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PROSPECTUS
Filed Pursuant to Rule 424(b)(3)
Registration No. 333-8043
FOUR M CORPORATION
OFFER TO EXCHANGE ITS
12% SERIES B SENIOR SECURED NOTES DUE 2006
WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT
FOR ANY AND ALL OF ITS OUTSTANDING
12% SERIES A SENIOR SECURED NOTES DUE 2006
($170,000,000 PRINCIPAL AMOUNT OUTSTANDING)
GUARANTEED BY CERTAIN SUBSIDIARIES OF FOUR M CORPORATION
THE EXCHANGE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 5:00 P.M., NEW YORK
CITY TIME, ON OCTOBER 29, 1996, AS SUCH DATE MAY BE EXTENDED (THE "EXPIRATION
DATE").
Four M Corporation, a Maryland corporation (the "Company" or "Four M"),
hereby offers (the "Exchange Offer"), upon the terms and subject to the
conditions set forth in this Prospectus and the accompanying letter of
transmittal (the "Letter of Transmittal"), to exchange an aggregate of up to
$170,000,000 principal amount of 12% Series B Senior Secured Notes due 2006,
including the Guarantees thereof (the "New Notes") for an identical face amount
of the outstanding 12% Series A Senior Secured Notes due 2006, including the
Guarantees thereof (the "Old Notes" and, with the New Notes, the "Notes"). The
terms of the New Notes are identical in all material respects to the terms of
the Old Notes except that the registration and other rights relating to the
exchange of Old Notes for New Notes and the restrictions on transfer set forth
on the Old Notes will not appear on the New Notes. See "The Exchange Offer." The
New Notes are being offered hereunder in order to satisfy certain obligations of
the Company under a Registration Rights Agreement dated as of May 30, 1996 (the
"Registration Rights Agreement") among the Company, the Guarantors (as defined
herein) and Bear, Stearns & Co. Inc. (the "Initial Purchaser"). Based on an
interpretation by the staff of the Securities and Exchange Commission (the
"Commission") set forth in no-action letters issued to third parties unrelated
to the Company, New Notes issued pursuant to the Exchange Offer in exchange for
Old Notes may be offered for resale, resold, and otherwise transferred by a
holder thereof (other than a holder which is an "affiliate" of the Company
within the meaning of Rule 405 under the Securities Act of 1933, as amended (the
"Securities Act")), without compliance with the registration and the prospectus
delivery provisions of the Securities Act, provided that such New Notes are
acquired in the ordinary course of such holder's business and such holder has no
arrangement with any person to participate in or is engaged in or is planning to
be engaged in the distribution of such New Notes.
The New Notes will bear interest at the rate of 12% per annum, payable
semi-annually in arrears on June 1 and December 1 of each year, commencing
December 1, 1996. The New Notes are guaranteed on a senior secured basis by Box
USA Group, Inc., Four M Paper Corporation, Page Packaging Corporation, Box USA,
Inc. and Four M Manufacturing Group of Georgia, Inc., each a direct or indirect
wholly-owned subsidiary of the Company. The New Notes will not be guaranteed by
Box USA Paper Corporation, Box USA of Florida, L.P., Florida Coast Paper
Company, L.L.C., and MannKraft Corporation. The Company will not be required to
make any mandatory redemption or sinking fund payment with respect to the New
Notes prior to maturity. The New Notes are redeemable at the option of the
Company, in whole or in part, at any time on or after June 1, 2001 at the
redemption prices set forth herein. In addition, at the option of the Company,
up to one-third of the New Notes may be redeemed prior to June 1, 1999 at the
redemption price set forth herein with the net proceeds of a public offering of
common stock of the Company; PROVIDED that at least two-thirds of the aggregate
principal amount of the New Notes remain outstanding following each such
redemption. In addition, upon the occurrence of a Change of Control (as defined
herein) prior to June 1, 2001, the Company, at its option, may redeem all, but
not less than all, of the outstanding New Notes at a redemption price equal to
100% of the principal amount thereof plus the applicable Make-Whole Premium (as
defined herein). Upon the occurrence of a Change of Control at any time, the
Company is required to make an offer to repurchase each holder of the Notes
("Holder") at a price equal to 101% of the aggregate principal amount thereof
plus accrued and unpaid interest, if any, to the date of purchase. There can be
no assurance that the Company will have the financial resources necessary to
repurchase the New Notes upon a Change of Control. The New Notes are senior
secured obligations of the Company, are senior in right of payment to all
subordinated indebtedness of the Company and are PARI PASSU in right of payment
with all other existing and future senior indebtedness of the Company. As of
April 30, 1996, after giving pro forma effect to the Acquisition (as defined
herein) and the financings therefor, the Company would have had total
outstanding indebtedness of $210.8 million, including the New Notes and
indebtedness pursuant to the Credit Facility (as defined herein). As of June 30,
1996, the Company had outstanding $31.8 million of indebtedness that is
subordinate to the Notes and no additional indebtedness could be incurred by the
Company which would be on par with or senior to the Notes. The New Notes are
secured by a first priority security interest in substantially all of the
equipment of the Company and its Restricted subsidiaries (as defined herein) and
certain other assets (but excluding, among other things, land and improvements
thereon, inventories and accounts receivable, and the proceeds thereof), and by
a pledge of the capital stock of the Subsidiaries of the Company (collectively,
the "Collateral"). See "Description of New Notes."
The Company will accept for exchange from an Eligible Holder any and all Old
Notes that are validly tendered prior to 5:00 p.m., New York City time, on the
Expiration Date. For purposes of the Exchange Offer, "Eligible Holder" shall
mean the registered owner of any Old Notes that remain Transfer Restricted
Securities, as reflected on the records of Norwest Bank Minnesota, National
Association, as registrar for the Old Notes (in such capacity, the "Registrar"),
or any person whose Old Notes are held of record by the depository of the Old
Notes. Tenders of Old Notes may be withdrawn at any time prior to 5:00 p.m., New
York City time, on the Expiration Date, unless previously accepted for exchange.
For purposes of the Exchange Offer, "Transfer Restricted Securities" means each
Old Note until the earliest to occur of (i) the date on which such Old Note is
exchanged in the Exchange Offer and is entitled to be resold to the public by
the holder thereof without complying with the prospectus delivery requirements
of the Securities Act, (ii) the date on which such Old Note is registered under
the Securities Act and is disposed of in a shelf registration statement or (iii)
the date on which such Old Note has been distributed to the public pursuant to
Rule 144 under the Securities Act or by a broker-dealer pursuant to the plan of
distribution described herein. See "Plan of Distribution."
Each broker-dealer that receives New Notes for its own account pursuant to
the Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of such New Notes. The Letter of Transmittal states
that by so acknowledging and by delivering a prospectus, a broker-dealer will
not be deemed to admit that it is an "underwriter" within the meaning of the
Securities Act. This Prospectus, as it may be amended or supplemented from time
to time, may be used by a broker-dealer in connection with resales of New Notes
received in exchange for Old Notes where such Old Notes were acquired by such
broker-dealer as a result of market-making activities or other trading
activities. The Company has agreed that, for a period of 270 days after the
effective date of the Exchange Offer Registration Statement (as defined herein),
it will make this Prospectus available to any broker-dealer for use in
connection with any such resale. See "The Exchange Offer" and "Plan of
Distribution."
Prior to this Exchange Offer, there has been no public market for the Old
Notes or the New Notes. The Company does not expect that an active trading
market in the Notes will develop.
The Exchange Agent for the Exchange Offer is Norwest Bank Minnesota,
National Association.
------------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 12 HEREIN FOR A DISCUSSION OF
RISKS THAT SHOULD BE CONSIDERED BY ELIGIBLE HOLDERS
IN EVALUATING THE EXCHANGE OFFER.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------
THE DATE OF THIS PROSPECTUS IS SEPTEMBER 30, 1996.
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AVAILABLE INFORMATION
The Company has filed with the Commission a Registration Statement (which
term shall include any amendments thereto) on Form S-4 under the Securities Act
with respect to the securities offered by this Prospectus. This Prospectus,
which constitutes a part of the Registration Statement, does not contain all the
information set forth in the Registration Statement and the exhibits and
schedules thereto, to which reference is hereby made. Each statement made in
this Prospectus referring to a document filed as an exhibit or schedule to the
Registration Statement is qualified in its entirety by reference to the exhibit
or schedule for a complete statement of its terms and conditions, although all
of the material terms of the Company's contracts and agreements that would be
material to an investor have been summarized in the Prospectus. In addition,
upon the effectiveness of the Registration Statement filed with the Commission,
the Company will be subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith the Company will file periodic reports and other information with the
Commission relating to its business, financial statements and other matters. Any
interested parties may inspect and/or copy the Registration Statement, its
schedules and exhibits, and the periodic reports and other information filed in
connection therewith, at the public reference facilities maintained by the
Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549 and at the Commission's regional offices located at Citicorp Center,
500 W. Madison Street, Suite 1400, Chicago, Illinois 60661, and 7 World Trade
Center, Suite 1300, New York, New York 10048. Copies of such materials can be
obtained at prescribed rates by addressing written requests for such copies to
the Public Reference Section of the Commission at its principal office at
Judiciary Plaza, 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549. The
obligations of the Company under the Exchange Act to file periodic reports and
other information with the Commission may be suspended, under certain
circumstances, if the New Notes are held of record by fewer than 300 holders at
the beginning of any fiscal year and are not listed on a national securities
exchange. The Company has agreed that, whether or not it is required to do so by
the rules and regulations of the Commission, for so long as any of the Notes
remain outstanding it will furnish to the holders of the Notes and if required
by the Exchange Act, file with the Commission (unless the Commission will not
accept such a filing) all annual, quarterly and current reports that the Company
is or would be required to file with the Commission pursuant to Section 13(a) or
15(d) of the Exchange Act. In addition, for so long as any of the Old Notes
remain outstanding, the Company has agreed to make available to any prospective
purchaser of the Old Notes or beneficial owner of the Old Notes in connection
with any sale thereof the information required by Rule 144A(d)(4) under the
Securities Act.
This Prospectus incorporates documents by reference which are not present
herein or delivered herewith. Copies of any such documents filed by the Company,
including exhibits to such documents, are available to any registered holder or
beneficial owner of the Old Notes upon written or oral request and without
charge from Four M Corporation, 115 Stevens Ave., Valhalla, NY 10595. Attention:
Chief Financial Officer. Telephone requests may be directed to the Company at
914-749-3200. In order to ensure timely delivery of the documents, any such
request should be made by October 18, 1996.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS. IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MAY NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OR
SOLICITATION WITH RESPECT TO ANY SECURITY OTHER THAN THE SECURITIES OFFERED
HEREBY OR AN OFFER TO OR SOLICITATION OF ANY PERSON IN ANY JURISDICTION IN WHICH
SUCH AN OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY DISTRIBUTION OF SECURITIES HEREUNDER SHALL UNDER ANY
CIRCUMSTANCES CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF OR THAT THERE HAS BEEN NO
CHANGE IN THE INFORMATION SET FORTH HEREIN OR IN THE AFFAIRS OF THE COMPANY
SINCE THE DATE HEREOF.
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PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND FINANCIAL STATEMENTS, INCLUDING THE NOTES THERETO, APPEARING
ELSEWHERE IN THIS PROSPECTUS. UNLESS THE CONTEXT OTHERWISE REQUIRES, ALL
REFERENCES HEREIN TO THE "COMPANY" OR "FOUR M" INCLUDE FOUR M CORPORATION AND
ITS CONSOLIDATED SUBSIDIARIES. REFERENCES TO "FISCAL 1995," "FISCAL 1994" AND
THE LIKE SHALL MEAN THE 12 MONTHS ENDED ON JULY 31 OF SUCH YEAR. ALL CAPITALIZED
TERMS USED IN THIS PROSPECTUS WITHOUT A DEFINITION ARE DEFINED AS SET FORTH
BELOW UNDER THE CAPTION "DESCRIPTION OF NEW NOTES--CERTAIN DEFINITIONS."
THE COMPANY
Four M Corporation, which operates under the trade name Box USA, believes
that it is one of the largest independent full-service converters of corrugated
packaging materials in North America. The Company operates 28 strategically
located converting facilities, which sold 9.6 billion square feet of finished
corrugated containers, partitions and sheets during the twelve months ended
April 30, 1996. The Company has developed and maintains longstanding customer
relationships with leading consumer products and packaging companies including
Anchor Glass, Avon, Clorox, Owens Illinois and Procter & Gamble. The Company
also owns and operates a paper mill located in Ft. Madison, Iowa (the "Ft.
Madison Mill") which produced 77,710 tons of corrugating medium during the
twelve months ended April 30, 1996, most of which was sold to third parties. For
the twelve months ended April 30, 1996, the Company generated net sales of
$223.0 million, net income of $6.8 million and EBITDA (as defined herein) of
$19.3 million.
On May 30, 1996, the Company acquired substantially all of the assets of St.
Joe Container, which primarily consisted of 16 converting facilities and related
working capital (the "Acquisition"). The Acquisition more than doubled the size
of the Company to 28 converting facilities which sold 10.0 billion square feet
of corrugated packaging materials in 1995. The Company and St. Joe Container
utilized similar manufacturing equipment and production processes, and the two
businesses operated with minimal geographic redundancy and no material customer
overlap. Accordingly, the Company believes that the Acquisition creates
opportunities to pursue continued growth in its business, utilize its purchasing
power to achieve reductions in raw material costs, improve productivity and
reduce operating expenses. For the twelve months ended April 30, 1996, after
giving pro forma effect to the Acquisition, the Company would have generated net
sales of $524.6 million, net income of $7.0 million and EBITDA of $46.0 million.
See "Unaudited Pro Forma Combined Condensed Financial Data."
The Company was founded in 1966 as a manufacturer of corrugated partitions.
From a single partition plant, the Company expanded initially through internal
growth and later through 11 separate acquisitions involving 17 manufacturing
facilities. The Company has historically targeted distressed properties and
undermanaged assets which could significantly improve the Company's
profitability. The Company's ability to target and integrate acquisitions
successfully is reflected in an increase in average revenue per plant from $9.0
million in 1991 to $15.1 million in 1995, while average annual production per
plant has grown from 201.7 million square feet to 291.8 million square feet over
the same period.
The Company's strategy is to enhance its position as one of the largest
independent full-service converters of corrugated packaging materials in North
America. Fundamental elements of the Company's strategy include:
-providing a full line of high-quality products
-capitalizing on the Company's significant raw materials purchasing power
-implementing cost-reduction manufacturing techniques and operating
efficiency programs
-responding quickly to customer needs and offering high levels of customer
service
-expanding the Company's penetration of national accounts and increasing the
Company's share of existing customers' business
One of the Company's competitive advantages is its long-term relationships
with many customers, some of which have been maintained for over 25 years. The
Company currently has business relationships which
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have existed for five or more years with approximately 800 customers; seven
customers have maintained their relationship with the Company for at least 25
years. A second feature which distinguishes the Company from its competitors is
the significant relationships it has established with its containerboard
suppliers. The Company believes that it is the largest customer of its three
primary raw material suppliers. As one of the largest purchasers of linerboard
and corrugating medium in the industry, the Company believes that it has been
able to purchase raw materials at prices substantially below those reported in
PULP & PAPER WEEK, an industry trade publication.
THE ACQUISITION
On November 1, 1995, the Company entered into an Asset Purchase Agreement
(the "Acquisition Agreement") pursuant to which on May 30, 1996 (i) the Company
acquired substantially all of the assets of St. Joe Container and (ii) a joint
venture (the "Mill Joint Venture") between the Company and Stone Container
Corporation ("Stone Container") acquired a 500,000 tons per year linerboard mill
(the "St. Joe Mill"). In 1995, St. Joe Container sold 6.5 billion square feet of
corrugated packaging materials and generated $326.7 million in net sales, $3.3
million in net income and $11.5 million in EBITDA. The purchase price for the
St. Joe Container facilities was $87.8 million for the fixed assets, plus
approximately $69.7 million for working capital, for a total purchase price of
$157.5 million, subject to adjustment for changes in working capital as
described herein. The purchase price for the St. Joe Mill was $185.0 million for
the fixed assets, plus approximately $17.4 million for working capital, for a
total purchase price of $202.4 million, subject to adjustment for changes in
working capital as described herein. The Company also acquired a 50.0% equity
interest in the Mill Joint Venture for $5.0 million.
Historically, the St. Joe Container facilities have been operated as a
captive outlet for linerboard produced by the St. Joe Mill. Because these
facilities represented only a small portion of the operations of St. Joe Paper
Company ("St. Joe Paper"), the Company believes that maximization of revenues
and profitability of St. Joe Paper's container operations was not a primary
priority of prior management. Based on its experience in integrating
acquisitions, the Company believes that it can successfully integrate the St.
Joe Container facilities and improve overall productivity and profitability by
(i) increasing revenues through utilization of available capacity, (ii)
capitalizing on the Company's raw materials purchasing leverage and (iii)
enhancing productivity and reducing operating expenses.
INCREASING REVENUES. The Acquisition enabled the Company to increase its
geographic coverage from nine to 17 states. As a result, the Company is able to
serve new markets in the Midwest, Mid-Atlantic and the faster growing Southeast.
In addition, the Company believes that the Acquisition, by expanding the
Company's geographic coverage, will particularly benefit its national account
sales program by enabling it to serve national accounts from the St. Joe
Container facilities in markets not previously covered by the Company. In
addition, the Company strives to operate its corrugator plants at three shifts
per day, five days per week. The Company believes that the addition of a third
shift at the St. Joe Container facilities would increase aggregate production at
these facilities by approximately 50.0%. The Company intends to utilize
available capacity to increase production of corrugated sheets to supply sheet
plants owned by third parties in the vicinity of the St. Joe Container
facilities.
CAPITALIZING ON RAW MATERIALS PURCHASING LEVERAGE. Historically, the St.
Joe Container facilities purchased linerboard from the St. Joe Mill at the
prices reported in PULP & PAPER WEEK. As one of the largest purchasers of
linerboard and corrugating medium in the industry, the Company believes that it
has been able to purchase raw materials at prices substantially below those
reported in PULP & PAPER WEEK. Based on the Company's average raw material
prices paid, St. Joe Container's net income and EBITDA for the twelve months
ended March 31, 1996, after giving pro forma effect to the Acquisition, would
have each increased by approximately $17.3 million. See "Unaudited Pro Forma
Combined Condensed Financial Data."
ENHANCING PRODUCTIVITY AND REDUCING OPERATING EXPENSES. The Company
believes it can achieve improved profitability by focusing on maximum
utilization of available production capacity, minimization of waste and the
development and implementation of financial controls and management systems. In
addition,
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the Company believes that it can eliminate certain duplicative functions and
achieve efficiencies in manufacturing, administration and sales and marketing.
Furthermore, the Company believes that it can reduce manufacturing costs by
reducing waste at the St. Joe Container facilities.
RECENT PERFORMANCE
The Company's net sales declined to $164.7 million for the nine-month period
ended April 30, 1996 from $213.7 million in the nine-month period ended April
30, 1995, and the Company's operating income declined to $11.0 million for the
nine-month period ended April 30, 1996 from $16.0 million for the nine-month
period ended April 30, 1995. Both of these decreases were primarily attributable
to the disposition of two of the Company's subsidiaries. For the three-month
period ended July 31, 1996, the Company and St. Joe Container experienced a
continued decline in prices for their products as a result of a decline in
industry-wide demand during this period. This decline in prices and demand had a
negative effect on certain financial results of the Company and St. Joe
Container. Since such period, the Company believes that prices for its products
have stabilized. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
The Company is incorporated under the laws of Maryland. The principal
executive office of the Company is located at 115 Stevens Avenue, Valhalla, New
York 10595 and its telephone number is (914) 749-3200.
Four M has no assets or independent business operations other than its
ownership interest in its subsidiaries. The following chart sets forth the
relationship between the Company and its subsidiaries:
[ORGANIZATIONAL CHART]
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ISSUANCE OF THE OLD NOTES
The outstanding $170.0 million principal amount of 12% Series A Senior
Secured Notes due 2006 (the "Old Notes") were sold by the Company to Bear,
Stearns & Co. Inc. (the "Initial Purchaser"), on May 30, 1996 (the "Closing
Date") pursuant to a Purchase Agreement, dated May 30, 1996 (the "Purchase
Agreement"), among the Company, Box USA Group, Inc., Four M Paper Corporation,
Page Packaging Corporation, Box USA, Inc. and Four M Manufacturing Group of
Georgia, Inc. (collectively the "Guarantors") and the Initial Purchaser. The
Initial Purchaser subsequently resold the Old Notes in reliance on Rule 144A
under the Securities Act and other available exemptions under the Securities Act
(the "Offering"). The Company and the Initial Purchaser also entered into a
registration rights agreement, dated as of May 30, 1996 (the "Registration
Rights Agreement"), among the Company, the Guarantors and the Initial Purchaser,
pursuant to which the Company granted certain registration rights for the
benefit of the holders of the Old Notes. The Exchange Offer is intended to
satisfy certain of the Company's obligations under the Registration Rights
Agreement with respect to the Old Notes. See "The Exchange Offer -- Purposes and
Effects."
The Old Notes were issued under the Indenture, dated as of May 30, 1996 (the
"Indenture"), among the Company, the Guarantors and Norwest Bank Minnesota,
National Association, as trustee (in such capacity, the "Trustee"). The New
Notes are also being issued under the Indenture and are entitled to the benefits
of the Indenture. The form and terms of the New Notes will be identical in all
material respects to the form and terms of the Old Notes, except that (i) the
New Notes have been registered under the Securities Act and, therefore will not
bear legends restricting the transfer thereof, (ii) holders of New Notes will
not be entitled to the Liquidated Damages otherwise payable under the terms of
the Registration Rights Agreement in respect of Old Notes constituting Transfer
Restricted Securities held by such holders during any period in which a
Registration Default (as defined herein) is continuing (the "Liquidated
Damages") and (iii) holders of New Notes will no longer be, and upon the
consummation of the Exchange Offer, Eligible Holders of Old Notes will no longer
be, entitled to certain rights under the Registration Rights Agreement intended
for the holders of unregistered securities. The Exchange Offer shall be deemed
consummated upon the delivery by the Company to the Registrar under the
Indenture of New Notes in the same aggregate principal amount as the aggregate
principal amount of Old Notes that are validly tendered by holders thereof
pursuant to the Exchange Offer. See "The Exchange Offer -- Termination of
Certain Rights" and "-- Procedures for Tendering" and "Description of New
Notes -- Registration Rights; Liquidated Damages."
The proceeds received by the Company from the issuance of the Old Notes were
used to fund a portion of the cash required to consummate the Acquisition. There
will be no proceeds to the Company from any exchange pursuant to the Exchange
Offer.
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THE EXCHANGE OFFER
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<S> <C>
THE EXCHANGE OFFER................ The Company is offering, upon the terms and subject to
the conditions set forth herein and in the accompanying
Letter of Transmittal, to exchange its 12% Series B
Senior Secured Notes due 2006, including the Guarantees
thereof, for an identical face amount of the outstanding
Old Notes, including the Guarantees thereof. As of the
date of this Prospectus, $170.0 million in aggregate
principal amount of the Old Notes is outstanding, the
maximum amount authorized by the Indenture for all
Notes. As of September 10, 1996, there was one
registered holder of the Old Notes, Cede & Co. ("Cede"),
which held $170.0 million of aggregate principal amount
of the Old Notes. See "The Exchange Offer -- Terms of
the Exchange Offer."
EXPIRATION DATE................... 5:00 p.m., New York City time, on October 29, 1996, as
the same may be extended. See "The Exchange Offer --
Expiration Date; Extension; Termination; Amendments."
CONDITIONS OF THE EXCHANGE
OFFER............................ The Exchange Offer is not conditioned upon any minimum
principal amount of Old Notes being tendered for
exchange. However, the Exchange Offer is subject to
certain customary conditions, which may be waived by the
Company. See "The Exchange Offer -- Conditions of the
Exchange Offer."
ACCRUED INTEREST ON THE OLD
NOTES............................ The New Notes will bear interest at a rate equal to 12%
per annum from and including their date of issuance.
Eligible Holders whose Old Notes are accepted for
exchange will have the right to receive interest accrued
thereon from the date of original issuance of the Old
Notes or the last Interest Payment Date, as applicable,
to, but not including, the date of issuance of the New
Notes, such interest to be payable with the first
interest payment on the New Notes. Interest on the Old
Notes accepted for exchange, which accrues at the rate
of 12% per annum, will cease to accrue on the day prior
to the issuance of the New Notes.
PROCEDURES FOR TENDERING OLD
NOTES............................ Each holder of Old Notes wishing to accept the Exchange
Offer must complete, sign and date the Letter of
Transmittal, or a facsimile thereof, in accordance with
the instructions contained herein and therein, and mail
or otherwise deliver such Letter of Transmittal, or such
facsimile, together with the Old Notes and any other
required documentation to the exchange agent (the
"Exchange Agent") at the address set forth herein. Old
Notes may be physically delivered, but physical delivery
is not required if a confirmation of a book-entry of
such Old Notes to the Exchange Agent's account at The
Depositary Trust Company ("DTC" or the "Depositary") is
delivered in a timely fashion. By executing the Letter
of Transmittal, each holder will represent to the
Company that, among other things, the New Notes acquired
pursuant to the Exchange Offer are being obtained in the
ordinary course of business of the person receiving such
New Notes, whether or not such person is the holder,
that neither the holder nor any such other person is
engaged in, or intends to engage in, or has an
arrangement or understanding with any person to
participate in, the distribution of such New Notes and
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<TABLE>
<S> <C>
that neither the holder nor any such other person is an
"affiliate," as defined under Rule 405 of the Securities
Act, of the Company or any Guarantor. Each broker or
dealer that receives New Notes for its own account in
exchange for Old Notes, where such Old Notes were
acquired by such broker or dealer as a result of
market-making activities or other trading activities,
must acknowledge that it will deliver a prospectus in
connection with any resale of such New Notes. See "The
Exchange Offer -- Procedures for Tendering" and "Plan of
Distribution."
GUARANTEED DELIVERY PROCEDURES.... Eligible Holders of Old Notes who wish to tender their
Old Notes and (i) whose Old Notes are not immediately
available or (ii) who cannot deliver their Old Notes or
any other documents required by the Letter of
Transmittal to the Exchange Agent prior to the
Expiration Date (or complete the procedure for
book-entry transfer on a timely basis), may tender their
Old Notes according to the guaranteed delivery
procedures set forth in the Letter of Transmittal. See
"The Exchange Offer -- Guaranteed Delivery Procedures."
ACCEPTANCE OF OLD NOTES AND
DELIVERY OF NEW NOTES............ Upon satisfaction or waiver of all conditions of the
Exchange Offer, the Company will accept any and all Old
Notes that are properly tendered in the Exchange Offer
prior to 5:00 p.m., New York City time, on the
Expiration Date. The New Notes issued pursuant to the
Exchange Offer will be delivered promptly after
acceptance of the Old Notes. See "The Exchange
Offer -- Terms of the Exchange Offer."
WITHDRAWAL RIGHTS................. Tenders of Old Notes may be withdrawn at any time prior
to 5:00 p.m., New York City time, on the Expiration
Date, unless previously accepted for exchange. See "The
Exchange Offer -- Withdrawal of Tenders."
THE EXCHANGE AGENT................ Norwest Bank Minnesota, National Association is the
exchange agent (in such capacity, the "Exchange Agent").
The address and telephone number of the Exchange Agent
are set forth in "The Exchange Offer -- Exchange Agent."
FEES AND EXPENSES................. All expenses incident to the Company's consummation of
the Exchange Offer and compliance with the Registration
Rights Agreement will be borne by the Company. The
Company will also pay certain transfer taxes applicable
to the Exchange Offer. See "The Exchange Offer -- Fees
and Expenses."
RESALES OF THE NEW NOTES.......... Based on interpretations by the staff of the Commission
set forth in no-action letters issued to third parties,
the Company believes that New Notes issued pursuant to
the Exchange Offer to an Eligible Holder in exchange for
Old Notes may be offered for resale, resold and
otherwise transferred by such Eligible Holder (other
than (i) a broker-dealer who purchased the Old Notes
directly from the Company for resale pursuant to Rule
144A under the Securities Act or any other available
exemption under the Securities Act, or (ii) a person
that is an affiliate of the Company within the meaning
of Rule 405 under the Securities Act), without
compliance with the registration and prospectus
</TABLE>
6
<PAGE>
<TABLE>
<S> <C>
delivery provisions of the Securities Act, provided that
the Eligible Holder is acquiring the New Notes in the
ordinary course of business and is not participating,
and has no arrangement or understanding with any person
to participate, in a distribution of the New Notes. Each
broker-dealer that receives New Notes for its own
account in exchange for Old Notes, where such Old Notes
were acquired by such broker as a result of
market-making or other trading activities, must
acknowledge that it will deliver a prospectus in
connection with any resale of such New Notes. See "Plan
of Distribution."
</TABLE>
DESCRIPTION OF NEW NOTES
The Exchange Offer applies to $170.0 million aggregate principal amount of
Old Notes. The terms of the New Notes are identical in all material respects to
the Old Notes, except for certain transfer restrictions and registration and
other rights relating to the exchange of the Old Notes for New Notes. The New
Notes will evidence the same debt as the Old Notes and will be entitled to the
benefits of the Indenture under which both the Old Notes were, and the New Notes
will be, issued. See "Description of New Notes."
<TABLE>
<S> <C>
ISSUER............................ Four M Corporation.
SECURITIES OFFERED................ $170.0 million in aggregate principal amount of 12%
Series B Senior Secured Notes due 2006.
MATURITY DATE..................... June 1, 2006
INTEREST AND INTEREST PAYMENT
DATES............................ 12% per annum, payable semi-annually in arrears on June
1 and December 1, commencing on December 1, 1996.
GUARANTEES........................ The New Notes will be guaranteed on a senior secured
basis by all current direct or indirect, wholly-owned
Subsidiaries (as defined herein) of the Company other
than Box USA Paper Corporation. The Notes are jointly
and severally guaranteed by such Guarantors. The
obligations of each Guarantor are unconditional and
remain in full force and effect until the guaranteed
obligations have been paid in full. In the event of a
sale of all of the assets or the capital stock of a
Guarantor, such Guarantor or the corporation acquiring
the property will be released from the guaranteed
obligations. The Company may apply such Net Proceeds to
the acquisition of a controlling interest in another
business, the making of a capital expenditure or the
acquisition of other tangible assets, in each case, in
the same line of business as the Company was engaged in
on the date of such sale, upon the consummation of which
the Collateral Agent shall have received a perfected
first priority security interest in the assets so
acquired. The Net Proceeds of all such sales shall
promptly and without commingling be deposited with the
Trustee in the form received to be held by the Trustee
as Pledged Collateral in the applicable Cash Collateral
Account established pursuant to the Indenture until
applied as permitted pursuant to the Indenture (as
defined herein). Any release of a Guarantor will not
have a material affect on the security of the Holders of
the Notes. See "Description of New Notes--Subsidiary
Guarantees," "-- Repurchase at the Option of Holders"
and "--Asset Sales and Events of Loss." In addition, Box
USA of Florida, L.P., Florida
</TABLE>
7
<PAGE>
<TABLE>
<S> <C>
Coast Paper Company, L.L.C., and MannKraft Corporation,
which are not wholly-owned subsidiaries of the Company,
are not guaranteeing the Notes. As of the date hereof,
all of the Company's Subsidiaries other than Box USA
Paper Corporation will be Restricted Subsidiaries (as
defined herein). Box USA Paper Corporation will be an
Unrestricted Subsidiary (as defined herein), and the
Company will be able to designate other current or
future Subsidiaries to be Unrestricted Subsidiaries
under certain circumstances. Unrestricted Subsidiaries
will not be subject to many of the restrictive covenants
set forth in the Indenture. See "Description of New
Notes--Certain Covenants--Restricted Payments" and
"--Certain Definitions-- Unrestricted Subsidiaries."
RANKING........................... The New Notes will be senior secured obligations of the
Company that will rank senior in right of payment to all
subordinated indebtedness of the Company. The New Notes
will rank PARI PASSU in right of payment with all other
existing and future senior indebtedness of the Company.
As of April 30, 1996, after giving pro forma effect to
the Acquisition and the financings therefor, the Company
would have had total outstanding indebtedness of $210.8
million, including the New Notes and indebtedness
pursuant to the Credit Facility.
SECURITY.......................... The New Notes will be secured by a first priority
security interest in substantially all of the equipment
of the Company and its Restricted Subsidiaries and
certain other assets (but excluding, among other things,
land and improvements thereon, inventories and accounts
receivable, and the proceeds thereof), and by a pledge
of the capital stock of the Subsidiaries of the Company.
See "Description of New Notes--Security."
OPTIONAL REDEMPTION............... The New Notes will not be redeemable at the Company's
option prior to June 1, 2001. Thereafter, the New Notes
will be subject to redemption, at the option of the
Company, in whole or in part, at the redemption prices
set forth herein plus accrued and unpaid interest, if
any, to the applicable redemption date. Notwithstanding
the foregoing, at any time prior to June 1, 1999, the
Company may redeem up to one-third in aggregate
principal amount of the New Notes at a redemption price
of 112% of the principal amount thereof, in each case
plus accrued and unpaid interest, if any, to the
redemption date, with the net proceeds of a public
offering of common stock of the Company; PROVIDED that
at least two-thirds in aggregate principal amount of the
New Notes originally issued hereunder remain outstanding
immediately after the occurrence of each such
redemption; and PROVIDED that such redemption shall
occur within 60 days following the date of the closing
of such public offering of common stock of the Company.
