
of the end of each year. The projected benefit obligation increased by $709,911
as a result of the reduction of the discount rate assumption in 1995.

The following table presents the funded status of the Company's pension plan
and the net pension liability included in the accompanying consolidated balance
sheet (in thousands):

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
<S> <C> <C>
1994 1995
--------- ---------
Actuarial present value of benefit obligations:
Vested benefits........................................................ $ (4,287) $ (5,649)
Nonvested benefits..................................................... (572) (759)
Projected benefit obligation......................................... (4,859) (6,408)
Fair value of plan assets................................................ 3,784 4,808
--------- ---------
Funded status........................................................ (1,075) (1,600)
Unrecognized net loss (gain)............................................. (312) 252
Unrecognized prior service cost.......................................... 52 139
Additional minimum liability............................................. -- (391)
--------- ---------
Net pension liability................................................ $ (1,335) $ (1,600)
--------- ---------
--------- ---------
</TABLE>

F-25
<PAGE>
CPG INVESTORS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

7. RETIREMENT PLANS: (CONTINUED)
Pursuant to the provisions of Statement of Financial Accounting Standards
No. 87, "Employers' Accounting for Pensions," the Company recorded in other
liabilities an additional minimum pension liability adjustment of $390,771 as of
December 31, 1995, representing the amount by which the projected benefit
obligation exceeded the fair value of plan assets plus accrued amounts
previously recorded. The additional liability has been offset by an intangible
asset to the extent of previously unrecognized prior service cost. The amount in
excess of previously unrecognized prior service cost is recorded as a reduction
of stockholders' equity in the amount of $156,203, representing the after-tax
impact.

The Company also sponsors qualified defined contribution plans for its
salaried and hourly employees. Participation in these plans is voluntary;
however, the Company encourages participation by matching 50% of a portion of
each employee's voluntary contribution. The Company's expense in 1993, 1994 and
1995 totaled $47,674, $271,647 and $276,638, respectively.

8. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS:

The Company has plans which provide certain health care and life insurance
benefits to eligible employees when they retire. Salaried employees generally
become eligible for retiree medical benefits after reaching age 62 with 15 years
of service or after reaching age 65. The medical plan for salaried employees
provides for an allowance, which must be used toward the purchase of a Medicare
supplemental insurance policy, based on a retiree's length of service. The
allowance may be adjusted to reflect annual changes in the Consumer Price Index
("CPI"); however, once the initial allowance has doubled, there will be no
further increases. Salaried employees hired after January 1, 1993 are not
eligible to participate in this retiree medical plan. Upon satisfying certain
eligibility requirements, approximately 45% of the hourly employees are eligible
upon retirement to receive a medical benefit, which is an allowance to be used
toward the purchase of a Medicare supplemental insurance policy and cannot
exceed a specified annual amount. The postretirement benefit obligations related
to employees who retired prior to the Acquisition were not assumed by the
Company and remain the responsibility of Rexam.

Postretirement benefits expense included the following components (in
thousands):

<TABLE>
<CAPTION>
FOR THE YEARS ENDED
FOR THE EIGHT
WEEKS ENDED DECEMBER 31,
DECEMBER 26, --------------------
1993 1994 1995
----------------- --------- ---------
<S> <C> <C> <C>
Service cost............................................... $ 10 $ 92 $ 75
Interest cost on accumulated postretirement benefit
obligation............................................... 20 118 124
Net amortizations and deferral............................. -- -- (18)
Postretirement benefits expense.......................... $ 30 $ 210 $ 181
--- --------- ---------
--- --------- ---------
</TABLE>

F-26
<PAGE>
CPG INVESTORS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

8. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS: (CONTINUED)
The following table sets forth the accumulated postretirement benefit
obligation included in other liabilities in the Company's consolidated balance
sheet (in thousands):

<TABLE>
<CAPTION>
DECEMBER 30,
--------------------
<S> <C> <C>
1994 1995
--------- ---------
Accumulated postretirement benefit obligation:
Fully eligible participants............................................ $ (131) $ (224)
Retirees............................................................... -- (152)
Other active plan participants......................................... (1,305) (1,533)
--------- ---------
Accumulated postretirement benefit obligation............................ (1,436) (1,909)
Unrecognized net gain................................................ (453) (148)
--------- ---------
Accrued postretirement benefit liability........................... $ (1,889) $ (2,057)
--------- ---------
--------- ---------
</TABLE>

9. COMMON STOCK:

10. STOCK OPTION PLAN:

Certain employees have been granted options to purchase shares of Class A
common stock under a nonqualified stock option plan adopted in December 1993.
The exercise price of options granted to employees is the fair value of the
Company's Class A common stock at the dates of grant. Options become partially
exercisable on the date of the grant and vest ratably over the three years
thereafter and expire if not exercised in ten years.

F-27
<PAGE>
CPG INVESTORS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

10. STOCK OPTION PLAN: (CONTINUED)
The following table is a summary of the option plan:

<TABLE>
<CAPTION>
EXERCISE PRICE
PER
NUMBER OF OPTIONS OPTION
------------------- ----------------
<S> <C> <C>
Outstanding on November 1, 1993........................ --
Granted.............................................. 57,000 $ 10.00
------
Outstanding on December 26, 1993....................... 57,000
Granted.............................................. 1,000 15.00
Exercised............................................ --
Canceled............................................. (1,000) 10.00
------
Outstanding on December 31, 1994....................... 57,000
Granted.............................................. 1,500 17.50
Exercised............................................ --
Canceled............................................. (4,000) 10.00-15.00
------
Outstanding on December 31, 1995....................... 54,500
------
------
</TABLE>

At December 31, 1995, options for 40,000 shares were exercisable and options
for 2,643 shares were available for future awards.

11. RELATED-PARTY TRANSACTIONS:

Two of CPG's directors are the principal stockholders of SCI Investors Inc.,
a privately held corporation which provides management consulting and financial
services to the Company. Payments and expenses for such services during 1993,
1994 and 1995 totaled $16,000, $102,859 and $141,397, respectively. In addition,
the Company paid fees of $350,000 to SCI Investors Inc. for its services in
negotiating the acquisition of its business and arranging the financing for the
acquisition. This fee was allocated to the purchase price of the acquisition and
to deferred financing costs.

Four of the Company's customers are owned by persons who are stockholders of
CPG and, in one case, a director of CPG. Sales to these customers aggregated
$869,989, $5,006,607 and $4,894,577 in 1993, 1994 and 1995, respectively.
Accounts receivable from these customers aggregated $729,633 at December 31,
1994 and $645,372 at December 31, 1995.

12. COMMITMENTS AND OTHER MATTERS:

LEASES: The Company has commitments under operating leases for certain
machinery, equipment and facilities used in various operations. Rental expense
was $146,000 in 1993, $870,377 in 1994 and $922,298 in

F-28
<PAGE>
CPG INVESTORS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

12. COMMITMENTS AND OTHER MATTERS: (CONTINUED)
1995. As of December 31, 1995, obligations to make future minimum lease payments
were as follows (in thousands):

<TABLE>
<CAPTION>
PAYMENTS TO BE MADE IN:
- ----------------------------------------------
<S> <C>
1996........................................ $ 937
1997........................................ 906
1998........................................ 754
1999........................................ 720
2000........................................ 308
Thereafter.................................. 1,294
------
$ 4,919
------
------
</TABLE>

UNUSUAL ITEM: In September 1994, the Company idled one of its paper
machines and recorded a provision of $714,869 to adjust the carrying values of
the paper machine and related equipment to net realizable values and to
recognize the outstanding commitments associated with a lease of certain process
control equipment.

LETTER OF CREDIT: At December 31, 1995, the Company had outstanding letters
of credit of $1,108,000 as collateral for one of its insurance policies.

13. SUBSEQUENT EVENTS:

On August 28, 1996, CPG entered into a merger agreement with Specialty
Paperboard, Inc. ("SPI") pursuant to which SPI, through a subsidiary, would
purchase all of the issued and outstanding common stock of CPG. In connection
with this proposed merger, SPI has performed environmental reviews of each of
the Company's operations and, as a result, the Company and SPI are evaluating
certain matters of concern to SPI. The Company does not believe the results of
these evaluations will have a material adverse effect on its business or
financial condition.

F-29
<PAGE>

ARCON HOLDINGS CORP.
AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1996
INDEPENDENT AUDITORS' REPORT

The Board of Directors
Arcon Holdings Corp.:

We have audited the accompanying consolidated balance sheet of Arcon Holdings
Corp. and subsidiary (the Company) as of October 31, 1996, and the related
consolidated statements of income and retained earnings and cash flows for the
year then ended. These consolidated financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these consolidated 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.

As discussed in notes 1(a) and 14 of the accompanying notes to the consolidated
financial statements, on October 31, 1996, the Company was acquired by Specialty
Paperboard, Inc. The accompanying consolidated financial statements reflect the
financial position, results of operations and cash flows of the Company
immediately prior to the acquisition.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Arcon Holdings Corp.
and subsidiary as of October 31, 1996, and the results of their operations and
their cash flows for the year then ended, in conformity with generally accepted
accounting principles.