In addition, upon the occurrence of a Change of Control
prior to June 1, 2001, the Company, at its option, may
redeem all, but not less than all, of the outstanding
New Notes at a redemption price equal to 100% of the
principal amount thereof plus the applicable Make-Whole
Premium. See "Description of New Notes-- Optional
Redemption."
</TABLE>
8
<PAGE>
<TABLE>
<S> <C>
CHANGE OF CONTROL................. Upon the occurrence of a Change of Control at any time,
the Company will be required to make an offer to
repurchase each Holder's New Notes at a price equal to
101% of the aggregate principal amount thereof plus
accrued and unpaid interest, if any, to the date of
purchase. There can be no assurance that the Company
will have the financial resources to repurchase the New
Notes upon a Change of Control. See "Description of New
Notes--Repurchase at the Option of Holders."
COVENANTS......................... The indenture pursuant to which the New Notes will be
issued (the "Indenture") will contain certain covenants
that, among other things, limit the ability of the
Company and its Restricted Subsidiaries to incur
additional indebtedness, issue preferred stock, pay
dividends or make other distributions, repurchase Equity
Interests (as defined herein) or repay subordinated
indebtedness or make certain other Restricted Payments
(as defined herein), create certain liens, enter into
certain transactions with affiliates, sell assets, issue
or sell Equity Interests of the Company's Subsidiaries
or enter into certain mergers and consolidations.
Subject to certain exceptions, pursuant to the
Indenture, the Company may incur certain indebtedness
and issue preferred stock if the Fixed Charge Coverage
Ratio for the Company's most recently ended four full
fiscal quarters would be at least 2.0 to 1, if incurred
prior to July 31, 1998 or 2.25 to 1 thereafter. In
addition, the Indenture requires the Company to
repurchase the Notes upon a Change of Control, an Event
of Default or an Event of Loss. There can be no
assurance that the Company will be able to obtain the
necessary financing to repurchase the Notes upon any
such event. In addition, the requirement to repurchase
the Notes upon a Change of Control may discourage
persons from making a tender offer for or a bid to
acquire the Company or its Subsidiaries. Conversely,
because the Indenture limits the ability of the Company
or any of its Restricted Subsidiaries to engage in
certain transactions except under certain circumstances,
the Company and its Restricted Subsidiaries may be
prohibited from entering into transactions that could be
beneficial to the Company. See "Description of New
Notes--Certain Covenants."
USE OF PROCEEDS................... There will be no proceeds to the Company from any
exchange pursuant to the Exchange Offer. The net
proceeds from the issuance of the Old Notes were used to
fund a portion of the cash required to consummate the
Acquisition by the Company.
ABSENCE OF A PUBLIC MARKET FOR THE
NEW NOTES........................ The New Notes are a new issue of securities with no
established market, and the Company does not expect that
an active trading market in the Notes will develop.
Accordingly, there can be no assurance as to the
development or liquidity of any market for the New
Notes. The Initial Purchaser has advised the Company
that it currently makes a market in the Notes. The
Company does not currently intend to apply for listing
of the New Notes on any securities exchange.
</TABLE>
FOR A DISCUSSION OF FACTORS THAT SHOULD BE CONSIDERED BY ELIGIBLE HOLDERS
EVALUATING THE EXCHANGE OFFER, SEE "RISK FACTORS."
9
<PAGE>
SUMMARY FINANCIAL DATA
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA (1)
-------------------------------
TWELVE NINE TWELVE
NINE MONTHS ENDED MONTHS MONTHS MONTHS
FISCAL YEAR ENDED JULY 31, APRIL 30, ENDED ENDED ENDED
---------------------------- ------------------ APRIL 30, FISCAL APRIL 30, APRIL 30,
1993 1994 1995 1995 1996 1996 1995 1996 1996
-------- -------- -------- -------- -------- --------- -------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales............................ $214,936 $228,563 $271,994 $213,723 $164,736 $223,007 $534,680 $383,902 $524,607
Cost of goods sold................... 192,208 205,025 232,154 181,870 141,973 192,257 442,332 336,580 452,179
-------- -------- -------- -------- -------- --------- -------- --------- ---------
Gross profit......................... 22,728 23,538 39,840 31,853 22,763 30,750 92,348 47,322 72,428
Selling, general and administrative
expenses............................ 21,813 22,018 19,703 15,810 11,664 15,557 36,847 29,550 38,863
-------- -------- -------- -------- -------- --------- -------- --------- ---------
Income from operations............... 915 1,520 20,137 16,043 11,099 15,193 55,501 17,772 33,565
Other income (expense)............... 3,651 126 1,927 1,761 -- 166 4,174 (68) 3,129
Interest expense..................... 4,948 5,448 5,607 4,672 2,697 3,632 23,958 17,969 23,958
Minority interest.................... -- (180) (146) -- -- (146) (146) -- (146)
Provision (benefit) for income
taxes............................... 453 (325) 5,483 4,350 3,658 4,791 12,704 662 5,231
Extraordinary item................... -- 381 2,219 2,219 -- -- -- -- --
-------- -------- -------- -------- -------- --------- -------- --------- ---------
Net income (loss).................... $ (835) $ (3,276) $ 13,047 $ 11,001 $ 4,744 $ 6,790 $ 22,867 $ (927) $ 7,359
-------- -------- -------- -------- -------- --------- -------- --------- ---------
-------- -------- -------- -------- -------- --------- -------- --------- ---------
OTHER FINANCIAL DATA:
Ratio of earnings to fixed
charges (2)......................... 1.0x 0.5x 3.3x 3.3x 3.2x 3.3x 2.4x 1.0x 1.5x
EBITDA (3)........................... $ 6,209 $ 6,796 $ 25,382 $ 20,033 $ 13,951 $ 19,300 $ 68,349 $ 26,831 $ 45,988
Ratio of EBITDA to interest expense
(4)................................. -- -- -- 3.3x 3.2x 3.3x 2.9x 1.5x 1.9x
Net cash provided by (used in)
operating activities (5)............ 8,860 4,794 (2,217) (5,065) 7,319 9,432 -- -- --
Net cash used by investing
activities.......................... (4,135) (9,126) (1,975) (1,235) (2,704) (3,207) -- -- --
Net cash (used in) provided by
financing activities................ (3,841) 5,182 3,518 5,079 (3,892) (5,482) -- -- --
Depreciation and amortization........ $ 5,294 $ 5,276 $ 5,245 $ 3,990 $ 2,852 $ 4,107 $ 12,848 $ 9,059 $ 12,423
Capital expenditures................. 3,935 3,916 3,690 2,950 4,281 5,021 8,054 4,659 5,134
Adjusted net sales (6)............... 153,857 155,869 212,562 158,380 154,919 209,101 -- -- --
Adjusted EBITDA (6).................. 2,196 3,926 24,210 20,715 16,884 20,379 -- -- --
OPERATING DATA:
Corrugated Converting Operations:
Million square feet sold........... 3,513 3,799 3,794 2,944 2,629 3,476 10,754 7,116 9,593
Average production per day
(tons)............................ 1,007 1,296 1,133 941 967 1,080 3,010 2,662 2,708
Plants opened or acquired.......... 2 4 -- -- -- -- 16 16 16
Plants closed or sold.............. 1 4 2 2 2 1 3 3 2
Plants at period end............... 15 15 13 13 12 12 28 27 27
Ft. Madison Mill Operations:
Tons sold.......................... -- 38,029 75,872 57,267 58,982 77,586 75,872 58,982 77,586
Average production per day
(tons)............................ -- 119 217 214 214 213 217 214 213
</TABLE>
<TABLE>
<CAPTION>
AS OF APRIL 30, 1996
------------------------
ACTUAL PRO FORMA (1)
--------- -------------
<S> <C> <C>
BALANCE SHEET DATA:
Working capital......................................................................... $ 12,925 $ 72,949
Property, plant and equipment, net...................................................... 34,977 125,166
Total assets............................................................................ 77,254 251,282
Total long-term debt.................................................................... 33,279 196,942
Total stockholder's equity.............................................................. 13,393 13,993
</TABLE>
THE ACCOMPANYING FOOTNOTES TO THE SUMMARY FINANCIAL DATA APPEAR ON THE FOLLOWING
PAGE.
10
<PAGE>
FOOTNOTES TO THE SUMMARY FINANCIAL DATA:
- ----------------------------------
(1) Gives pro forma effect to (a) the Acquisition and the financings therefor,
and (b) the closing of the Company's corrugator plant located in Flint,
Michigan ("Flint"), which the Company intends to close in 1996, as if such
transactions had occurred on August 1, 1994 with respect to Fiscal 1995 and
the nine months ended April 30, 1996, on May 1, 1995 with respect to the
twelve months ended April 30, 1996, and on April 30, 1996 with respect to
the balance sheet data. The pro forma statement of operations data for
Fiscal 1995 reflect the disposition in March 1995 by the Company of The
Fonda Group, Inc. ("Fonda"), a subsidiary of the Company which produced
paper plates, cups and other food service disposables. See "Unaudited Pro
Forma Combined Condensed Financial Data."
(2) For purposes of calculating the ratio of earnings to fixed charges,
earnings consist of earnings (loss) before provision (benefit) for income
taxes, minority interest and extraordinary gain on early retirement of debt
plus fixed charges, and fixed charges consist of interest expense plus that
portion of rental payments on operating leases deemed representative of the
interest factor.
(3) EBITDA represents income from operations before interest expense, provision
(benefit) for income taxes and depreciation and amortization. EBITDA
provides information regarding a company's ability to service and/or incur
debt. EBITDA should not be considered in isolation or as a substitute for
net income, cash flows from operations, or other consolidated income or
cash flow data prepared in accordance with generally accepted accounting
principles or as a measure of a company's profitability or liquidity.
EBITDA is not intended to disclose excess funds available for reinvestment
because other commitments and obligations exist, including, but not limited
to, principal repayment obligations and lease commitments, that are not
considered in the calculation of EBITDA. See Notes 6, 11 and 12 to the
Company's financial statements. EBITDA is a measure used as part of the
covenants of the Credit Facility.
(4) Interest expense excludes the amortization of debt issuance costs of $880,
$660 and $880 for pro forma Fiscal 1995, the pro forma nine months ended
April 30, 1996 and the pro forma twelve months ended April 30, 1996,
respectively.
(5) Material differences between EBITDA and net cash provided by or used in
operating activities may occur because of the inherent differences in each
such calculation including (a) the change in operating assets and
liabilities between the beginning and end of each period, as well as
certain non-cash items which are considered when presenting net cash
provided by or used in operating activities but are not used when
calculating EBITDA and (b) interest expense, provision for income taxes and
other income or expense which are included when presenting net cash
provided by or used in operating activities but are not included in the
calculation of EBITDA.
(6) Adjusted to exclude the results of Fonda and Flint.
11
<PAGE>
RISK FACTORS
HOLDERS OF THE OLD NOTES SHOULD CAREFULLY CONSIDER THE FOLLOWING MATTERS, AS
WELL AS THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS, BEFORE DECIDING TO
TENDER THEIR OLD NOTES IN THE EXCHANGE OFFER.
SUBSTANTIAL LEVERAGE
Since the issuance of the Old Notes and subsequent to the Acquisition, the
Company has become highly leveraged. As of April 30, 1996, after giving pro
forma effect to the Acquisition and the financings therefor, including the
issuance of the New Notes, the Company would have had approximately $210.8
million of indebtedness outstanding and approximately $39.7 million of
additional borrowing capacity under the Credit Facility, subject to borrowing
base limitations. See "Capitalization." As of April 30, 1996, the Company's debt
to equity ratio was 2.8:1, and its annual debt service is expected to be $24.3
million.
The significant indebtedness incurred as a result of the Acquisition has
several important consequences to the Holders of the New Notes, including, but
not limited to, the following: (i) a substantial portion of the Company's cash
flow from operations must be dedicated to service such indebtedness, and the
failure of the Company to generate sufficient cash flow to service such
indebtedness could result in a default under such indebtedness, including under
the New Notes; (ii) the Company's ability to obtain additional financing in the
future for working capital, capital expenditures, acquisitions or for other
purposes may be impaired; (iii) the Company's flexibility to expand, make
capital expenditures and respond to changes in the industry and economic
conditions generally may be limited; (iv) the Credit Facility and the Indenture
contain, and future agreements relating to the Company's indebtedness may
contain, numerous financial and other restrictive covenants, including, among
other things, limitations on the ability of the Company to incur additional
indebtedness, to create liens and other encumbrances, to make certain payments
and investments, to sell or otherwise dispose of assets, or to merge or
consolidate with another entity, the failure to comply with which may result in
a default under such agreements, which, if not cured or waived, could have a
material adverse effect on the Company; and (v) the ability of the Company to
satisfy its obligations pursuant to such indebtedness, including pursuant to the
New Notes, will be dependent upon the Company's future performance which, in
turn, will be subject to management, financial, business, regulatory and other
factors affecting the business and operations of the Company, some of which are
not in the Company's control.
INTEGRATION OF THE ACQUIRED FACILITIES
Although St. Joe Container utilizes manufacturing equipment, raw materials
and production processes which are similar to those used by the Company, there
can be no assurance that the Company will be able to integrate successfully the
facilities acquired in the Acquisition with the Company's existing operations.
Integration of such facilities could be affected by a number of factors, some of
which are not in the Company's control, including the ability of the Company's
existing management and systems infrastructure to absorb the increased
operations, the response of competition and general economic conditions. The
Company may pursue additional acquisitions in the future. There can be no
assurance that future acquisitions will be advantageous or that anticipated
results of such acquisitions will be realized. See "The Acquisition."
HIGHLY COMPETITIVE INDUSTRY; INDUSTRY CONDITIONS
The corrugated packaging industry is a highly fragmented and competitive
industry. The markets for corrugated packaging materials are sensitive to
changes in industry capacity and cyclical changes in the economy. Both of these
factors can significantly impact the Company's profitability. After a period of
declining prices for the Company's products because of a decline in
industry-wide demand, beginning in 1994, demand improved which allowed the
Company to increase prices for most of its products. Since October 1995, prices
for the Company's products have declined due to a decrease in industry-wide
demand. Since the end of the fourth quarter ended July 31, 1996, the Company
believes that prices for its products have stabilized. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--Recent
Performance."
The Company's competitors include large, vertically integrated corrugated
packaging companies and, on a local and regional level, many smaller,
independent companies. The primary competitive factors in the corrugated
packaging industry are price, design, quality and service. In addition,
corrugated packaging materials compete with other packaging materials, including
paper, plastic, wood and metal.
12
<PAGE>
Linerboard and corrugating medium are the principal raw materials used in
all of the Company's converting facilities and are purchased in highly
competitive and price sensitive markets. These raw materials have historically
exhibited price and demand cyclicality. In addition, the supply and price of
wood fiber, the principal component of linerboard and corrugating medium, are
dependent upon a variety of factors many of which are not in the Company's
control, including environmental and conservation regulations, natural
disasters, such as forest fires and hurricanes, and weather. Although the
Company has not experienced any significant difficulty in obtaining wood fiber
for the manufacture of corrugating medium at the Ft. Madison Mill, or in
obtaining linerboard and corrugating medium for use in its converting
facilities, there can be no assurance that the Company will be able to continue
to do so or that increased costs of purchasing such materials could be passed
along to the Company's customers.
RELATIONSHIP WITH MILL JOINT VENTURE
In connection with the Acquisition, the Company and Stone Container formed
the Mill Joint Venture for the purpose of acquiring the St. Joe Mill from St.
Joe Forest Products Company ("St. Joe Forest"), an affiliate of St. Joe
Container. The Company and Stone Container each invested $5.0 million in the
common equity of the Mill Joint Venture. In addition, Stone Container loaned
$30.0 million to Florida Coast Paper Holding Co., L.L.C, the parent of the Mill
Joint Venture. See "The Acquisition." In addition, the Company and Stone
Container each agreed to provide the Mill Joint Venture with up to $10.0 million
of subordinated indebtedness, if needed, in addition to the capital invested in
the Mill Joint Venture, for general corporate purposes pursuant to a
Subordinated Credit Facility (the "Subordinated Credit Facility").
Both the Company and Stone Container also agreed to purchase from the Mill
Joint Venture one-half of the St. Joe Mill's entire annual linerboard production
at a price that is $25 per ton below the price of such product published in PULP
& PAPER WEEK, under the section entitled "Price Watch: Paper and Paperboard,"
subject to a minimum purchase price, which price is intended to generate
sufficient funds to cover cash operating costs, cash interest expense and
maintenance capital expenditures. The price that the Company is required to pay
the Mill Joint Venture for such linerboard may be higher than the prices at
which the Company could purchase linerboard from unrelated third parties. In
addition, there can be no assurance that if the prices that the Company is
required to pay to the Mill Joint Venture for linerboard is substantially higher
than the prices available to the Company from third parties, such higher pricing
will not have a material adverse effect on the Company. See "The Acquisition."
FT. MADISON MILL OPERATIONS
In Fiscal 1995 and the nine months ended April 30, 1996, the Ft. Madison
Mill contributed approximately 12.3% and 10.9%, respectively, to the Company's
net sales, approximately 38.2% and 104.6%, respectively, to the Company's net
income and approximately 27.1% and 34.4%, respectively, to the Company's EBITDA
before corporate overhead. After giving pro forma effect to the Acqusition, in
Fiscal 1995 and in the twelve months ended April 30, 1996, the Ft. Madison Mill
would have contributed approximately 6.3% and 6.9%, respectively, to the
Company's net sales, approximately 23.4% and 81.3%, respectively, to the
Company's net income and approximately 11.3% and 21.1%, respectively, to the
Company's EBITDA before corporate overhead. Any adverse change in the operations
of the Ft. Madison Mill could have a material adverse effect on the Company's
financial condition and results of operations. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
ENVIRONMENTAL MATTERS
The Company's operations are subject to environmental regulation by federal,
state and local authorities in the United States. Unreimbursed liabilities
arising from environmental claims, if significant, could have a material adverse
effect on the Company's financial condition and results of operations.
Furthermore, actions by federal, state and local governments concerning
environmental matters could result in laws or regulations that could increase
the cost of compliance with environmental laws and regulations. There can be no
assurance that future capital expenditures by the Company to comply with such
laws and regulations will not be significant or that such costs will not result
in a material adverse effect on the Company's financial condition or results of
operations.
13
<PAGE>
In November 1993, the U.S. Environmental Protection Agency (the "EPA")
announced proposed regulations, known as the "cluster rules," that would require
more stringent controls on air and water discharges from pulp and paper mills
under the Clean Water Act and the Clean Air Act. The Company estimates that
these regulations, if adopted as currently proposed, would require capital
expenditures of approximately $1.5 million to $2.0 million by the Company with
respect to the Ft. Madison Mill. The ultimate financial impact of the proposed
regulations on the Company will depend on the nature of the final regulations,
the timing of required implementation and the cost and availability of new
technology. See "Business--Environmental Matters." St. Joe Container, St. Joe
Paper and St. Joe Forest (collectively, the "Paper Indemnitors") agreed to
indemnify the Company for certain environmental matters based on activities
prior to the closing of the Acquisition (the "Closing"). There can be no
assurance that this indemnification will be sufficient to reimburse the Company
for all environmental liabilities. See "Business--Environmental Matters."
CREDIT FACILITY AND INDENTURE RESTRICTIONS
The Credit Facility and the Indenture contain numerous restrictive covenants
including, among other things, limitations on the ability of the Company and its
Restricted Subsidiaries to incur additional indebtedness, to issue preferred
stock, to create liens and other encumbrances, to pay dividends, to repurchase
Equity Interests, to repay subordinated indebtedness or to make certain other
payments and investments, to enter into certain transactions with affiliates, to
sell or otherwise dispose of assets, to issue or sell Equity Interests of the
Company's Subsidiaries or to merge or consolidate with another entity. The
Credit Facility also requires the Company to meet certain financial tests. The
Company's failure to comply with its obligations under the Credit Facility or
the Indenture, or under agreements relating to indebtedness incurred in the
future, could result in an event of default under such agreements, which could
permit acceleration of the related indebtedness and acceleration of indebtedness
under other financing arrangements that may contain cross-acceleration or
cross-default provisions. See "Description of New Notes" and "Description of
Credit Facility."
In addition, the Indenture requires the Company to repurchase the Notes upon
a Change of Control, an Event of Default or an Event of Loss. There can be no
assurance that the Company will be able to obtain the necessary financing to
repurchase the Notes upon any such event. In addition, the requirement to
repurchase the Notes upon a Change of Control may discourage persons from making
a tender offer for or a bid to acquire the Company or its Subsidiaries.
Conversely, because the Indenture limits the ability of the Company or any of
its Restricted Subsidiaries to engage in certain transactions except under
certain circumstances, the Company and its Restricted Subsidiaries may be
prohibited from entering into transactions that could be beneficial to the
Company. See "Description of New Notes -- Certain Covenants."
LABOR MATTERS
As of April 30, 1996, approximately 44.0% of the Company's employees were
covered by collective bargaining agreements. In addition, as of April 30, 1996,
approximately 53.0% of the employees at the facilities acquired in the
Acquisition were covered by collective bargaining agreements. Since the Company
has not assumed St. Joe Container's obligations under such collective bargaining
agreements, the Company must negotiate new collective bargaining agreements
covering such employees. There can be no assurance that the Company will be
successful in renegotiating collective bargaining agreements that are due to
expire or in negotiating new collective bargaining agreements relating to the
employees at the acquired facilities, or that the Company will not incur
increased costs as a result of such negotiations. See "Business-- Employees."
CONTROL BY PRINCIPAL STOCKHOLDER
All of the outstanding common stock of the Company is owned by Dennis
Mehiel, the Company's Chairman and Chief Executive Officer. As a result, Mr.
Mehiel controls the Company and has the power to elect all of its directors,
appoint new management and approve any other action requiring the approval of
the holders of the Company's stock, including adopting amendments to the
Company's articles of incorporation and approving mergers or sales of all of the
Company's assets.
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DEPENDENCE ON KEY PERSONNEL
The Company is dependent on the retention of, and continued performance by,
its senior management, particularly Dennis Mehiel, its Chairman and Chief
Executive Officer, and Chris Mehiel, its Executive Vice President and Chief
Operating Officer. The Company believes that the loss of the services of either
of these officers could have a material adverse effect on the Company. The
Company does not have employment contracts with either Dennis Mehiel or Chris
Mehiel.
UNCERTAIN VALUE OF SECURITY INTERESTS
No assurance can be given that the proceeds of a sale of the Collateral
securing the Notes would be sufficient to repay all of the Notes following a
foreclosure upon the Collateral or a liquidation of the Company. If the net
proceeds received from the sale of the Collateral (after payment of expenses
relating to the sale) were insufficient to pay all amounts due with respect to
the Notes, then Holders of the Notes would, to the extent of such insufficiency,
have only an unsecured claim against any remaining assets of the Company.
Furthermore, the ability of the Trustee to foreclose upon the Collateral would
be delayed if the Company were the subject of any bankruptcy, receivership or
similar proceedings.
FRAUDULENT TRANSFER STATUTES; ENFORCEABILITY OF GUARANTEES
Under federal or state fraudulent transfer laws, the Notes or the Subsidiary
Guarantees may be subordinated to existing or future indebtedness of the Company
or the Guarantors, as the case may be, or found not to be enforceable in
accordance with their terms. Under such statutes, if a court were to find that,
at the time the Notes and the Subsidiary Guarantees were issued, the Company or
any such Guarantor was insolvent, was rendered insolvent by the issuance of the
Notes or its Subsidiary Guarantee, as the case may be, together with the
substantially concurrent use of the proceeds therefrom, was engaged in a
business or transaction for which the assets remaining with the Company or such
Guarantor constituted unreasonably small capital, intended to incur, or believed
that it would incur, debts beyond its ability to pay such debts as they matured,
or intended to hinder, delay or defraud its creditors, such court could void the
Company's obligations under the Notes or such Guarantor's obligations under its
Subsidiary Guarantee, or subordinate the Notes or such Subsidiary Guarantee to
all other indebtedness of the Company or such Guarantor, as the case may be. In
such event, there can be no assurance that any repayment of the Notes could ever
be recovered by Holders of the Notes.
For purposes of the foregoing, the measure of insolvency varies depending
upon the law of the jurisdiction that is being applied. Generally, however, the
Company or a Guarantor would be considered to have been insolvent at the time
the Notes and the Subsidiary Guarantees were issued if the sum of its debts was,
at that time, greater than the sum of the value of all of its property at a fair
valuation, or if the then fair saleable value of its assets was less than the
amount that was then required to pay its probable liability on its existing
debts as they became absolute and matured. There can be no assurance as to the
standard a court would apply in order to determine whether the Company or a
Guarantor was insolvent as of the date the Notes and the Subsidiary Guarantees
were issued, or that, regardless of the method of valuation, a court would not
determine that the Company or a Guarantor was insolvent on that date, or that,
regardless of whether the Company or such Guarantor was insolvent on the date
the Notes and the Subsidiary Guarantees were issued, that the issuances
constituted fraudulent transfers on another of the grounds summarized above.
CHANGE OF CONTROL PROVISIONS
Upon the occurrence of a Change of Control at any time, the Company will be
required to offer to repurchase each Holder's Notes at a price equal to 101% of
the aggregate principal amount thereof plus accrued and unpaid interest, if any,
to the date of purchase. There can be no assurance that the Company will have
the financial resources necessary to repurchase the Notes upon a Change of
Control. See "Description of New Notes--Repurchase at the Option of
Holders--Change of Control." In addition, a Change of Control may constitute a
default under the Credit Facility.
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CONSEQUENCES OF FAILURE TO EXCHANGE
Holders of Old Notes who do not exchange their Old Notes for New Notes
pursuant to the Exchange Offer will continue to be subject to the restrictions
on transfer of such Old Notes as set forth in the legend thereon as a
consequence of the issuance of the Old Notes pursuant to exemptions from, or in
transactions not subject to, the registration requirements of the Securities Act
and applicable state securities laws. In general, the Old Notes may not be
offered or sold, unless registered under the Securities Act, except pursuant to
an exemption from, or in a transaction not subject to, the Securities Act and
applicable state securities laws. The Company does not currently anticipate that
it will register the Old Notes under the Securities Act. New Notes issued
pursuant to the Exchange Offer in exchange for Old Notes may be offered for
resale, resold or otherwise transferred by Holders thereof (other than any such
holder who is an "affiliate" of the Company or any Guarantor within the meaning
of Rule 405 under the Securities Act) without compliance with the registration
and prospectus delivery provisions of the Securities Act provided that such New
Notes are acquired in the ordinary course of such holders' business and such
holders have no arrangement with any person to participate in the distribution
of such Notes. Each broker-dealer that receives New Notes for its own account
pursuant to the Exchange Offer must acknowledge that it will deliver a
prospectus in connection with any resale of such new Notes. The Letter of
Transmittal states that, by so acknowledging and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act. This Prospectus, as it may be amended or
supplemented from time to time, may be used by a broker-dealer in connection
with resales of New Notes received in exchange for Old Notes where such Old
Notes were acquired by such broker-dealer as a result of market-making
activities or other trading activities. The Company has agreed that, for a
period 270 days after the effective date of the Exchange Offer Registration
Statement (as defined herein), it will make this Prospectus available to any
broker-dealer for use in connection with any such resale. See "Plan of
Distribution." However, to comply with the securities laws of certain
jurisdictions, if applicable, the New Notes may not be offered or sold unless
they have been registered or qualified for sale in such jurisdictions or an
exemption from registration or qualification is available and is complied with.
To the extent that Old Notes are tendered and accepted in the Exchange Offer,
the trading market for untendered and tendered but unaccepted Old Notes will be
adversely affected.
ABSENCE OF PUBLIC MARKET
Prior to this Prospectus, there has been no public market for the New Notes,
and the Company does not expect that an active trading market in the Notes will
develop. In addition, the Company does not currently intend to apply for listing
of the New Notes on any securities exchange. If a market for the New Notes
should develop, the New Notes may trade at a discount from their initial
offering price, depending upon prevailing interest rates, the market for similar
securities, the Company's performance and other factors. The Initial Purchaser
has made a market in the Notes as permitted by applicable law and regulation;
however, the Initial Purchaser is not obligated to do so and any such
market-making activities may be discontinued at any time without notice. In
addition, such market-making activities may be limited during the Exchange
Offer. Therefore, there can be no assurance that an active market for the New
Notes will develop after the Company's performance of its obligations under the
Registration Rights Agreement. See "Description of New Notes."
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THE EXCHANGE OFFER
PURPOSES AND EFFECTS
The Old Notes were sold by the Company on May 30, 1996 to the Initial
Purchaser, who resold the Old Notes to "qualified institutional buyers" (as
defined in Rule 144A under the Securities Act) and other institutional
"accredited investors" (as defined in Rule 501(a) under the Securities Act). In
connection with the sale of the Old Notes, the Company and the Initial Purchaser
entered into a Registration Rights Agreement dated as of May 30, 1996 (the
"Registration Rights Agreement") pursuant to which the Company agreed to file
with the Commission a registration statement (the "Exchange Offer Registration
Statement") with respect to an offer to exchange the Old Notes for New Notes
within 45 days following the closing date of the Old Notes. In addition, the
Company agreed to use its best efforts to cause the Exchange Offer Registration
Statement to become effective under the Securities Act and to issue the New
Notes pursuant to the Exchange Offer. A copy of the Registration Rights
Agreement has been filed as an exhibit to the Exchange Offer Registration
Statement.
The Exchange Offer is being made pursuant to the Registration Rights
Agreement to satisfy the Company's obligations thereunder. For purposes of the
Exchange Offer, the term "Eligible Holder" shall mean the registered owner of
any Old Notes that remain Transfer Restricted Securities, as reflected on the
records of Norwest Bank Minnesota, National Association as registrar for the Old
Notes (in such capacity, the "Registrar"), or any person whose Old Notes are
held of record by the depositary of the Old Notes. The Company is not required
to include any securities other than the New Notes in the Exchange Offer
Registration Statement. Holders of Old Notes who do not tender their Old Notes
or whose Old Notes are tendered but not accepted would have to rely on
exemptions to registration requirements under the securities laws, including the
Securities Act, if they wish to sell their Old Notes.
Based on an interpretation by the staff of the Commission set forth in
no-action letters issued to third parties unrelated to the Company, the Company
believes that the New Notes issued pursuant to the Exchange Offer in exchange
for Old Notes may be offered for resale, resold and otherwise transferred by any
holder of such New Notes (other than a person that is an "affiliate" of the
Company or a Guarantor within the meaning of Rule 405 under the Securities Act
and except as set forth in the next paragraph) without compliance with the
registration and prospectus delivery provisions of the Securities Act, provided
that such New Notes are acquired in the ordinary course of such holder's
business and such holder is not participating and does not intend to
participate, and has no arrangement or understanding with any person to
participate, in the distribution of such New Notes.
If any person were to participate in the Exchange Offer for the purpose of
distributing securities in a manner not permitted by the Commission's
interpretation (i) the position of the staff of the Commission enunciated in the
aforementioned interpretive letters would be inapplicable to such person and
(ii) such person would be required to comply with the registration and
prospectus delivery requirements of the Securities Act in connection with any
resale transaction. Each broker-dealer that receives New Notes for its own
account in exchange for Old Notes, where such Old Notes were acquired by such
broker-dealer as a result of market-making activities or other trading
activities, must acknowledge that it will deliver a prospectus in connection
with any resale of such New Notes. See "Plan of Distribution."
The Exchange Offer is not being made to, nor will the Company accept
surrenders for exchange from, holders of Old Notes in any jurisdiction in which
the Exchange Offer or the acceptance thereof would not be in compliance with the
securities or blue sky laws of such jurisdiction. Prior to the Exchange Offer,
however, the Company will use its best efforts to register or qualify the New
Notes for offer and sale under the securities or blue sky laws of such
jurisdictions as is necessary to permit consummation of the Exchange Offer and
do any and all other acts or things necessary or advisable to enable the offer
and sale in such jurisdictions of the New Notes.
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this Prospectus
and in the accompanying Letter of Transmittal, the Company will accept any and
all Old Notes validly tendered prior to 5:00 p.m.,
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New York City time, on the Expiration Date. The Company will issue up to
$170,000,000 aggregate principal amount of New Notes in exchange for a like
principal amount of outstanding Old Notes which are validly tendered and
accepted in the Exchange Offer. Subject to the conditions of the Exchange Offer
described below, the Company will accept any and all Old Notes which are so
tendered. Holders may tender some or all of their Old Notes pursuant to the
Exchange Offer; however, the Old Notes may be tendered only in multiples of
$1,000. See "Description of New Notes."
The form and terms of the New Notes will be the same in all material
respects as the form and terms of the Old Notes, except that the New Notes will
be registered under the Securities Act and hence will not bear legends
restricting the transfer thereof.
Holders of Old Notes do not have any appraisal or dissenters' rights under
the General Corporation Law of the State of Maryland or the Indenture in
connection with the Exchange Offer. The Company intends to conduct the Exchange
Offer in accordance with the provisions of the Registration Rights Agreement.