KPMG PEAT MARWICK LLP

Jericho, New York
December 20, 1996

F-30
<PAGE>
ARCON HOLDINGS CORP. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEET

OCTOBER 31, 1996

ASSETS

<TABLE>
<S> <C>
Current assets:
Cash......................................................................... $1,382,207
Accounts receivable, net of allowance for doubtful accounts of $53,000....... 2,227,859
Inventories, net............................................................. 2,766,820
Prepaid expenses and other................................................... 74,068
Deferred income taxes........................................................ 93,215
----------
Total current assets..................................................... 6,544,169
Property, plant and equipment, net............................................. 1,188,558
Deferred financing costs, net of accumulated amortization of $443,108.......... 386,609
Goodwill, net of accumulated amortization of $2,086,078........................ 10,153,906
Deferred income taxes.......................................................... 67,948
----------
Total assets............................................................. $18,341,190
----------
----------
LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
Account payable and accrued expenses......................................... 1,179,289
Accrued interest payable..................................................... 74,165
Current portion of long-term debt............................................ 1,937,500
Income taxes payable......................................................... 433,542
----------
Total current liabilities................................................ 3,624,496

Long-term debt................................................................. 6,134,855
Warrants....................................................................... 1,750,000
Deferred compensation.......................................................... 258,582
----------
Total liabilities........................................................ 11,767,933

Series A preferred stock, $.01 par value, 32,000 shares authorized, 31,945
shares issued and outstanding................................................ 5,204,774
Series B preferred stock, $.01 par value, 6,500 shares authorized, 6,255 shares
issued and outstanding....................................................... 1,019,122

Stockholders' equity:
Common stock, $.01 par value, 1,600,000 shares authorized, 41,175 shares
issued and outstanding..................................................... 412
Paid-in capital.............................................................. 179,588
Retained earnings............................................................ 169,361
----------
Total stockholders' equity............................................... 6,573,257
----------
Commitments
Total liabilities and stockholders' equity............................... $18,341,190
----------
----------
</TABLE>

See accompanying notes to consolidated financial statements.

F-31
<PAGE>
ARCON HOLDINGS CORP. AND SUBSIDIARY

CONSOLIDATED STATEMENT OF INCOME AND RETAINED EARNINGS

YEAR ENDED OCTOBER 31, 1996

<TABLE>
<S> <C>
Net sales...................................................................... $28,627,690
Cost of goods sold............................................................. 20,521,631
----------
Gross profit........................................................... 8,106,059

Selling, general and administrative expenses................................... 2,038,666
Interest expense............................................................... 1,108,648
Accretion of warrants to fair market value..................................... 1,108,500
Amortization of goodwill and deferred financing costs.......................... 992,496
Depreciation and amortization of property, plant and equipment................. 255,996
Management fees................................................................ 100,000
----------
Total expenses......................................................... 5,604,306
----------
Income before provision for income taxes............................... 2,501,753

Provision for income taxes..................................................... 1,314,108
----------
Net income............................................................. 1,187,645

Retained earnings, beginning of year........................................... 508,811
Accretion of excess of redemption value of preferred stock over fair value at
issuance date................................................................ (1,527,095)
----------
Retained earnings, end of year................................................. $ 169,361
----------
----------
</TABLE>

See accompanying notes to consolidated financial statements.

F-32
<PAGE>
ARCON HOLDINGS CORP. AND SUBSIDIARY

CONSOLIDATED STATEMENT OF CASH FLOWS

YEAR ENDED OCTOBER 31, 1996

<TABLE>
<S> <C>
Cash flows from operating activities:
Net income.................................................................... $1,187,645
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization............................................... 1,248,492
Increase in warrant value................................................... 1,108,500
Deferred compensation....................................................... 51,149
Recovery of doubtful accounts............................................... (25,915)
Deferred income taxes....................................................... (50,786)
Changes in operating assets and liabilities:
Accounts receivable....................................................... (266,403)
Inventories, net.......................................................... (45,272)
Prepaid expenses and other................................................ 337
Accounts payable and accrued expenses..................................... (523,381)
Accrued interest.......................................................... (25,278)
Income taxes payable...................................................... 524,342
---------
Net cash provided by operating activities............................. 3,183,430
---------
Cash flows from investing activities:
Capital expenditures.......................................................... (105,888)
---------
Net cash used in investing activities................................. (105,888)
---------
Cash flows from financing activities:
Repayment of long-term debt................................................... (3,042,068)
Proceeds from borrowing....................................................... 1,050,000
---------
Net cash used in financing activities................................. (1,992,068)
---------
Net increase in cash............................................................ 1,085,474
Cash at beginning of year....................................................... 296,733
---------
Cash at end of year............................................................. $1,382,207
---------
---------
Supplemental disclosure of cash flow information:
Interest paid................................................................. $1,032,231
---------
---------
Income taxes paid............................................................. $ 927,131
---------
---------
</TABLE>

See accompanying notes to consolidated financial statements.

F-33
<PAGE>
ARCON HOLDINGS CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

OCTOBER 31, 1996

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES

(A) DESCRIPTION OF BUSINESS

Arcon Holdings Corp. (Arcon Holdings) and its wholly-owned subsidiary, Arcon
Coating Mills, Inc. (Arcon Coating Mills or the Subsidiary), (collectively the
Company) is a leading producer of tapes and edge covering materials which are
used to bind, reinforce, protect and decorate office and school supply products
as well as checkbooks and hard and soft cover books. The Company maintains
operating facilities in Oceanside, New York and Springfield, Ohio.

Arcon Holdings was incorporated on March 17, 1994 for the purpose of
acquiring Arcon Coating Mills, Inc. On April 14, 1994, 100% of Arcon Coating
Mill's common stock was purchased by Arcon Acquisition Corp., a wholly-owned
subsidiary of Arcon Holdings, for a purchase price of $17,349,000. The purchase
price exceeded the fair value of the net assets acquired of $4,340,799 by
$13,008,201 (as adjusted) and, accordingly, goodwill and certain intangible
assets were recorded as of the acquisition date.

Pursuant to the Stock Purchase Agreement (the Agreement) dated August 28,
1996 by and among Specialty Paperboard Inc. (SPI) and the stockholders of Arcon
Holdings, SPI acquired all the outstanding stock of Arcon Holdings as of October
31, 1996 (the Acquisition). The Acquisition is further described in note 14. The
accompanying consolidated financial statements of the Company have been prepared
immediately prior to the Acquisition and therefore do not reflect the effect of
the Acquisition.

(B) PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiary. All significant intercompany accounts and
transactions have been eliminated in consolidation.

Inventories are reported at the lower of cost or market value, with cost
determined using the first-in, first-out, (FIFO) method.

(D) PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment are stated at cost and are depreciated using
the straight-line method over estimated useful lives of assets as follows:
automobiles--5 years; furniture and fixtures--7 years; machinery and
equipment--7 years; and building--15 years. Leasehold improvements are amortized
over the shorter of the life of the improvement or the lease term.

(E) GOODWILL AND DEFERRED FINANCING COSTS

Goodwill arising from the April 14, 1994 acquisition described in note 1(a)
is being amortized over 15 years on a straight-line basis.

Deferred financing costs arising from the acquisition debt are amortized,
using the straight-line method, over the life of the underlying indebtedness.

F-34
<PAGE>
ARCON HOLDINGS CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

OCTOBER 31, 1996

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES (CONTINUED)
(F) INCOME TAXES

Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
basis. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.

(G) USE OF ESTIMATES

The accompanying financial statements were prepared in conformity with
generally accepted accounting principles which require management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of income and expenses during
the reporting period. Actual results could differ from those estimates.

(2) FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying value of financial instruments classified as a current asset or
current liability are deemed to approximate fair value because of the short
maturity of these instruments. The carrying amounts of the Company's long-term
financial instruments (namely long-term debt and warrants) at October 31, 1996
represent the amounts they were redeemed at as a result of the Acquisition
described in note 14 and are therefore indicative of their fair values of such
instruments.

(3) INVENTORIES

Inventories consist of the following at October 31, 1996:

<TABLE>
<S> <C>
Raw materials................................... $1,120,845
Work-in-process................................. 1,529,515
Finished goods.................................. 116,460
---------
$2,766,820
---------
---------
</TABLE>

F-35
<PAGE>
ARCON HOLDINGS CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

OCTOBER 31, 1996

(4) PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consists of the following at October 31, 1996:

<TABLE>
<S> <C>
Land and building............................... $ 117,433
Machinery and equipment......................... 1,323,909
Leasehold improvements.......................... 163,348
Automobiles..................................... 113,527
Furniture and fixtures.......................... 78,977
---------
1,797,194
Less accumulated depreciation and
amortization.................................. 608,636
---------
$1,188,558
---------
---------
</TABLE>

(5) DEBT

Long-term debt consists of the following at October 31, 1996:

<TABLE>
<S> <C>
Term loan A..................................... $5,312,500
Term loan B..................................... 2,758,150
Revolving line of credit........................ 1,705
---------
8,072,355
Less current portion............................ 1,937,500
---------
$6,134,855
---------
---------
</TABLE>

TERM LOAN A

The term loan A principal is due and payable on the last day in January,
April, July and October of each year through January 31, 2000. The quarterly
payments are $387,500 through October 31, 1999 with a final payment of $275,000
on January 31, 2000. The note bears interest at the higher of the prime rate or
the federal funds effective rate, plus 2%. Such rate was 10.25% at October 31,
1996. Interest is payable on the first day of each month.

The Company did not make its October 31, 1996 payment of $387,500 in
anticipation of the Acquisition described in note 14. The amount of the payment
is included in the current portion of long-term debt on the accompanying balance
sheet.

TERM LOAN B

Term loan B was issued with detachable warrants (note 9) and recorded net of
a discount which represented the original fair value of the warrants. The
discount is being amortized over the life of the loan.

F-36
<PAGE>
ARCON HOLDINGS CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

OCTOBER 31, 1996

(5) DEBT (CONTINUED)

The term loans are collateralized by substantially all assets of the
Company.

REVOLVING LINE OF CREDIT

The Company entered into a revolving credit agreement which expires on April
30, 2001. The maximum amount that can be borrowed under this agreement is the
lesser of $3,000,000 or 85% of eligible accounts receivable plus 50% of eligible
inventory. The line bears interest at the higher of the prime rate or the
federal funds effective rate, plus 2%, payable on the first day of each month.
In addition, the Company pays commitment fees of .5% on the average daily unused
balance. The unused balance under the revolving credit agreement was
approximately $3.0 million at October 31, 1996. Borrowing under the revolving
credit agreement are collateralized by accounts receivable and inventory.

The Company has reduced its exposure to changes in the cost of its variable
rate borrowing through the use of a base rate cap agreement. This instrument
provides, for a three-year period beginning in July 1994, a 10% ceiling on the
base interest rate used to calculate interest payments on the first $4.5 million
of the Company's term loan A. At October 31, 1996, $11,968 net of accumulated
amortization of $49,532 was recorded in deferred financing costs.

The following is a schedule of aggregate annual principal payments for each
of the fiscal years ending October 31:

<TABLE>
<S> <C>
1997....................... $1,937,500
1998....................... 1,550,000
1999....................... 1,550,000
2000....................... 1,775,000
2001 and thereafter........ 1,501,705
---------
8,314,205
Less unamortized (241,850)
discount..................
---------
$8,072,355
---------
---------
</TABLE>

F-37
<PAGE>
ARCON HOLDINGS CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

OCTOBER 31, 1996

(6) INCOME TAXES

The provision (benefit) for income taxes for the fiscal year ended October
31, 1996 consists of the following:

<TABLE>
<S> <C>
Current:
Federal..................................... $1,140,700
State....................................... 224,194
---------
1,364,894
---------
Deferred:
Federal..................................... (41,581)
State....................................... (9,205)
---------
(50,786)
---------
$1,314,108
---------
---------
</TABLE>

The provision for income taxes differs from the amount of income tax
determined by applying the U.S. statutory federal income tax rate to pretax
income principally as a result of state income taxes and the increase in the
warrant value which is not deductible for income tax purposes.

Deferred tax assets (liabilities) are comprised of the following at October
31, 1996:

<TABLE>
<S> <C>
Deferred tax assets:
Inventory reserves.................................................... $ 25,023
Accounts receivable allowances........................................ 20,547
Inventory uniform capitalization adjustment........................... 20,409
Accruals and deferred compensation.................................... 127,100
---------

Gross deferred tax asset.......................................... 193,079
Deferred tax liabilities:
Fixed asset book basis in excess of tax basis......................... (31,916)
---------
Net deferred tax asset............................................ $ 161,163
---------
---------
</TABLE>

In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Management considers the
scheduled reversal of deferred tax liabilities, projected future taxable income,
and tax planning strategies in making this assessment. Management believes it is
more likely than not the Company will realize the benefits of these deductible
difference.

(7) PREFERRED STOCK

At the time of its acquisition of Arcon Coating Mills, Arcon Holdings sold
31,945, 6,255 and 41,175 shares of Series A preferred stock, Series B preferred
stock and Series A common stock, respectively, for $3,194,475, $625,525 and
$180,000, respectively.

F-38
<PAGE>
ARCON HOLDINGS CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

OCTOBER 31, 1996

(7) PREFERRED STOCK (CONTINUED)

Both the Series A preferred stock, which is non-voting, and the Series B
preferred stock, which has voting rights, are mandatorily redeemable on April
30, 2001. Such redemption may also occur at the option of the stockholders
beginning on October 31, 2000. The redemption price will be determined on the
redemption date based on a multiple of adjusted earnings during the Company's
preceding fiscal year, and further adjusted based on the Company's cash and debt
balances as of the end of the preceding fiscal year.

The excess of the estimated redemption value over the carrying value of the
preferred stock is being accreted by periodic charges to retained earnings
through October 31, 2000. During the fiscal year ended October 31, 1996, the
carrying value of the Series A and Series B preferred stock was increased by
$1,527,095, based upon the present value of the redemption price, as defined in
the April 14, 1994 acquisition agreement.

Holders of both series of preferred stock receive preferential treatment in
the case of the dissolution of the Company, with the stock to be purchased by
the Company at $100 per share. In addition, no dividends will be paid to the
holders of common stock without the affirmative vote of the holders of the
Series B preferred stock. No provision for mandatory dividends exists.

The Series B preferred stock is convertible into common stock, at the option
of the holder, at a rate of approximately 23 shares of common stock for each
share of preferred stock submitted for conversion. The holders of Series A
preferred stock may convert their shares to common stock upon the occurrence of
a "conversion event" including the transfer or sale of substantially all of the
assets or shares of the Company to an unrelated party.

(8) STOCK OPTIONS

The Company adopted a stock option plan (the Stock Option Plan) in 1994
which provides that the Company may grant, to certain key employees, incentive
stock options or non-qualified stock options at the discretion of the Board of
Directors. The Stock Option Plan provides that the aggregate number of shares of
common stock issuable pursuant to these options may not exceed 111,000 shares.
These options, which are exercisable during the period beginning one year from
the date at the grant and ending ten years from the grant date, are exercisable
at a price to be determined by the Board of Directors of the Company.

In April 1994, pursuant to the Stock Option Plan, the Company granted
non-qualified stock options to two employees to purchase an aggregate of 72,223
shares of common stock at $.44 per share. Of this amount, 20% of the options
vest at the date of grant, 20% vest upon the subsequent three anniversaries of
the grant date and 20% vests on October 31, 1997. No options were exercised as
of October 31, 1996. Deferred compensation expense of $51,149 was recorded in
the fiscal year ended October 31, 1996, based upon the difference between the
exercise price and the fair market value, as determined by an independent
valuation, of the common stock at the date of grant the number of options vested
as of each balance sheet date.

The conversion rate, dissolution amounts and the number of shares reserved
for the Stock Option Plan are subject to change in the event of a stock split,
stock dividend or other such dilative occurrence.

F-39
<PAGE>
ARCON HOLDINGS CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

OCTOBER 31, 1996

(9) WARRANTS

On April 14, 1994, the Company entered into a warrant agreement with the
Company's lender whereby the lender could purchase up to 8-12% of the
outstanding stock of Arcon Holdings (note 5) for $.01 per share (par value). The
warrants expire on April 14, 2004. For a five-year period commencing on April
14, 1999 the lender may also require the Company to purchase the warrants
described above at its fair market value on the date of the put. The estimated
fair value of the warrants was $1,750,000 at October 31, 1996, based on the
amounts that were repurchased as a result of the Acquisition described in note
14.

(10) RELATED PARTY TRANSACTIONS

The Company paid management fees of $100,000 during the fiscal year ended
October 31, 1996, for services provided by a major shareholder of Arcon
Holdings.

(11) PROFIT SHARING PLAN

The Company makes discretionary contributions to the Arcon Profit Sharing
Benefit Plan (the Plan), a defined contribution plan. This Plan covers all
employees, over the age of 20-1/2, who have completed at least six months of
service. Such contributions have been funded to the Plan. Total contributions to
the Plan which have been charged to operations were $116,043 for the fiscal year
ended October 31, 996.

(12) LEASE COMMITMENTS

The Company leases an office and manufacturing facility located in
Oceanside, New York. The facility lease expires in fiscal 1998 and is renewable
thereafter. Total rent expense under this lease was $249,530 for the fiscal year
ended October 31, 1996.

Minimum annual rentals under the facility lease and operating leases for
automobiles and equipment for each of the years ending October 31, are as
follows:

(13) SIGNIFICANT BUSINESS CONCENTRATIONS

The Company's principal raw material, Tyvek-Registered Trademark-, is
proprietary to a single vendor. Tyvek-Registered Trademark- purchases
represented approximately 53% of total raw material purchases of the Company for
the fiscal year ended October 31, 1996.

The Company had sales to one customer which represented approximately 24.5%
of total sales for the fiscal year ended October 31, 1996. At October 31, 1996,
this customer represented 15% of the total outstanding accounts receivable.

F-40
<PAGE>
ARCON HOLDINGS CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

OCTOBER 31, 1996

(14) SUBSEQUENT EVENT

Pursuant to the Agreement dated August 28, 1996 by and among SPI and the
stockholders of Arcon Holdings, SPI acquired all the outstanding stock of Arcon
Holdings as of October 31, 1996 for a purchase price of $32,000,000. Pursuant to
the Agreement and immediately prior to the Acquisition, the non-qualified stock
options granted as described in note 8 were vested and exercised. The remaining
options issuable under the Stock Option Plan were canceled. Concurrently with
the transfer of the purchase price to the stockholders of the Company, the
stockholders agreed to repay all amounts owed under the Company's revolver and
term loan A and B debt and repurchase and cancel the warrants, as described in
notes 5 and 9, respectively. Upon completion of such events, SPI will own all of
the outstanding shares and rights to acquire shares of stock of the company.

Also concurrent with the Acquisition, SPI has agreed to sell the assets and
the liabilities of Thomas Tape, a division of the Company, on November 1, 1996
for a $300,000 promissory note to a company formed by the previous general
manager of the Thomas Tape division. The carrying value of the division's assets
and liabilities have not been adjusted for this sale in the accompanying
consolidated financial statements.

The accompanying consolidated financial statements of the Company have been
prepared immediately prior to the Acquisition and, therefore, do not reflect the
Acquisition, the exercise of the non-qualified stock options, the related
repayment of debt, the repurchase and cancellation of warrants, and an
allocation of the purchase price, including acquisition costs, to the net assets
of the Company in accordance with Opinion No. 16 of the Accounting Principles
Board.

F-41
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors
and Stockholders of
Arcon Holdings Corp.

In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of income and retained earnings (deficit) and of cash
flows present fairly, in all material respects, the financial position of Arcon
Holdings Corp. and its subsidiary (the "Company") at October31, 1995 and 1994,
and the results of its operations and its cash flows for the year ended
October31, 1995 and for the period April14, 1994 (Inception) through October 31,
1994 in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.