Old Notes which are not tendered for exchange or are tendered but not accepted
in the Exchange Offer will remain outstanding and be entitled to the benefits of
the Indenture, but will not be entitled to any registration rights under the
Registration Rights Agreement.
The Company shall be deemed to have accepted validly tendered Old Notes
when, as and if the Company has given oral or written notice thereof to the
Exchange Agent for the Exchange Offer. The Exchange Agent will act as agent for
the tendering holders for the purposes of receiving the New Notes from the
Company.
If any tendered Old Notes are not accepted for exchange because of an
invalid tender, the occurrence of certain other events set forth herein or
otherwise, certificates for any such unaccepted Old Notes will be returned,
without expense, to the tendering holder thereof as promptly as practicable
after the Expiration Date.
Eligible Holders who tender Old Notes in the Exchange Offer will not be
required to pay brokerage commissions or fees or, subject to the instructions in
the Letter of Transmittal, transfer taxes with respect to the exchange of Old
Notes pursuant to the Exchange Offer. The Company will pay all charges and
expenses, other than certain applicable taxes described below, in connection
with the Exchange Offer. See "--Fees and Expenses."
EXPIRATION DATE; EXTENSION; TERMINATION; AMENDMENTS
The Exchange Offer will expire at 5:00 p.m., New York City time, on October
29, 1996, subject to extension by the Company by notice to the Exchange Agent as
herein provided. The Company reserves the right to so extend the Exchange Offer
at its discretion, in which event the term "Expiration Date" shall mean the time
and date on which the Exchange Offer as so extended shall expire. The Company
will notify the Exchange Agent of any extension by oral or written notice and
will make a public announcement thereof, each prior to 9:00 a.m., New York City
time, on the next business day after the previously scheduled Expiration Date.
The Company reserves the right (i) to delay accepting for exchange any Old
Notes for any New Notes or to extend or terminate the Exchange Offer and not
accept for exchange any Old Notes for any New Notes if any of the events set
forth below under the caption "Conditions of the Exchange Offer" shall have
occurred and shall not have been waived by the Company by giving oral or written
notice of such delay or termination to the Exchange Agent, or (ii) to amend the
terms of the Exchange Offer in any manner. Any such delay in acceptance for
exchange, extension or amendment will be followed as promptly as practicable by
public announcement thereof. If the Exchange Offer is amended in a manner
determined by the Company to constitute a material change, the Company will
promptly disclose such amendment in a manner reasonably calculated to inform the
holder of the New Notes of such amendment, and the Company will extend the
Exchange Offer for a minimum of five business days, depending upon the
significance of the amendment and the manner of disclosure to the holders of the
New Notes, if the Exchange Offer would otherwise expire during such five
business-day period. The rights reserved by the Company in this paragraph are in
addition to the Company's rights set forth below under the caption "Conditions
of the Exchange Offer."
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TERMINATION OF CERTAIN RIGHTS
The Registration Rights Agreement provides that, subject to certain
exceptions, in the event of a Registration Default, Eligible Holders of Old
Notes are entitled to receive Liquidated Damages in an amount equal to 50 basis
points per annum for each 90 day period or any portion thereof (up to a maximum
of 200 basis points per annum). For purposes of the Exchange Offer,
"Registration Default" shall occur if (i) the Company fails to file any of the
Registration Statements required by the Registration Rights Agreement on or
before the date specified for such filing; (ii) any such Registration Statement
is not declared effective by the Commission on or prior to the date specified
for such effectiveness (the "Effectiveness Target Date") or (iii) the Company
fails to consummate the Exchange Offer within 30 days of the Effectiveness
Target Date with respect to the Exchange Offer Registration Statements; or (iv)
the Shelf Registration Statement (as defined in the Registration Rights
Agreement) or the Exchange Offer Registration Statement is declared effective
but thereafter ceases to be effective or usable in connection with the resales
of the New Notes.
Holders of New Notes will not be and, upon consummation of the Exchange
Offer, Eligible Holders of Old Notes will no longer be entitled to (i) the right
to receive the Liquidated Damages or (ii) certain other rights under the
Registration Rights Agreement intended for holders of Transfer Restricted
Securities. The Exchange Offer shall be deemed consummated upon the occurrence
of the delivery by the Company to the Registrar under the Indenture of New Notes
in the same aggregate principal amount as the aggregate principal amount of Old
Notes that are tendered by holders thereof pursuant to the Exchange Offer.
PROCEDURES FOR TENDERING
Only Eligible Holders of Old Notes may tender such Old Notes in the Exchange
Offer. To tender in the Exchange Offer, Eligible Holders must complete, sign and
date the Letter of Transmittal, or a facsimile thereof, have the signatures
thereon guaranteed if required by the Letter of Transmittal, and mail or
otherwise deliver such Letter of Transmittal or such facsimile, together with
the Old Notes (unless such tender is being effected pursuant to the procedure
for book-entry transfer described below) and any other required documents, to
the Exchange Agent prior to 5:00 p.m., New York City time, on the Expiration
Date.
Any financial institution that is a participant in the Depositary's
Book-Entry Transfer Facility system may make book-entry delivery of the Old
Notes by causing the Depositary to transfer such Old Notes into the Exchange
Agent's account in accordance with the Depositary's procedure for such transfer.
Although delivery of Old Notes may be effected through book-entry transfer in
the Exchange Agent's account at the Depositary, the Letter of Transmittal (or
facsimile thereof), with any required signature guarantees and any other
required documents, must, in any case, be transmitted to and received or
confirmed by the Exchange Agent at its addresses set forth under the caption
"Exchange Agent" below prior to 5:00 p.m., New York City time, on the Expiration
Date. DELIVERY OF DOCUMENTS TO THE DEPOSITARY IN ACCORDANCE WITH ITS PROCEDURES
DOES NOT CONSTITUTE DELIVERY TO THE EXCHANGE AGENT.
The tender by an Eligible Holder of Old Notes will constitute an agreement
between such holder and the Company in accordance with the terms and subject to
the conditions set forth herein and in the Letter of Transmittal.
The method of delivery of Old Notes and the Letter of Transmittal and all
other required documents to the Exchange Agent is at the election and risk of
the Eligible Holders. Instead of delivery by mail, it is recommended that
Eligible Holders use an overnight or hand delivery service. In all cases,
sufficient time should be allowed to assure delivery to the Exchange Agent
before the Expiration Date. No Letter of Transmittal or Old Notes should be sent
to the Company. Eligible Holders may request their respective brokers, dealers,
commercial banks, trust companies or nominees to effect the tenders for such
holders.
Signatures on a Letter of Transmittal or a notice of withdrawal, as the case
may be, must be guaranteed by an Eligible Institution (as defined below) unless
the Old Notes tendered pursuant thereto are tendered (i) by a registered holder
who has not completed the box entitled "Special Issuance Instructions" or
"Special Delivery Instructions" on the Letter of Transmittal, or (ii) for the
account of an Eligible Institution. In the
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event that signatures on a Letter of Transmittal or a notice of withdrawal, as
the case may be, are required to be guaranteed, such guarantee must be by a
member of a signature guarantee program within the meaning of Rule 17Ad-15 under
the Exchange Act (an "Eligible Institution").
If the Letter of Transmittal or any Old Notes or bond powers are signed by
trustees, executors, administrators, guardians, attorneys-in-fact, officers of
corporations or others acting in a fiduciary or representative capacity, such
persons should so indicate when signing, and unless waived by the Company,
evidence satisfactory to the Company of their authority to so act must be
submitted with the Letter of Transmittal.
All questions as to the validity, form, eligibility (including time of
receipt) and acceptance and withdrawal of tendered Old Notes will be determined
by the Company in its sole discretion, which determination will be final and
binding. The Company reserves the absolute right to reject any and all Old Notes
not properly tendered or any Old Notes the Company's acceptance of which would,
in the opinion of counsel for the Company, be unlawful. The Company also
reserves the right to waive any defects, irregularities or conditions of tender
as to particular Old Notes. The Company's interpretation of the terms and
conditions of the Exchange Offer (including the instructions in the Letter of
Transmittal) will be final and binding on all parties. Unless waived, any
defects or irregularities in connection with tenders of Old Notes must be cured
within such times as the Company shall determine. Although the Company intends
to request the Exchange Agent to notify holders of defects or irregularities
with respect to tenders of Old Notes, neither the Company, the Exchange Agent
nor any other person shall incur any liability for failure to give such
notification. Tenders of Old Notes will not be deemed to have been made until
such defects or irregularities have been cured or waived. Any Old Notes received
by the Exchange Agent that are not properly tendered and as to which the defects
or irregularities have not been cured or waived will be returned by the Exchange
Agent to the tendering holders, unless otherwise provided in the Letter of
Transmittal, as soon as practicable following the Expiration Date.
In addition, the Company reserves the right in its sole discretion (subject
to limitations contained in the Indenture) (i) to purchase or make offers for
any Old Notes that remain outstanding subsequent to the Expiration Date and (ii)
to the extent permitted by applicable law, purchase Old Notes in privately
negotiated transactions or otherwise. The terms of any such purchases or offers
could differ from the terms of the Exchange Offer.
By tendering, each Eligible Holder will represent to the Company that, among
other things, the New Notes acquired pursuant to the Exchange Offer are being
obtained in the ordinary course of business by persons receiving such New Notes,
whether or not such person is the holder and that neither the Eligible Holder
nor any such other person has an arrangement or understanding with any person to
participate in the distribution of such New Notes and that neither the Eligible
Holder nor any such other person is an "affiliate," as defined in Rule 405 under
the Securities Act, of the Company. If the holder is a broker-dealer that will
receive New Notes for its own account in exchange for Old Notes that were
acquired as a result of market-making activities or other trading activities,
such holder by tendering will acknowledge that it will deliver a prospectus in
connection with any resale of such New Notes.
GUARANTEED DELIVERY PROCEDURES
Eligible Holders who wish to tender their Old Notes and (i) whose Old Notes
are not immediately available, or (ii) who cannot deliver their Old Notes and
other required documents to the Exchange Agent or cannot complete the procedure
for book-entry transfer prior to the Expiration Date, may effect a tender if:
(a) the tender is made through an Eligible Institution;
(b) prior to the Expiration Date, the Exchange Agent receives from such
Eligible Institution a properly completed and duly executed Notice of
Guaranteed Delivery (by facsimile transmission, mail or hand delivery)
setting forth the name and address of the Eligible Holder, the certificate
number(s) of such Old Notes (if available) and the principal amount of Old
Notes tendered together with a duly executed Letter of Transmittal (or a
facsimile thereof), stating that the tender is being made thereby and
guaranteeing that, within three business days after the Expiration Date, the
certificate(s) representing
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the Old Notes to be tendered in proper form for transfer (or a confirmation
of a book-entry transfer into the Exchange Agent's account at the Depositary
of Old Notes delivered electronically) and any other documents required by
the Letter of Transmittal will be deposited by the Eligible Institution with
the Exchange Agent; and
(c) such certificate(s) representing all tendered Old Notes in proper
form for transfer (or confirmation of a book-entry transfer into the
Exchange Agent's account at the Depositary of Old Notes delivered
electronically) and all other documents required by the Letter of
Transmittal are received by the Exchange Agent within three business days
after the Expiration Date.
Upon request to the Exchange Agent, a Notice of Guaranteed Delivery will be
sent to Eligible Holders who wish to tender their Old Notes according to the
guaranteed delivery procedures set forth above.
WITHDRAWAL OF TENDERS
Except as otherwise provided herein, tenders of Old Notes may be withdrawn
at any time prior to 5:00 p.m., New York City time, on the Expiration Date,
unless previously accepted for exchange.
To withdraw a tender of Old Notes in the Exchange Offer, a written or
facsimile transmission notice of withdrawal must be received by the Exchange
Agent at its address set forth herein prior to 5:00 p.m., New York City time, on
the Expiration Date, and prior to acceptance for exchange thereof by the
Company. Any such notice of withdrawal must (i) specify the name of the person
having deposited the Old Notes to be withdrawn (the "Depositor"), (ii) identify
the Old Notes to be withdrawn (including the certificate number or numbers and
principal amount of such Old Notes), (iii) be signed by the Depositor in the
same manner as the original signature on the Letter of Transmittal by which such
Old Notes were tendered (including any required signature guarantees) or be
accompanied by documents of transfer sufficient to have the Trustee with respect
to the Old Notes register the transfer of such Old Notes into the name of the
person withdrawing the tender, and (iv) specify the name in which any such Old
Notes are to be registered, if different from that of the Depositor. All
questions as to the validity, form and eligibility (including time of receipt)
of such withdrawal notices will be determined by the Company in its sole
discretion, whose determination shall be final and binding on all parties. Any
Old Notes so withdrawn will be deemed not to have been validly tendered for
purposes of the Exchange Offer, and no New Notes will be issued with respect
thereto unless the Old Notes so withdrawn are validly re-tendered. Any Old Notes
which have been tendered but which are not accepted for exchange or which are
withdrawn will be returned to the holder thereof without cost to such holder as
soon as practicable after withdrawal, rejection of tender or termination of the
Exchange Offer. Properly withdrawn Old Notes may be re-tendered by following one
of the procedures described above under "Procedures for Tendering" or
"Guaranteed Delivery Procedures" at any time prior to the Expiration Date.
CONDITIONS OF THE EXCHANGE OFFER
In addition, and notwithstanding any other term of the Exchange Offer, the
Company will not be required to accept for exchange any Old Notes for any New
Notes tendered and may terminate or amend the Exchange Offer as provided herein
before the acceptance of such Old Notes, if any of the following conditions
exist:
(a) any action or proceeding is instituted or threatened in any court or
by or before any governmental agency or regulatory authority with
respect to the Exchange Offer which, in the sole judgment of the Company,
might materially impair the ability of the Company to proceed with the
Exchange Offer or have a material adverse effect on the contemplated
benefits of the Exchange Offer to the Company; or
(b) there shall have occurred any change, or any development involving a
prospective change, in the business or financial affairs of the
Company or any of its subsidiaries, which in the sole judgment of the
Company, might materially impair the ability of the Company to proceed with
the Exchange Offer or materially impair the contemplated benefits of the
Exchange Offer to the Company; or
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(c) there shall have been proposed, adopted or enacted any law, statute,
rule or regulation which, in the sole judgment of the Company, might
materially impair the ability of the Company to proceed with the Exchange
Offer or have a material adverse effect on the contemplated benefits of the
Exchange Offer to the Company; or
(d) there shall have occurred (i) any general suspension of, shortening
of hours for, or limitation on prices for, trading in securities on
the New York Stock Exchange (whether or not mandatory), (ii) a declaration
of a banking moratorium or any suspension of payments in respect of banks by
Federal or state authorities in the United States (whether or not
mandatory), (iii) a commencement of a war, armed hostilities or other
international or national crisis directly or indirectly involving the United
States, (iv) any limitation (whether or not mandatory) by any governmental
authority on, or other event having a reasonable likelihood of affecting,
the extension of credit by banks or other lending institutions in the United
States, or (v) in the case of any of the foregoing existing at the time of
the commencement of the Exchange Offer, a material acceleration or worsening
thereof.
The foregoing conditions are for the sole benefit of the Company and may be
asserted by the Company regardless of the circumstances giving rise to such
conditions or may be waived by the Company in whole or in part at any time and
from time to time in its sole discretion. If the Company waives or amends the
foregoing conditions, the Company will, if required by applicable law, extend
the Exchange Offer for a minimum of five business days from the date that the
Company first gives notice, by public announcement or otherwise, of such waiver
or amendment, if the Exchange Offer would otherwise expire within such five
business-day period. Any determination by the Company concerning the events
described above will be final and binding upon all parties.
FEES AND EXPENSES
The expenses of soliciting tenders pursuant to the Exchange Offer will be
borne by the Company. The principal solicitation for tenders pursuant to the
Exchange Offer is being made by mail; however, additional solicitation may be
made by telecopy, telephone or in person by officers and regular employees of
the Company and its affiliates.
The Company has not retained any dealer-manager in connection with the
Exchange Offer and will not make any payments to brokers, dealers or others
soliciting acceptances of the Exchange Offer. The Company, however, will pay the
Exchange Agent reasonable and customary fees for its services and will reimburse
it for its reasonable out-of-pocket expenses in connection therewith. The
Company may also pay brokerage houses and other custodians, nominees and
fiduciaries the reasonable out-of-pocket expenses incurred by them in forwarding
copies of this Prospectus, Letters of Transmittal and related documents to the
beneficial owners of the Old Notes and in handling or forwarding tenders for
exchange. The Company will pay the other expenses to be incurred in connection
with the Exchange Offer, including fees and expenses of the Trustee, accounting
and legal fees and printing costs.
The Company will pay all transfer taxes, if any, applicable to the exchange
of Old Notes pursuant to the Exchange Offer. If, however, certificates
representing New Notes or Old Notes for principal amounts not tendered or
accepted for exchange are to be delivered to, or are to be issued in the name
of, any person other than the registered holder of the Old Notes tendered, or if
tendered Old Notes are registered in the name of any person other than the
person signing the Letter of Transmittal, or if a transfer tax is imposed for
any reason other than the exchange of Old Notes pursuant to the Exchange Offer,
then the amount of any such transfer taxes (whether imposed on the registered
holder or any other persons) will be payable by the tendering holder. If
satisfactory evidence of payment of such taxes or exemption therefrom is not
submitted with the Letter of Transmittal, the amount of such transfer taxes will
be billed directly to such tendering holder.
CONSEQUENCES OF FAILURE TO EXCHANGE OLD NOTES
Generally, Eligible Holders (other than any holder who is an "affiliate" of
the Company within the meaning of Rule 405 under the Securities Act) who
exchange their Old Notes for New Notes pursuant to the Exchange Offer may offer
such New Notes for resale, resell such New Notes, and otherwise transfer such
22
<PAGE>
New Notes without compliance with the registration and prospectus delivery
provisions of the Securities Act, provided such New Notes are acquired in the
ordinary course of the holders' business, and such holders have no arrangement
with any person to participate in a distribution of such New Notes. Each
broker-dealer that receives New Notes for its own account in exchange for Old
Notes, where such Old Notes were acquired by such broker-dealer as a result of
market-making activities or other trading activities, must acknowledge that it
will deliver a prospectus in connection with any resale of such New Notes. See
"Plan of Distribution." To comply with the securities laws of certain
jurisdictions, it may be necessary to qualify for sale or register the New Notes
prior to offering or selling such New Notes. Upon request by Eligible Holders
prior to the Exchange Offer, the Company will register or qualify the New Notes
in certain jurisdictions subject to the conditions in the Registration Rights
Agreement. If an Eligible Holder does not exchange such Old Notes for New Notes
pursuant to the Exchange Offer, such Old Notes will continue to be subject to
the restrictions on transfer contained in the legend thereon and will not have
the benefit of any covenant regarding registration under the Securities Act. In
general, the Old Notes may not be offered or sold, unless registered under the
Securities Act, except pursuant to an exemption from, or in a transaction not
subject to, the Securities Act and applicable state securities laws. To the
extent that Old Notes are tendered and accepted in the Exchange Offer, a
holder's ability to sell untendered Old Notes could be adversely affected.
ACCOUNTING TREATMENT
The New Notes will be recorded at the same carrying value as the Old Notes,
as reflected in the Company's accounting records on the date of the exchange.
Accordingly, no gain or loss for accounting purposes will be recognized by the
Company upon the consummation of the Exchange Offer. The expenses of the
Exchange Offer will be amortized by the Company over the term of the New Notes
under generally accepted accounting principles.
EXCHANGE AGENT
Norwest Bank Minnesota, National Association has been appointed as Exchange
Agent for the Exchange Offer. All correspondence in connection with the Exchange
Offer and the Letter of Transmittal should be addressed to the Exchange Agent,
as follows:
<TABLE>
<S> <C> <C>
BY HAND OR OVERNIGHT COURIER: BY MAIL: IN PERSON:
(registered or certified
recommended)
Norwest Bank Minnesota, Norwest Bank Minnesota, Northstar East Bldg.
National Association National Association 608 2nd Avenue S.
Corporate Trust Operations Corporate Trust Operations 12th Floor
Norwest Center P.O. Box 1517 Corporate Trust Ser.
Sixth and Marquette Minneapolis, MN 55480-1517 Minneapolis, MN
Minneapolis, MN 55479-0113
</TABLE>
FACSIMILE NUMBER (FOR ELIGIBLE INSTITUTIONS ONLY)
(612) 667-4927
CONFIRM RECEIPT OF NOTICE
OF GUARANTEED DELIVERY
BY TELEPHONE:
(612) 667-9764
Requests for additional copies of this Prospectus or the Letter of
Transmittal should be directed to the Exchange Agent.
23
<PAGE>
THE ACQUISITION
On May 30, 1996 (the "Closing Date"), the Company acquired substantially all
of the assets of St. Joe Container, and the Mill Joint Venture, a joint venture
between the Company and Stone Container, acquired a 500,000 tons per year
linerboard mill from St. Joe Forest. In 1995, St. Joe Container sold 6.5 billion
square feet of corrugated packaging materials and generated $326.7 million in
net sales, $3.3 million in net income and $11.5 million in EBITDA. The purchase
price for the St. Joe Container facilities was $87.8 million for the fixed
assets, plus approximately $69.7 million for working capital, for a total
purchase price of $157.5 million, subject to adjustment for changes in working
capital and certain other items subsequent to June 30, 1995. The purchase price
for the St. Joe Mill was $185.0 million for the fixed assets, plus approximately
$17.4 million for working capital, for a total purchase price of $202.4 million,
subject to adjustment for changes in working capital and certain other items
subsequent to June 30, 1995. The Company acquired a 50.0% equity interest in the
Mill Joint Venture for $5.0 million.
The Acquisition Agreement contains customary representations, warranties and
covenants. The Company, on the one hand, and St. Joe Container and St. Joe
Paper, on the other hand, also agreed to indemnify one another and their
respective affiliates for breaches of representations and warranties contained
in the Acquisition Agreement, PROVIDED that claims with respect thereto (other
than environmental claims) are asserted on or before September 30, 1997. In
addition, pursuant to the terms of the Acquisition Agreement, St. Joe Container
and St. Joe Paper, agreed to indemnify and reimburse the Company and its
affiliates for all losses arising from breaches of covenants and agreements in
the Acquisition Agreement, all retained liabilities, liens other than permitted
liens and certain other matters as specified in the Acquisition Agreement. In
turn, the Company agreed to indemnify and reimburse St. Joe Container and its
affiliates for all losses arising from breaches of covenants and agreements of
the Company in the Acquisition Agreement, all assumed liabilities and certain
other matters as specified in the Acquisition Agreement. There are no dollar
limitations as to the foregoing indemnification obligations.
The Paper Indemnitors (as defined in the Acquisition Agreement) agreed to
indemnify the Company and the Mill Joint Venture, to the extent permissible by
law, for on-site environmental claims arising from the operation of the St. Joe
Container facilities and the St. Joe Mill prior to the consummation of the
Acquisition up to a maximum of $10.0 million of the first $17.5 million of
costs, subject to certain exceptions and limitations. The Company and the Mill
Joint Venture will be required to fund $7.5 million of the first $17.5 million
of any such costs, and any costs in excess of $17.5 million will not be
indemnified by the Paper Indemnitors. The obligations of the Paper Indemnitors
with respect to on-site environmental liabilities will terminate in the event
the Company or the Mill Joint Venture is subject to a "change of control" (as
defined in the Acquisition Agreement). Pursuant to an Indemnification
Reimbursement Agreement between the Company and the Mill Joint Venture (the
"Indemnification Reimbursement Agreement"), the benefit of indemnification from
the Paper Indemnitors with respect to such environmental liabilities will be
allocated 80.0% to the Mill Joint Venture and 20.0% to the Company, with the
Company or the Mill Joint Venture being obligated, under certain circumstances,
to reimburse each other in the event either recovers more than its allocated
percentage share. See "Business--Environmental Matters."
On the Closing Date, the Company entered into certain agreements with Stone
Container and the Mill Joint Venture. Pursuant to an Output Purchase Agreement,
Stone Container and the Company will each purchase from the Mill Joint Venture
one-half of the St. Joe Mill's entire linerboard production, which will
represent approximately one-third of the Company's total requirements, at a
price that is $25 per ton below the price of such product published in PULP &
PAPER WEEK under the section entitled "Price Watch: Paper and Paperboard,"
subject to a minimum purchase price, which minimum purchase price is intended to
generate sufficient funds to cover cash operating costs, cash interest expense
and maintenance capital expenditures. The Mill Joint Venture must also use its
best efforts to operate the St. Joe Mill at a production rate not less than the
average capacity utilization rate of domestic linerboard producers.
Pursuant to the Subordinated Credit Facility, the Company and Stone
Container each will provide the Mill Joint Venture with up to $10.0 million of
subordinated indebtedness, if needed, on a revolving credit basis for general
corporate purposes.
24
<PAGE>
CAPITALIZATION
The following table sets forth the consolidated capitalization of the
Company as of April 30, 1996 on an actual basis and as adjusted to give effect
to the Acquisition and the financings therefor. This table should be read in
conjunction with the other financial information appearing elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
ACTUAL ADJUSTMENTS AS ADJUSTED
--------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Current maturities of long-term debt........................................ $ 4,158 $ (1,151) $ 3,007
--------- ----------- -----------
--------- ----------- -----------
Long-term debt:
Credit Facility (1)....................................................... $ -- $ 16,731 $ 16,731
Notes..................................................................... -- 170,000 170,000
Existing indebtedness..................................................... 33,279 (23,068) 10,211
--------- ----------- -----------
Total long-term debt.................................................... 33,279 163,663 196,942
--------- ----------- -----------
Stockholder's equity:
Common stock, $0.125 par value, 10,000,000 shares authorized, 7,229,770
shares issued and 6,815,867 shares outstanding........................... 904 -- 904
Additional paid-in capital................................................ 117 600(2) 717
Retained earnings......................................................... 13,334 13,334
Treasury stock............................................................ (962) -- (962)
--------- ----------- -----------
Total stockholder's equity.............................................. 13,393 600 13,993
--------- ----------- -----------
Total capitalization.................................................. $ 46,672 $ 164,263 $ 210,935
--------- ----------- -----------
--------- ----------- -----------
</TABLE>
- ------------------------
(1) The Credit Facility will provide up to $80.0 million on a revolving basis,
subject to borrowing base limitations. See "Description of Credit Facility."
(2) For the purpose of this presentation, the Company valued warrants that were
issued to the Initial Purchaser in connection with the Acquisition at $0.6
million.
25
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA
The following selected historical financial data have been derived from the
consolidated financial statements of the Company. The data as of and for each
fiscal year in the three-year period ended July 31, 1993 are derived from the
consolidated financial statements of the Company audited by KPMG Peat Marwick
LLP, independent certified public accountants, whose report with respect to the
fiscal year ended July 31, 1993 is included elsewhere in this Prospectus. The
data as of and for the fiscal years ended July 31, 1994 and 1995 are derived
from the consolidated financial statements of the Company audited by BDO
Seidman, LLP, independent certified public accountants, whose report thereon is
included elsewhere in this Prospectus. The data as of and for the nine months
ended April 30, 1995 and 1996 and the twelve months ended April 30, 1996 are
derived from the Company's unaudited consolidated financial statements, which,
in the opinion of management, include all adjustments (consisting of only normal
recurring adjustments) necessary for a fair presentation of the information set
forth therein. The results of operations for the nine months ended April 30,
1996 are not necessarily indicative of the results that may be expected for the
full year. The following data should be read in conjunction with the Company's
consolidated financial statements and related notes, "Management's Discussion
and Analysis of Financial Condition and Results of Operations," and the other
financial information included elsewhere herein.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
TWELVE
FISCAL YEAR ENDED JULY 31, APRIL 30, MONTHS ENDED
----------------------------------------------------- -------------------- APRIL 30,
1991 1992 1993 1994 1995 1995 1996 1996
--------- --------- --------- --------- --------- --------- --------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales........................ $ 189,661 $ 203,179 $ 214,936 $ 228,563 $ 271,994 $ 213,723 $ 164,736 $ 223,007
Cost of goods sold............... 166,812 178,189 192,208 205,025 232,154 181,870 141,973 192,257
--------- --------- --------- --------- --------- --------- --------- -------------
Gross profit..................... 22,849 24,990 22,728 23,538 39,840 31,853 22,763 30,750
Selling, general and
administrative expenses......... 20,379 23,663 21,813 22,018 19,703 15,810 11,664 15,557
--------- --------- --------- --------- --------- --------- --------- -------------
Income from operations........... 2,470 1,327 915 1,520 20,137 16,043 11,099 15,193
Other income..................... 755 5,917 3,651 126 1,927 1,761 -- 166
Interest expense................. 6,431 5,903 4,948 5,448 5,607 4,672 2,697 3,632
--------- --------- --------- --------- --------- --------- --------- -------------
Income (loss) before provision
(benefit) for income taxes,
minority interest and
extraordinary gain on early
retirement of debt.............. (3,206) 1,341 (382) (3,802) 16,457 13,132 8,402 11,727
Minority interest................ 274 94 -- (180) (146) -- -- (146)
Provision (benefit) for income
taxes........................... (655) 832 453 (325) 5,483 4,350 3,658 4,791
Extraordinary gain on early
retirement of debt.............. -- 321 -- 381 2,219 2,219 -- --
--------- --------- --------- --------- --------- --------- --------- -------------
Net income (loss)................ $ (2,277) $ 924 $ (835) $ (3,276) $ 13,047 $ 11,001 $ 4,744 $ 6,790
--------- --------- --------- --------- --------- --------- --------- -------------
--------- --------- --------- --------- --------- --------- --------- -------------
OTHER FINANCIAL DATA:
Ratio of earnings to fixed
charges (1)..................... 0.7x 1.1x 1.0x 0.5x 3.3x 3.3x 3.2x 3.3x
EBITDA (2)....................... $ 7,675 $ 6,664 $ 6,209 $ 6,796 $ 25,382 $ 20,033 $ 13,951 $ 19,300
Net cash provided by (used in)
operating activities (3)........ 7,030 3,615 8,860 4,794 (2,217) (5,065) 7,319 9,432
Net cash provided by (used in)
investing activities............ (2,723) 3,733 (4,135) (9,126) (1,975) (1,235) (2,704) (3,207)
Net cash (used in) provided by
financing activities............ (4,234) (8,336) (3,841) 5,182 3,518 5,079 (3,892) (5,482)
Depreciation and amortization.... $ 5,205 $ 5,337 $ 5,294 $ 5,276 $ 5,245 $ 3,990 $ 2,852 $ 4,107
Capital expenditures............. 2,064 2,862 3,935 3,916 3,690 2,950 4,281 5,021
Adjusted net sales (4)........... 126,580 139,116 153,857 155,869 212,562 158,380 154,919 209,101
Adjusted EBITDA (4).............. 3,283 3,110 2,196 3,926 24,210 20,715 16,884 20,379
</TABLE>
<TABLE>
<CAPTION>
AS OF
AS OF JULY 31, APRIL 30,
----------------------------------------------------- --------------------
1991 1992 1993 1994 1995 1995 1996
--------- --------- --------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital..................................... $ 4,984 $ 11,573 $ 10,413 $ 8,903 $ 14,504 $ 7,853 $ 12,925
Property, plant and equipment, net.................. 40,148 37,636 36,052 36,536 27,044 27,183 34,977
Total assets........................................ 91,444 85,744 79,716 93,933 73,137 77,113 77,254
Total long-term debt................................ 41,646 44,285 40,993 44,105 30,998 29,199 33,279
Stockholder's equity................................ 4,465 5,389 4,554 1,278 8,649 5,798 13,393
</TABLE>
- ------------------------------
(1) For purposes of calculating the ratio of earnings to fixed charges,
earnings consist of earnings (loss) before provision (benefit) for income
taxes, minority interest and extraordinary gain on early retirement of debt
plus fixed charges, and fixed charges consist of interest expense plus that
portion of rental payments on operating leases deemed representative of the
interest factor.
(2) EBITDA represents income from operations before interest expense, provision
(benefit) for income taxes and depreciation and amortization. EBITDA
provides information regarding a company's ability to service and/or incur
debt. EBITDA should not be considered in isolation or as a substitute for
net income, cash flows from operations, or other consolidated income or
cash flow data prepared in accordance with generally accepted accounting
principles or as a measure of a company's profitability or
26
<PAGE>
liquidity. EBITDA is not intended to disclose excess funds available for
reinvestment because other commitments and obligations exist, including,
but not limited to, principal repayment obligations and lease commitments,
that are not considered in the calculation of EBITDA. See Notes 6, 11 and
12 to the Company's financial statements.
(3) Material differences between EBITDA and net cash provided by or used in
operating activities may occur because of the inherent differences in each
such calculation including (a) the change in operating assets and
liabilities between the beginning and end of each period, as well as
certain non-cash items which are considered when presenting net cash
provided by or used in operating activities but are not used when
calculating EBITDA and (b) interest expense, provision for income taxes and
other income or expense which are included when presenting net cash
provided by or used in operating activities but are not included in the
calculation of EBITDA. EBITDA is a measure used as part of the covenants of
the Credit Facility.
(4) Adjusted to exclude the results of Fonda and Flint.
27
<PAGE>
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL DATA
On November 1, 1995, the Company entered into the Acquisition Agreement
pursuant to which on May 30, 1996 (i) the Company acquired substantially all of
the assets of St. Joe Container and (ii) the Mill Joint Venture acquired the St.
Joe Mill. The purchase price for the St. Joe Container facilities was $87.8
million for the fixed assets, plus approximately $69.7 million for working
capital, for a total purchase price of $157.5 million, subject to adjustment for
changes in working capital described herein. The purchase price for the St. Joe
Mill was $185.0 million for the fixed assets, plus approximately $17.4 million
for working capital, for a total purchase price of $202.4 million, subject to
adjustment for changes in working capital described herein. The Company acquired
a 50.0% equity interest in the Mill Joint Venture for $5.0 million.
In addition, on August 16, 1996, Box USA Group, Inc. ("Box USA"), a
wholly-owned subsidiary of the Company, discontinued its operations at its
Flint, Michigan facility and disposed of substantially all of the machinery and
equipment, finished goods and work-in-progress inventory and certain related
assets utilized at such facility for a purchase price of approximately $2.6
million. Box USA retained all accounts receivable, accounts payable and raw
material inventory. The equipment was transferred pursuant to a like-kind
exchange within the meaning of section 1031 of the Code.
The following unaudited pro forma combined condensed financial data as of
April 30, 1996 and for the fiscal year ended July 31, 1995 and the nine and
twelve months ended April 30, 1996 (the "Pro Forma Financial Statements") are
derived from the Company's consolidated financial statements as of April 30,
1996 and for the fiscal year ended July 31, 1995 and the nine and twelve months
ended April 30, 1996 and the financial statements of St. Joe Container as of
March 31, 1996 and for the twelve months ended June 30, 1995 and the nine and
twelve months ended March 31, 1996. The Pro Forma Financial Statements give
effect to the Acquisition and the closing of Flint, as if such transactions had
occurred on April 30, 1996, in the case of the balance sheet data, on August 1,
1994 in the case of the statement of operations data for the twelve months ended
July 31, 1995, and the nine months ended April 30, 1996, and on May 1, 1995 in
the case of the statement of operations data for the twelve months ended April
30, 1996. In addition, the pro forma statement of operations data for the twelve
months ended July 31, 1995, reflect the disposition of Fonda as if such
disposition had occurred on August 1, 1994. The Pro Forma Financial Statements
do not give effect to the disposition of three individually insignificant
converting facilities. See Note (a) of the Notes to the Unaudited Pro Forma
Combined Condensed Financial Data. The pro forma adjustments are based upon
available information and certain assumptions that the Company believes are
reasonable. The Pro Forma Financial Statements do not purport to represent what
the Company's results of operations or financial position would actually have
been had the Acquisition in fact occurred on such dates or to project results of
operations for or at any future period or date. The Pro Forma Financial
Statements should be read in conjunction with "Capitalization," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the financial statements of the Company and St. Joe Container and the notes
thereto included elsewhere in this Prospectus.
The Acquisition has been accounted for under the purchase method of
accounting. The total purchase price for the Acquisition was allocated to the
assets and liabilities acquired based upon their relative fair values at the
closing date, based upon valuation and other studies which are not yet complete.
The allocation of the purchase price reflected herein is subject to revision
when additional information from the valuations and studies become available.
The Company does not expect that the effects of the final allocation will differ
materially from those set forth herein. The Mill Joint Venture will be accounted
for under the equity method of accounting.
28
<PAGE>
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
AS OF
AS OF AS OF APRIL 30,
APRIL 30, MARCH 31, 1996 1996
1996 ST. JOE PRO FORMA
FOUR M CONTAINER ADJUSTMENTS COMBINED
------------- ---------------- -------------- -------------
<S> <C> <C> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents.................... $ 1,949 $ 871 $ (871)(a) $ 1,949
Accounts receivable, net..................... 21,997 28,837 (124)(d) 50,710
Inventories.................................. 11,019 30,128 21,824(b) 47,095
(15,876)(d)
Other current assets......................... 3,285 687 (687)(a) 3,285
------------- ------- -------------- -------------
Total current assets..................... 38,250 60,523 4,266 103,039
Property, plant and equipment, net............. 34,977 35,298 54,891(b) 125,166
Goodwill and other intangibles, net............ 987 -- -- 987
Other assets................................... 3,040 128 (128)(a) 11,840
8,800(b)
Long-term investment........................... -- 3,113 2,137(b) 5,250
Investment in Mill Joint Venture............... -- -- 5,000(b) 5,000
------------- ------- -------------- -------------
$ 77,254 $ 99,062 $ 74,966 $ 251,282
------------- ------- -------------- -------------
------------- ------- -------------- -------------
LIABILITIES AND STOCKHOLDER'S EQUITY:
Current liabilities:
Accounts payable and accrued liabilities..... $ 21,167 $ 9,748 $ (1,659)(a) $ 27,083
(2,173)(d)
2,971(c)
(2,971)(d)
Current maturities of long-term debt......... 4,158 -- (1,151)(c) 3,007
------------- ------- -------------- -------------
Total current liabilities................ 25,325 9,748 (4,983) 30,090
Long-term debt less current maturities:
Credit Facility.............................. -- -- 27,587(c) 16,731
(10,856)(d)
Notes........................................ -- -- 170,000(c) 170,000
Existing indebtedness........................ 33,279 -- (23,068)(c) 10,211
Deferred income taxes.......................... 4,410 4,234 (4,234)(a) 4,410
Other liabilities.............................. 847 1,939 (1,939)(a) 5,847
5,000(b)
------------- ------- -------------- -------------
Total liabilities........................ 63,861 15,921 157,507 237,289
------------- ------- -------------- -------------
Stockholder's equity:
Common stock................................. 904 -- -- 904
Additional paid-in capital................... 117 -- 600(c) 717
Equity in net assets......................... -- 81,318 (81,318) --
Net unrealized gain on marketable equity
securities.................................. -- 1,823 (1,823)(a) --
Retained earnings............................ 13,334 -- -- 13,334
Treasury stock............................... (962) -- -- (962)
------------- ------- -------------- -------------
Total stockholder's equity............... 13,393 83,141 (82,541) 13,993
------------- ------- -------------- -------------
$ 77,254 $ 99,062 $ 74,966 $ 251,282
------------- ------- -------------- -------------
------------- ------- -------------- -------------
</TABLE>
See accompanying notes to Unaudited Pro Forma Combined Condensed Balance Sheet.
29
<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
(a) Reflects the elimination of assets and liabilities of St. Joe Container that
were retained by St. Joe Container and therefore are excluded in the
Acquisition as follows:
<TABLE>
<CAPTION>
(DOLLARS IN
THOUSANDS)
-----------
<S> <C>
Cash and cash equivalents................................................................... $ 871
Other current assets........................................................................ 687
Other assets................................................................................ 128
Accrued liabilities......................................................................... (1,659)
Deferred taxes.............................................................................. (4,234)
Non-current workers compensation reserves................................................... (1,939)
Net unrealized gain on marketable equity securities......................................... (1,823)
-----------
Net liabilities excluded................................................................ $(7,969)
-----------
-----------
</TABLE>
(b) The Acquisition was accounted for as a purchase in accordance with
Accounting Principles Board Opinion No. 16, "Business Combinations,"
pursuant to which the purchase price has been allocated to the acquired
assets and liabilities based upon their relative fair values as of the
Closing Date.
The following table sets forth the Company's preliminary allocation of the
purchase price of the Acquisition:
<TABLE>
<CAPTION>
ASSETS CARRYING
ACQUIRED VALUE ADJUSTMENT
---------- --------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Accounts receivable, net............................................ $ 28,837 $ 28,837 $ --
Inventories, net.................................................... 30,128 30,128 --
Reversal of LIFO reserve............................................ 21,824 -- 21,824
Property plant and equipment, net................................... 90,189 35,298 54,891
Long-term investment................................................ 5,250 3,113 2,137
Deferred financing costs............................................ 8,800 -- 8,800
Investment in Mill Joint Venture.................................... 5,000 -- 5,000
Accounts payable and accrued liabilities............................ (8,089) (8,089) --
Acquisition related provisions (1).................................. (5,000) -- (5,000)
---------- --------- -----------
$176,939 $89,287 $87,652
---------- --------- -----------
---------- --------- -----------
</TABLE>
(c) Reflects the financing of the Acquisition as follows:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
----------------------
<S> <C> <C>
Notes........................................................................... $ 170,000
Credit Facility................................................................. 27,587
Refinancing of existing indebtedness -- current................................. $ (1,151)
Refinancing of existing indebtedness -- noncurrent.............................. (23,068) (24,219)
----------
Warrants issued to the Initial Purchaser (2).................................... 600
Additional consideration based on working capital at March 31, 1996 (3)......... 2,971
----------
$ 176,939
----------
----------
</TABLE>
- ------------------------------
(1) Includes the following provisions: (i) professional costs incurred with
respect to the Acquisition, (ii) reserve for plant closure, and (iii)
severance/relocation accrual.
(2) For the purpose of this presentation, the Company has valued warrants that
were issued to the Initial Purchaser in connection with the Acquisition at
$0.6 million.
(3) The Acquisition Agreement provides for a post-closing adjustment to adjust
for actual working capital acquired at Closing. The acquisition of working
capital as of March 31, 1996 results in an assumed purchase price
adjustment of $3.0 million. (See note (d) for subsequent amendment to
assumed purchase price based on the closing balance sheet delivered by St.
Joe Container.)
30
<PAGE>
(d) St. Joe Container has delivered to the Company its preliminary balance sheet
as of May 30, 1996 and, based on such balance sheet, has paid approximately
$13.8 million to the Company as the purchase price adjustment. The purchase
price adjustment is reflected in the working capital components of the pro
forma balance sheet as follows:
<TABLE>
<S> <C>
Reduction of accounts receivable, net...................................... $ 124
Reduction of inventories, net.............................................. 15,876
---------
Reduction of accounts payable and accrued liabilities...................... (2,173)
---------
Net adjustment to working capital (1).................................... $ 13,827
---------
---------
</TABLE>
The purchase price adjustment is reflected in the financing components of
the Acquisition as follows:
<TABLE>
<S> <C>
Reduction of Credit Facility............................................... $ 10,856
Reduction in additional consideration based on working capital at March 31,
1996...................................................................... 2,971
---------
$ 13,827
---------
---------
</TABLE>
- ------------------------
(1) The Company believes that this amount is understated and has notified St.
Joe Paper of its position pursuant to the Acquisition Agreement.
31
<PAGE>
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL DATA
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
TWELVE MONTHS
FISCAL YEAR ENDED JUNE 30,
ENDED JULY 1995 ADJUSTMENTS
31, 1995 --------------- FOR
------------- ST. JOE DISPOSED ACQUISITION PRO FORMA
FOUR M CONTAINER OPERATIONS(A) ADJUSTMENTS COMBINED
------------- --------------- -------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS DATA:
Net sales.................................... $ 271,994 $ 322,118 $ (59,432) $ -- $ 534,680
Cost of goods sold........................... 232,154 291,370 (51,921) (29,271)(b) 442,332
------------- --------------- -------------- ----------- -----------
Gross profit................................. 39,840 30,748 (7,511) 29,271 92,348
Selling, general and administrative
expenses.................................... 19,703 23,458 (7,323) 1,009(c) 36,847
------------- --------------- -------------- ----------- -----------
Income from operations....................... 20,137 7,290 (188) 28,262 55,501
Other income................................. 1,927 2,071 176 -- 4,174
Interest expense............................. 5,607 539 (1,308) 19,120(d) 23,958
------------- --------------- -------------- ----------- -----------
Income before provision for income taxes,
minority interest and extraordinary gain on
early retirement of debt.................... 16,457 8,822 1,296 9,142 35,717
Minority interest............................ (146) -- -- -- (146)
Provision for income taxes................... 5,483 3,127 437 3,657(e) 12,704
------------- --------------- -------------- ----------- -----------
Net income before extraordinary gain on early
retirement of debt.......................... $ 10,828 $ 5,695 $ 859 $ 5,485 $ 22,867
------------- --------------- -------------- ----------- -----------
------------- --------------- -------------- ----------- -----------
OTHER FINANCIAL DATA:
Ratio of earnings to fixed charges........... -- -- -- -- 2.4x(f)
EBITDA....................................... $ 25,382 $ 15,177 $ (1,172) $ 28,962 $ 68,349
Ratio of EBITDA to interest expense.......... -- -- -- -- 2.9x(g)
Depreciation and amortization................ $ 5,245 $ 7,887 $ (984) $ 700 $ 12,848
Capital expenditures......................... 3,690 4,603 (239) -- 8,054
OPERATING DATA:
Corrugated Converting Operations:
Million square feet sold................... 3,794 7,201 (241) -- 10,754
Average production per day (tons).......... 1,133 1,969 (92) -- 3,010
Plants at period end....................... 13 16 (1) -- 28
Ft. Madison Mill Operations:
Tons sold.................................. 75,872 -- -- -- 75,872
Average production per day (tons).......... 217 -- -- -- 217
</TABLE>
See accompanying notes to Unaudited Pro Forma Combined Condensed Financial Data.
32
<PAGE>
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL DATA
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS
NINE MONTHS ENDED
ENDED APRIL MARCH 31, 1996 ADJUSTMENTS
30, 1996 --------------- FOR
------------- ST. JOE DISPOSED ACQUISITION PRO FORMA
FOUR M CONTAINER OPERATIONS(A) ADJUSTMENTS COMBINED
------------- --------------- ------------- -------------- -----------
<S> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS DATA:
Net sales.................................. $ 164,736 $ 228,983 $ (9,817) $ -- $ 383,902
Cost of goods sold......................... 141,973 218,759 (11,841) (12,311)(b) 336,580
------------- --------------- ------------- -------------- -----------
Gross profit............................... 22,763 10,224 2,024 12,311 47,322
Selling, general and administrative
expenses.................................. 11,664 18,020 (891) 757(c) 29,550
------------- --------------- ------------- -------------- -----------
Income from operations..................... 11,099 (7,796) 2,915 11,554 17,772
Other income (expense)..................... -- (64) (4) -- (68)
Interest expense........................... 2,697 84 (155) 15,343(d) 17,969
------------- --------------- ------------- -------------- -----------
Income (loss) before provision (benefit)
for income taxes and extraordinary gain on
early retirement of debt.................. 8,402 (7,944) 3,066 (3,789) (265)
Provision (benefit) for income taxes....... 3,658 (2,815) 1,334 (1,515)(e) 662
------------- --------------- ------------- -------------- -----------
Net income (loss) before extraordinary gain
on early retirement of debt............... $ 4,744 $ (5,129) $ 1,732 $ (2,274) $ (927)
------------- --------------- ------------- -------------- -----------
------------- --------------- ------------- -------------- -----------
OTHER FINANCIAL DATA:
Ratio of earnings to fixed charges......... -- -- -- -- 1.0x(f)
EBITDA..................................... $ 13,951 $ (1,978) $ 2,779 $ 12,079 $ 26,831
Ratio of EBITDA to interest expense........ -- -- -- 1.5x(g)
Depreciation and amortization.............. $ 2,852 $ 5,818 $ (136) $ 525 $ 9,059
Capital expenditures....................... 4,281 456 (78) -- 4,659
OPERATING DATA:
Corrugated Converting Operations:
Million square feet sold................. 2,629 4,607 (120) -- 7,116
Average production per day (tons)........ 967 1,759 (64) -- 2,662
Plants at period end..................... 12 16 (1) -- 27
Ft. Madison Mill Operations:
Tons sold................................ 58,982 -- -- -- 58,982
Average production per day (tons)........ 214 -- -- -- 214
</TABLE>
See accompanying notes to Unaudited Pro Forma Combined Condensed Financial Data.
33
<PAGE>
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL DATA
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
TWELVE MONTHS
TWELVE MONTHS ENDED
ENDED APRIL MARCH 31, 1996 ADJUSTMENTS
30, 1996 --------------- FOR
------------- ST. JOE DISPOSED ACQUISITION PRO FORMA
FOUR M CONTAINER OPERATIONS(A) ADJUSTMENTS COMBINED
------------- --------------- -------------- ------------ -----------
<S> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS DATA:
Net sales.................................. $ 223,007 $ 315,506 $ (13,906) $ -- $ 524,607
Cost of goods sold......................... 192,257 293,808 (14,536) (19,350 (b) 452,179
------------- --------------- -------------- ------------ -----------
Gross profit............................... 30,750 21,698 630 19,350 72,428
Selling, general and administrative
expenses.................................. 15,557 23,578 (1,281) 1,009(c) 38,863
------------- --------------- -------------- ------------ -----------
Income from operations..................... 15,193 (1,880) 1,911 18,341 33,565
Other income............................... 166 1,878 1,085 -- 3,129
Interest expense........................... 3,632 205 (205) 20,326(d) 23,958
------------- --------------- -------------- ------------ -----------
Income (loss) before provision (benefit)
for income taxes, minority interest and
extraordinary gain on early retirement of
debt...................................... 11,727 (207) 3,201 (1,985) 12,736
Minority interest.......................... (146) -- -- -- (146)
Provision (benefit) for income taxes....... 4,791 (73) 1,307 (794 (e) 5,231
------------- --------------- -------------- ------------ -----------
Net income (loss) before extraordinary gain
on early retirement of debt............... $ 6,790 $ (134) $ 1,894 $ (1,191) $ 7,359
------------- --------------- -------------- ------------ -----------
------------- --------------- -------------- ------------ -----------
OTHER FINANCIAL DATA:
Ratio of earnings to fixed charges......... -- -- -- -- 1.5x(f)
EBITDA..................................... $ 19,300 $ 5,894 $ 1,753 $ 19,041 $ 45,988
Ratio of EBITDA to interest expense........ -- -- -- 1.9x(g)
Depreciation and amortization.............. $ 4,107 $ 7,774 $ (158) $ 700 $ 12,423
Capital expenditures....................... 5,021 470 (357) -- 5,134
OPERATING DATA:
Corrugated Converting Operations:
Million square feet sold................. 3,476 6,284 (167) -- 9,593
Average production per day (tons)........ 1,080 1,705 (77) -- 2,708
Plants at period end..................... 12 16 (1) -- 27
Ft. Madison Mill Operations:
Tons sold................................ 77,586 -- -- -- 77,586
Average production per day (tons)........ 213 -- -- -- 213
</TABLE>
See accompanying notes to Unaudited Pro Forma Combined Condensed Financial Data.
34
<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL DATA
(a) Reflects elimination of the results of operations of Fonda, which was spun
off in March 1995, and Flint, which will be closed in 1996. The Company
historically has allocated general and administrative expenses to the
disposed operations; however, these allocated expenses were not eliminated
in the Pro Forma Financial Statements. In addition, interest expense that
was allocated to the disposed operations was limited to the interest on debt
of the disposed operations that was assumed or paid by the buyer. The Pro
Forma Financial Statements do not give effect to the disposition of three
individually insignificant converting facilities which together generated
net sales, net income and EBITDA as follows:
<TABLE>
<CAPTION>
FISCAL YEAR
ENDED NINE MONTHS TWELVE MONTHS
JULY 31, ENDED ENDED
1995 APRIL 30, 1996 APRIL 30, 1996
------------ --------------- ---------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Net sales............................................. $ 17,211 $ 1,398 $ 4,910
Net income............................................ 235 58 (368)
EBITDA................................................ 908 78 (806)
</TABLE>
(b) Reflects (i) cost savings at the acquired facilities based on the Output
Purchase Agreement, pursuant to which the Company will purchase
approximately 250,000 tons of linerboard at a cost of $25 per ton below the
price reported in PULP & PAPER WEEK, subject to a minimum purchase price,
which minimum purchase price is intended to generate sufficient funds to
cover cash operating costs, cash interest expense and maintenance capital
expenditures; however, in the event such purchase price is adjusted pursuant
to the Output Purchase Agreement, the Company's costs of goods sold will
increase accordingly to reflect the impact of this increased purchase price
(while the St. Joe Mill has a maximum output capacity of 500,000 tons and
the Company is required to purchase half of such output, the Mill's entire
production may not reach the 500,000 ton capacity level under the Output
Purchase Agreement), (ii) cost savings at the acquired facilities relating
to the purchase by the Company of the remainder of its linerboard
requirements at an average price paid by the Company, (iii) estimated
increased costs of providing benefits for hourly employees at the acquired
facilities, (iv) reduced cost of goods sold resulting from the restatement
of St. Joe Container's results of operations from the last-in first-out
("LIFO") method to the first-in first-out ("FIFO") method and (v) increased
depreciation and amortization based upon the preliminary purchase price
allocation of the Acquisition. The following table summarizes these
adjustments:
<TABLE>
<CAPTION>
FISCAL YEAR NINE MONTHS
ENDED ENDED TWELVE MONTHS
JULY 31, APRIL 30, ENDED
1995 1996 APRIL 30, 1996
------------ ------------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Reduction in raw material prices to reflect the Output
Purchase Agreement (1).................................... $ (5,500) $ (3,861) $ (5,291)
Reduction in raw material prices to reflect prices paid by
the Company (2)........................................... (12,712) (10,069) (12,013)
Increase in cost of pension benefits to hourly employees... 639 479 639
Effect on cost of goods sold of change from
LIFO to FIFO.............................................. (12,398) 615 (3,385)
Increase in depreciation expense resulting from preliminary
purchase price allocation................................. 700 525 700
------------ ------------- --------------
Total adjustments...................................... $ (29,271) $ (12,311) $ (19,350)
------------ ------------- --------------
------------ ------------- --------------
</TABLE>
- ------------------------
(1) For the twelve months ended April 30, 1996, on a pro forma basis giving
effect to the Output Purchase Agreement, the Company would have purchased
linerboard from the Mill Joint Venture at a cost of $25 per ton below the
price reported in PULP & PAPER WEEK. However, there can be no assurance
that the purchase price will not have to be increased pursuant to the
Output Purchase
35
<PAGE>
Agreement. Although the current cash operating costs, cash interest costs
and maintenance capital expenditures will not remain constant, assuming
that they do, the Company believes that the purchase price would have to be
increased in the event the price of linerboard published in PULP & PAPER
WEEK falls below approximately $335 per ton.
(2) Pursuant to current vendor agreements, the Company has the capacity to
purchase the remainder of its linerboard requirements at prices below those
reported in PULP & PAPER WEEK. Historically, St. Joe Container purchased
all its linerboard from its parent, St. Joe Forest Products Company, at
prices published in PULP & PAPER WEEK, which are not indicative of prices
at which such quantities of linerboard are typically purchased.
(c) Reflects the elimination of corporate overhead charges allocated to St. Joe
Container by St. Joe Paper and the Company's estimate of incremental
overhead expenses that will be incurred following the Acquisition, as
follows:
<TABLE>
<CAPTION>
FISCAL YEAR NINE MONTHS TWELVE MONTHS
ENDED ENDED ENDED
JULY 31, 1995 APRIL 30, 1996 APRIL 30, 1996
------------- --------------- ---------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Reversal of St. Joe Container corporate charges............ $ (931) $ (698) $ (931)
Estimated incremental corporate overhead expense (1)....... 1,940 1,455 1,940
------ ----- ------
$ 1,009 $ 757 $ 1,009
------ ----- ------
------ ----- ------
</TABLE>
- ------------------------------
(1) Reflects hiring of approximately 22 additional personnel as a result of the
Acquisition.
(d) Reflects the elimination of historical interest expense and the addition of
the interest expense resulting from the pro forma capitalization of the
Company, as follows:
<TABLE>
<CAPTION>
FISCAL YEAR NINE MONTHS
ENDED ENDED TWELVE MONTHS
JULY 31, APRIL 30, ENDED
1995 1996 APRIL 30, 1996
------------ ------------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Notes at 12%............................................... $ 20,400 $ 15,300 $ 20,400
Credit Facility at an assumed rate of 8.5%................. 1,422 1,067 1,422
Existing indebtedness at weighted average interest rate of
9.5%...................................................... 1,256 942 1,256
------------ ------------- -------
Cash interest expense...................................... 23,078 17,309 23,078
Amortization of financing costs............................ 880 660 880
------------ ------------- -------
Pro forma interest expense................................. 23,958 17,969 23,958
Less historical interest expense........................... (4,838) (2,626) (3,632)
------------ ------------- -------
Total adjustments...................................... $ 19,120 $ 15,343 $ 20,326
------------ ------------- -------
------------ ------------- -------
</TABLE>
(e) Reflects the cumulative tax effect of the pro forma adjustments at an
effective rate of 40.0%.
(f) For purposes of calculating the ratio of earnings to fixed charges, earnings
consist of earnings (loss) before provision (benefit) for income taxes,
minority interest and extraordinary gain on early retirement of debt plus
fixed charges, and fixed charges consist of interest expense plus that
portion of rental payments on operating leases deemed representative of the
interest factor.
(g) Interest expense excludes the amortization of debt issuance costs of
$880,000, $660,000 and $880,000 for pro forma Fiscal 1995, the pro forma
nine months ended April 30, 1996 and the pro forma twelve months ended April
30, 1996, respectively.
36
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
The following discussion and analysis should be read in conjunction with the
financial statements of the Company and the notes thereto included elsewhere in
this Prospectus.
The markets for corrugated packaging materials produced by the Company are
generally subject to changes in industry capacity and cyclical changes in the
economy, both of which can significantly impact the Company's profitability. The
ability of the Company to sustain profitability during cyclical fluctuations in
corrugating packaging material markets is dependent upon the Company's ability
to maintain value-added margins (net sales less the cost of raw materials). For
corrugated packaging material manufacturers, raw materials typically represent
approximately 70.0% of the total cost of goods sold. The ability of the Company
to maintain value-added margins is a function of the speed with which the
Company can pass on raw material cost increases to its customers. The Company
has been able to sustain consistent value-added margins on a unit basis. While
there can be no assurance that the Company will be able to maintain these
value-added margins, the Company believes that historically it has demonstrated
an ability to show growth and productivity despite changes in market conditions.
In addition, the Company also believes it has been able to mitigate raw material
price increases at its converting facilities by entering into several long-term
supply contracts. Income from operations for the twelve months ended April 30,
1996, on a pro forma basis, would have had to decline to approximately $12.1
million from $33.6 million for the Company to be unable to meet its debt service
requirements.
In addition to maintaining value-added margins, the Company has also focused
on controlling costs through maximum utilization of available production
capacity, the development and implementation of financial controls and
management systems and minimization of waste. Direct costs of production at the
Company's converting facilities have declined on a per unit basis from 1992
through the present. By controlling costs and maintaining value-added margins,
together with adding to its manufacturing base through acquisitions completed in
a cost effective manner, the Company has been able to increase its net sales
from $36.3 million in Fiscal 1985 to $272.0 million in Fiscal 1995, to increase
net income from $0.7 million to $13.0 million over the same period and to
increase EBITDA from $2.6 million to $25.4 million over the same period.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
FISCAL YEAR ENDED JULY 31, APRIL 30,
------------------------------- --------------------
1993 1994 1995 1995 1996
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Corrugated Converting Operations:
Square feet sold (millions)................................... 3,513 3,799 3,794 2,944 2,629
Net sales (millions).......................................... $ 153.9 $ 155.4 $ 196.0 $ 147.1 $ 146.9
Gross profit (millions)....................................... 11.5 13.3 24.4 19.5 15.3
Average price per thousand square feet sold................... 43.90 40.90 51.66 49.97 55.88
Value-added margin per thousand square feet sold (1).......... 17.66 18.29 20.73 20.17 20.03
Ft. Madison Mill Operations:
Tons sold..................................................... -- 38,029 75,872 57,267 58,982
Net sales (millions).......................................... -- $ 11.3 $ 33.6 $ 24.2 $ 17.8
Gross profit (millions)....................................... -- 0.1 9.0 6.0 7.5
Average price per ton sold.................................... -- 297.98 442.67 422.58 408.60
Value-added margin per ton sold (1)........................... -- 198.30 313.12 300.71 308.14
Fonda:
Net sales (millions).......................................... $ 61.1 $ 61.8 $ 42.4 $ 42.4 --
Gross profit (millions)....................................... 11.2 10.1 6.4 6.4 --
</TABLE>
- ------------------------
(1) Value-added margin represents net sales less the cost of raw materials.
RECENT PERFORMANCE
For the three-month period ended July 31, 1996, the Company and the acquired
St. Joe Container facilities have experienced a continued decline in prices for
their products as a result of a decline in industry-
37
<PAGE>
wide demand during this period. This decline in prices and demand has had a
negative effect on certain financial results of the Company and St. Joe
Container. Since such period, the Company believes that prices for its products
have stabilized.
Pro forma combined net loss and EBITDA of the Company and St. Joe Container
based on the three-month period ended April 30, 1996 for the Company and the
three-month period ended March 31, 1996 for St. Joe Container, which aggregated
$0.7 million and $3.5 million, respectively, include all pro forma adjustments
made in the Unaudited Pro Forma Combined Condensed Financial Data included
elsewhere herein. The historical financial statements of St. Joe Container,
which are being used as the basis for the pro forma financial statements, were
negatively impacted by a $5.8 million inventory devaluation primarily due to a
decrease in the prices of St. Joe Container's linerboard. The pro forma combined
EBITDA of the Company and St. Joe Container for the three-month period ended
April 30, 1996 would have been insufficient to cover cash interest expense by
$2.4 million.
On May 30, 1996, the Mill Joint Venture acquired the St. Joe Mill for its
strategic location and to fulfill a portion of the linerboard requirements of
the corrugated container facilities of the two Mill Joint Venture partners, each
of which has committed to purchase one-half of the St. Joe Mill's output. The
St. Joe Mill has two paper machines which are capable of producing approximately
500,000 tons of linerboard annually in a variety of grades and basis weights.
Since 1990, approximately $147.8 million has been spent for the maintenance and
modernization of the St. Joe Mill's plant, equipment and machinery and for
environmental compliance. The St. Joe Mill's production presently is
approximately evenly divided between mottled white linerboard, a premium priced
product, and unbleached kraft linerboard. The St. Joe Mill's operations will be
managed principally by personnel designated by Stone Container.
Prior to the consummation of the Acquisition, both of the St. Joe Mill's
paper machines were shut down for maintenance and to reduce inventory from April
17, 1996 through May 6, 1996, and in December 1995 and January 1996, one paper
machine was shut down for the same reasons. Since the consummation of the
Acquisition, the St. Joe Mill was shut down in July 1996 for its annual
maintenance. While there can be no assurance, the Mill Joint Venture does not
expect any shut downs in the next twelve months other than for routine
maintenance. The Output Purchase Agreement requires that the St. Joe Mill
operate at a production rate not less than the average capacity utilization rate
of domestic linerboard producers. In the event further shut downs occur, the
Company will need to purchase that portion of its linerboard that it would have
otherwise purchased from the Mill Joint Venture from outside suppliers.
38
<PAGE>
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
FISCAL YEAR ENDED JULY 31, APRIL 30,
------------------------------------------------------------------------ ----------------------
1993 1994 1995
---------------------- ---------------------- 1995 ----------------------
PERCENT PERCENT ------------------------ PERCENT
OF NET OF NET PERCENT OF OF NET
AMOUNT SALES AMOUNT SALES AMOUNT NET SALES AMOUNT SALES
----------- --------- ----------- --------- ----------- ----------- ----------- ---------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales.............. $214.9 100.0% $228.6 100.0% $272.0 100.0 % $213.7 100.0%
Cost of goods sold..... 192.2 89.5 205.0 89.7 232.2 85.4 181.9 85.1
----------- --------- ----------- --------- ----------- ----------- ----------- ---------
Gross profit........... 22.7 10.5 23.6 10.3 39.8 14.6 31.8 14.9
Selling, general and
administrative
expenses.............. 21.8 10.1 22.0 9.6 19.7 7.2 15.8 7.4
Income from
operations............ 0.9 0.4 1.6 0.7 20.1 7.4 16.0 7.5
Other income........... 3.7 1.7 0.1 0.1 2.0 0.7 1.8 0.8
Interest expense....... 5.0 2.3 5.5 2.4 5.6 2.1 4.7 2.2
----------- --------- ----------- --------- ----------- ----------- ----------- ---------
Income (loss) before
provision (benefit)
for income taxes,
minority interest and
extraordinary gain on
early retirement of
debt.................. (0.4 ) (0.2) (3.8 ) (1.6) 16.5 6.1 13.1 6.1
Provision (benefit) for
income taxes.......... 0.4 0.2 (0.3 ) (0.1) 5.5 2.0 4.4 2.0
----------- --------- ----------- --------- ----------- ----------- ----------- ---------
Net income (loss)
before minority
interest and
extraordinary gain on
early retirement of
debt.................. $ (0.8 ) (0.4)% $ (3.5 ) (1.5)% $ 11.0 4.1 % $ 8.7 4.1%
----------- --------- ----------- --------- ----------- ----------- ----------- ---------
----------- --------- ----------- --------- ----------- ----------- ----------- ---------
<CAPTION>
1996
----------------------
PERCENT
OF NET
AMOUNT SALES
----------- ---------
<S> <C> <C>
Net sales.............. $164.7 100.0%
Cost of goods sold..... 142.0 86.2
----------- ---------
Gross profit........... 22.7 13.8
Selling, general and
administrative
expenses.............. 11.7 7.1
Income from
operations............ 11.0 6.7
Other income........... -- --
Interest expense....... 2.7 1.6
----------- ---------
Income (loss) before
provision (benefit)
for income taxes,
minority interest and
extraordinary gain on
early retirement of
debt.................. 8.3 5.1
Provision (benefit) for
income taxes.......... 3.6 2.2
----------- ---------
Net income (loss)
before minority
interest and
extraordinary gain on
early retirement of
debt.................. $ 4.7 2.9%
----------- ---------
----------- ---------
</TABLE>
NINE MONTHS ENDED APRIL 30, 1996 COMPARED TO NINE MONTHS ENDED APRIL 30, 1995
The Company's net sales decreased $49.0 million, or 22.9%, to $164.7 million
for the nine months ended April 30, 1996 compared to net sales of $213.7 million
for the nine months ended April 30, 1995. Net sales for the Company's converting
operations decreased $0.2 million, or 0.1%, to $146.9 million in the nine months
ended April 30, 1996 compared to $147.1 million in the nine months ended April
30, 1995 primarily as a result of a 10.7% decrease in volume of million square
feet sold of 2,944 square feet sold to 2,629 square feet sold which was
partially offset by a 11.8% increase in average price per thousand square feet
sold to $55.88 from $49.97. Net sales at the Ft. Madison Mill decreased $6.4
million, or 26.4%, to $17.8 million for the nine months ended April 30, 1996
from $24.2 million for the nine months ended April 30, 1995 due to a 3.3%
decrease in price per ton sold to $408.60 from $422.58 which was partially
offset by a 3.0% increase in volume to 58,982 tons sold from 57,267 tons sold.