Price Waterhouse LLP

Jericho, New York
November 28, 1995 except for Note 14, which is as of August 28, 1996

F-42
<PAGE>
ARCON HOLDINGS CORP. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEET

<TABLE>
<CAPTION>
OCTOBER 31,
---------------------------- SEPTEMBER 30,
1995 1994 1996
------------- ------------- -------------
<S> <C> <C> <C>
(UNAUDITED)
ASSETS
Current assets
Cash.............................................................. $ 296,733 $ 255,232 $ 1,825,096
Accounts receivable, net of allowance for doubtful accounts of
$78,915 and $56,202 at October 31, 1995 and 1994, respectively,
and $52,311 at September 30, 1996............................... 1,935,541 2,015,029 1,964,232
Inventories....................................................... 2,721,548 1,907,504 2,694,534
Prepaid expenses and other........................................ 74,405 58,954 180,117
Income tax receivable............................................. 90,800 --
Deferred income taxes............................................. 94,948 67,651 114,000
------------- ------------- -------------
Total current assets.......................................... 5,213,975 4,304,370 6,777,979

Property, plant and equipment, net.................................. 1,338,666 1,404,554 1,209,190
Deferred financing costs, net of accumulated amortization of
$266,612 and $92,185 at October 31, 1995 and 1994, respectively,
and $428,400 at September 30, 1996................................ 563,105 739,987 401,317
Goodwill, net of accumulated amortization of $1,270,078 and $448,078
at October 31, 1995 and 1994, respectively, and $2,018,079 at
September 30, 1996................................................ 10,969,906 11,791,906 10,221,905
Deferred income taxes............................................... 15,429 18,091 15,429
------------- ------------- -------------
Total assets.................................................. $ 18,101,081 $ 18,258,908 18,625,820
------------- ------------- -------------
------------- ------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses............................. $ 1,702,670 $ 1,572,188 $ 1,699,573
Accrued interest.................................................. 99,443 108,621 145,000
Current portion of long-term debt................................. 1,425,000 1,650,000 1,550,000
Income taxes payable.............................................. 177,587 635,538
------------- ------------- -------------
Total current liabilities..................................... 3,227,113 3,508,396 4,030,111

Long-term debt...................................................... 8,639,423 9,950,632 6,477,027
Warrants............................................................ 641,500 379,710 1,752,000
Deferred compensation............................................... 207,433 56,831 284,156
------------- ------------- -------------
Total liabilities............................................. 12,715,469 13,895,569 12,543,294

Stockholders' equity
Series A Preferred Stock, $.01 par value, 32,000 shares
authorized, 31,945 shares issued and outstanding................ 3,927,700 3,194,475 5,173,560
Series B Preferred Stock, $.01 par value, 6,500 shares authorized,
6,255 shares issued and outstanding............................. 769,101 625,525 1,013,058
Common stock, $.01 par value, 1,600,000 shares authorized, 41,175
shares issued and outstanding................................... 412 412 412
Paid in capital................................................... 179,588 179,588 179,588
Retained earnings (deficit)....................................... 508,811 363,339 (284,092)
------------- ------------- -------------
Total stockholders' equity.................................... 5,385,612 4,363,339 6,082,526
------------- ------------- -------------
Commitments and contingencies
Total liabilities and stockholders' equity.................... $ 18,101,081 $ 18,258,908 $ 18,625,820
------------- ------------- -------------
------------- ------------- -------------
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-43
<PAGE>
ARCON HOLDINGS CORP. AND SUBSIDIARY

CONSOLIDATED STATEMENT OF INCOME AND RETAINED EARNINGS (DEFICIT)

<TABLE>
<CAPTION>
FOR THE PERIOD
FROM APRIL 14,
1994
(INCEPTION) 11 MONTH 11 MONTH
YEAR ENDED THROUGH PERIOD ENDED PERIOD ENDED
OCTOBER 31, OCTOBER 31, SEPTEMBER 30, SEPTEMBER 30,
1995 1994 1996 1995
------------- --------------- ------------- -------------
<S> <C> <C> <C> <C>
(UNAUDITED) (UNAUDITED)

Net sales.......................................... $ 25,788,864 $ 12,172,916 $ 25,984,254 $ 23,532,386
Cost of goods sold................................. 18,652,559 9,029,333 18,590,000 17,096,783
------------- --------------- ------------- -------------
Gross profit................................... 7,136,305 3,143,583 7,394,254 6,435,603

Selling, general and administrative expenses....... 2,313,310 1,114,145 1,874,548 2,124,061
Interest expense................................... 1,314,618 732,187 1,077,649 1,230,677
Accretion of warrants to fair market value......... 261,790 -- 1,110,208 262,000
Amortization of intangible assets.................. 996,600 531,550 891,000 894,762
Depreciation and amortization of property, plant
and equipment.................................... 240,232 121,891 234,934 220,000
Management fees.................................... 100,000 54,165 90,000 91,667
------------- --------------- ------------- -------------
Total other expenses........................... 5,226,550 2,553,938 5,278,339 4,823,167
------------- --------------- ------------- -------------
Income before provision for income taxes....... 1,909,755 589,645 2,115,915 1,612,436

Provision for income taxes......................... 887,482 226,306 1,419,000 831,000
------------- --------------- ------------- -------------
Net income..................................... 1,022,273 363,339 696,915 781,436

Retained earning, beginning of period.............. 363,339 -- 508,811 363,339
Accretion of excess of redemption value of
preferred stock over fair value at issuance
date............................................. (876,801) -- (1,489,818) (876,801)
------------- --------------- ------------- -------------
Retained earnings (deficit), end of period......... $ 508,811 $ 363,339 $ (284,092) $ 267,974
------------- --------------- ------------- -------------
------------- --------------- ------------- -------------
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-44
<PAGE>
ARCON HOLDINGS CORP. AND SUBSIDIARY

CONSOLIDATED STATEMENT OF CASH FLOWS

<TABLE>
<CAPTION>
FOR THE PERIOD
FROM APRIL 14,
1994 11 MONTH 11 MONTH
YEAR ENDED (INCEPTION) PERIOD ENDED PERIOD ENDED
OCTOBER 31, THROUGH OCTOBER SEPTEMBER 30, SEPTEMBER 30,
1995 31, 1994 1996 1995
----------- --------------- ------------- -------------
<S> <C> <C> <C> <C>
(UNAUDITED) (UNAUDITED)
Cash flows from operating activities
Net income.......................................... $1,022,273 $ 363,339 $ 696,915 $ 781,436
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization................. 1,236,832 661,420 1,146,996 1,013,052
Loss on sale of property, plant and
equipment................................... 14,780 -- -- --
Increase in warrant value..................... 261,790 -- 1,110,500 262,000
Deferred compensation......................... 150,602 56,831 76,723 150,602
Allowance for doubtful accounts............... 22,713 20,336 (26,604) 54,459
Deferred income taxes......................... (24,635) (85,742) (19,052) --
Changes in operating assets and liabilities
Accounts receivable........................... 56,775 (7,699) (2,087) (111,459)
Inventories................................... (814,044) 216,176 27,014 (685,391)
Prepaid expenses and other.................... (15,451) 25,858 (105,712) 23,000
Accounts payable.............................. 130,482 292,248 3,097 (540,000)
Accrued interest.............................. (9,178) 108,621 45,557 402,000
Income taxes payable.......................... (268,387) -- 626,807 41,336
----------- --------------- ------------- -------------
Net cash provided by operating
activities.............................. 1,764,522 1,651,388 3,580,154 1,391,035
----------- --------------- ------------- -------------
Cash flows from investing activities
Capital expenditures.............................. (186,842) (24,996) (103,524) (147,000)
Cash paid for acquisition, net of cash acquired... (17,252,596) -- --
----------- --------------- ------------- -------------
Net cash used in investing activities..... (186,842) (17,277,592) (103,524) (147,000)
----------- --------------- ------------- -------------
Cash flows from financing activities
Repayment of long-term debt....................... (3,720,628) (3,559,446) (1,948,267) (1,746,000)
Proceeds from borrowing........................... 2,184,419 2,152,786 -- --
Proceeds from acquisition debt financing.......... 13,349,596 -- --
Proceeds from sale of preferred and common
stock.......................................... 4,000,000 -- --
Purchase of interest rate cap..................... (61,500) -- --
----------- --------------- ------------- -------------
Net cash (used in) provided by financing
activities.............................. (1,536,209) 15,881,436 (1,948,267) (1,746,000)
----------- --------------- ------------- -------------
Net increase (decrease) in cash................... 41,501 255,232 1,528,363 (501,965)
Cash at beginning of period....................... 255,232 0 296,733 255,232
----------- --------------- ------------- -------------
Cash at end of period............................. $ 296,733 $ 255,232 $ 1,825,096 $ (246,733)
----------- --------------- ------------- -------------
----------- --------------- ------------- -------------
Supplemental disclosure of cash flow information:
Interest paid..................................... $1,476,076 $ 602,786 $ 1,077,649 $ 1,230,677
----------- --------------- ------------- -------------
----------- --------------- ------------- -------------
Income taxes paid................................. $1,179,270 $ 134,461 $ 794,806 $ 1,826,213
----------- --------------- ------------- -------------
----------- --------------- ------------- -------------
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-45
<PAGE>
ARCON HOLDINGS CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BACKGROUND

Arcon Holdings Corp. and its wholly-owned subsidiary, Arcon Coating Mills,
Inc. ("Arcon Coating Mills" or the "Subsidiary"), (collectively the "Company")
is a leading producer of tapes and edge covering materials which are used to
bind, reinforce, protect and decorate office and school supply products as well
as checkbooks and hard and soft cover books. The Company maintains operating
facilities in Oceanside, New York, and Springfield, Ohio.

The Company was incorporated on March 17, 1994 for the purpose of acquiring
Arcon Coating Mills, Inc. As discussed in Note 2, Arcon Coating Mills, Inc. was
acquired by Arcon Acquisition Corp. (a wholly-owned subsidiary of the Company)
on April 14, 1994 and, accordingly, the results of operations and cash flows of
the Subsidiary for the period ended October 31, 1994 are presented from the date
of acquisition. Concurrent with the acquisition, Arcon Acquisition Corp. was
merged into Arcon Coating Mills, Inc.

USE OF ESTIMATES

The accompanying financial statements were prepared in conformity with
generally accepted accounting principles which require management to make
estimates, and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of income and expenses during
the reporting period. Actual results could differ from those estimates.

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiary. All significant intercompany accounts and
transactions have been eliminated.

INVENTORIES

Inventories are reported at the lower of cost or market value, with cost
determined using the first-in, first-out (FIFO) method.

PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment are stated at cost and are depreciated using
the straight-line method over estimated useful lives of assets as follows:
automobiles - 5 years; furniture and fixtures - 7 years; machinery and equipment
- -7 years; and buildings - 15 years. Leasehold improvements are amortized over
the shorter of the life of the improvement or the lease term.

INTANGIBLE ASSETS

Deferred financing costs arising from the acquisition debt are charged to
operations as additional interest expense, using the straight-line method, over
the life of the underlying indebtedness. Goodwill arising from the acquisition
described in Note 2 is being amortized over 15 years on a straight-line basis.

F-46
<PAGE>
ARCON HOLDINGS CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES

Income taxes have been provided for in conformity with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS
109"). This statement requires recognition of deferred income taxes utilizing a
liability based approach.

FAIR VALUE OF FINANCIAL INSTRUMENTS

The estimated fair value of the Company's financial instruments is believed
to approximate their carrying amounts.

UNAUDITED INTERIM FINANCIAL INFORMATION

The consolidated balance sheet at September 30, 1996, the consolidated
statement of income and retained earnings (deficit) and the consolidated
statement of the cash flows for the eleven-month interim periods ended September
30, 1996 and September 30, 1995 have been prepared by the Company without audit.
In the opinion of management, all adjustments, consisting only of normal
recurring adjustments, necessary to fairly present the interim financial
information, have been made. The results of operations of interim periods are
not necessarily indicative of the operating results of a full year or of future
years.

2. ACQUISITION

On April 14, 1994 (the "acquisition date"), 100% of Arcon Coating Mill's
common stock was purchased by Arcon Acquisition Corp. a wholly-owned subsidiary
of the Company, for a purchase price of $17,349,000. The purchase price,
including acquisition costs, was allocated to the net assets of the Company in
accordance with Opinion No. 16 of the Accounting Principles Board. The purchase
price exceeded the fair value of the net assets acquired of $4,340,799 by
$13,008,201 (as adjusted) and, accordingly, goodwill and certain intangible
assets were recorded as of the acquisition date.

The acquisition was accounted for as a purchase and, therefore, the results
of operations of Arcon Coating Mills are included in the consolidated financial
statements for periods subsequent to the date of acquisition.

3. INVENTORIES

Net inventories consist of the following at:

<TABLE>
<CAPTION>
OCTOBER 31
-------------------------- SEPTEMBER 30,
1995 1994 1996
------------ ------------ -------------
<S> <C> <C> <C>
(UNAUDITED)
Raw materials.......................................................... $ 1,477,689 $ 929,993 $ 1,308,145
Work-in-process........................................................ 1,108,664 910,936 1,231,711
Finished goods......................................................... 135,195 66,575 154,678
------------ ------------ -------------
2,721,548 1,907,504 2,694,534
------------ ------------ -------------
------------ ------------ -------------
</TABLE>

F-47
<PAGE>
ARCON HOLDINGS CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

4. PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consists of the following at:

<TABLE>
<CAPTION>
OCTOBER 31
-------------------------- SEPTEMBER 30,
1995 1994 1996
------------ ------------ -------------
<S> <C> <C> <C>
(UNAUDITED)
Land and building...................................................... $ 115,932 $ 115,932 $ 117,433
Machinery and equipment................................................ 1,219,415 1,102,823 1,323,209
Leasehold improvements................................................. 158,690 157,790 163,348
Automobiles............................................................ 118,292 85,750 113,526
Furniture and fixtures................................................. 78,977 63,416 78,977
------------ ------------ -------------
$ 1,691,306 $ 1,525,711 $ 1,796,493
Less--Accumulated depreciation and amortization.................... 352,640 121,157 587,303
------------ ------------ -------------
$ 1,338,666 $ 1,404,554 $ 1,209,190
------------ ------------ -------------
------------ ------------ -------------
</TABLE>

5. DEBT

Long-term debt consists of the following at:

<TABLE>
<CAPTION>
OCTOBER 31
-------------------------- SEPTEMBER 30,
1995 1994 1996
------------ ------------ -------------
<S> <C> <C> <C>
(UNAUDITED)
Term loan A............................................................ $ 6,350,000 $ 7,500,000 $ 5,312,500
Term loan B............................................................ 2,680,527 2,641,155 2,714,527
Revolving line of credit............................................... 1,033,896 1,459,477 2,245
------------ ------------ -------------
10,064,423 11,600,632 8,029,272
Less--Current portion.............................................. 1,425,000 1,650,000 1,550,000
------------ ------------ -------------
$ 8,639,423 $ 9,950,632 $ 6,479,272
------------ ------------ -------------
------------ ------------ -------------
</TABLE>

TERM LOAN A

The term loan A principal is due and payable on the last day in January,
April, July and October of each year through January 31, 2000. The quarterly
payments are $387,500 through October 31, 1999 with a final payment of $275,000
on January 31, 2000. The note bears interest at the higher of the prime rate or
the Federal funds effective rate, plus 2%. Such rate was 10.75% and 10.25% at
October 31, 1995 and September 30, 1996, respectively. Interest is payable on
the first day of each month.

TERM LOAN B

The term loan B principal is due and payable in the amount of $750,000 on
July 31, 2000, October 31, 2000, January 31, 2001 and April 30, 2001,
respectively. Interest accrues at a fixed rate of 11.5% and is payable on the
first day of each month. During the fiscal year ended October 31, 1995 and the
period ended September 30, 1996, the note has been recorded net of unamortized
discount of $319,473 and $286,473, respectively, which is being amortized over
the life of the indebtedness.

F-48
<PAGE>
ARCON HOLDINGS CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

5. DEBT (CONTINUED)
REVOLVING LINE OF CREDIT

Concurrent with the acquisition, the Company entered into a revolving credit
agreement which expires on April 30, 2001. Based upon management's intention to
continually refinance outstanding borrowings under this long-term agreement, the
outstanding amount has been classified as a non-current liability. The maximum
amount that can be borrowed under this agreement is the lesser of $3,000,000 or
85% of eligible accounts receivable plus 50% of eligible inventory. Such
eligible amounts were greater than $3,000,000 at October 31, 1995. The line
bears interest at the higher of the prime rate or the Federal funds effective
rate, plus 2%, payable on the first day of each month. In addition, the Company
pays commitment fees of .5% on the average daily unused balance. The unused
balance under the revolving credit agreement was approximately $2.0 million and
$3.0 million at October 31, 1995 and September 30, 1996, respectively.

Borrowings under the revolving credit agreement are collateralized by
accounts receivable and inventory. The term notes are collateralized by
substantially all assets of the Company.

The loan agreements contain certain affirmative and negative covenants which
include requirements that the Company maintain certain financial ratios and that
excess cash flows from operating and other activities, as defined in the
agreements, be remitted to the lender. The term loan A balances at October 31,
1995 reflect the acceleration of $500,000 of debt payments made during the year
related to such excess cash flows.

The Company has reduced its exposure to changes in the cost of its variable
rate borrowings through the use of a base rate cap agreement. This instrument
provides, for a three year period beginning in July 1994, a 10% ceiling on the
base interest rate used to calculate interest payments on the first $4.5 million
of the Company's term loan A. At October 31, 1995, $32,464, net of accumulated
amortization of $29,036, was recorded in deferred financing costs. At September
30, 1996, $13,676, net of accumulated amortization of $47,824, was recorded in
deferred financing costs.

The following is a schedule of aggregate annual principal payments for each
of the fiscal years ending October 31:

<TABLE>
<S> <C>
1996........................................................ $1,425,000
1997........................................................ 1,550,000
1998........................................................ 1,550,000
1999........................................................ 1,550,000
2000........................................................ 1,775,000
2001 and thereafter......................................... 2,533,896
----------
10,383,896
Less--Unamortized discount.................................. (319,473)
----------
$10,064,423
----------
----------
</TABLE>

6. INCOME TAXES

The Company accounts for income taxes under the requirements of SFAS 109.
SFAS 109 utilizes an asset and liability approach to measuring income tax
expense. The asset and liability approach requires the recognition of deferred
tax assets and liabilities for the expected future consequences of temporary

F-49
<PAGE>
ARCON HOLDINGS CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

6. INCOME TAXES (CONTINUED)
differences between the financial statement carrying amounts and the tax basis
of certain assets and liabilities.