The decreases in net sales for the Company's converting operations and the Ft.
Madison Mill were affected by the elimination of net sales generated by Fonda,
which accounted for $42.4 million, or 19.8%, of net sales for the nine months
ended April 30, 1995, and the elimination of eight months of net sales produced
by Timberline Packaging, Inc. ("Timberline"), a converting facility which
accounted for $10.1 million, or 4.7%, of net sales for the nine months ended
April 30, 1995 compared to $1.2 million, or 1.0%, for the nine months ended
April 30, 1996. The Company spun off Fonda in March 1995 and sold its 67.0%
interest in Timberline in August 1995.
The Company's cost of goods sold as a percentage of net sales increased to
86.2% for the nine months ended April 30, 1996 from 85.1% in the nine months
ended April 30, 1995. Cost of goods sold at the Company's converting operations
increased as a percentage of net sales to 89.6% in the nine months ended April
30, 1996 from 86.7% for the nine months ended April 30, 1995 primarily as a
result of a shift in product mix for the nine months ended April 30, 1996. Cost
of goods sold at the Ft. Madison Mill decreased as a percentage of net sales to
68.9% for the nine months ended April 30, 1996 from 75.2% for the nine months
ended April 30, 1995 primarily as a result of a 2.5% increase in value-added
margins per ton to $308.4 from $300.17.
Gross profit decreased $9.1 million, or 28.5%, to $22.8 million for the nine
months ended April 30, 1996 from $31.9 million for the nine months ended April
30, 1995. As a percentage of net sales, gross profit decreased to 13.8% for the
nine months ended April 30, 1996 compared to 14.9% for the nine months ended
39
<PAGE>
April 30, 1995. Gross profit as a percentage of net sales for the Company's
converting operations decreased to 10.4% for the nine months ended April 30,
1996 compared to 13.3% for the nine months ended April 30, 1995. Gross profit as
a percentage of net sales for the Ft. Madison Mill increased to 31.1% in the
nine months ended April 30, 1996 compared to 24.8% for the nine months ended
April 30, 1995.
Selling, general and administrative expenses decreased $4.1 million, or
26.0%, to $11.7 million for the nine months ended April 30, 1996 from $15.8
million for the nine months ended April 30, 1995 primarily as a result of the
elimination of Fonda's expenses after March 1995. Selling, general and
administrative expenses as a percentage of net sales decreased to 7.1% for the
nine months ended April 30, 1996 from 7.4% for the nine months ended April 30,
1995.
Operating income decreased $4.9 million, or 31.0%, to $11.1 million for the
nine months ended April 30, 1996 from $16.0 million for the nine months ended
April 30, 1995. This decrease was net of a $5.9 million decrease in operating
income for the Company's converting operations between the two periods primarily
as a result of the disposition of Fonda and Timberline.
For the nine months ended April 30, 1996, other income represented a gain on
disposed assets of $1.8 million, while for the nine-month period ended April 30,
1995, there was no corresponding activity.
Income taxes decreased $0.7 million to $3.7 million for the nine months
ended April 30, 1996 compared to $4.4 million for the nine months ended April
30, 1995. This decrease in the provision for income taxes was related to the
decrease in income before taxes.
FISCAL 1995 COMPARED TO FISCAL 1994
The Company's net sales increased $43.4 million, or 19.0%, to $272.0 million
in Fiscal 1995 compared to $228.6 million in Fiscal 1994. Net sales for the
Company's converting operations increased $40.6 million, or 26.1%, to $196.0
million in Fiscal 1995 compared to $155.4 million in Fiscal 1994 primarily as a
result of an increase in average price per thousand square feet sold to $51.66
in Fiscal 1995 from $40.90 in Fiscal 1994 with volume remaining virtually flat
at 3,794 million square feet sold compared to 3,799 million square feet sold.
Net sales at the Ft. Madison Mill increased $22.3 million, or 197.3%, to $33.6
million in Fiscal 1995 compared to $11.3 million in Fiscal 1994 primarily as a
result of net sales in Fiscal 1994 reflecting only five full months of
operations of the Ft. Madison Mill, which was acquired by the Company in January
1994, and by a 48.6% rise in the average price per ton sold of corrugating
medium to $442.67 in Fiscal 1995 from $297.98 in Fiscal 1994. Volume at the Ft.
Madison Mill increased to 75,872 tons sold in Fiscal 1995 from 38,029 tons sold
in Fiscal 1994. The increase in net sales from the Company's converting and mill
operations was partially offset by a decrease of $19.4 million, or 31.4%, in
Fonda's net sales to $42.4 million in Fiscal 1995 from $61.8 million in Fiscal
1994, resulting from the elimination of four months of operations following the
spin-off of Fonda in March 1995.
The Company's cost of goods sold as a percentage of net sales improved to
85.4% in Fiscal 1995 compared to 89.7% in Fiscal 1994. Cost of goods sold as a
percentage of net sales at the Company's converting facilities improved to 87.1%
in Fiscal 1995 compared to 91.2% in Fiscal 1994. This improvement was primarily
a result of a decrease in labor costs to 10.3% of net sales in Fiscal 1995 from
13.8% of net sales in Fiscal 1994 and reductions in other major components of
manufacturing costs as a percentage of net sales. Cost of goods sold as a
percentage of net sales at the Ft. Madison Mill improved to 73.2% in Fiscal 1995
from 99.1% of net sales for the initial five months of ownership ended July 31,
1994. The improved performance at the Ft. Madison Mill was primarily a result of
improved value-added margins which resulted from the 48.6% increase in average
price per ton sold of corrugating medium partially offset by a 24.7% increase in
raw material costs per ton sold. Manufacturing costs per ton (excluding raw
materials used at the Ft. Madison Mill) decreased to $169 per ton in Fiscal
1995, or 1.7%, from $172 per ton sold in Fiscal 1994.
Gross profit increased $16.3 million, or 69.4%, to $39.8 million in Fiscal
1995 from $23.5 million in Fiscal 1994, primarily as a result of the reduction
in the cost of goods sold as a percentage of net sales to 85.4% from 89.7%
during this period. Gross profit as a percentage of net sales for the Company's
converting operations increased to 12.4% in Fiscal 1995 compared to 8.8% in
Fiscal 1994. Gross profit as a percentage of net sales for the Ft. Madison Mill
improved to 26.8% in Fiscal 1995 compared to 0.9% in Fiscal 1994.
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Selling, general and administrative expenses decreased $2.3 million, or
10.5%, to $19.7 million in Fiscal 1995 from $22.0 million in Fiscal 1994 due, in
part, to the elimination of Fonda's expenses subsequent to March 1995. Selling,
general and administrative expenses as a percentage of net sales were 7.2% in
Fiscal 1995 compared to 9.6% in Fiscal 1994. This decrease was primarily a
result of a reduction in certain selling, legal, insurance and other costs at
the Company's converting facilities.
Operating income increased $18.6 million to $20.1 million in Fiscal 1995
from $1.5 million in Fiscal 1994. This increase was attributable to a 26.1%
increase in net sales in the Company's converting operations and a 13.2%
improvement in value-added margin for the Company's converting operations, as
well as a reduction in overall selling, general and administrative expenses
primarily as a result of the exclusion of Fonda after March 1995.
Other income increased $1.8 million to $1.9 million in Fiscal 1995 compared
to $0.1 million in Fiscal 1994. This increase was due to a gain on the sale of
the assets of the Company's fiber partitions division.
Income taxes increased $5.8 million to $5.5 million in Fiscal 1995 compared
to a tax benefit in Fiscal 1994 of $0.3 million. This increase was directly
related to the change in income before taxes.
FISCAL 1994 COMPARED TO FISCAL 1993
The Company's net sales increased $13.7 million, or 6.4%, to $228.6 million
in Fiscal 1994 compared to $214.9 million in Fiscal 1993. Net sales for the
Company's converting operations increased $1.5 million, or 1.0%, to $155.4
million in Fiscal 1994 from $153.9 million in Fiscal 1993 primarily as a result
of an 8.1% increase in volume to 3,799 million square feet sold from 3,513
million square feet sold, partially offset by a 6.6% decrease in average price
per thousand square feet sold to $40.90 from $43.90. The Ft. Madison Mill
generated $11.3 million in net sales in its five months of operations in Fiscal
1994. Net sales from Fonda remained relatively flat at $61.8 million in Fiscal
1994 compared to $61.1 million in Fiscal 1993.
Cost of goods sold as a percentage of net sales increased to 89.7% in Fiscal
1994 compared to 89.4% in Fiscal 1993. Cost of goods sold as a percentage of net
sales for the Company's converting facilities declined 1.1% to 91.2% in Fiscal
1994 from 92.5% in Fiscal 1993. This reduction was primarily a result of lower
raw material costs, which declined to 55.3% of net sales in Fiscal 1994 compared
to 59.8% of net sales in Fiscal 1993, partially offset by increases in freight,
direct and indirect expenses. Value-added margin per thousand square feet sold
improved 3.6% to $18.29 in Fiscal 1994 from $17.66 in Fiscal 1993. Cost of goods
sold as a percentage of net sales at the Ft. Madison Mill were 99.0% for the
five months of operations in Fiscal 1994 which followed the purchase of the Ft.
Madison Mill out of bankruptcy by the Company in January 1994. Cost of goods
sold as a percentage of net sales at Fonda were 83.6% in Fiscal 1994 compared to
81.6% in Fiscal 1993.
Gross profit increased $0.9 million, or 4.0%, to $23.6 million in Fiscal
1994 from $22.7 million in Fiscal 1993. Gross profit as a percentage of net
sales for the Company's converting operations increased to 8.8% in Fiscal 1994
compared to 7.5% in Fiscal 1993. Gross profit as a percentage of net sales for
the Ft. Madison Mill was 0.9% in Fiscal 1994.
Selling, general and administrative expenses increased $0.2 million, or
0.9%, to $22.0 million in Fiscal 1994 from $21.8 million in Fiscal 1993.
Selling, general and administrative expenses as a percentage of net sales
decreased to 9.6% in Fiscal 1994 compared to 10.1% in Fiscal 1993. This
reduction was primarily a result of a constant amount paid for expenses compared
to increased sales volume.
Operating income increased $0.6 million, or 66.7%, to $1.5 million in Fiscal
1994 from $0.9 million in Fiscal 1993. This increase was attributable to a 1.0%
increase in net sales attributable to the Company's converting operations
combined with a 3.8% improvement in value-added margin partially offset by a
reduction in gross profit attributable to Fonda.
Other income decreased $3.6 million to $0.1 million in Fiscal 1994 compared
to $3.7 million in Fiscal 1993. This decrease was primarily attributable to a
gain on a disposition of assets of $3.9 million in Fiscal 1993.
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Income taxes decreased $0.8 million to $0.3 million benefit in Fiscal 1994
compared to $0.5 million in Fiscal 1993. This increase is directly related to
the decrease in income before taxes.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company has relied on cash flows from operations and bank
borrowing to finance its working capital requirements and capital expenditures.
Net cash provided by operating activities for the nine months ended April
30, 1996 was $7.3 million compared to net cash used in operating activities of
$5.1 million for the nine months ended April 30, 1995. Cash provided in the nine
months ended April 30, 1996 was driven by net income of $4.7 million for the
period and a $3.2 million reduction in the level of accounts receivable and
inventory which was offset by a $4.1 million reduction in accounts payable and
accrued liabilities. Net cash provided by operating activities was $4.8 million
for Fiscal 1994 compared to $2.2 million net cash used for Fiscal 1995. The
period-to-period change was due primarily to the net changes related to the
exclusion of Fonda after March 1995.
Net cash used by investing activities was $2.7 million for the nine months
ended April 30, 1996 compared to $1.2 million for the nine months ended April
30, 1995. The Company's net cash used by investing activities decreased to $2.0
million in Fiscal 1995 compared to $9.1 million for Fiscal 1994. The decrease
was principally the result of the acquisition by the Company in January 1994 of
three converting facilities and the Ft. Madison Mill for $5.3 million (the "CPC
Acquisition").
Capital expenditures for the nine months ended April 30, 1996 were $4.3
million compared to $2.9 million for the nine months ended April 30, 1995.
Capital expenditures for Fiscal 1995 were $3.7 million compared to $3.9 million
in Fiscal 1994. Estimated capital expenditures for Fiscal 1996 will be
approximately $7.5 million.
Following the Acquisition, the Company plans to implement a targeted capital
expenditure program with annual capital expenditures totaling approximately
$10.0 million to $15.0 million for Fiscal 1997. The Company intends to finance
capital expenditures primarily through operating cash flow.
Net cash used in financing activities was $3.9 million in the nine months
ended April 30, 1996 compared to net cash provided by financing activities of
$5.1 million in the nine months ended April 30, 1995. For Fiscal 1995, net cash
provided by financing activities totaled $3.5 million and additional borrowings
were used in part to pay $8.6 million of subordinated debt. Net cash provided by
financing activities for Fiscal 1994 totaled $5.2 million. In addition to normal
capital expenditures, additional borrowings in Fiscal 1994 were used to fund
acquisitions, primarily the CPC Acquisition.
The Company had a $35.0 million bank credit facility consisting of term
loans and revolving credit facilities. As of April 30, 1996, the Company had
unused availability of approximately $14.1 million. On November 1, 1995, the
Company increased its approved credit under the bank credit facility from $31.0
million to $35.0 million.
On May 30, 1996, the Company established a Credit Facility which will mature
in 2001. The Credit Facility provides total borrowing of up to $80.0 million on
a revolving basis, subject to borrowing base limitations, to finance the
Company's working capital needs. Unused borrowing base availability must be at
least $5.0 million. On May 30, 1996, the Company had unused borrowing capacity
of approximately $33.4 million under the Credit Facility excluding any purchase
price adjustments. Pursuant to the Credit Facility, the Company is subject to
certain affirmative and negative covenants customarily found in agreements of
this type, including, without limitation, covenants that restrict, subject to
specified exceptions (i) mergers, consolidations, asset sales or changes in
capital structure, (ii) creation or acquisition of subsidiaries, (iii) purchase
or redemption of the Company's capital stock or declaration or payment of
dividends or distributions on such capital stock, (iv) incurrence of additional
indebtedness, (v) investment activities, (vi) capital expenditures, (vii)
granting or incurrence of liens to secure other indebtedness, (viii) prepayment
or modification of the terms of subordinated indebtedness and (ix) transactions
with affiliates. In addition, the Credit Facility requires that the Company
maintain certain specified financial covenants, including, without limitation, a
minimum tangible net worth, a minimum interest coverage ratio, a maximum funded
debt to EBITDA ratio and a minimum fixed charge coverage ratio. See "Description
of Credit Facility." In addition,
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the Company will provide, if needed, the Mill Joint Venture with up to $10.0
million of subordinated indebtedness on a revolving credit basis. The Company
anticipates that the Mill Joint Venture will need to draw down on this facility
to supplement its cash flow in order to meet its 1996 debt service requirements.
On November 1, 1995, the Company entered into the Acquisition Agreement
pursuant to which on May 30, 1996 (i) the Company acquired substantially all of
the assets of St. Joe Container and (ii) the Mill Joint Venture acquired the St.
Joe Mill. The purchase price for the St. Joe Container facilities was $87.8
million for the fixed assets, plus approximately $69.7 million for working
capital, for a total purchase price of $157.5 million, subject to adjustment for
changes in working capital described herein. The purchase price for the St. Joe
Mill was $185.0 million for the fixed assets, plus approximately $17.4 million
for working capital, for a total purchase price of $202.4 million, subject to
adjustment for changes in working capital described herein. The Company acquired
a 50.0% equity interest in the Mill Joint Venture for $5.0 million dollars. The
Acquisition was funded by the sale of the Old Notes and borrowings under the
Credit Facility.
Following the Acquisition, the Company believes that cash generated by
operations, combined with amounts available under the Credit Facility, will be
sufficient to meet its capital expenditure needs, debt service requirements and
working capital needs for the next twelve months.
IMPACT OF INFLATION
A period of rising prices will affect the Company's cost of production and,
in particular, the Company's raw material costs. Since the Company's business is
a margin business, the impact of increased costs on the Company will depend upon
the Company's ability to pass on such costs to its customers. The Company is
typically able to pass on a significant portion of its increased raw material
costs in a timely fashion. From time to time, however, there is a lag in passing
on price adjustments which creates a temporary margin contraction in a rising
price environment. Historically, the Company has been able to recover fully from
the impact of rising prices over a short period of time.
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INDUSTRY OVERVIEW
The corrugated container is unrivaled in most industrial applications for
providing an economical and safe means of transporting products. In addition,
corrugated containers are increasingly utilized as an integrated transportation
and marketing device in the form of point-of-sale displays. According to the
Fibre Box Association, the corrugated container industry generated revenue of
$19.6 billion in 1995. The major end-use markets for corrugated containers are
food, beverage and agricultural products, paper and fiber products, petroleum,
petrochemical resins, plastics and rubber products, glass and metal containers,
electronic products and electrical and other machinery.
Corrugated sheet, consisting of linerboard and corrugating medium, is the
principal raw material used in the manufacture of corrugated containers.
Linerboard provides the strength component of a container while corrugating
medium provides rigidity. Corrugating medium is fluted and laminated to
linerboard to produce corrugated sheets. The sheets are subsequently printed,
cut, folded and glued to produce finished corrugated containers or corrugated
partitions. Over 90.0% of the corrugated containers produced are unbleached
kraft products. However corrugated containers produced from bleached linerboard
(mottled white or white-top) have recently experienced increasing demand due to
the increased use of graphics in displays for fresh produce, office paper,
electronic devices, office equipment, household goods, bins and other
point-of-sale displays. Mottled white containers generally sell at a premium
over unbleached kraft, in part to cover the higher costs associated with the
bleaching process.
There are generally three types of corrugated container plants: feeder
plants that combine linerboard with corrugating medium to produce corrugated
sheets; sheet plants that convert the corrugated sheets supplied by the feeder
plants into finished corrugated containers with printed graphics; and large,
integrated corrugator plants that perform both functions. Most corrugated
container plants generally run jobs to an individual customer's specifications,
necessitating a carefully managed process of machine set up between each job to
meet production schedules. The increased use of automation has greatly decreased
the amount of downtime during the production process, thereby allowing for
increased operating efficiencies.
Target customers for corrugated containers fall into two general categories:
national and local. National accounts seek suppliers with wide geographic
coverage that can service most of their locations with long run, low cost
products. Local accounts place a high priority on assurance of supply on a
timely or as needed basis. Both types of customers are price and quality
conscious, and place a strong emphasis on the ability of their supplier to meet
their product need and delivery time requirements.
Shipping costs and customer service obligations require corrugated container
plants to be located relatively close to customers. Each corrugated container
plant typically services a market within a 150 mile radius of the plant, and
employs its own sales force which sells and services accounts within this
geographic area. Corrugated containers generally are delivered by truck due to
the large number of customers and demand for timely service. The dispersion of
customers and the high bulk and low density and value of corrugated containers
make shipping costs a relatively high percentage of total costs.
According to the Fibre Box Association, shipments of corrugated containers
have increased at a compound annual rate of 3.0% since 1970. Shipments in 1995
declined approximately 0.6% from 1994 to 372.5 billion square feet, after
experiencing increases of 4.9%, 5.4% and 6.0% in 1992, 1993 and 1994,
respectively. The decline in 1995 represents the seventh decline in annual
shipments in the past 26 years; only once during this period have shipments
declined in successive years (1974-1975).
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[CHART]
Description of the chart is a bar graph depicting corrugated container shipments
in billions of square feet from 1970 through 1995 starting with approximately
175 billion square feet in 1970 to approximately 375 billion square feet in
1995.
Source: Fibre Box Association
Corrugated container plant profits are dependent on the ability to pass
through the cost of linerboard and on the maintenance of high operating
efficiencies. For corrugated container manufacturers, linerboard and corrugating
medium typically represent approximately 70.0% of total cost of goods sold.
Manufacturers of corrugated containers are generally able to respond to raw
material price increases from suppliers by increasing product prices to their
customers. Conversely, when raw material prices are reduced by suppliers,
corrugated container manufacturers must decrease product prices to remain
competitive. Converting margins are typically best during weak linerboard
markets when manufacturers of corrugated containers are able to purchase their
raw materials at lower prices. The success of a corrugated container plant
operation depends on, among other factors: (i) efficient low-cost operations,
(ii) operation at or near full capacity, (iii) careful management of inventory
levels, (iv) access to reasonably priced linerboard and corrugating medium and
(v) ability to respond quickly and profitably to customer needs.
[CHART]
Description of the chart is a graph of linerboard and corrugated container price
trends in dollars per ton from the first quarter of 1990 to the fourth quarter
of 1995 in quarterly increments. The graph tracks the dollars per ton of each of
(i) corrugated containers, (ii) linerboard, and (iii) the difference between (i)
and (ii). In the first quarter of 1990, corrugated containers were approximately
$620 per ton, linerboard was approximately $390 per ton and the difference was
approximately $230 per ton. In the last quarter of 1995, corrugated containers
were approximately $780 per ton, linerboard was approximately $550 per ton and
the difference was approximately $290 per ton.
Source: Pulp & Paper Forecaster
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BUSINESS
THE COMPANY
Four M Corporation, which operates under the trade name Box USA, believes
that it is one of the largest independent full-service converters of corrugated
packaging materials in North America. The Company operates 28 strategically
located converting facilities, which sold 9.6 billion square feet of finished
corrugated containers, partitions and sheets during the twelve months ended
April 30, 1996. The Company has developed and maintains longstanding customer
relationships with leading consumer products and packaging companies including
Anchor Glass, Avon, Clorox, Owens Illinois and Procter & Gamble. The Company
also owns and operates a paper mill at Ft. Madison, Iowa which produced 77,710
tons of corrugating medium during the twelve months ended April 30, 1996, most
of which was sold to third parties. For the twelve months ended April 30, 1996,
the Company generated net sales of $223.0 million, net income of $6.8 million
and EBITDA of $19.3 million.
On May 30, 1996, the Company acquired substantially all of the assets of St.
Joe Container, which consisted primarily of 16 converting facilities and related
working capital. The Acquisition more than doubled the size of the Company to 28
converting facilities which sold 10.0 billion square feet of corrugated
packaging materials in 1995. The Company and St. Joe Container utilize similar
manufacturing equipment and production processes, and the two businesses operate
with minimal geographic redundancy and no material customer overlap.
Accordingly, the Company believes that the Acquisition creates opportunities to
pursue continued growth in its business, utilize its purchasing power to achieve
reductions in raw material costs, improve productivity and reduce operating
expenses. For the twelve months ended April 30, 1996, after giving pro forma
effect to the Acquisition, the Company would have generated net sales of $524.6
million, net income of $7.0 million and EBITDA of $46.0 million. See "Unaudited
Pro Forma Combined Condensed Financial Data."
The Company was founded in 1966 as a manufacturer of corrugated partitions.
From a single partition plant, the Company expanded initially through internal
growth and later through 11 separate acquisitions involving 17 manufacturing
facilities. These strategic acquisitions have allowed the Company to (i) supply
its partition plants with lower-cost corrugated sheets for conversion into
interior packaging components, (ii) capture a portion of its partition
customers' corrugated container business and (iii) diversify its customer base
to include a broader variety of users of corrugated packaging materials. The
Company has historically targeted distressed properties and undermanaged assets
to which the Company could significantly improve profitability. The Company's
ability to target and integrate acquisitions successfully is reflected in an
increase in average revenue per plant from $9.0 million in 1991 to $15.1 million
in 1995 while average annual production per plant has grown from 201.7 million
square feet to 291.8 million square feet over the same period.
The Company's strategy is to enhance its position as one of the largest
independent full-service converters of corrugated packaging materials in North
America. Fundamental elements of the Company's strategy include:
-providing a full line of high-quality products
-capitalizing on the Company's significant raw materials
purchasing power
-implementing cost-reduction manufacturing techniques and
operating efficiency programs
-responding quickly to customer needs and offering high levels of
customer service
-expanding the Company's penetration of national accounts and
increasing the Company's share of existing customers' business
One of the Company's competitive advantages is its long-term relationships
with many customers, some of which have been maintained for over 25 years. A
second feature which distinguishes the Company from its competitors is the
significant relationships it has established with its containerboard suppliers.
The Company believes that it is the largest customer of its three primary raw
material suppliers. As one of the largest purchasers of linerboard and
corrugating medium in the industry, the Company believes that it has been able
to purchase raw materials at prices substantially below those reported in PULP &
PAPER WEEK.
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Four M has no assets or independent business operations other than its
ownership interest in its subsidiaries.
THE ACQUISITION
Historically, the St. Joe Container facilities were operated as a captive
outlet for linerboard produced by the St. Joe Mill. Because these facilities
represented only a small portion of the operations of St. Joe Paper, the Company
believes that maximization of revenues and profitability of St. Joe Paper's
container operations was not a primary priority of prior management. Based on
its experience in integrating acquisitions, the Company believes that it can
successfully integrate the St. Joe Container facilities and improve overall
productivity and profitability by (i) increasing revenues through utilization of
available capacity, (ii) capitalizing on the Company's raw materials purchasing
leverage and (iii) enhancing productivity and reducing operating expenses.
INCREASING REVENUES
The Company has built its business through internal growth and opportunistic
acquisitions. The Company's strategy has resulted in (i) geographic expansion of
its operations, (ii) new product offerings which have allowed the Company to
attract new customers and capture an increasing share of its existing customers'
business and (iii) vertical integration of the Company's converting operations.
The Acquisition enabled the Company to increase its geographic coverage from
nine to 17 states. As a result, the Company is able to serve new markets in the
Midwest, Mid-Atlantic and the faster growing Southeast. While corrugated
packaging plants typically serve customers within a 150-mile radius, the Company
is generally able to extend its service area to a radius of approximately 250
miles. The Company believes that improved operating efficiencies have enabled it
to overcome any incremental freight costs associated with its larger trading
areas.
The Company believes that the Acquisition, by expanding the Company's
geographic coverage, will particularly benefit its national account sales
program by enabling it to serve national accounts from St. Joe Container
facilities in markets not previously covered by the Company. National accounts
comprise approximately 18.1% of net sales for the Company in Fiscal 1995. In
addition, the Company strives to operate its corrugator plants at three shifts
per day, five days per week rather than the two shifts, five days per week
operation of the St. Joe Container facilities. The Company believes that the
addition of a third shift at the St. Joe Container facilities will increase
aggregate production at these facilities by approximately 50.0%. The Company
intends to utilize available capacity to increase production of corrugated
sheets to supply sheet plants owned by third parties in the vicinity of the St.
Joe Container facilities.
The Company also believes that the Acquisition will further improve the
vertical integration of the Company's converting operations. The Company
anticipates that the 15 additional corrugator plants operated by the Company
after the Acquisition will produce corrugated sheets for use at other Company
facilities, reducing the dependence of the Company on external suppliers of
corrugated sheets. The Company may also pursue acquisitions of sheet plants in
areas contiguous to its existing operations in order to maintain outlets for its
production of corrugated sheets.
CAPITALIZING ON RAW MATERIALS PURCHASING LEVERAGE
Historically, the St. Joe Container facilities purchased linerboard from the
St. Joe Mill at the prices reported in PULP & PAPER WEEK, an industry trade
publication. As one of the largest purchasers of linerboard and corrugating
medium in the industry, the Company believes that it has been able to purchase
raw materials at prices substantially below those reported in PULP & PAPER WEEK.
Based on the Company's average raw materials prices paid during 1995, St. Joe
Container's net income and EBITDA for 1995, after giving pro forma effect to the
Acquisition, would have increased by approximately $15.9 million. See "Unaudited
Pro Forma Combined Condensed Financial Data."
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ENHANCING PRODUCTIVITY AND REDUCING OPERATING EXPENSES
The Company has improved profitability by focusing on maximum utilization of
available production capacity, minimization of waste and the development and
implementation of financial controls and management systems. In addition, the
Company believes that it can eliminate certain duplicative functions and achieve
efficiencies in manufacturing, administration and sales and marketing.
Furthermore, the Company believes that it can reduce manufacturing costs by
reducing waste at the St. Joe Container facilities.
OPERATIONS
The Company operates three types of converting facilities: (i) corrugator
plants which convert linerboard and corrugating medium into corrugated sheets
and then convert the sheets into corrugated containers, (ii) sheet or specialty
container plants which receive corrugated sheets from the Company's corrugator
plants or external suppliers and then manufacture corrugated containers and
displays and (iii) partition plants which receive corrugated sheets from the
Company's corrugator plants or external sources and make corrugated interior
packaging components. The Company also owns a paper mill which produces
corrugating medium primarily for sale to third parties.
CORRUGATORS
The Company believes that it is one of the largest independent full-service
converters of corrugated containers in North America. The Company operates five
corrugator plants located in the Midwest, the Southeast and California. As a
result of the Acquisition, the Company currently operates an additional 15
full-service corrugators located in the Southeast, Midwest, Mid-Atlantic and
Texas. The Company supplies corrugated containers to national, regional and
local accounts, which include companies in the food, household products,
cosmetics, personal care, beverage, pharmaceutical, electrical and other
machinery, and high-tech industries. The Company's corrugator plants are
value-added container manufacturers as well as suppliers of corrugated sheets to
the Company's and third-parties' sheet and partition plants.
During Fiscal 1995, the Company's corrugator plants produced approximately
4.1 billion square feet of corrugated sheets, of which 61.2% were used in the
Company's plants and the remaining 38.8% were sold to third parties. The Company
supplied approximately 88.7% of its own corrugated sheet requirements in 1995
and purchased the remaining 11.3% in the marketplace from third parties.
The Company's corrugators convert mottled white linerboard, unbleached kraft
linerboard and corrugating medium into corrugated sheets and containers. Mottled
white containers are generally sold at a premium over kraft containers; however,
the premium tends to cover the higher cost of mottled white linerboard without
increasing operating margins at the container facilities. Approximately 89.9% of
the corrugated materials produced in these facilities in Fiscal 1995 required
unbleached kraft linerboard and the remaining 10.1% required mottled white
linerboard.
SHEET PLANTS
The Company's sheet plants convert corrugated sheets into specialty
containers and point-of-sale displays. The Company operates one sheet plant in
Ohio, one in Alabama and two in California. During Fiscal 1995, the Company's
sheet plants produced approximately 831.7 million square feet of corrugated
containers, accounting for approximately 22.3% of the Company's net sales. The
Alabama facility, which was acquired by the Company in the Acquisition, shipped
approximately 70.4 million square feet of corrugated containers in 1995.
The Company's sheet plants operate on a two shifts per day, five days per
week schedule. The Company operates the sheet plants for smaller production runs
and specialized containers. The customers for these plants are primarily local
and regional accounts. By serving different market segments, sheet plants allow
the Company to operate in trading areas which overlap those of the corrugator
plants without competing with the larger, integrated facilities.
PARTITION PLANTS
The Company believes that it is the largest producer of corrugated interior
packaging components in the United States. The Company operates four
free-standing partition plants in the West, Midwest and
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Southeast and supplies interior packaging components to major food, household
products, and glass and plastic container producers. The Company also has
partition manufacturing capability at two of its sheet plants. The Company
maintains a leading position in the partition segment of the corrugated market
by supplying national account, high-volume users such as Anchor Glass, Clorox,
Owens Illinois and Procter & Gamble. Output at the partition plants totaled
448.9 million square feet in Fiscal 1995.
FT. MADISON MILL
The Company's paper mill in Ft. Madison, Iowa was acquired out of bankruptcy
in January 1994. In 1993, the Ft. Madison Mill had a capacity of approximately
70,000 tons per year and 200 tons per day of corrugating medium and actual
production of approximately 165 tons per day. Following the acquisition of the
Ft. Madison Mill, the Company improved production by providing management
leadership, supplying necessary working capital and initiating significant
repairs. By the first quarter of 1995, the Ft. Madison Mill began to achieve
record daily production levels, thereby lowering unit operating costs and
increasing sales. The following table sets forth average tons produced per day
and total tons produced per year at the Ft. Madison Mill in 1994 and 1995.