Deferred tax assets (liabilities) are comprised of the following at October
31:

<TABLE>
<CAPTION>
1995 1994
---------- ---------
<S> <C> <C>
Deferred tax assets
Inventory reserves....................................................................... $ 38,154 $ 27,808
Accounts receivable allowances........................................................... 30,477 21,705
Inventory uniform capitalization adjustment.............................................. 24,755 10,427
Accruals and deferred compensation....................................................... 81,632 30,443
---------- ---------
Gross deferred tax asset............................................................... $ 175,018 $ 90,383
Deferred tax liabilities
Fixed asset book basis in excess of tax basis............................................ $ (64,641) $ (4,641)
---------- ---------
Net deferred tax asset................................................................. $ 110,377 $ 85,742
---------- ---------
---------- ---------
</TABLE>

The provision (benefit) for income taxes consists of the following:

<TABLE>
<CAPTION>
FOR THE ELEVEN MONTH
FOR THE YEAR ENDED PERIOD ENDING SEPTEMBER
OCTOBER 31, 30,
---------------------- ------------------------
1995 1994 1996 1995
---------- ---------- ------------ ----------
<S> <C> <C> <C> <C>
(UNAUDITED)
Current
Federal...................................................... $ 744,751 $ 255,488 $ 1,269,903 $ 694,730
State........................................................ 167,366 56,560 172,557 93,722
---------- ---------- ------------ ----------
912,117 312,048 1,442,460 788,452
---------- ---------- ------------ ----------
Deferred:
Federal...................................................... (21,669) (70,070) (21,142) 37,458
State........................................................ (2,936) (15,672) (2,318) 5,090
---------- ---------- ------------ ----------
(24,635) (85,742) (23,460) 42,548
---------- ---------- ------------ ----------
$ 887,482 $ 226,306 $ 1,419,000 $ 831,000
---------- ---------- ------------ ----------
---------- ---------- ------------ ----------
</TABLE>

The provision for income taxes differs from the amount of income tax
determined by applying the U.S. statutory Federal income tax rate to pretax
income principally as a result of state income taxes and the increase in the
warrant value which is not deductible for income tax purposes.

7. STOCKHOLDERS' EQUITY

At the time of the formation of the Company and the acquisition of Arcon
Coating Mills, the Company sold 31,945, 6,255 and 41,175 shares of Series A
Preferred Stock, Series B Preferred Stock and Series A Common Stock,
respectively, for $3,194,475, $625,525 and $180,000, respectively.

Both the Series A Preferred Stock, which is non-voting, and the Series B
Preferred Stock, which has voting rights, are mandatorily redeemable on April
30, 2001. Such redemption may also occur at the option of the stockholders
beginning on October 31, 2000. The redemption price will be determined on the

F-50
<PAGE>
ARCON HOLDINGS CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

7. STOCKHOLDERS' EQUITY (CONTINUED)
redemption date based on a multiple of adjusted earnings during the Company's
preceding fiscal year, and as further adjusted based on the Company's cash and
debt balances as of the end of the preceding fiscal year.

The excess of the estimated redemption value over the carrying value of the
preferred stock is being accreted by periodic charges to retained earnings
through October 31, 2000. During the fiscal year ended October 31, 1995 and the
period ended September 30, 1996, the carrying value of the Series A and Series B
Preferred Stock was increased by $876,801 and $1,489,818, respectively.

Holders of both series of preferred stock receive preferential treatment in
the case of the dissolution of the Company, with stock to be purchased by the
Company at $100 per share. In addition, no dividends will be paid to the holders
of common stock without the affirmative vote of the holders of the Series B
Preferred Stock. No provision for mandatory dividends exists.

The Series B Preferred Stock is convertible into common stock, at the option
of the holder, at a rate of approximately 23 shares of common stock for each
share of preferred stock submitted for conversion. The holders of Series A
Preferred stock may convert their shares to common stock upon the occurrence of
a "conversion event" including the transfer or sale of substantially all of the
assets or shares of the Company to an unrelated party.

The Company adopted a stock option plan (the "Stock Option Plan") in 1994
which provides that the Company may grant, to certain key employees, Incentive
Stock Options or Non-qualified Stock Options at the discretion of the Board of
Directors. The Stock Option Plan provides that the aggregate number of shares of
common stock issuable pursuant to these options may not exceed 111,000 shares.
These options, which are exercisable during the period beginning one year from
the date at the grant and ending ten years from the grant date, are exercisable
at a price to be determined by the Board of Directors of the Company.

Pursuant to the Stock Option Plan, in April 1994, the Company granted
non-qualified stock options to two employees to purchase an aggregate of 72,223
shares of common stock at $.44 per share. Of this amount, 20% of the options
vest at the date of grant, 20% vest upon the subsequent three anniversaries of
the grant date and 20% vests on October 31, 1997. Deferred compensation expense
of $150,602, $56,831 and $76,723 was recorded for the year ended October 31,
1995 and the period ended October 31, 1994 and the period ended September 30,
1996, respectively, based upon the difference between the exercise price and the
fair market value of the common stock at the date of grant and the number of
options vested as of each balance sheet date.

8. WARRANTS

Concurrent with the acquisition, the Company and Arcon Holdings Corp.,
entered into a warrant agreement with the Company's lender whereby the lender
could purchase up to 8 1/2% of the outstanding stock of Arcon Holdings Corp. for
$.01 per share (par value). The warrant expires on April 14, 2004. For a five
year period commencing on April 14, 1999 the lender may also require the Company
to purchase the warrant described above at its fair market value on the date of
the put. The estimated fair value of the warrant was $641,500 and $379,710 at
October 31, 1995 and 1994, respectively and $1,752,000 at September 30, 1996.

F-51
<PAGE>
ARCON HOLDINGS CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

9. RELATED PARTY TRANSACTIONS

The Company paid management fees of $100,000 and $54,165 for the year ended
October 31, 1995 and the period ended October 31, 1994, respectively, and
$90,000 for the period ended September 30, 1996 for services provided by a major
shareholder of Arcon Holdings Corp.

10. PROFIT SHARING PLAN

During 1995, the Company made contributions to the Arcon Profit Sharing
Benefit Plan. This plan, which is a defined contribution plan, covers all
employees, over the age of 20 1/2, who have completed at least six months of
service. The costs of the plan are funded currently. Total expenses charged to
operations were $254,150 and $110,908 at October 31, 1995 and 1994,
respectively, and $129,421 at September 30, 1996.

11. LEASE COMMITMENTS

The Company leases an office and manufacturing facility located in
Oceanside, New York. The lease expires in fiscal 1998 and is renewable
thereafter. Total rent expense under this lease was $243,664 and $131,316 for
the year ended October 31, 1995 and the period ended October 31, 1994,
respectively, and $228,051 for the period ended September 30, 1996.

Minimum annual rentals under all of the Company's operating leases for each
of the years ending October 31, are as follows:

12. COMMITMENTS AND CONTINGENCIES

The Company's principal raw material, Tyvek-Registered Trademark-, is
proprietary to a single vendor. Tyvek-Registered Trademark- purchases
represented approximately 53%, 50% and 60% of total raw material purchases of
the Company for the year ended October 31, 1995, the period ended October 31,
1994 and the period ended September 30, 1996, respectively.

13. MAJOR CUSTOMER

The Company had sales to one customer which represented approximately 20%
and 23% of total sales for the year ended October 31, 1995 and the period ended
September 30, 1996, respectively. At October 31, 1995 and September 30, 1996,
this customer represented 12% and 12%, respectively, of the total outstanding
accounts receivable.

14. SUBSEQUENT EVENT

Pursuant to a Stock Purchase Agreement dated as of August 28, 1996,
Specialty Paperboard, Inc. has agreed to purchase all of the issued and
outstanding capital stock of the Company.

F-52
<PAGE>
ITEM 7--FINANCIAL STATEMENTS PRO FORMA FINANCIAL INFORMATION AND EXHIBITS

(b) Pro Forma Financial Information

UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA

The following Unaudited Pro Forma Combined Consolidated Statements of Income
give effect to the Transactions as if they had occurred on January 1, 1995. The
unaudited pro forma financial data are based on the historical consolidated
financial statements of SPI, CPG and Arcon and the assumptions and adjustments
described in the accompanying notes. The Unaudited Pro Forma Combined
Consolidated Statements of Income do not (a) purport to represent what the
Company's results of operations actually would have been if the Transactions had
occurred as of the date indicated or what such results will be for any future
periods or (b) give effect to certain non-recurring charges expected to result
from the Transactions.

The following Unaudited Pro Forma Combined Consolidated Balance Sheet as of
September 30, 1996 was prepared as if the Transactions had occurred on such
date. The Unaudited Pro Forma Combined Consolidated Balance Sheet reflects the
preliminary allocation of the purchase prices for the Acquisitions to the
Company's tangible and intangible assets and liabilities. The final allocation
of such purchase prices, and the resulting amortization expense in the
accompanying Unaudited Pro Forma Combined Statements of Income, will differ from
the preliminary estimates due to the final allocation being based on: (a) actual
closing date amounts of assets and liabilities, and (b) actual values of
property, plant and equipment and any identifiable intangible assets.

The unaudited pro forma financial data are based upon assumptions that SPI
believes are reasonable and should be read in conjunction with the consolidated
financial statements of SPI and the accompanying notes thereto, the consolidated
financial statements of CPG and the accompanying notes thereto and the
consolidated financial statements of Arcon and the accompanying notes thereto
included elsewhere in this Prospectus.

Although Arcon's fiscal year ends October 31, the historical information of
Arcon in the pro forma statements of income is presented for the twelve months
ended December 31, 1995 and the nine months ended September 30, 1996 and 1995.