<TABLE>
<CAPTION>
AVERAGE TONS PER
DAY PRODUCED TOTAL TONS PRODUCED
------------------- -------------------
<S> <C> <C>
First Quarter 1994............................................... 178 15,134
Second Quarter 1994.............................................. 199 17,885
Third Quarter 1994............................................... 201 17,855
Fourth Quarter 1994.............................................. 215 18,531
First Quarter 1995............................................... 220 19,820
Second Quarter 1995.............................................. 218 19,818
Third Quarter 1995............................................... 211 19,374
Fourth Quarter 1995.............................................. 224 20,168
</TABLE>
The Ft. Madison Mill is currently capable of producing up to 80,000 tons per
year of corrugating medium. The Ft. Madison Mill sells its output primarily to
smaller, independent corrugated container manufacturers in the Midwest. In 1995,
the Ft. Madison Mill generated net sales of $33.6 million through sales of
75,872 tons of corrugating medium to third parties. In addition, the Ft. Madison
Mill supplied 3,186 tons of corrugating medium for processing at the Company's
corrugator plants.
The Ft. Madison Mill has the capability to process both wood fiber and
recycled fiber. Recycled fiber utilized at the Ft. Madison Mill consists of
double-lined kraft clippings. This flexibility in raw materials processing has
enabled the Company to reduce the impact of fluctuations in raw material prices.
In 1995, the output of the Ft. Madison Mill consisted of approximately 39.0%
recycled fiber. Presently, the Company is benefiting from lower recycled fiber
costs. The price of recycled fiber paid by the Ft. Madison Mill has declined
from an average of approximately $205 per ton in August 1995 to an average of
approximately $80 per ton as of March 31, 1996.
ST. JOE MILL
On May 30, 1996, the Mill Joint Venture acquired the St. Joe Mill for its
strategic location and to fulfill a portion of the linerboard requirements of
the corrugated container facilities of the two Mill Joint Venture partners, each
of which has committed to purchase one-half of the St. Joe Mill's output. The
St. Joe Mill has two paper machines which are capable of producing approximately
500,000 tons of linerboard annually in a variety of grades and basis weights.
Since 1990, approximately $147.8 million has been spent for the maintenance and
modernization of the St. Joe Mill's plant, equipment and machinery and for
environmental compliance. The St. Joe Mill's production presently is
approximately evenly divided between mottled white linerboard, a premium priced
product, and unbleached kraft linerboard. The St. Joe Mill's operations will be
managed principally by personnel designated by Stone Container.
FIBRE MARKETING GROUP
In 1996, the Company acquired a 50.0% interest in Fibre Marketing Group, LLC
("Fibre Marketing"), which procures and markets waste paper. Fibre Marketing
acts as a broker for the sale and transportation of
49
<PAGE>
waste material from companies which generate waste, such as printers, paper
converters and recycling processors, to paper mills. Fibre Marketing currently
provides brokerage services to all of the Company's converting facilities. Fibre
Marketing also owns and operates Fibre Processing Corporation, a waste paper
processing company located in Edgemere, Maryland, which services sources of
recyclable waste paper which are too small to utilize brokerage services.
MANNKRAFT CORPORATION
On August 5, 1996, the Company acquired 490 shares of the common stock of
MannKraft Corporation ("MannKraft") from Stone Container. The purchase
represented 49% of MannKraft's outstanding shares and was acquired by the
Company for $5.5 million, which was paid on August 6, 1996. The Company's
interest in MannKraft is now 50%. This transaction was made in compliance with
the covenants contained in the Indenture.
SALES, MARKETING AND CUSTOMERS
SALES AND MARKETING
The Company's products are sold on a direct basis and, to a lesser degree,
through the use of brokers. Currently, the Company generates approximately 90%
of its business through direct sales and approximately 10% through brokers. The
Company seeks to be a leader in customer service for the markets it serves by
capitalizing on its marketing experience, technical expertise and manufacturing
flexibility. The Company's corrugated packaging materials are typically
manufactured to customer order. The Company believes that the strong integration
between manufacturing, marketing and sales provides it with a competitive
advantage by allowing it to respond favorably and quickly to changing customer
demands. The Company prides itself on its sales oriented culture and its
long-standing relationships with customers. The Company's senior executive
officers personally handle a number of the larger accounts.
The Company's sales are coordinated by five regional sales managers, one in
each of the East, Southeast and West and two in the Midwest. Each regional sales
manager is responsible for directing sales of corrugated containers and
partitions to large national accounts and smaller regional and local purchasers
and sales of corrugated sheets to other corrugated container companies through a
regional sales force consisting of sales representatives from each facility. In
addition to the regional sales force, the Company uses the services of several
brokers in the West and Northeast regions.
Each of the Company's sales representatives receives training in product
specifications and manufacturing techniques in order to satisfy customer
requirements and maintain existing national and local account relationships. The
Company emphasizes achieving sales efficiency by preserving existing
relationships, having a thorough knowledge of customer requirements and being
flexible and responsive to changing customer needs. The Company has focused on
capturing market share by targeting a diverse customer base and offering a full
product line within a given geographical area. The Company believes that the
Acquisition has provided access to markets currently outside the Company's
geographic service areas as well as allow it to expand relationships with
existing customers which have packaging requirements within geographic areas
serviced by the St. Joe Container facilities.
The Company's sales and marketing system is supported by a centralized
computer network. All sales are invoiced and entered into the computer network
at the plant level. Sales information and data are accessible on a real-time
basis from computer terminals at each plant and at the Company's executive
offices. The Company's sales and marketing organization provides the Company
with accurate and timely information on projected product demand, competitive
activity in the marketplace and potential markets for new products and services.
CUSTOMERS
In Fiscal 1995, the Company's largest customer accounted for approximately
8.7% of net sales, with the top 10 customers accounting for approximately 23.5%.
Following the Acquisition, it is anticipated that no customer will account for
more than 5.0% of sales. The Company typically has one-year, and in some cases
50
<PAGE>
multi-year, contracts with its national accounts. These contracts have
provisions which provide for price adjustments based on changes in the Company's
raw material prices. Sales to national accounts accounted for approximately
18.1% of net sales in Fiscal 1995.
COMPETITION
The markets in which the Company sells its products are highly competitive.
Competitors of the Company's corrugators include large, integrated manufacturers
with operations throughout the United States as well as small, independent
converters with a regional or local focus. The Company competes by offering its
customers high-quality products produced to the customers' specifications, rapid
order turnaround, competitive pricing and high levels of customer service.
The Company's sheet plants generally compete with independent regional and
local sheet plants. Competitive factors include product quality, price, delivery
time and customer service. The Company believes that its ready access to raw
materials from its corrugator plants provides it a competitive advantage over
its non-integrated competitors.
The market for corrugated partitions is mature. The primary competitors in
the partition business are producers of solid fiber partitions. Solid fiber
partitions have a price advantage over corrugated partitions due to lower raw
material costs but are not as effective as corrugated partitions for protection
of fragile products during shipment and storage. The Company competes with the
solid fiber manufacturers by tailoring timing, manufacturing specifications and
delivery requirements to individual customer needs. As consolidation among users
of corrugated partitions has increased, the Company has continued to focus on
aligning its manufacturing capabilites with individual customer needs to
maintain its market share in the partition segment. In addition, the Company has
utilized its relationships with its partition customers to increase sales of
corrugated containers.
DISTRIBUTION
Corrugated packaging materials generally are delivered by truck due to the
large number of customers and demand for timely service. The dispersion of
customers and the high bulk and low density and value of corrugated packaging
materials make shipping costs a relatively high percentage of total costs. As a
result, corrugated packaging material plants tend to be located close to
customers to minimize freight costs. Generally, corrugated packaging material
plants service an area within a 150-mile radius of the plant locations. Each of
the Company's plants typically services a market within a 250-mile radius of the
plant. The Company believes that improved operating efficiencies have enabled it
to overcome any incremental freight costs associated with its larger trading
areas.
RAW MATERIALS
The Company's primary raw materials are linerboard and corrugating medium.
Historically, over two-thirds of the Company's raw materials have been provided
by Stone Container, Inland Container Corporation and Tenneco Packaging Inc.
pursuant to long-term supply contracts. The Company has recently negotiated
renewals of two of these contracts through March and July, 2000, and is
currently negotiating the renewal of the third contract. The Company has also
entered into an additional long-term supply contract with Georgia-Pacific
Corporation. The contracts specify certain monthly and annual discounts to
negotiated market prices, which are based on volumes purchased. The Company
believes that alternate sources of raw materials are available.
In 1995, St. Joe Container bought a substantial amount of its containerboard
from the St. Joe Mill. Under the Output Purchase Agreement entered into by the
Company, St. Joe Container, and the Mill Joint Venture on the Closing Date, the
Company must purchase one-half of the Mill's entire annual linerboard production
(approximately 250,000 tons), representing approximately one-third of its total
requirements, at a price that is $25 per ton below the price published in PULP &
PAPER WEEK, under the section entitled "Price Watch: Paper and Paperboard,"
subject to a minimum purchase price, which price is intended to generate
sufficient funds to cover cash operating costs, cash interest expense and
maintenance capital expenditures.
51
<PAGE>
The Ft. Madison Mill purchases its virgin fiber and its recycled fiber from
several suppliers, including some suppliers of recycled fiber who are also
customers of the Ft. Madison Mill. The Ft. Madison Mill does not typically enter
into long-term supply contracts.
ENVIRONMENTAL MATTERS
The Company's operations are subject to environmental regulation by federal,
state and local authorities in the United States. The Company believes that it
is in substantial compliance with current federal, state and local environmental
regulation. Unreimbursed liabilities arising from environmental claims, if
significant, could have a material adverse effect on the Company's results of
operations and financial condition. Furthermore, actions by federal, state and
local governments concerning environmental matters could result in laws or
regulations that could increase the cost of compliance with environmental laws
and regulations.
In November 1993, the EPA announced proposed regulations, known as the
"cluster rules," that would require more stringent controls on air and water
discharges from pulp and paper mills under the Clean Water Act and the Clean Air
Act. In March 1996, the EPA reopened the comment period for certain of the
proposed cluster rule air regulations and proposed additional regulations
regarding air discharges. Pulp and paper manufacturers have submitted extensive
comments to the EPA on the proposed cluster rules in support of the position
that requirements under the proposed regulations are unnecessarily complex,
burdensome and environmentally unjustified. It cannot be predicted at this time
whether the EPA will modify the requirements in the final regulations. Based on
information presently available from the EPA, it is expected that the EPA will
promulgate the final cluster rules in 1996. In addition, the Company anticipates
that the earliest time for industry compliance with certain aspects of the
regulations should not be prior to the last quarter of 1997, and that compliance
with the remaining elements will be required by the end of 1999. The Company
estimates that these regulations, if adopted as currently proposed, would
require capital expenditures of approximately $1.5 million to $2.0 million by
the Company with respect to the Ft. Madison Mill. The ultimate financial impact
of the proposed regulations on the Company will depend on the nature of the
final regulations, the timing of required implementation and the cost and
availability of new technology.
The Acquisition Agreement provides that the Paper Indemnitors will indemnify
the Company for certain "On-Site Environmental Liabilities" (as defined in the
Acquisition Agreement) arising from conditions existing on the Closing Date and
relating either to the St. Joe Mill or the St. Joe Container facilities.
Pursuant to these provisions, (1) 100.0% of the first $2.5 million of such
liability will be paid by the Company or the Mill Joint Venture, (2) 100.0% of
the next $2.5 million by the Paper Indemnitors, (3) 100.0% of the next $2.5
million of such liability will be paid by the Company or the Mill Joint Venture,
(4) 100.0% of the next $2.5 million of such liability will be paid by the Paper
Indemnitors, (5) 100.0% of the next $2.5 million of such liability will be paid
by the Company or the Mill Joint Venture and (6) 100.0% of the next $5.0 million
of such liability will be paid by the Paper Indemnitors; PROVIDED that the
conditions that give rise to such On-Site Environmental Liabilities are
discovered and the Paper Indemnitors are notified not later than three years
after the Closing and, subject to certain exceptions, remediation expenses are
incurred within five years after the Closing. The Paper Indemnitors will have no
responsibility to indemnify the Company or the Mill Joint Venture for expenses
relating to On-Site Environmental Liabilities in excess of the foregoing or for
any On-Site Environmental Liabilities discovered after the third anniversary of
the Closing. The Company is solely responsible for On-Site Environmental
Liabilities that arise from the acts or omissions of the Company after the
Closing. In the event that On-Site Environmental Liabilities arise from acts or
omissions which occurred both before and after the Closing, such liabilities
will be allocated between the Paper Indemnitors, on the one hand, and the
Company or the Mill Joint Venture, on the other hand, based on the relative
contribution of the acts and omissions occurring in each time period to such
On-Site Environmental Liabilities. St. Joe Paper and its affiliates, including
St. Joe Container, have retained responsibility for "Off-Site Environmental
Liabilities" (as defined in the Acquisition Agreement) that arise from
conditions existing on the Closing Date. In the event Off-Site Environmental
Liabilities arise from acts or omissions that occurred both before and after the
Closing, such Liabilities will be allocated between the Paper Indemnitors, on
the one hand, and the Company and the Mill Joint Venture, on the other hand,
based on the relative contribution of the acts and omissions occurring in each
time period to such Off-Site Environmental Liabilities. Should a condition exist
that requires remediation costs to be incurred both within and without the
boundaries of the real
52
<PAGE>
property, the costs for work within the boundaries will be deemed On-Site
Environmental Liabilities, and the work outside such boundaries will be deemed
Off-Site Environmental Liabilities. Subject to certain exceptions, On-Site
Environmental Liabilities do not include liabilities that arise due to a change
in any law or regulation becoming effective after November 1, 1995.
Pursuant to the Indemnification Reimbursement Agreement between the Mill
Joint Venture and the Company, the benefit of indemnification from the Paper
Indemnitors with respect to such environmental liabilities will be allocated
80.0% to the Mill Joint Venture and 20.0% to the Company, with the Mill Joint
Venture or the Company being obligated, under certain circumstances, to
reimburse the other in the event either recovers more than its allocated share
and the other recovers less.
The obligations of the Paper Indemnitors with respect to On-Site
Environmental Liabilities will terminate in the event that either the Company or
the Mill Joint Venture undergoes a "change of control" (as defined in the
Acquisition Agreement). Change of Control is defined to mean (i) a transaction
in which any Person or Group (as defined in Rule 13d-5 of the Exchange Act)
other than the "Principals" (as defined in the Acquisition Agreement) or the
"Lenders" (as defined in the Acquisition Agreement) acquires more than 50.0% of
the total voting power of all classes of voting stock of the Company or the Mill
Joint Venture, as the case may be, (ii) a transaction in which any Person or
Group (as defined in Rule 13d-5 of the Exchange Act) other than the Principals
or the Lenders has a sufficient number of nominees elected to constitute a
majority of the Board of Directors of the Company or of the Board of Managers of
the Mill Joint Venture, as the case may be, (iii) the sale of all or
substantially all of the capital stock of the Company or the Mill Joint Venture,
as the case may be, as an entirety or substantially as an entirety to any Person
or Group (as defined in Rule 13d-5 of the Exchange Act) other than the
Principals or the Lenders and (iv) the sale or transfer of all or substantially
all of the assets of the Company or the Mill Joint Venture, as the case may be,
as an entirety or substantially as an entirety to any Person other than the
Principals or the Lenders. For purposes of the definition of Change of Control,
"Principals" is defined as (1) Dennis Mehiel in the case of the Company, (2) the
Company and Stone Container, in the case of the Mill Joint Venture, and (3) any
subsidiary of Dennis Mehiel, the Company or Stone Container; and "Lenders" is
defined as one or more institutional lenders which provide debt financing to the
Company or the Mill Joint Venture as of the Closing.
Pursuant to the Acquisition Agreement, St. Joe Container has agreed to
undertake and complete, at its sole cost, remedial actions required for a former
land application area at the container facility located in Laurens, South
Carolina and remedial actions associated with two underground storage tanks at
the container facility located in Chicago, Illinois. St. Joe Container has also
agreed to reimburse the Company for up to $1.4 million of expenses incurred by
the Company after the Closing to undertake certain identified environmental
projects at several of the acquired container facilities.
The indemnification provisions in the Acquisition Agreement are generally
intended to be the exclusive remedies of the parties with respect to such
agreements.
LEGAL PROCEEDINGS
On July 19, 1996, a civil action was filed in the Superior Court of Fulton
County, Georgia (the "Suit") by Sid Dunken, a former employee, individually and
on behalf of D&M Partnership, a Georgia partnership, against Four M, Box USA
Group, Inc., Four M Manufacturing Group of Georgia, Inc. and Dennis Mehiel. The
complaint alleges that Dunken is entitled to an equity interest in Four M or in
the alternative, $150,000,000 in compensatory damages, as well as punitive
damages and attorneys' fees. The Company believes that the Suit is without
merit. The Company intends to defend against the Suit vigorously and believes
that it has adequate defenses. However, the Suit is in a very preliminary stage,
and there can be no assurance that the outcome of the Suit will not be adverse
to Four M.
From time to time, the Company is subject to legal proceedings and other
claims arising in the ordinary course of its business. The Company maintains
insurance coverage against claims in an amount which it believes to be adequate.
The Company believes that it is not presently a party to any litigation, the
outcome of which could reasonably be expected to have a material adverse effect
on its financial condition or results of operations.
53
<PAGE>
PROPERTIES
The Company owns or leases manufacturing properties having an aggregate
floor space of approximately 4.3 million square feet. The table below provides
summary information regarding the principal properties owned or leased by the
Company.
<TABLE>
<CAPTION>
APPROXIMATE LEASED OR
LOCATION SQUARE FOOTAGE TYPE OWNED
- -------------------------- -------------- ------------------- ------------
<S> <C> <C> <C>
Birmingham, AL (1) 167,000 Corrugator Owned
Lake Wales, FL (1) 275,000 Corrugator Owned
Chicago, IL (1) 185,000 Corrugator Owned
Hartford City, IN (1) 277,150 Corrugator Owned
Louisville, KY (1) 240,000 Corrugator Owned
Baltimore, MD (1) 220,000 Corrugator Owned
Newark, OH 107,000 Corrugator Owned
Charlotte, NC (1) 170,000 Corrugator Owned
Eighty Four, PA 133,000 Corrugator Owned
Pittsburgh, PA (1) 225,000 Corrugator Owned
Laurens, SC (1) 180,000 Corrugator Owned
Memphis, TN (1) 216,000 Corrugator Owned
Dallas, TX (1) 187,000 Corrugator Owned
Houston, TX (1) 157,000 Corrugator Owned
Chesapeake, VA (1) 148,000 Corrugator Owned
Compton, CA 135,000 Corrugator Leased
Port St. Joe, FL (1)(2) 142,000 Corrugator Leased
Stockbridge, GA (3) 160,000 Corrugator Leased
Dothan, AL (1) 31,000 Sheet Owned
Byesville, OH 60,000 Sheet Owned
Montebello, CA 90,000 Sheet (4) Leased
San Leandro, CA 110,000 Sheet (4) Leased
Vernon, CA (6) 200,000 Sheet Owned
Jacksonville, FL (3)(5) 69,000 Partition Leased
Litchfield, IL 42,000 Partition Leased
Portland, IN (3) 40,500 Partition Leased
Bethesda, OH (3) 44,100 Partition Leased
Ft. Madison, IA 138,570 Mill Owned
Valhalla, NY 16,000 Executive Offices Leased
Union, NJ (1) 800 Sales Leased
Newark, NJ 180,000 Corrugator Leased
</TABLE>
- ------------------------------
(1) Properties acquired in the Acquisition.
(2) Property to be net leased from the Mill Joint Venture for a nominal rental
payment.
(3) Properties owned, directly or indirectly, by Dennis Mehiel. See "Related
Party Transactions."
(4) Sheet plants which have the capability to produce partitions.
(5) As of March 21, 1996, the Company has leased an additional sheet plant of
approximately 72,690 square feet located in Jacksonville, Florida which
became fully operational on July 1, 1996.
(6) Acquired on June 4, 1996 by Box USA Group, Inc. for approximately $4.5
million. The Company anticipates that it will spend approximately $1.1
million for capital expenditures on this plant.
54
<PAGE>
EMPLOYEES
As of April 30, 1996, the Company had 915 employees, of whom 672 were hourly
employees and 243 were salaried employees. Of such employees, 205 were engaged
in management and administrative functions, 38 were engaged in sales and
marketing and 672 were engaged in manufacturing. Three hundred ninety-one hourly
employees at seven Company facilities are members of unions under seven separate
contracts. Two of these contracts expire in 1996, one in 1997 and four in 1998.
Management believes that its employee relations are good.
As of January 31, 1996, 1,409 people were employed in the St. Joe Container
facilities, of whom 997 were hourly employees and 412 were salaried employees.
Of such employees, 140 were engaged in management and administrative functions,
120 were engaged in sales and marketing, 997 were engaged in manufacturing, and
152 were engaged in distribution. Approximately 740 of the hourly employees were
members of various unions. None of the union agreements to which St. Joe
Container is a party were assignable to the Company in the Acquisition, and the
Company must negotiate new collective bargaining agreements with the relevant
unions in connection with the consummation of the Acquisition. See "Risk Factors
- -- Labor Matters."
55
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The following is a table setting forth certain information with respect to
the individuals who are the directors and executive officers of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------- --- ------------------------------------------------------
<S> <C> <C>
Dennis Mehiel 54 Chairman, Chief Executive Officer and Director
Chris Mehiel 57 Executive Vice President, Chief Operating Officer and
Director
Timothy D. McMillin 53 Senior Vice President, Chief Financial Officer and
Director
Gerald K. Adams 43 Chief Executive Officer
Harvey L. Friedman 54 Corporate Secretary and General Counsel
Frederick H. Woestendiek 66 Vice President and Regional Manager
Ingrid Santiago 44 Vice President--Materials Management
Clinton G. Ames 74 Director
Lawrence A. Bishop 51 Director
Samuel B. Guren 49 Director
Thomas Uleau 51 Director
James Armenakis 53 Director
John Nevin 61 Director
</TABLE>
DENNIS MEHIEL, a co-founder of the Company, has been the Chairman and Chief
Executive Officer of the Company, except during a leave of absence from April
1994 through July 1995, since 1977. He was also the Chief Executive Officer of
the Company's subsidiary, Box USA Group, Inc., until June 1996. He is also the
Chairman of the Executive Committee of the Company's Board of Directors. Mr.
Mehiel is also the Chairman of Fonda and the MannKraft Corporation, a corrugated
container manufacturer ("MannKraft").
CHRIS MEHIEL, the brother of Dennis Mehiel, is a co-founder of the Company
and has been Executive Vice President, Chief Operating Officer and a Director of
the Company since September 1995. Mr. Mehiel was President of Fibre Marketing
Group, Inc., a waste paper recovery business which he co-founded, from 1994 to
January 1996. He is the President of the managing member of Fibre Marketing
Group, LLC, the successor to Fibre Marketing Group, Inc. From 1993 to 1994, Mr.
Mehiel served as President and Chief Operating Officer of MannKraft Corporation,
a corrugated container manufacturer. From 1982 to 1992, Mr. Mehiel served as the
President and Chief Operating Officer of Specialty Industries, Inc., a waste
paper processing and container manufacturing company.
TIMOTHY D. MCMILLIN has been a Director of the Company since 1983 and Senior
Vice President and Chief Financial Officer since September 1995. From November
1994 to September 1995, he was Chairman of Executive Advisors, Inc., a
consulting firm specializing in financial restructuring. From 1991 to 1994, Mr.
McMillin was an independent strategic and financial consultant. Mr. McMillin
spent over 25 years in the financial services industry and served in various
capacities, including Executive Vice President, at Maryland National Bank, from
1965 to 1990. Mr. McMillin is a Director of EIL Instruments, Inc., a
manufacturer and distributor of testing, measurement and energy control systems.
Mr. McMillin is a member of the Audit Committee of the Company's Board of
Directors.
GERALD K. ADAMS became Chief Executive Officer of the Company's subsidiary,
Box USA Group, Inc., in June 1996. From March 1992 to March 1996, he was Chief
Executive Officer of Amcor Fibre Packaging Group, a corrugated packaging company
and a division of Amcor, Ltd. From March 1988 until March 1992, Mr. Adams was
the General Manager of Australian Paper, a folding cartonboard producer and a
division of Amcor, Ltd.
HARVEY L. FRIEDMAN has been General Counsel since 1991 and Corporate
Secretary since May 1996. He was a Director of the Company from 1985 to May
1996. He was formerly a partner in Kramer, Levin, Naftalis & Frankel, a New York
City law firm.
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<PAGE>
FREDERICK H. WOESTENDIEK has been Vice President and Regional Manager of the
Company's subsidiary, Box USA Group, Inc., since 1990. Mr. Woestendiek has been
in the corrugated industry for over 30 years. He joined the Company when Eastern
Ohio Packaging Company (a company he started in 1984) was acquired by the
Company in 1988. He was Sales Manager with Greif Brothers Corporation, a
manufacturer of corrugated containers and fiber drums, from 1961 to 1984.
INGRID SANTIAGO has been Vice President--Materials Management of the
Company's subsidiary, Box USA Group, Inc., since 1991. Ms. Santiago joined the
Company in 1977 as Executive Secretary. In 1982 she joined the Customer Service
Department and in 1984 was named Director of the Company's Corporate Sales
Service Department.
CLINTON G. AMES has been a Director of the Company since 1992 and has been
Chief Executive Officer of Four M Paper Corporation, a subsidiary of the Company
and the operating company for the Ft. Madison Mill, since July 1995. From April
1994 through July 1995, Mr. Ames served as the Company's President, Chief
Executive Officer and Chief Operating Officer. From 1990 to 1994, he served as
the Chief Executive Officer of Fonda. From 1988 to 1990, Mr. Ames served as a
consultant to the Company. Prior to joining the Company, Mr. Ames was with
Inland Container Corporation for 19 years, commencing in 1968. In 1974, he
became Inland's President and, in 1978, its Chief Executive Officer and
Chairman, positions he held until he retired from Inland in 1987. Mr. Ames is
also a Director of Bell Packaging Corporation.
LAWRENCE A. BISHOP has been a Director of the Company since November 1985.
He has held various positions since 1980 at Gray, Seifert and Co., Inc., a
registered investment advisor that provides money management services to
individuals and institutions, and currently holds the title of Executive Vice
President. From 1972 to 1979, he was a Vice President of Bessemer Trust Company,
N.A. Mr. Bishop is a Director of Synergistics, Inc., and Unapix Entertainment,
Inc. Mr. Bishop is Chairman of the Compensation/Stock Appreciation Rights
Committee and a member of the Executive Committee and Audit Committee of the
Company's Board of Directors. Mr. Bishop is also a Director of Fonda.
SAMUEL B. GUREN has been a Director of the Company since 1987. He is a
Managing Director of Baird Capital Partners, a private equity fund. He is also
co-founder and Managing Partner since 1982 of William Blair Venture Management
Company, the general partner of three private equity funds. Mr. Guren was a Vice
President at Continental Illinois Corporation from 1974 to 1981. Mr. Guren is
Chairman of the Audit Committee of the Company's Board of Directors. Mr. Guren
is also a Director of Fonda.
THOMAS ULEAU has been the Chief Operating Officer of Fonda since March 1995
a Director of Fonda since 1988 and a Director of the Company since May 1989. Mr.
Uleau was Executive Vice President and Chief Financial Officer of the Company
from 1989 through March 1994. He served as President of Cardinal Container
Corporation (which was acquired by the Company in 1985) from 1983 to 1986. Mr.
Uleau started his career as an accountant at Deloitte, Haskins and Sells from
1969 to 1972, after which he spent several years in various capacities at IU
International, a transportation and paper products conglomerate.
JAMES ARMENAKIS has been a Director of the Company since May 1996. He has
been a partner in Armenakis & Armenakis, a New York City law firm, since 1990.
JOHN NEVIN has been a Director of the Company since May 1996. He has been an
Executive Vice President at Fieldcrest Cannon, Inc. since October 1995. From
September 1990 to October 1995 he was a Senior Vice President at James River
Corporation. From 1957 to 1990, Mr. Nevin served in various capacities at
International Paper Company, including Vice President and Group Executive of the
Pulp and Coated Papers Businesses.
57
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth the compensation paid to the Company's
Chairman of the Board of Directors and the Company's four most highly
compensated executive officers (the "Named Executive Officers") during Fiscal
1995:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
---------------
ANNUAL COMPENSATION SECURITIES
---------------------- OTHER ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS COMPENSATION OPTION/SARS COMPENSATION
- ------------------------------------------- ---------- ---------- ------------- --------------- -------------
<S> <C> <C> <C> <C> <C>
Dennis Mehiel
Chairman of the Board of
Directors $333,044 $375,000 $38,904 (1) -- $137,448 (2)
Clinton Ames
Chief Executive Officer
of Four M Paper
Corporation 360,000 120,000 -- -- --
William Hutchinson, Jr. (3)
former Executive Vice President 160,000 55,000 -- -- 1,542 (4)
Frederick H. Woestendiek
Vice President and Regional
Manager of Box USA
Group, Inc. 122,855 16,000 -- 1,500 3,452 (4)
Thomas Uleau
Chief Operating Officer
of Fonda 106,667(5) -- -- -- 1,208 (4)
</TABLE>
- ------------------------------
(1) Includes imputed interest ($37,189) from non-interest bearing loans
provided to Dennis Mehiel by the Company.
(2) Consists of split-dollar term life insurance premiums for Mr. Mehiel paid
by the Company.
(3) Resigned as Executive Vice President in August 1995 when the Company sold
its interest in Timberline Packaging, Inc.
(4) Consists of contributions to the Company's Savings and Investment Plan.
(5) Consists of salary through March 1995 when Fonda was spun off.
COMPENSATION OF DIRECTORS
Any Director who is not an employee of the Company receives annual
compensation of $5,000 and a fee of $500 for attendance at each meeting of the
Board of Directors. Directors who are employees of the Company do not receive
any compensation or fees for service on the Board of Directors.
58
<PAGE>
STOCK APPRECIATION RIGHTS
The following table provides information on grants of stock appreciation
rights ("SARs") made during Fiscal 1995 to the Named Executive Officers:
OPTION/SAR GRANTS IN FISCAL 1995
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
--------------------------------------------------
NUMBER OF
SECURITIES % OF TOTAL
UNDERLYING OPTIONS/SARS EXERCISE
OPTIONS/ GRANTED TO OR BASE
SARS EMPLOYEES IN PRICE EXPIRATION
NAME GRANTED FISCAL YEAR PER SHARE DATE (1)
- -------------------------------------------------------------- ----------- ------------- ---------- ----------
<S> <C> <C> <C> <C>
Frederick H. Woestendiek...................................... 1,500 6.1 % $0.13 --
</TABLE>
- ------------------------------
(1) Unless otherwise determined by the non-employee directors of the Company and
the Chief Executive Officer of the Company (the "Administering Committee"),
awards of SARs will vest on each anniversary of their grant at the rate of
20.0% per year commencing on the first anniversary date. However, in the
event that at the time of any grant of SARs the grantee has not been
continuously employed by the Company for at least five years, such vesting
shall be conditional and shall be deemed unvested until the completion of
such five-year period. Upon voluntary termination of employment, involuntary
termination without cause or termination due to death, disability or
retirement at age 60 or above, all unvested SARs will be forfeited and
vested SARs not previously redeemed will be redeemed automatically by the
Company as of the date of termination.
The following table provides information on SARs exercised by the Named
Executive Officers in Fiscal 1995 and the value held by such officers as of the
end of Fiscal 1995:
AGGREGATE OPTION/SAR EXERCISES IN FISCAL 1995
AND FISCAL YEAR END OPTION/SAR VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS/SARS OPTIONS/SARS
AS OF JULY 31, 1995 AS OF JULY 31, 1995
SHARES ACQUIRED VALUE -------------------------- --------------------------
NAME ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------------- --------------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
William Hutchinson, Jr......... -- -- 8,000 7,000 -- --
Thomas Uleau................... -- -- 4,800 4,200 -- --
Frederick H. Woestendiek....... -- -- 1,100 2,400 -- --
</TABLE>
59
<PAGE>
SECURITY OWNERSHIP
The following table sets forth information as of December 31, 1995 with
respect to the beneficial ownership of shares of Common Stock:
<TABLE>
<CAPTION>
AMOUNT OF
BENEFICIAL PERCENTAGE OF BENEFICIAL
OWNERSHIP OF SHARES OWNERSHIP OF SHARES OF
NAME OF COMMON STOCK(1) COMMON STOCK
- ----------------------------------------------------------- ------------------- -------------------------
<S> <C> <C>
Dennis Mehiel.............................................. 6,815,867 100%
</TABLE>
RELATED PARTY TRANSACTIONS
Dennis Mehiel is an owner of entities from which the Company rents certain
property, plant and equipment. Rental expense incurred and paid to these
entities in Fiscal 1993, Fiscal 1994 and Fiscal 1995 amounted to approximately
$0.9 million, $1.1 million, and $0.9 million, respectively. The Company believes
that such rents are not in excess of market levels. The partition plant located
in Jacksonville, Florida is currently leased by Fonda from Mr. Mehiel, and a
portion of the facility is subleased to the Company.
Dennis Mehiel has been a part owner since 1993 of MannKraft, to which the
Company sold approximately $15.0 million, $3.3 million and $30,000 of material
in Fiscal 1993, Fiscal 1994 and Fiscal 1995, respectively. The Company believes
that the prices at which such sales were made are not below market levels.
In March 1995, the Company spun off its Fonda subsidiary to Dennis Mehiel.
The Company sold approximately $0.8 million, $0.6 million and $1.1 million of
material to Fonda in Fiscal 1993, Fiscal 1994 and Fiscal 1995, respectively. The
Company believes that the prices at which such sales were made are not below
market levels.
Chris Mehiel has been a part owner since 1994 of Fibre Marketing, to which
the Company sold approximately $3.4 million of material in Fiscal 1995. The
Company believes that the prices at which such sales were made are not below
market levels.
The Company had outstanding notes and loans receivable from Dennis Mehiel in
the amount of $0.8 million, $1.3 million and $1.5 million at the end of Fiscal
1993, Fiscal 1994 and Fiscal 1995, respectively, all of which were non-interest
bearing and all of which have been paid.
In addition, the Initial Purchaser provided certain financial advisory
services to the Company in connection with the Acquisition. In connection
therewith, the Initial Purchaser received a fee of $1.2 million and warrants to
purchase 1.3% of the Company, plus reimbursement of certain expenses.
60
<PAGE>
DESCRIPTION OF NEW NOTES
GENERAL. The New Notes will be issued pursuant to an Indenture (the
"Indenture") between the Company and Norwest Bank Minnesota, N.A., as trustee
(the "Trustee"), in a private transaction that is not subject to the
registration requirements of the Securities Act. The terms of the New Notes
include those stated in the Indenture and those made part of the Indenture by
reference to the Trust Indenture Act of 1939 (the "Trust Indenture Act"). The
New Notes are subject to all such terms, and Holders of New Notes are referred
to the Indenture and the Trust Indenture Act for a statement thereof. The
following summary of certain provisions of the Indenture does not purport to be
complete and is qualified in its entirety by reference to the Indenture,
including the definitions therein of certain terms used below. Copies of the
Indenture, Collateral Documents (as defined herein) and Registration Rights
Agreement are available as set forth under the caption "--Additional
Information." The definitions of certain terms used in the following summary are
set forth below under the caption "--Certain Definitions."
The New Notes will be senior secured obligations of the Company, rank senior
in right of payment to all subordinated indebtedness of the Company and rank
PARI PASSU in right of payment with all senior borrowings. The New Notes will be
secured by a lien on certain assets of the Company and its Restricted
Subsidiaries, including a first priority security interest in substantially all
of the equipment of the Company and its Restricted Subsidiaries and a pledge of
the Capital Stock of the Subsidiaries of the Company. See "--Security."
The New Notes will be guaranteed, on a senior secured basis, by all current
Subsidiaries of the Company other than Box USA Paper Corporation, which
indirectly holds the Company's interests in the St. Joe Mill, and Box USA of
Florida, L.P., which operates one converting facility. See "--Subsidiary
Guarantees." As of the date of the Indenture, all of the Company's Subsidiaries
other than Box USA Paper Corporation are Restricted Subsidiaries. Box USA Paper
Corporation is an Unrestricted Subsidiary, and the Company is able to designate
other current or future Subsidiaries as Unrestricted Subsidiaries under certain
circumstances. Unrestricted Subsidiaries are not subject to many of the
restrictive covenants set forth in the Indenture. See "--Certain
Covenants--Restricted Payments" and "--Certain Definitions--Unrestricted
Subsidiary."
SUBSIDIARY GUARANTEES. The Company's payment obligations under the New
Notes will be jointly and severally guaranteed (the "Subsidiary Guarantees") by
the Guarantors.
The Indenture provides that no Guarantor may consolidate with or merge with
or into (whether or not such Guarantor is the surviving Person) another
corporation, Person or entity, whether or not affiliated with such Guarantor,
unless (i) subject to the provisions of the following paragraph, the Person
formed by or surviving any such consolidation or merger (if other than such
Guarantor) assumes all the obligations of such Guarantor, pursuant to a
supplemental indenture and the appropriate Collateral Documents in form and
substance reasonably satisfactory to the Trustee, under the New Notes, the
Indenture and the Collateral Documents; (ii) immediately after giving effect to
such transaction, no Default or Event of Default exists; (iii) such Guarantor,
or any Person formed by or surviving any such consolidation or merger, would
have Consolidated Net Worth (immediately after giving effect to such
transaction) equal to or greater than the Consolidated Net Worth of such
Guarantor immediately preceding the transaction; and (iv) the Company would be
permitted by virtue of the Company's pro forma Fixed Charge Coverage Ratio,
immediately after giving effect to such transaction, to incur at least $1.00 of
additional Indebtedness pursuant to the Fixed Charge Coverage Ratio test set
forth in the covenant described below under the caption "--Certain
Covenants--Incurrence of Indebtedness"; PROVIDED, that the foregoing provisions
do not restrict the ability of a Restricted Subsidiary to consolidate or merge
with the Company or another Restricted Subsidiary.
The Indenture provides that, in the event of a sale or other disposition of
all of the assets of any Guarantor (other than to or with the Company or another
Guarantor), by way of merger, consolidation or otherwise, or a sale or other
disposition of all of the capital stock of any Guarantor (other than to the
Company or another Guarantor), then such Guarantor (in the event of a sale or
other disposition, by way of such a merger, consolidation or otherwise, of all
of the capital stock of such Guarantor) or the corporation acquiring the
property (in the event of a sale or other disposition of all of the assets of
such Guarantor) will
61
<PAGE>
be released and relieved of any obligations under its Subsidiary Guarantee;
PROVIDED that the Net Proceeds of such sale or other disposition are applied in
accordance with the applicable provisions of the Indenture. See "--Repurchase at
Option of Holders--Asset Sales and Events of Loss." In addition, the Indenture
provides that, in the event the Company designates a Subsidiary Guarantor to be
an Unrestricted Subsidiary, then such Subsidiary Guarantor will be released and
relieved of any obligations under its Subsidiary Guarantee; PROVIDED that such
designation is conducted in accordance with the applicable provisions of the
Indenture. See "--Certain Covenants--Restricted Payments" and "--Certain
Definitions--Unrestricted Subsidiary."
"Guarantors" means all current Subsidiaries of the Company, other than Box
USA Paper Corporation and Box USA of Florida, L.P., and any other Subsidiary
that executed a Subsidiary Guarantee in accordance with the provisions of the
Indenture, and their respective successors and assigns, unless and until any
successor replaces any such Guarantor in accordance with the terms of the
Indenture, and thereafter includes each such successor.
SECURITY. The New Notes will be secured by a first priority security
interest in substantially all of the equipment and certain other assets of the
Company and its Restricted Subsidiaries (but excluding, among other things, land
and improvements thereon, inventories and accounts receivable, and the proceeds
thereof), and by a pledge of the Capital Stock of the Subsidiaries of the
Company. The Company and its Restricted Subsidiaries, other than Box USA of
Florida, L.P., have entered into certain of the Collateral Documents providing
for the grant by the Company and its Restricted Subsidiaries to the Trustee, as
collateral agent (in such capacity, the "Collateral Agent") for the holders of
the New Notes ("Holders"), of a first priority security interest in the
Collateral. Such security interests will secure the payment and performance when
due of all of the Obligations of the Company and its Restricted Subsidiaries
under the Indenture, the New Notes and the Collateral Documents.
In the event that any Collateral is sold in accordance with the provisions
of the Indenture and the Net Proceeds therefrom are applied in accordance with
the terms of the covenant entitled "Repurchase at the Option of Holders--Asset
Sales and Events of Loss," the Collateral Agent shall release the Liens in favor
of the Collateral Agent in the Collateral sold; PROVIDED, that the Collateral
Agent shall have received from the Company an Officer's Certificate and an
Opinion of Counsel that such Net Proceeds have been or will be so applied. Upon
the full and final payment and performance of all Obligations of the Company and
its Restricted Subsidiaries under the Indenture, the New Notes and the
Collateral Documents, the Collateral Documents shall terminate and the
Collateral shall be released from the Lien of the applicable Collateral
Document. If an Event of Default (as defined herein) shall have occurred and is
continuing, the rights and remedies of the Trustee as Collateral Agent for the
Holders of the New Notes with respect to the Collateral shall be as set forth in
the Collateral Documents.
PRINCIPAL, MATURITY AND INTEREST. The New Notes will be limited in
aggregate principal amount to $170.0 million and will mature on June 1, 2006.
Interest on the New Notes will accrue at the rate of 12% per annum and will be
payable semi-annually in arrears on June 1 and December 1 of each year,
commencing on December 1, 1996, to Holders of record on the immediately
preceding May 15 and November 15. Interest on the New Notes will accrue from the
most recent date to which interest has been paid or, if no interest has been
paid, from the date of original issuance. Interest will be computed on the basis
of a 360-day year comprised of twelve 30-day months. Principal of, premium and
interest on the New Notes will be payable at the office or agency of the Company
maintained for such purpose or, at the option of the Company, payment of
interest may be made by check mailed to the Holders of the New Notes at their
respective addresses set forth in the register of Holders of New Notes; PROVIDED
that all payments with respect to New Notes the Holders of which have given wire
transfer instructions to the Company will be required to be made by wire
transfer of immediately available funds to the accounts specified by the Holders
thereof. Until otherwise designated by the Company, the Company's office or
agency will be the office of the Trustee maintained for such purpose. The New
Notes will be issued in denominations of $1,000 and integral multiples thereof.
OPTIONAL REDEMPTION. The New Notes will not be redeemable at the Company's
option prior to June 1, 2001. Thereafter, the New Notes will be subject to
redemption at the option of the Company, in whole or in part, upon not less than
30 nor more than 60 days' notice, at the redemption prices (expressed as
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<PAGE>
percentages of principal amount) set forth below plus accrued and unpaid
interest, if any, to the applicable redemption date, if redeemed during the
twelve-month period beginning on June 1 of the years indicated below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
- ---------------------------------------------------------------------------------- -----------
<S> <C>
2001.............................................................................. 106.0%
2002.............................................................................. 104.0%
2003.............................................................................. 102.0%
2004 and thereafter............................................................... 100.0%
</TABLE>
Notwithstanding the foregoing, at any time prior to June 1, 1999, the
Company may redeem up to one-third in aggregate principal amount of New Notes at
a redemption price of 112% of the principal amount thereof, in each case plus
accrued and unpaid interest, if any, to the redemption date, with the net
proceeds of a public offering of common stock of the Company; PROVIDED that at
least two-thirds in aggregate principal amount of the New Notes originally
issued under the Indenture remain outstanding immediately after the occurrence
of such redemption; and PROVIDED, further, that such redemption shall occur
within 60 days following the date of the closing of such initial public offering
of common stock of the Company.
In addition, upon the occurrence of a Change of Control prior to June 1,
2001, the Company, at its option, may redeem all, but not less than all, of the
outstanding New Notes at a redemption price equal to 100% of the principal
amount thereof plus the applicable Make-Whole Premium (a "Change of Control
Redemption"). The Company shall give not less than 30 and not more than 60 days'
notice of such redemption within 30 days following a Change of Control.
SELECTION AND NOTICE. If less than all of the New Notes are to be redeemed
at any time, selection of New Notes for redemption will be made by the Trustee
in compliance with the requirements of the principal national securities
exchange, if any, on which the New Notes are listed, or, if the New Notes are
not so listed, on a pro rata basis, by lot or by such method as the Trustee
shall deem fair and appropriate; PROVIDED that no New Notes of $1,000 or less
shall be redeemed in part. Notices of redemption shall be mailed by first class
mail at least 30 but not more than 60 days before the redemption date to each
Holder of New Notes to be redeemed at its registered address. If any New Note is
to be redeemed in part only, the notice of redemption that relates to such New
Note shall state the portion of the principal amount thereof to be redeemed. A
new New Note in principal amount equal to the unredeemed portion thereof will be
issued in the name of the Holder thereof upon cancellation of the original New
Note. On and after the redemption date, interest shall cease to accrue on New
Notes or the portions thereof called for redemption.
MANDATORY REDEMPTION. Except as set forth below under the caption
"--Repurchase at the Option of Holders," the Company is not required to make
mandatory redemption or sinking fund payments with respect to the New Notes.
REPURCHASE AT THE OPTION OF HOLDERS
CHANGE OF CONTROL. Upon the occurrence of a Change of Control, each Holder
of New Notes will have the right to require the Company to repurchase all or any
part (equal to $1,000 or an integral multiple thereof) of such Holder's New
Notes pursuant to the offer described below (the "Change of Control Offer") at
an offer price in cash equal to 101% of the aggregate principal amount thereof
plus accrued and unpaid interest, if any, to the date of purchase (the "Change
of Control Payment"). Within ten days following any Change of Control, the
Company will mail a notice to each Holder that describes the transaction or
transactions that constitute the Change of Control and offers to repurchase New
Notes pursuant to the procedures required by the Indenture and described in such
notice. The Company will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with the
repurchase of the New Notes as a result of a Change of Control.
On the Change of Control Payment Date, the Company will, to the extent
lawful, (1) accept for payment all New Notes or portions thereof properly
tendered pursuant to the Change of Control Offer, (2) deposit with the Paying
Agent an amount equal to the Change of Control Payment in respect of all New
Notes or
63
<PAGE>
portions thereof so tendered and (3) deliver or cause to be delivered to the
Trustee the New Notes so accepted together with an Officers' Certificate stating
the aggregate principal amount of New Notes or portions thereof being purchased
by the Company. The Paying Agent will promptly mail to each Holder of New Notes
so tendered the Change of Control Payment for such New Notes, and the Trustee
will promptly authenticate and mail (or cause to be transferred by book entry)
to each Holder a new New Note equal in principal amount to any unpurchased
portion of the New Notes surrendered, if any; PROVIDED that each such new New
Note will be in a principal amount of $1,000 or an integral multiple thereof.
The Company will publicly announce the results of the Change of Control Offer on
or as soon as practicable after the Change of Control Payment Date.
Except as described above with respect to a Change of Control, the Indenture
does not contain provisions that permit the Holders of the New Notes to require
that the Company repurchase or redeem the New Notes in the event of a takeover,
recapitalization or similar transaction. The Company's ability to pay cash to
the Holders of New Notes upon a repurchase may be limited by the Company's then
existing financial resources. In addition, the occurrence of a Change of Control
may constitute a default under the Credit Facility.
The Company will not be required to make a Change of Control Offer upon a
Change of Control if a third party makes the Change of Control Offer in the
manner, at the times and otherwise in compliance with the requirements set forth
in the Indenture applicable to a Change of Control Offer made by the Company and
purchases all New Notes validly tendered and not withdrawn under such Change of
Control Offer.
"Change of Control" means the occurrence of any of the following: (i) the
sale, lease, transfer, conveyance or other disposition (other than by way of
merger or consolidation), in one or a series of related transactions, of all or
substantially all of the assets of the Company and its Restricted Subsidiaries
taken as a whole to any "person" (as such term is used in Section 13(d)(3) of
the Exchange Act) other than the Principals (as defined below), (ii) the
adoption of a plan relating to the liquidation or dissolution of the Company,
(iii) the consummation of any transaction (including, without limitation, any
merger or consolidation) the result of which is that any "person" (as defined
above), other than the Principals, becomes the "beneficial owner" (as such term
is defined in Rule 13d-3 and Rule 13d-5 under the Exchange Act), directly or
indirectly, of more than 35% of the voting stock of the Company, (iv) the
consummation of the first transaction (including, without limitation, any merger
or consolidation) the result of which is that any "person" (as defined above)
becomes the "beneficial owner" (as defined above), directly or indirectly, of
more of the voting stock of the Company than is at the time "beneficially owned"
(as defined above) by the Principals or (v) the first day on which a majority of
the members of the Board of Directors of the Company are not Continuing
Directors. For purposes of this definition, any transfer of an equity interest
of an entity that was formed for the purpose of acquiring voting stock of the
Company will be deemed to be a transfer of such portion of such voting stock as
corresponds to the portion of the equity of such entity that has been so
transferred.
"Continuing Directors" means, as of any date of determination, any member of
the Board of Directors of the Company who (i) was a member of such Board of
Directors on the date of the Indenture or (ii) was nominated for election or
elected to such Board of Directors with the approval of a majority of the
Continuing Directors who were members of such Board at the time of such
nomination or election.
"Principals" means Dennis Mehiel, his wife and lineal descendants, and any
trust, corporation, partnership or other entity in which Dennis Mehiel and his
wife and/or lineal descendants hold an 80% or more controlling interest.
ASSET SALES AND EVENTS OF LOSS. The Indenture provides that the Company
will not, and will not permit any of its Restricted Subsidiaries to, engage in
an Asset Sale unless (i) the Company (or the Restricted Subsidiary, as the case
may be) receives consideration at the time of such Asset Sale at least equal to
the fair market value (evidenced by a resolution of the Board of Directors set
forth in an Officers' Certificate delivered to the Trustee) of the assets or
Equity Interests issued or sold or otherwise disposed of and (ii) at least 85%
of the consideration therefor received by the Company or such Restricted
Subsidiary is in the form of cash; PROVIDED that the amount of (x) any
liabilities (as shown on the Company's or such
64
<PAGE>
Restricted Subsidiary's most recent balance sheet), of the Company or any
Restricted Subsidiary (other than contingent liabilities and liabilities that
are by their terms subordinated to the New Notes or any guarantee thereof) that
are assumed by the transferee of any such assets pursuant to a customary
novation agreement that releases the Company or such Restricted Subsidiary from
further liability, (y) any notes or other obligations received by the Company or
any such Restricted Subsidiary from such transferee that are immediately
converted by the Company or such Restricted Subsidiary into cash (to the extent
of the cash received) and (z) sales, leases, conveyances or other dispositions
of "Excluded Property" as that term is defined respectively in the Security
Agreement and in the Subsidiary Security Agreement, in each case, shall be
deemed to be cash for purposes of this provision.
Within 270 days after the receipt of any Net Proceeds from an Asset Sale or
an Event of Loss, the Company may apply such Net Proceeds to the acquisition of
a controlling interest in another business, the making of a capital expenditure
or the acquisition of other tangible assets, in each case, in the same line of
business as the Company was engaged in on the date of such Asset Sale or Event
of Loss, upon the consummation of which the Collateral Agent shall have received
a perfected first priority security interest in the assets so acquired. The Net
Proceeds of all Asset Sales and Events of Loss shall promptly and without
commingling be deposited with the Trustee in the form received to be held by the
Trustee as Pledged Collateral in the applicable Cash Collateral Account
established pursuant to the Indenture until applied as permitted pursuant to the
Indenture. Any Net Proceeds from Asset Sales or Events of Loss that are not
applied or invested as provided in the first sentence of this paragraph will be
deemed to constitute "Excess Proceeds." When the aggregate amount of Excess
Proceeds exceeds $5.0 million, the Company will be required to make an offer to
all Holders of New Notes (an "Excess Proceeds Offer") to purchase the maximum
principal amount of New Notes that may be purchased out of the Excess Proceeds,
at an offer price in cash in an amount equal to 101% of the principal amount
thereof plus accrued and unpaid interest, if any, to the date of purchase, in
accordance with the procedures set forth in the Indenture. To the extent that
the aggregate amount of New Notes tendered pursuant to an Excess Proceeds Offer
is less than the Excess Proceeds, the Company may use any remaining Excess
Proceeds for general corporate purposes. If the aggregate principal amount of
New Notes surrendered by Holders thereof exceeds the amount of Excess Proceeds,
the Trustee shall select the New Notes to be purchased on a pro rata basis. Upon
completion of such offer to purchase, the amount of Excess Proceeds shall be
reset at zero. The Trustee shall continue to have, and the Company shall grant
to the Trustee, on behalf of the Holders, a first priority Lien on any
properties or assets acquired with the Net Proceeds of any such Asset Sale or
Event of Loss on the terms set forth in the Indenture and the Collateral
Documents.
CERTAIN COVENANTS
RESTRICTED PAYMENTS. The Indenture provides that the Company will not, and
will not permit any of its Restricted Subsidiaries to, directly or indirectly:
(i) declare or pay any dividend or make any other payment or distribution on
account of the Company's or any of its Restricted Subsidiaries' Equity Interests
(including, without limitation, any payment in connection with any merger or
consolidation involving the Company) or to the direct or indirect holders of the
Company's Equity Interests in their capacity as such (other than dividends or
distributions payable in Equity Interests (other than Disqualified Stock) of the
Company and dividends or distributions payable to the Company or any Wholly
Owned Restricted Subsidiary of the Company); (ii) purchase, redeem or otherwise
acquire or retire for value any Equity Interests of the Company or any direct or
indirect parent of the Company or other Affiliate of the Company (other than any
such Equity Interests owned by the Company or any Wholly Owned Restricted
Subsidiary of the Company); (iii) make any principal payment on, or purchase,
redeem, defease or otherwise acquire or retire for value any Indebtedness that
is subordinated to the New Notes, except at final maturity; or (iv) make any
Restricted Investment (all such payments and other actions set forth in clauses
(i) through (iv) above being collectively referred to as "Restricted Payments"),
unless, at the time of and after giving effect to such Restricted Payment:
(a) no Default or Event of Default shall have occurred and be continuing
or would occur as a consequence thereof;
65
<PAGE>
(b) the Company would, at the time of such Restricted Payment and after
giving pro forma effect thereto as if such Restricted Payment had been made
at the beginning of the applicable four-quarter period, have been permitted
to incur at least $1.00 of additional Indebtedness pursuant to the Fixed
Charge Coverage Ratio test set forth in the first paragraph of the covenant
described below under the caption "--Certain Covenants--Incurrence of
Indebtedness;" and
(c) such Restricted Payment, together with the aggregate of all other
Restricted Payments made by the Company and its Restricted Subsidiaries
after the date of the Indenture (excluding Restricted Payments permitted by
clauses (1) - (3), but including Restricted Payments permitted by clauses
(4) and (5), of the next succeeding paragraph), is less than the sum of (i)
50% of the Consolidated Net Income of the Company for the period (taken as
one accounting period) from the beginning of the first fiscal quarter
commencing after the date of the Indenture to the end of the Company's most
recently ended fiscal quarter for which internal financial statements are
available at the time of such Restricted Payment (or, if such Consolidated
Net Income for such period is a deficit, less 100% of such deficit), plus
(ii) 100% of the aggregate net cash proceeds received by the Company from
the issue or sale since the date of the Indenture of Equity Interests of the
Company or of debt securities of the Company that have been converted into
such Equity Interests (other than Equity Interests (or convertible debt
securities) sold to a Subsidiary of the Company and other than Disqualified
Stock or debt securities that have been converted into Disqualified Stock),
plus (iii) 50% of the Net Income of any Unrestricted Subsidiary of the
Company to the extent that such Net Income is received as a dividend by the
Company in cash, plus (iv) to the extent that any Restricted Investment that
was made after the date of the Indenture is sold for cash or otherwise
liquidated or repaid for cash, the lesser of (A) the cash return of capital
with respect to such Restricted Investment (less the cost of disposition, if
any) and (B) the initial amount of such Restricted Investment.
The foregoing provisions will not prohibit:
(1) the payment of any dividend within 60 days after the date of declaration
thereof, if at said date of declaration such payment would have complied with
the provisions of the Indenture;
(2) the redemption, repurchase, retirement or other acquisition of any
Equity Interests of the Company in exchange for, or out of the proceeds of, the
substantially concurrent sale (other than to a Subsidiary of the Company) of
other Equity Interests of the Company (other than any Disqualified Stock);
PROVIDED that the amount of any such net cash proceeds that are utilized for any
such redemption, repurchase, retirement or other acquisition shall be excluded
from clause (c)(ii) of the preceding paragraph;
(3) the defeasance, redemption or repurchase of subordinated Indebtedness
with the net cash proceeds from an incurrence of Permitted Refinancing
Indebtedness or the substantially concurrent sale (other than to a Subsidiary of
the Company) of Equity Interests of the Company (other than Disqualified Stock);
PROVIDED that the amount of any such net cash proceeds that are utilized for any
such redemption, repurchase, retirement or other acquisition shall be excluded
from clause (c)(ii) of the preceding paragraph;
(4) Investments in the Mill Joint Venture in an aggregate amount not to
exceed $5.0 million, plus the amount of any such Investments in the Mill Joint
Venture that are returned to the Company or its Restricted Subsidiaries in cash;
PROVIDED that the amount of any such Investments that are returned to the
Company or its Restricted Subsidiaries shall be excluded from clause (c)(iv) of
the preceding paragraph; and
(5) the repurchase, redemption or other acquisition or retirement for value
of any Equity Interests of the Company or any Restricted Subsidiary of the
Company held by any member of the Company's (or any of its Restricted
Subsidiaries') management pursuant to any management equity subscription
agreement or stock option agreement; PROVIDED that the aggregate price paid for
all such repurchased, redeemed, acquired or retired Equity Interests shall not
exceed $500,000 in any twelve-month period plus the aggregate cash proceeds
received by the Company during such twelve-month period from any reissuance of
Equity Interests by the Company to members of management of the Company and its
Restricted Subsidiaries; and PROVIDED, FURTHER, that no Default or Event of
Default shall have occurred and be continuing immediately after such
transaction.
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The Board of Directors may designate any Restricted Subsidiary to be an
Unrestricted Subsidiary if such designation would not cause a Default. For
purposes of making such determination, all outstanding Investments by the
Company and its Restricted Subsidiaries (except to the extent repaid in cash) in
the Subsidiary so designated will be deemed to be Restricted Payments at the
time of such designation and will reduce the amount available for Restricted
Payments under the first paragraph of this covenant. All such outstanding
Investments will be deemed to constitute Investments in an amount equal to the
greatest of (x) the net book value of such Investments at the time of such
designation, (y) the fair market value of such Investments at the time of such
designation and (z) the original fair market value of such Investments at the
time they were made. Such designation will only be permitted if such Restricted
Payment would be permitted at such time and if such Restricted Subsidiary
otherwise meets the definition of an Unrestricted Subsidiary.
The amount of all Restricted Payments (other than cash) shall be the fair
market value (evidenced by a resolution of the Board of Directors set forth in
an Officers' Certificate delivered to the Trustee) on the date of the Restricted
Payment of the asset(s) proposed to be transferred by the Company or such
Restricted Subsidiary, as the case may be, pursuant to the Restricted Payment.
Not later than the date of making any Restricted Payment, the Company shall
deliver to the Trustee an Officers' Certificate stating that such Restricted
Payment is permitted and setting forth the basis upon which the calculations
required by the covenant "--Certain Covenants--Restricted Payments" were
computed, which calculations may be based upon the Company's latest available
financial statements.
INCURRENCE OF INDEBTEDNESS. The Indenture provides that the Company will
not, and will not permit any of its Subsidiaries to, directly or indirectly,
create, incur, issue, assume, guaranty or otherwise become directly or
indirectly liable, contingently or otherwise, with respect to (collectively,
"incur") any Indebtedness (including Acquired Debt) and that the Company will
not issue any Disqualified Stock; PROVIDED, HOWEVER, that the Company may incur
Indebtedness (including Acquired Debt) or issue shares of Disqualified Stock if
the Fixed Charge Coverage Ratio for the Company's most recently ended four full
fiscal quarters for which internal financial statements are available
immediately preceding the date on which such additional Indebtedness is incurred
or such Disqualified Stock is issued would have been at least 2.0 to 1, if such
Indebtedness is incurred or such Disqualified Stock is issued prior to July 31,
1998, or 2.25 to 1 thereafter, in each case determined on a pro forma basis
(including a pro forma application of the net proceeds therefrom), as if the
additional Indebtedness had been incurred, or the Disqualified Stock had been
issued, as the case may be, at the beginning of such four-quarter period.
The foregoing provisions will not apply to:
(i) the incurrence by the Company or its Restricted Subsidiaries of
Indebtedness pursuant to the Credit Facility in an aggregate principal amount at
any time outstanding (with letters of credit being deemed to have a principal
amount equal to the maximum potential liability of the Company and its
Restricted Subsidiaries thereunder) not to exceed the greater of (a) the
Borrowing Base and (b) $80.0 million;
(ii) the incurrence by the Company and its Restricted Subsidiaries of the
Existing Indebtedness;
(iii) the incurrence by the Company of Indebtedness represented by the New
Notes;
(iv) the incurrence by the Company or any of its Restricted Subsidiaries of
Indebtedness represented by Capital Lease Obligations, mortgage financings or
purchase money obligations, in each case incurred for the purpose of financing
all or any part of the purchase price or cost of construction or improvement of
property, plant or equipment used in the business of the Company or such
Restricted Subsidiary, in an aggregate principal amount not to exceed $10.0
million at any time outstanding;
(v) the incurrence by the Company or any of its Restricted Subsidiaries of
Indebtedness in connection with the acquisition of assets or a new Restricted
Subsidiary; PROVIDED that such Indebtedness was incurred by the prior owner of
such assets or such Restricted Subsidiary prior to such acquisition by the
Company or one of its Restricted Subsidiaries and was not incurred in connection
with, or in contemplation of, such acquisition by the Company or one of it
Restricted Subsidiaries; and PROVIDED FURTHER that the principal amount (or
accreted value, as applicable) of such Indebtedness, together with any other
outstanding Indebtedness incurred pursuant to this clause (v), does not exceed
$5.0 million;
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(vi) the incurrence by the Company or any of its Restricted Subsidiaries of
Permitted Refinancing Debt in exchange for, or the net proceeds of which are
used to extend, refinance, renew, replace, defease or refund, Indebtedness that
was permitted by the Indenture to be incurred;
(vii) the incurrence by the Company or any of its Restricted Subsidiaries of
intercompany Indebtedness between or among the Company and any of its Wholly
Owned Restricted Subsidiaries; PROVIDED, HOWEVER, that (A) any subsequent
issuance or transfer of Equity Interests that results in any such Indebtedness
being held by a Person other than the Company or a Wholly Owned Restricted
Subsidiary and (B) any sale or other transfer of any such Indebtedness to a
Person that is not either the Company or a Wholly Owned Restricted Subsidiary
shall be deemed, in each case, to constitute an incurrence of such Indebtedness
by the Company or such Restricted Subsidiary, as the case may be;
(viii) the incurrence by the Company or any of its Restricted Subsidiaries of
Hedging Obligations that are incurred for the purpose of fixing or hedging
interest rate risk with respect to any floating rate Indebtedness that is
permitted by the terms of the Indenture to be outstanding;
(ix) the incurrence by the Company and its Restricted Subsidiaries of
additional Indebtedness in an aggregate amount not to exceed $10.0 million at
any one time outstanding; and
(x) the incurrence by the Company's Unrestricted Subsidiaries of
Non-Recourse Debt, PROVIDED, HOWEVER, that if any such Indebtedness ceases to be
Non-Recourse Debt of an Unrestricted Subsidiary, such event shall be deemed to
constitute an incurrence of Indebtedness by a Restricted Subsidiary of the
Company.
LIENS. The Indenture provides that the Company will not, and will not
permit any of its Subsidiaries to, directly or indirectly, create, incur, assume
or suffer to exist any Lien on any asset now owned or hereafter acquired, or any
income or profits therefrom or assign or convey any right to receive income
therefrom, except Permitted Liens.
DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING SUBSIDIARIES. The
Indenture provides that the Company will not, and will not permit any of its
Restricted Subsidiaries to, directly or indirectly, create or otherwise cause or
suffer to exist or become effective any encumbrance or restriction on the
ability of any Restricted Subsidiary to (i)(a) pay dividends or make any other
distributions to the Company or any of its Restricted Subsidiaries (1) on its
Capital Stock or (2) with respect to any other interest or participation in, or
measured by, its profits, or (b) pay any indebtedness owed to the Company or any
of its Restricted Subsidiaries, (ii) make loans or advances to the Company or
any of its Restricted Subsidiaries or (iii) transfer any of its properties or
assets to the Company or any of its Restricted Subsidiaries, except for such
encumbrances or restrictions existing under or by reason of (a) Existing
Indebtedness as in effect on the date of the Indenture, (b) the Credit Facility
as in effect as of the date of the Indenture, and any amendments, modifications,
restatements, renewals, increases, supplements, refundings, replacements or
refinancings thereof, PROVIDED that such amendments, modifications,
restatements, renewals, increases, supplements, refundings, replacements or
refinancings are no more restrictive with respect to such dividend and other
payment restrictions than those contained in the Credit Facility as in effect on
the date of the Indenture, (c) the Indenture and the New Notes, (d) applicable
law, (e) any instrument governing Indebtedness or Capital Stock of a Person
acquired by the Company or any of its Restricted Subsidiaries as in effect at
the time of such acquisition (except to the extent such Indebtedness was
incurred in connection with or in contemplation of such acquisition), which
encumbrance or restriction is not applicable to any Person, or the properties or
assets of any Person, other than the Person, or the property or assets of the
Person, so acquired, provided that, in the case of Indebtedness, such
Indebtedness was permitted by the terms of the Indenture to be incurred, (f) by
reason of customary non-assignment provisions in leases entered into in the
ordinary course of business and consistent with past practices, (g) purchase
money obligations for property acquired in the ordinary course of business that
impose restrictions of the nature described in clause (iii) above on the
property so acquired, or (h) Permitted Refinancing Indebtedness, provided that
the restrictions contained in the agreements governing such Permitted
Refinancing Indebtedness are no more restrictive than those contained in the
agreements governing the Indebtedness being refinanced.