F-53
<PAGE>
UNAUDITED PRO FORMA COMBINED CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1996
(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
ASSETS

<S> <C> <C> <C> <C> <C> <C> <C>
OFFERING ACQUISITIONS COMPANY
HISTORICAL ADJUSTMENTS ADJUSTMENTS PRO FORMA
----------------------------------- ----------- -------------------- -----------

<CAPTION>
SPI CPG ARCON CPG ARCON
----------- ----------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
CURRENT ASSETS:
Cash....................... $ 3,174 $ 3 $ 1,825 $ 73,053(a) $ (45,124 (d) $ (26,048 (f) $ 6,883
Accounts receivable........ 11,278 11,030 1,964 -- -- -- 24,272
Cogen receivable........... 1,512 -- -- -- -- -- 1,512
Inventories................ 16,402 8,317 2,695 -- 1,415(e) -- 28,829
Deferred taxes............. -- 716 114 -- -- (114 (g) 716
Other...................... 1,016 307 180 -- -- -- 1,503
----------- ----------- --------- ----------- --------- --------- -----------
Total current assets..... 33,382 20,373 6,778 73,053 (43,709) (26,162) 63,715
Property, plant and
equipment, net........... 36,030 19,444 1,209 -- 36,940(e) -- 93,623
Organizational and
financing costs.......... 1,988 303 401 1,808(b) -- -- 4,500
Other long-term assets..... 487 976 -- -- -- -- 1,463
Goodwill................... -- -- 10,222 -- 7,916(e) 19,856(g) 37,994
Deferred income taxes...... 4,128 135 16 -- -- -- 4,279
----------- ----------- --------- ----------- --------- --------- -----------
Total assets............. $ 76,015 $ 41,231 $ 18,626 $ 74,861 $ 1,147 $ (6,306) $ 205,574
----------- ----------- --------- ----------- --------- --------- -----------
----------- ----------- --------- ----------- --------- --------- -----------

LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of
long-term debt........... $ -- $ 1,750 $ 1,550 $ (3,300)(a) $ -- $ -- $ --
Accounts payable........... 7,155 4,520 1,699 -- -- -- 13,374
Accrued liabilities........ 8,175 5,396 1,065 (1,191)(c) 450(e) 1,529(g) 15,424
----------- ----------- --------- ----------- --------- --------- -----------
Total current
liabilities............ 15,330 11,666 4,314 (4,491) 450 1,529 28,798
LONG-TERM LIABILITIES:
Senior Notes............... -- -- -- 100,000(a) -- -- 100,000
Long-term debt............. 1,845 10,540 6,477 (18,862)(a) -- -- --
----------- ----------- --------- ----------- --------- --------- -----------
Total long-term debt..... 1,845 10,540 6,477 81,138 -- 100,000
Deferred gain.............. 13,033 -- -- -- -- -- 13,033
Deferred income taxes...... -- -- -- -- 15,342(e) -- 15,342
Warrant -- -- 1,752 -- -- (1,752 (h) --
Other long-term liabilities -- 4,380 -- -- -- -- 4,380
----------- ----------- --------- ----------- --------- --------- -----------
Total long-term
liabilities 14,878 14,920 8,229 81,138 15,342 (1,752) 132,755
----------- ----------- --------- ----------- --------- --------- -----------
STOCKHOLDERS' EQUITY:
Common stock............... 4 5 1 -- (5 (h) (1 (h) 4
Preferred stock............ -- -- 6,187 -- -- (6,187 (h) --
Additional paid in
capital.................. 44,733 4,565 179 -- (4,565 (h) (179 (h) 44,733
Unearned compensation...... (26) -- -- -- -- -- (26)
Retained earnings
(deficit)................ 1,096 10,140 (284) (1,786)(c) (10,140 (h) 284(h) (690)
Minimum pension
adjustment............... -- (65) -- -- 65(h) -- --
----------- ----------- --------- ----------- --------- --------- -----------
Total stockholders'
equity................. 45,807 14,645 6,083 (1,786) (14,645) (6,083) 44,021
----------- ----------- --------- ----------- --------- --------- -----------
Total liabilities and
stockholders' equity... $ 76,015 $ 41,231 $ 18,626 $ 74,861 $ 1,147 $ (6,306) $ 205,574
----------- ----------- --------- ----------- --------- --------- -----------
----------- ----------- --------- ----------- --------- --------- -----------
</TABLE>

See accompanying notes

F-54
<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED CONSOLIDATED BALANCE SHEET
(DOLLARS IN THOUSANDS)

The Pro Forma Combined Consolidated Balance Sheet reflects the Transactions
as if they had occurred as of September 30, 1996 as follows:

(a) Reflects the issuance of the Notes and application of proceeds
therefrom:

<TABLE>
<S> <C>
Issuance of the Notes............................................. $ 100,000
Expenses for issuance of the Notes................................ (4,500)
Retirement of current maturities of long-term debt................ (3,300)
Retirement of long-term debt...................................... (18,862)
Elimination of debt discount...................................... (285)
---------
$ 73,053
---------
---------
</TABLE>

(b) Reflects the following:

<TABLE>
<CAPTION>
Financing costs related to the Offering............................. $ 4,500
<S> <C>
Write off of financing costs and expenses relating to debt to be
retired........................................................... (2,692)
---------
$ 1,808
---------
---------
</TABLE>

<TABLE>
<S> <C>
Elimination of debt discount relating to debt to be retired........ $ (285)
Write off of financing costs and expenses relating to debt to be
retired.......................................................... (2,692)
Tax benefit from above adjustments................................. 1,191
---------
$ (1,786)
---------
---------
</TABLE>

(d) Represents the following cash payments related to the CPG Acquisition:

<TABLE>
<S> <C>
Purchase price--CPG Acquisition................................... $ (53,000)
Net purchase price adjustment..................................... (4,164)
Less debt outstanding............................................. 12,290
---------
Payment to sellers................................................ (44,874)
Acquisition expenses.............................................. (250)
---------
$ (45,124)
---------
---------
</TABLE>

F-55
<PAGE>
(e) The CPG Acquisition will be accounted for as a purchase in accordance
with Accounting Principles Board Opinion No. 16, "Business Combinations." The
purchase price is being allocated first to the tangible and identifiable
intangible assets and liabilities of CPG based upon preliminary estimates of
their fair market values, with the remainder allocated to goodwill.

<TABLE>
<S> <C>
Payment to sellers -- CPG Acquisition.............................. $ 44,874
Acquisition expenses............................................... 250
Book value of net assets acquired.................................. (14,645)
---------
Increase in basis.................................................. $ 30,479
---------
---------
Allocation of increase in basis:
Increase in inventory value to convert LIFO to fair value.......... $ 1,415
Increase in fair value of property, plant and equipment, net....... 36,940
Increase in Goodwill............................................... 7,916
Accrual for Acquisition-related severance costs to be incurred at
CPG.............................................................. (450)
Increase in deferred tax liabilities--long-term.................... (15,342)
---------
$ 30,479
---------
---------
</TABLE>

(f) Represents the following cash payments related to the Arcon Acquisition:

<TABLE>
<S> <C>
Purchase price--Arcon Acquisition................................. $ (32,000)
Less debt outstanding............................................. 8,027
Plus cash accounts to sellers..................................... (1,825)
---------
Payment to sellers for shares, options and warrant................ (25,798)
Acquisition expenses.............................................. (250)
---------
$ (26,048)
---------
---------
</TABLE>

(g) The Arcon Acquisition will be accounted for as a purchase in accordance
with Accounting Principles Board Opinion No. 16, "Business Combinations." The
purchase price is being allocated first to the tangible and identifiable
intangible assets and liabilities of Arcon based upon preliminary estimates of
their fair market values, with the remainder allocated to goodwill.

<TABLE>
<S> <C>
Payment to sellers for shares, options and warrant--Arcon
Acquisition...................................................... $ 23,973
Acquisition expenses............................................... 250
Book value of net assets acquired.................................. (6,010)
---------
Increase in basis.................................................. $ 18,213
---------
---------
Allocation of increase in basis:
Increase in goodwill............................................... $ 19,856
Decrease in deferred compensation.................................. 284
Accrual for acquisition-related severance and relocation costs to
be incurred at Arcon............................................. (1,813)
Decrease in deferred tax asset--current............................ (114)
---------
$ 18,213
---------
---------
</TABLE>

(h) Reflects the elimination of CPG and Arcon equity balances and warrant
pursuant to purchase accounting.

F-56
<PAGE>
UNAUDITED PRO FORMA COMBINED CONSOLIDATED STATEMENTS OF INCOME

YEAR ENDED DECEMBER 31, 1995

(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
TOTAL PRO FORMA COMPANY
HISTORICAL HISTORICAL ADJUSTMENTS PRO FORMA
--------------------------------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
SPI CPG ARCON
---------- --------- ----------
Net sales..................................... $ 117,516 $ 95,795 $ 26,153 $ 239,464 $ -- $ 239,464
Cost of product sold.......................... 100,106 84,419 19,135 203,660 (700)(a) 202,960
---------- --------- ---------- ---------- ----------- -----------
Gross profit................................ 17,410 11,376 7,018 35,804 700 36,504
General and administrative.................... 8,397 5,310 3,401 17,108 (3,097)(b) 14,011
---------- --------- ---------- ---------- ----------- -----------
Income from operations...................... 9,013 6,066 3,617 18,696 3,797 22,493
Other (income) expenses, net.................. (1,198) -- -- (1,198) -- (1,198)
Loss on sale of assets........................ 8,302 -- -- 8,302 -- 8,302
Cogeneration income........................... (6,512) -- -- (6,512) -- (6,512)
Interest expense.............................. 892 1,345 1,793 4,030 5,795(c) 9,825
---------- --------- ---------- ---------- ----------- -----------
Income before income taxes.................. 7,529 4,721 1,824 14,074 (1,998) 12,076
Income tax provision (benefit)................ (424) 1,842 956 2,374 (1,014)(d) 1,360
---------- --------- ---------- ---------- ----------- -----------
Net income.................................... $ 7,953 $ 2,879 $ 868 $ 11,700 $ (984) $ 10,716
---------- --------- ---------- ---------- ----------- -----------
---------- --------- ---------- ---------- ----------- -----------
Other Data:
EBITDA (e).................................. $ 23,885 $ 29,454
Depreciation and amortization (f)........... 5,189 6,961
Capital expenditures........................ 9,445 9,445
</TABLE>

F-57
<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED CONSOLIDATED STATEMENTS OF INCOME

(DOLLARS IN THOUSANDS)

The Pro Forma Combined Consolidated Statement of Income for the year ended
December 31, 1995 reflects the Transactions as if they had occurred on January
1, 1995 as follows:

<TABLE>
<C> <S> <C>
(a) Reflects the following:
Conversion of CPG inventory from LIFO to fair value...................... $ (1,272)
Additional depreciation expense on increased property basis due to
purchase accounting adjustment......................................... 1,847
Reduction in headcount and operational expenses due to integration of
Arcon.................................................................. (1,275)
---------
$ (700)
---------
---------
(b) Reflects the following:
Reversal of amortization of intangible assets............................ $ (987)
Reversal of management fees.............................................. (100)
Amortization of goodwill acquired........................................ 950
Reversal of deferred compensation expense................................ (135)
Reduction in headcount and operational expense due to integration of
CPG and Arcon.......................................................... (2,825)
---------
$ (3,097)
---------
---------
(c) Reflects the following:
Interest costs on the Notes.............................................. $ 9,375
Reversal of interest expense............................................. (3,247)
Reversal of warrant accretion............................................ (500)
Reversal of amortization of financing costs relating to debt to be
retired................................................................ (283)
Amortization of financing costs relating to the issuance of the Notes.... 450
---------
$ 5,795
---------
---------
</TABLE>

(d) Reflects the net additional income tax provision (benefit) as a result of
the above adjustments, except the goodwill amortization adjustment, at an
effective tax rate of 40%.

(e) EBITDA is defined as income from operations plus depreciation and
amortization to the extent such depreciation and amortization are included
in the calculation of income from operations. EBITDA is provided because it
is a measure of an issuer's ability to service its indebtedness commonly
used by certain investors. EBITDA is not a measurement of financial
performance under generally accepted accounting principles and should not be
considered as an alternative to net income as a measure of performance or to
cash flow as a measure of liquidity.

(f) Depreciation and amortization includes only those items included in income
from operations and excludes $(995) and $(995) of amortization included in
other (income) expense and $283 and $450 of amortization included in
interest expense in the total historical and pro forma results,
respectively.

F-58
<PAGE>
UNAUDITED PRO FORMA COMBINED CONSOLIDATED STATEMENT OF INCOME

NINE MONTHS ENDED SEPTEMBER 30, 1995

(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
TOTAL PRO FORMA
HISTORICAL HISTORICAL ADJUSTMENTS PRO FORMA
------------------------------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
SPI CPG ARCON
--------- --------- ---------
Net sales....................................... $ 91,557 $ 72,395 $ 19,444 $ 183,396 $ -- $ 183,396
Cost of product sold............................ 78,601 63,674 14,274 156,549 (711)(a) 155,838
--------- --------- --------- ---------- ----------- -----------
Gross profit.................................. 12,956 8,721 5,170 26,847 711 27,558
General and administrative...................... 6,189 4,064 2,570 12,823 (2,290)(b) 10,533
--------- --------- --------- ---------- ----------- -----------
Income from operations........................ 6,767 4,657 2,600 14,024 3,001 17,025
Other (income) expenses, net.................... (782) -- -- (782) (782)
Loss on sale of assets.......................... 8,159 -- -- 8,159 8,159
Cogeneration income............................. (6,512) -- -- (6,512) (6,512)
Interest expense................................ 811 1,037 1,238 3,086 4,284(c) 7,370
--------- --------- --------- ---------- ----------- -----------
Income before income taxes.................... 5,091 3,620 1,362 10,073 (1,283) 8,790
Income tax provisions (benefit)................. (1,364) 1,376 707 719 (612)(d) 107
--------- --------- --------- ---------- ----------- -----------
Net income...................................... $ 6,455 $ 2,244 $ 655 $ 9,354 $ (671) $ 8,683
--------- --------- --------- ---------- ----------- -----------
--------- --------- --------- ---------- ----------- -----------
Other Data:
EBITDA (e).................................... $ 17,959 $ 22,298
Depreciation and amortization (f)............. 3,935 5,273
Capital expenditures.......................... 5,303 5,303
</TABLE>

F-59
<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED CONSOLIDATED STATEMENT OF INCOME

(DOLLARS IN THOUSANDS)

The Pro Forma Combined Consolidated Statement of Income for the nine months
ended September 30, 1995 reflects the Transactions as if they had occurred on
January 1, 1995 as follows:

<TABLE>
<C> <S> <C>
(a) Reflects the following:
Conversion of CPG inventory from LIFO to fair value...................... $ (1,140)
Additional depreciation expense on increased property basis due to
purchase accounting adjustment......................................... 1,385
Reduction in headcount and operational expenses due to integration of
Arcon.................................................................. (956)
---------
$ (711)
---------
---------
(b) Reflects the following:
Reversal of amortization of intangible assets............................ $ (732)
Reversal of management fees.............................................. (75)
Amortization of goodwill acquired........................................ 712
Reversal of deferred compensation expense................................ (76)
Reduction in headcount and operational expenses due to integration of CPG
and Arcon.............................................................. (2,119)
---------
$ (2,290)
---------
---------
(c) Reflects the following:
Interest costs on the Notes.............................................. $ 7,031
Reversal of interest expense............................................. (2,610)
Reversal of warrant accretion............................................ (262)
Reversal of amortization of financing costs relating to debt to be
retired................................................................ (213)
Amortization of financing costs relating to the issuance of the Notes.... 338
---------
$ 4,284
---------
---------
</TABLE>

(d) Reflects the net additional income tax provision (benefit) as a result of
the above adjustments, except the goodwill amortization adjustment, at an
effective tax rate of 40%.

(f) Depreciation and amortization includes only those items included in income
from operations and excludes $(646) and $(646) of amortization included in
other (income) expense and $213 and $338 of amortization included in
interest expense in the total historical and pro forma results,
respectively.

F-60
<PAGE>
UNAUDITED PRO FORMA COMBINED CONSOLIDATED STATEMENT OF INCOME

NINE MONTHS ENDED SEPTEMBER 30, 1996

(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
TOTAL PRO FORMA
HISTORICAL HISTORICAL ADJUSTMENTS PRO FORMA
------------------------------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
SPI CPG ARCON
--------- --------- ---------
Net sales....................................... $ 77,734 $ 69,719 $ 21,533 $ 168,986 $ -- $ 168,986
Cost of product sold............................ 64,105 58,469 15,541 138,115 1,497(a) 139,612
--------- --------- --------- ---------- ----------- -----------
Gross profit.................................. 13,629 11,250 5,992 30,871 (1,497) 29,374
General and administrative...................... 6,316 4,330 2,324 12,970 (2,258)(b) 10,712
--------- --------- --------- ---------- ----------- -----------
Income from operations........................ 7,313 6,920 3,668 17,901 761 18,662
Other (income) expenses, net.................... (991) -- -- (991) (991)
Interest expense................................ 310 797 1,717 2,824 4,546(c) 7,370
--------- --------- --------- ---------- ----------- -----------
Income before income taxes.................... 7,994 6,123 1,951 16,068 (3,785) 12,283
Income tax provision (benefit).................. 3,037 2,449 1,226 6,712 (1,964)(d) 4,748
--------- --------- --------- ---------- ----------- -----------
Net income...................................... $ 4,957 $ 3,674 $ 725 $ 9,356 $ (1,821) $ 7,535
--------- --------- --------- ---------- ----------- -----------
--------- --------- --------- ---------- ----------- -----------
Other Data:
EBITDA (e).................................... $ 21,972 $ 24,074
Depreciation and amortization (f)............. 4,071 5,412
Capital expenditures.......................... 6,825 6,825
</TABLE>

F-61
<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED CONSOLIDATED STATEMENTS OF INCOME

(DOLLARS IN THOUSANDS)

The Pro Forma Combined Consolidated Statement of Income for the nine months
ended September 30, 1996 reflects the Transactions as if they had occurred on
January 1, 1996 as follows:

<TABLE>
<C> <S> <C>
(a) Reflects the following:
Conversion of CPG inventory from LIFO to fair value............................ $ 1,068
Additional depreciation expense on increased property basis due to purchase
accounting adjustment.......................................................... 1,385
Reduction in headcount and operational expense due to integration of Arcon..... (956)
---------
$ 1,497
---------
---------
(b) Reflects the following:
Reversal of amortization of intangible assets............................ $ (729)
Reversal of management fees.............................................. (74)
Amortization of goodwill acquired........................................ 712
Reversal of deferred compensation expense................................ (48)
Reduction in headcount and operational expenses due to integration of CPG
and Arcon.............................................................. (2,119)
---------
$ (2,258)
---------
---------
(c) Reflects the following:
Interest costs on the Notes.............................................. $ 7,031
Reversal of interest expense............................................. (1,500)
Reversal of warrant accretion............................................ (1,110)
Reversal of amortization of financing cost relating to debt to be
retired................................................................ (213)
Amortization of financing costs relating to the issuance of the Notes.... 338
---------
$ 4,546
---------
---------
</TABLE>

(d) Reflects the net additional income tax provision (benefit) as a result of
the above adjustments, except the goodwill amortization adjustment, at an
effective tax rate of 40%.

(f) Depreciation and amortization includes only those items included in income
from operations and excludes $(677) and $(677) of amortization included in
other (income) expense and $213 and $338 of amortization included in
interest expense, in the total historical and pro forma results,
respectively.

F-62
<PAGE>
SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.

SPECIALTY PAPERBOARD, INC.

By: /s/ BRUCE P. MOORE
-----------------------------------------
Bruce P. Moore
VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER

Date January 13, 1997