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MERGER, CONSOLIDATION, OR SALE OF ASSETS. The Indenture provides that the
Company may not consolidate or merge with or into (whether or not the Company is
the surviving corporation), or sell, assign, transfer, lease, convey or
otherwise dispose of all or substantially all of its properties or assets in one
or more related transactions, to another corporation, Person or entity unless
(i) the Company is the surviving corporation or the entity or the Person formed
by or surviving any such consolidation or merger (if other than the Company) or
to which such sale, assignment, transfer, lease, conveyance or other disposition
shall have been made is a corporation organized or existing under the laws of
the United States, any state thereof or the District of Columbia; (ii) the
entity or Person formed by or surviving any such consolidation or merger (if
other than the Company) or the entity or Person to which such sale, assignment,
transfer, lease, conveyance or other disposition shall have been made assumes
all the obligations of the Company under the New Notes and the Indenture
pursuant to a supplemental indenture in a form reasonably satisfactory to the
Trustee; (iii) immediately after such transaction no Default or Event of Default
exists; and (iv) except in the case of a merger of the Company with or into a
Wholly Owned Restricted Subsidiary of the Company, the Company or the entity or
Person formed by or surviving any such consolidation or merger (if other than
the Company), or to which such sale, assignment, transfer, lease, conveyance or
other disposition shall have been made (A) will have Consolidated Net Worth
immediately after the transaction equal to or greater than the Consolidated Net
Worth of the Company immediately preceding the transaction and (B) will, at the
time of such transaction and after giving pro forma effect thereto as if such
transaction had occurred at the beginning of the applicable four-quarter period,
be permitted to incur at least $1.00 of additional Indebtedness pursuant to the
Fixed Charge Coverage Ratio test set forth in the first paragraph of the
covenant described above under the caption "--Incurrence of Indebtedness;"
provided, that the foregoing provisions will not restrict the ability of a
Restricted Subsidiary to consolidate or merge with the Company.
ISSUANCES AND SALES OF CAPITAL STOCK OF RESTRICTED SUBSIDIARIES. The
Indenture provides that the Company (i) will not, and will not permit any of its
Wholly Owned Restricted Subsidiaries to, transfer, convey, sell, lease or
otherwise dispose of any Capital Stock of any Wholly Owned Restricted Subsidiary
of the Company to any Person (other than the Company or another Wholly Owned
Restricted Subsidiary), unless such transfer, conveyance, sale, lease or other
disposition (a) is of all the Capital Stock of such Wholly Owned Restricted
Subsidiary and (b) complies with the covenant described above under the caption
"--Repurchase at the Option of Holders--Asset Sales and Events of Loss," (ii)
will not permit any Wholly Owned Restricted Subsidiary of the Company to issue
any of its Equity Interests (other than, if required by law, shares of Capital
Stock constituting directors' qualifying shares of a Subsidiary that is
organized outside of the United States) to any Person other than to the Company
or a Wholly Owned Restricted Subsidiary of the Company and (iii) will not permit
any of its Restricted Subsidiaries to issue any preferred Equity Interests to
any Person other than to the Company or a Wholly Owned Restricted Subsidiary of
the Company.
TRANSACTIONS WITH AFFILIATES. The Indenture provides that the Company will
not, and will not permit any of its Restricted Subsidiaries to, make any payment
to, or sell, lease, transfer or otherwise dispose of any of its properties or
assets to, or purchase any property or assets from, or enter into or make or
amend any contract, agreement, understanding, loan, advance or guarantee with,
or for the benefit of, any Affiliate (each of the foregoing, an "Affiliate
Transaction"), unless (i) such Affiliate Transaction is on terms that are no
less favorable to the Company or the relevant Restricted Subsidiary than those
that would have been obtained in a comparable transaction by the Company or such
Restricted Subsidiary with an unrelated Person and (ii) the Company delivers to
the Trustee (a) with respect to any Affiliate Transaction or series of related
Affiliate Transactions involving aggregate consideration in excess of $1.0
million, a resolution of the Board of Directors set forth in an Officers'
Certificate certifying that such Affiliate Transaction complies with clause (i)
above and that such Affiliate Transaction has been approved by a majority of the
disinterested members of the Board of Directors and (b) with respect to any
Affiliate Transaction or series of related Affiliate Transactions involving
aggregate consideration in excess of $5.0 million, an opinion as to the fairness
to the Holders of such Affiliate Transaction from a financial point of view
issued by an investment banking firm of national standing with total assets in
excess of $1.0 billion; PROVIDED that (1) any employment agreement entered into
by the Company or any of its Restricted Subsidiaries in the ordinary course of
business and consistent with the past practice of the Company or such Restricted
Subsidiary, (2) transactions
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between or among the Company and/or its Restricted Subsidiaries, (3)
transactions pursuant to the Output Purchase Agreement, the Subordinated Credit
Facility, the Indemnification Reimbursement Agreement and the lease by Box USA
Group, Inc. of the corrugator facility owned by Florida Coast Paper Company,
L.L.C., in each case as in effect on the date of the Indenture and (4)
Restricted Payments and Permitted Investments that are permitted by the
provisions of the Indenture described above under the caption "--Certain
Covenants--Restricted Payments," in each case, shall not be deemed Affiliate
Transactions.
ADDITIONAL SUBSIDIARY GUARANTEES. The Indenture provides that if the
Company or any of its Subsidiaries shall acquire or create another Subsidiary
after the date of the Indenture, then such newly acquired or created Subsidiary
shall (a) become a party to each of the Subsidiary Guarantee and the
Contribution Agreement, the Drop-Down Note Security Agreement, the Subsidiary
Pledge Agreement and the Subsidiary Security Agreement pursuant to the terms
thereof and (b) execute and deliver to the Trustee, for the ratable benefit of
the Holders, a Drop-Down Note, if required; PROVIDED, that this covenant shall
not apply to all Subsidiaries that have been properly designated as Unrestricted
Subsidiaries in accordance with the Indenture for so long as they continue to
constitute Unrestricted Subsidiaries.
BUSINESS ACTIVITIES. The Company will not, and will not permit any
Restricted Subsidiary to, engage in any business other than the packaging and
paper product manufacturing business engaged in by the Company or its
Subsidiaries on the date of the Indenture and such business activities as are
incidental or related thereto.
PAYMENTS FOR CONSENT. The Indenture provides that neither the Company nor
any of its Subsidiaries will, directly or indirectly, pay or cause to be paid
any consideration, whether by way of interest, fee or otherwise, to any Holder
of any New Notes for or as an inducement to any consent, waiver or amendment of
any of the terms or provisions of the Indenture or the New Notes unless such
consideration is offered to be paid or is paid to all Holders of the New Notes
that consent, waive or agree to amend in the time frame set forth in the
solicitation documents relating to such consent, waiver or agreement.
REPORTS. The Indenture provides that, whether or not required by the rules
and regulations of the Securities and Exchange Commission (the "Commission"), so
long as any New Notes are outstanding, the Company will furnish to the Holders
of New Notes (i) all quarterly and annual financial information that would be
required to be contained in a filing with the Commission on Forms 10-Q and 10-K
if the Company were required to file such Forms, including a "Management's
Discussion and Analysis of Financial Condition and Results of Operations" that
describes the financial condition and results of operations of the Company and
its Restricted Subsidiaries and, with respect to the annual information only, a
report thereon by the Company's certified independent accountants and (ii) all
current reports that would be required to be filed with the Commission on Form
8-K if the Company were required to file such reports. In addition, whether or
not required by the rules and regulations of the Commission, the Company will
file a copy of all such information and reports with the Commission for public
availability (unless the Commission will not accept such a filing) and make such
information available to securities analysts and prospective investors upon
request. In addition, the Company and the Subsidiary Guarantors have agreed
that, for so long as any New Notes remain outstanding, they will furnish to the
Holders and to securities analysts and prospective investors, upon their
request, the information required to be delivered pursuant to Rule 144A(d)(4)
under the Securities Act.
EVENTS OF DEFAULT AND REMEDIES. The Indenture provides that each of the
following constitutes an Event of Default: (i) default for 30 days in the
payment when due of interest on the New Notes; (ii) default in payment when due
of the principal of or premium, if any, on the New Notes; (iii) failure by the
Company to comply with the provisions described above under the captions
"--Repurchase at the Option of Holders-- Change of Control," "--Repurchase at
the Option of Holders--Asset Sales and Events of Loss," "--Certain
Covenants--Restricted Payments" or "--Certain Covenants--Incurrence of
Indebtedness"; (iv) failure by the Company for 30 days after notice to comply
with any of its other agreements in the Indenture or the New Notes; (v) default
under any mortgage, indenture or instrument under which there may be issued or
by which there may be secured or evidenced any Indebtedness for money borrowed
by the Company or any of its Restricted Subsidiaries (or the payment of which is
guaranteed by the Company or any of its Restricted
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Subsidiaries) whether such Indebtedness or guarantee now exists, or is created
after the date of the Indenture, which default (a) is caused by a failure to pay
principal of or premium, if any, or interest on such Indebtedness prior to the
expiration of the grace period provided in such Indebtedness on the date of such
default (a "Payment Default") or (b) results in the acceleration of such
Indebtedness prior to its express maturity and, in each case, the outstanding
principal amount of any such Indebtedness, together with the outstanding
principal amount of any other such Indebtedness under which there has been a
Payment Default or the maturity of which has been so accelerated, aggregates
$5.0 million or more; (vi) failure by the Company or any of its Restricted
Subsidiaries to pay final judgments aggregating in excess of $5.0 million, which
judgments are not paid, discharged or stayed for a period of 60 days; (vii)
breach by the Company or any Subsidiary of any material representation or
warranty set forth in any Collateral Document, or default by the Company or any
Subsidiary in the performance of any covenant set forth in any Collateral
Document (after giving effect to any applicable grace or cure periods), or
repudiation by the Company or any Subsidiary of its obligations under any
Collateral Document, or any Collateral Document shall be held in any judicial
proceeding to be unenforceable or invalid or cease for any reason to be in full
force and effect; (viii) except as permitted by the Indenture, any Subsidiary
Guarantee shall be held in any judicial proceeding to be unenforceable or
invalid or shall cease for any reason to be in full force and effect or any
Guarantor, or any Person acing on behalf of any Guarantor, shall deny or
disaffirm its obligations under its Subsidiary Guarantee; and (ix) certain
events of bankruptcy or insolvency with respect to the Company or any of its
Restricted Subsidiaries.
If any Event of Default occurs and is continuing, the Trustee or the Holders
of at least 25% in principal amount of the then outstanding New Notes may
declare all the New Notes to be due and payable immediately. Notwithstanding the
foregoing, in the case of an Event of Default arising from certain events of
bankruptcy or insolvency, with respect to the Company, any Significant
Subsidiary or any group of Restricted Subsidiaries that, taken together, would
constitute a Significant Subsidiary, all outstanding New Notes will become due
and payable without further action or notice. Holders of the New Notes may not
enforce the Indenture or the New Notes except as provided in the Indenture.
Subject to certain limitations, Holders of a majority in principal amount of the
then outstanding New Notes may direct the Trustee in its exercise of any trust
or power. The Trustee may withhold from Holders of the New Notes notice of any
continuing Default or Event of Default (except a Default or Event of Default
relating to the payment of principal or interest) if it determines that
withholding notice is in their interest.
In the case of any Event of Default occurring by reason of any willful
action (or inaction) taken (or not taken) by or on behalf of the Company with
the intention of avoiding payment of the premium that the Company would have had
to pay if the Company then had elected to redeem the New Notes pursuant to the
optional redemption provisions of the Indenture, an equivalent premium shall
also become and be immediately due and payable to the extent permitted by law
upon the acceleration of the New Notes. If an Event of Default occurs prior to
June 1, 2001 by reason of any willful action (or inaction) taken (or not taken)
by or on behalf of the Company with the intention of avoiding the prohibition on
redemption of the New Notes prior to June 1, 2001, then the premium specified in
the Indenture shall also become immediately due and payable to the extent
permitted by law upon the acceleration of the New Notes.
The Holders of a majority in aggregate principal amount of the New Notes
then outstanding by notice to the Trustee may on behalf of the Holders of all of
the New Notes waive any existing Default or Event of Default and its
consequences under the Indenture except a continuing Default or Event of Default
in the payment of principal of or interest on the New Notes.
The Company is required to deliver to the Trustee annually a statement
regarding compliance with the Indenture, and the Company is required upon
becoming aware of any Default or Event of Default, to deliver to the Trustee a
statement specifying such Default or Event of Default.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND
STOCKHOLDERS. No director, officer, employee, incorporator or stockholder of
the Company, as such, shall have any liability for any obligations of the
Company under the New Notes, the Indenture or the Security Agreement or for any
claim based on, in respect of, or by reason of, such obligations or their
creation. Each Holder of New Notes by accepting a New
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Note waives and releases all such liability. The waiver and release are part of
the consideration for issuance of the New Notes. Such waiver may not be
effective to waive liabilities under the federal securities laws and it is the
view of the Commission that such a waiver is against public policy.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE. The Company may, at its option
and at any time, elect to have all of its obligations discharged with respect to
the outstanding New Notes ("Legal Defeasance") except for (i) the rights of
Holders of outstanding New Notes to receive principal of or premium and interest
payments, if any, on such New Notes when such payments are due from the trust
referred to below, (ii) the Company's obligations with respect to the New Notes
concerning issuing temporary New Notes, registration of New Notes, mutilated,
destroyed, lost or stolen New Notes and the maintenance of an office or agency
for payment and money for security payments held in trust, (iii) the rights,
powers, trusts, duties and immunities of the Trustee, and the Company's
obligations in connection therewith and (iv) the Legal Defeasance provisions of
the Indenture. In addition, the Company may, at its option and at any time,
elect to have the obligations of the Company released with respect to certain
covenants that are described in the Indenture ("Covenant Defeasance") and
thereafter any omission to comply with such covenants shall not constitute a
Default or Event of Default with respect to the New Notes. In the event Covenant
Defeasance occurs, certain events (not including non-payment, bankruptcy,
receivership, rehabilitation and insolvency events) described under "--Events of
Default" will no longer constitute an Event of Default with respect to the New
Notes.
In order to exercise either Legal Defeasance or Covenant Defeasance, (i) the
Company must irrevocably deposit with the Trustee, in trust, for the benefit of
the Holders of the New Notes, cash in U.S. dollars, non-callable Government
Securities, or a combination thereof, in such amounts as will be sufficient, in
the opinion of a nationally recognized firm of independent public accountants,
to pay the principal of and premium and interest, if any, on, the outstanding
New Notes on the stated maturity or on the applicable redemption date, as the
case may be, and the Company must specify whether the New Notes are being
defeased to maturity or to a particular redemption date; (ii) in the case of
Legal Defeasance, the Company shall have delivered to the Trustee an opinion of
counsel in the United States reasonably acceptable to the Trustee confirming
that (A) the Company has received from, or there has been published by, the
Internal Revenue Service a ruling or (B) since the date of the Indenture, there
has been a change in the applicable federal income tax law, in either case to
the effect that, and based thereon such opinion of counsel shall confirm that,
the Holders of the outstanding New Notes will not recognize income, gain or loss
for federal income tax purposes as a result of such Legal Defeasance and will be
subject to federal income tax on the same amounts, in the same manner and at the
same times as would have been the case if such Legal Defeasance had not
occurred; (iii) in the case of Covenant Defeasance, the Company shall have
delivered to the Trustee an opinion of counsel in the United States reasonably
acceptable to the Trustee confirming that the Holders of the outstanding New
Notes will not recognize income, gain or loss for federal income tax purposes as
a result of such Covenant Defeasance and will be subject to federal income tax
on the same amounts, in the same manner and at the same times as would have been
the case if such Covenant Defeasance had not occurred; (iv) no Default or Event
of Default shall have occurred and be continuing on the date of such deposit
(other than a Default or Event of Default resulting from the borrowing of funds
to be applied to such deposit) or insofar as Events of Default from bankruptcy
or insolvency events are concerned, at any time in the period ending on the 91st
day after the date of deposit; (v) such Legal Defeasance or Covenant Defeasance
will not result in a breach or violation of, or constitute a default under any
material agreement or instrument (other than the Indenture) to which the Company
or any of its Subsidiaries is a party or by which the Company or any of its
Subsidiaries is bound; (vi) the Company must have delivered to the Trustee an
opinion of counsel to the effect that after the 91st day following the deposit,
the trust funds will not be subject to the effect of any applicable bankruptcy,
insolvency, reorganization or similar laws affecting creditors' rights
generally; (vii) the Company must deliver to the Trustee an Officers'
Certificate stating that the deposit was not made by the Company with the intent
of preferring the Holders of New Notes over the other creditors of the Company
with the intent of defeating, hindering, delaying or defrauding creditors of the
Company or others; and (viii) the Company must deliver to the Trustee an
Officers' Certificate and an opinion of counsel, each stating that all
conditions precedent provided for relating to the Legal Defeasance or the
Covenant Defeasance have been complied with.
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TRANSFER AND EXCHANGE. A Holder may transfer or exchange New Notes in
accordance with the Indenture. The Registrar and the Trustee may require a
Holder, among other things, to furnish appropriate endorsements and transfer
documents and the Company may require a Holder to pay any taxes and fees
required by law or permitted by the Indenture. The Company is not required to
transfer or exchange any New Note selected for redemption. Also, the Company is
not required to transfer or exchange any New Note for a period of 15 days before
a selection of New Notes to be redeemed.
The registered Holder of a New Note will be treated as the owner of it for
all purposes.
AMENDMENT, SUPPLEMENT AND WAIVER. Except as provided in the next two
succeeding paragraphs, the Indenture, the New Notes or the Security Agreement
may be amended or supplemented with the consent of the Holders of at least a
majority in principal amount of the New Notes then outstanding (including,
without limitation, consents obtained in connection with a purchase of, or
tender offer or exchange offer for, New Notes), and any existing default or
compliance with any provision of the Indenture, the New Notes or the Collateral
Documents may be waived with the consent of the Holders of a majority in
principal amount of the then outstanding New Notes (including consents obtained
in connection with a tender offer or exchange offer for New Notes).
Without the consent of each Holder affected, an amendment or waiver may not
(with respect to any New Notes held by a non-consenting Holder): (i) reduce the
principal amount of New Notes whose Holders must consent to an amendment,
supplement or waiver, (ii) reduce the principal of or change the fixed maturity
of any New Note or alter the provisions with respect to the redemption of the
New Notes (other than provisions relating to the covenants described above under
the caption "--Repurchase at the Option of Holders"), (iii) reduce the rate of
or change the time for payment of interest on any New Note, (iv) waive a Default
or Event of Default in the payment of principal of or premium or interest on the
New Notes (except a rescission of acceleration of the New Notes by the Holders
of at least a majority in aggregate principal amount of the New Notes and a
waiver of the payment default that resulted from such acceleration), (v) make
any New Note payable in money other than that stated in the New Notes, (vi) make
any change in the provisions of the Indenture relating to waivers of past
Defaults or the rights of Holders of New Notes to receive interest payments on
the New Notes, (vii) waive a redemption payment with respect to any New Note
(other than a payment required by one of the covenants described above under the
caption "--Repurchase at the Option of Holders"), (viii) consent to a release of
the security interest in the Pledged Collateral or make any change in the
provisions of the Indenture or the Collateral Documents relating to the security
interest of the Trustee in Pledged Collateral or (ix) make any change in the
foregoing amendment and waiver provisions.
Notwithstanding the foregoing, without the consent of any Holder of New
Notes, the Company and the Trustee may amend or supplement the Indenture, the
New Notes or the Collateral Documents to cure any ambiguity, defect or
inconsistency, to provide for uncertificated New Notes in addition to or in
place of certificated New Notes, to provide for the assumption of the Company's
obligations to Holders of New Notes in the case of a merger or consolidation, to
make any change that would provide any additional rights or benefits to the
Holders of New Notes or that does not adversely affect the legal rights under
the Indenture of any such Holder, to provide for additional collateral to secure
the New Notes or to comply with requirements of the Commission in order to
effect or maintain the qualification of the Indenture under the Trust Indenture
Act.
CONCERNING THE TRUSTEE. The Indenture contains certain limitations on the
rights of the Trustee, should it become a creditor of the Company, to obtain
payment of claims in certain cases, or to realize on certain property received
in respect of any such claim as security or otherwise. The Trustee will be
permitted to engage in other transactions; however, if it acquires any
conflicting interest it must eliminate such conflict within 90 days, apply to
the Commission for permission to continue or resign.
The Holders of a majority in principal amount of the then outstanding New
Notes will have the right to direct the time, method and place of conducting any
proceeding for exercising any remedy available to the Trustee, subject to
certain exceptions. The Indenture provides that in case an Event of Default
shall occur (which shall not be cured), the Trustee will be required, in the
exercise of its power, to use the degree of care
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of a prudent man in the conduct of his own affairs. Subject to such provisions,
the Trustee will be under no obligation to exercise any of its rights or powers
under the Indenture at the request of any Holder of New Notes, unless such
Holder shall have offered to the Trustee security and indemnity satisfactory to
it against any loss, liability or expense.
BOOK-ENTRY, DELIVERY AND FORM
The New Notes to be resold as set forth herein will initially be issued in
the form of one global note (the "Global Note"). The Global Note will be
deposited on the closing date of the Exchange Offer becomes effective (the
"Effective Date") with, or on behalf of, the Depositary and registered in the
name of Cede & Co., as nominee of the Depositary (such nominee being referred to
herein as the "Global Note Holder").
New Notes that are issued as described below under the caption
"--Certificated Notes" will be issued in the form of registered definitive
certificates (the "Certificated Notes"). Upon the transfer of Certificated
Notes, such Certificated Notes may, unless the Global Notes have previously been
exchanged for Certificated Notes, be exchanged for an interest in the Global
Note representing the principal amount of the New Notes being transferred.
The Depositary is a limited-purpose trust company that was created to hold
securities for its participating organizations (collectively, the "Participants"
or the "Depositary's Participants") and to facilitate the clearance and
settlement of transactions in such securities between Participants through
electronic book-entry changes in accounts of its Participants. The Depositary's
Participants include securities brokers and dealers (including the Initial
Purchaser), banks and trust companies, clearing corporations and certain other
organizations. Access to the Depositary's system is also available to other
entities such as banks, brokers, dealers and trust companies (collectively, the
"Indirect Participants" or the "Depositary's Indirect Participants") that clear
through or maintain a custodial relationship with a Participant, either directly
or indirectly. Persons who are not Participants may beneficially own securities
held by or on behalf of the Depositary only through the Depositary's
Participants or the Depositary's Indirect Participants.
The Company expects that pursuant to procedures established by the
Depositary (i) upon deposit of the Global Note, the Depositary will credit the
accounts of Participants designated by the Initial Purchaser with portions of
the Global Note and (ii) ownership of the Notes evidenced by the Global Note
will be shown on, and the transfer of ownership thereof will be effected only
through, records maintained by the Depositary (with respect to the interests of
the Depositary's Participants), the Depositary's Participants and the
Depositary's Indirect Participants. Prospective purchasers are advised that the
laws of some states require that certain persons take physical delivery in
definitive form of securities that they own. Consequently, the ability to
transfer New Notes evidenced by the Global Notes will be limited to such extent.
So long as the Global Note Holder is the registered owner of any New Notes,
the Global Note Holder will be considered the sole owner of the New Notes
represented by such Global Notes. Beneficial owners of New Notes evidenced by
the Global Notes will not be considered the owners or holders thereof under the
Indenture for any purpose, including with respect to the giving of any
directions, instructions or approvals to Trustee thereunder. As a result, the
ability of a person having a beneficial interest in New Notes represented by any
Global Note, to pledge such interest to persons or entities that do not
participate in the Depositary's system or to otherwise take actions in respect
of such interest, may be affected by the lack of a physical certificate
evidencing such interest. Neither the Company nor the Trustee will have any
responsibility or liability for any aspect of the records relating to or
payments made on account of New Notes by the Depositary, or for maintaining,
supervising or reviewing any records of the Depositary relating to such New
Notes.
Payments in respect of the New Notes registered in the name of a Global Note
Holder on the applicable record date will be payable by the applicable transfer
agent to or at the direction of such Global Note Holder in its capacity as the
registered holder of such New Notes. Under the terms of the Indenture, the
Company and the Trustee may treat the persons in whose names New Notes,
including the Global Notes, are registered as the owners thereof for the purpose
of receiving such payments and for any and all other purposes whatsoever.
Consequently, none of the Company nor the Trustee has or will have any
responsibility or
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liability for the payment of such amounts to beneficial owners of the New Notes
(including principal, premium and interest, if any). The Company believes,
however, that it is currently the policy of the Depositary to immediately credit
the accounts of the relevant Participants with such payments, in amounts
proportionate to their respective holdings of beneficial interests in the
relevant security as shown on the records of the Depositary. Payments by the
Depositary's Participants and the Depositary's Indirect Participants to the
beneficial owners of Notes will be governed by standing instructions and
customary practice and will be the responsibility of the Depositary's
Participants or the Depositary's Indirect Participants.
CERTIFICATED NOTES. Subject to certain conditions, any person having a
beneficial interest in any Global Note may, upon request to the Trustee,
exchange such beneficial interest for New Notes in the form of Certificated
Notes. Upon any such issuance, the Trustee is required to register such
Certificated Notes in the name of, and cause the same to be delivered to, such
person or persons (or the nominee of any thereof). In addition, if (i) a Company
notifies the Trustee in writing that the Depositary is no longer willing or able
to act as a depositary and the Company is unable to locate a qualified successor
within 90 days or (ii) the Company, at its option, notifies the Trustee in
writing that it elects to cause the issuance of New Notes in the form of
Certificated Notes, then, upon surrender by the Global Note Holder of its Global
Note, New Notes in such form will be issued to each person that the Global Note
Holder and the Depositary identify as being the beneficial owner of the related
New Notes.
Neither the Company nor the Trustee will be liable for any delay by the
Global Note Holder or the Depositary in identifying the beneficial owners of New
Notes and the Company, and the Trustee may conclusively rely on, and will be
protected in relying on, instructions from the Global Note Holder or the
Depositary for all purposes.
SAME-DAY SETTLEMENT AND PAYMENT. The Indenture requires that payments in
respect of the New Notes represented by the Global Note (including principal,
premium and interest, if any) be made by wire transfer of immediately available
funds to the accounts specified by the Global Note Holder. With respect to
Certificated Notes, the Company will make all payments in respect of the New
Notes (including principal, premium and interest, if any), by wire transfer of
immediately available funds to the accounts specified by the Holders thereof or,
if no such account is specified, by mailing a check to each such Holder's
registered address. Secondary trading in long-term notes and debentures of
corporate issuers is generally settled in clearing-house or next-day funds. In
contrast, the New Notes represented by the Global Notes are expected to be
eligible to trade in the Depositary's Same-Day Funds Settlement System, and any
permitted secondary market trading activity in such New Notes will, therefore,
be required by the Depositary to be settled in immediately available funds. The
Company expects that secondary trading in the Certificated Notes will also be
settled in immediately available funds.
REGISTRATION RIGHTS; LIQUIDATED DAMAGES
The Company, the Guarantors and the Initial Purchaser entered into the
Registration Rights Agreement dated as of May 30, 1996. Pursuant to the
Registration Rights Agreement, the Company and the Guarantors agreed to file
with the Commission the Exchange Offer Registration Statement on the appropriate
form under the Securities Act with respect to the New Notes. Upon the
effectiveness of the Exchange Offer Registration Statement, the Company will
offer to the Holders of Transfer Restricted Securities pursuant to the Exchange
Offer who are able to make certain representations the opportunity to exchange
their Transfer Restricted Securities for New Notes. If the Company does not meet
its obligations under the Registration Rights Agreement, it may be required to
pay Liquidated Damages to holders of Old Notes.
Holders of New Notes are not entitled to any registration rights with
respect to the New Notes. The Company agrees for a period of 270 days from the
effective date of the Exchange Offer Registration Statement to make available a
prospectus meeting the requirements of the Securities Act to any broker-dealer
for use in connection with any resale of any New Notes. The Registration
Statement of which this Prospectus is a part constitutes the registration
statement for the Exchange Offer which is the subject of the Registration Rights
Agreement. Upon the closing of the Exchange Offer, subject to certain limited
exceptions, Holders of untendered Old Notes will not retain any rights under the
Registration Rights Agreement.
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Holders of Transfer Restricted Securities will be required to make certain
representations to the Company (as described in the Registration Rights
Agreement) in order to participate in the Exchange Offer and will be required to
deliver information to be used in connection with the Shelf Registration
Statement, if any, and to provide comments on the Shelf Registration Statement
within the time periods set forth in the Registration Rights Agreement in order
to have their Transfer Restricted Securities included in the Shelf Registration
Statement.
CERTAIN DEFINITIONS
Set forth below are certain defined terms used in the Indenture. Reference
is made to the Indenture for a full disclosure of all such terms, as well as any
other capitalized terms used herein for which no definition is provided.
"Acquired Debt" means, with respect to any specified Person, (i)
Indebtedness of any other Person existing at the time such other Person is
merged with or into or becomes a Subsidiary of such specified Person, including,
without limitation, Indebtedness incurred in connection with, or in
contemplation of, such other Person merging with or into or becoming a
Subsidiary of such specified Person, and (ii) Indebtedness secured by a Lien
encumbering any asset acquired by such specified Person.
"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled by"
and "under common control with"), as used with respect to any Person, shall mean
the possession, directly or indirectly, of the power to direct or cause the
direction of the management or policies of such Person, whether through the
ownership of voting securities, by agreement or otherwise; PROVIDED that
beneficial ownership of 10% or more of the voting securities of a Person shall
be deemed to be control.
"Asset Sale" means (i) the sale, lease, conveyance or other disposition of
any assets (including, without limitation, by way of a sale and leaseback),
other than (x) sales of inventory in the ordinary course of business consistent
with past practices (PROVIDED that the sale, lease, conveyance or other
disposition of all or substantially all of the assets of the Company and its
Restricted Subsidiaries taken as a whole will be governed by the provisions of
the Indenture described above under the caption "--Repurchase at the Option of
the Holders--Change of Control" and/or the provisions described above under the
caption "-- Certain Covenants--Merger, Consolidation, or Sale of Assets," and
not by the provisions of the Asset Sale covenant), and (y) sales of the
Company's equity interest in Groveton Paperboard, Inc. and (ii) the issue or
sale of Equity Interests in any of its Subsidiaries, in the case of either
clause (i) or (ii), whether in a single transaction or a series of related
transactions (a) that have a fair market value in excess of $1.0 million or (b)
for Net Proceeds in excess of $1.0 million. Notwithstanding the foregoing: (i) a
transfer of assets by the Company to a Wholly Owned Restricted Subsidiary or by
a Wholly Owned Restricted Subsidiary to the Company or to another Wholly Owned
Restricted Subsidiary and (ii) a Restricted Payment that is permitted by the
covenant described above under the caption "--Certain Covenants--Restricted
Payments," as applicable, will not be deemed to be Asset Sales.
"Asset Sale Account" means a cash collateral account in which the Net
Proceeds from Asset Sales shall be deposited pursuant to the Indenture.
"Borrowing Base" means, at any time, an amount equal to the aggregate of (i)
85% of the amount of eligible accounts receivable plus (ii) the lesser of 60% of
the amount of eligible inventory or $40.0 million.
"Capital Lease Obligation" means, at the time any determination thereof is
to be made, the amount of the liability in respect of a capital lease that would
at such time be required to be capitalized on a balance sheet in accordance with
GAAP.
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"Capital Stock" means (i) in the case of a corporation, corporate stock,
(ii) in the case of an association or business entity, any and all shares,
interests, participations, rights or other equivalents (however designated) of
corporate stock, (iii) in the case of a partnership, partnership interests
(whether general or limited) and (iv) any other interest or participation that
confers on a Person the right to receive a share of the profits and losses of,
or distributions of assets of, the issuing Person.
"Cash Collateral Account" means the Asset Sale Account and the Event of Loss
Account.
"Cash Equivalents" means (i) United States dollars, (ii) securities issued
or directly and fully guaranteed or insured by the United States government or
any agency or instrumentality thereof having maturities of not more than six
months from the date of acquisition, (iii) certificates of deposit and
eurodollar time deposits with maturities of six months or less from the date of
acquisition, bankers' acceptances with maturities not exceeding six months and
overnight bank deposits, in each case with any domestic commercial bank having
capital and surplus in excess of $500 million and a Keefe Bank Watch Rating of
"B" or better, (iv) repurchase obligations with a term of not more than seven
days for underlying securities of the types described in clauses (ii) and (iii)
above entered into with any financial institution meeting the qualifications
specified in clause (iii) above and (v) commercial paper having the highest
rating obtainable from Moody's Investors Service, Inc. or Standard & Poor's
Ratings Corporation and in each case maturing within six months after the date
of acquisition.
"Collateral Documents" means the Security Agreement, the Pledge Agreement,
the Subsidiary Guarantee, the Contribution Agreement, the Subsidiary Security
Agreement, the Subsidiary Pledge Agreement, the Drop-Down Notes and the
Drop-Down Note Security Agreement and any other agreements, instruments,
financing statements or other documents that evidence or set forth the Lien of
the Trustee in the Pledged Collateral.
"Consolidated Cash Flow" means, with respect to any Person for any period,
the Consolidated Net Income of such Person and its Restricted Subsidiaries for
such period plus (i) an amount equal to any extraordinary loss plus any net loss
realized in connection with an Asset Sale (to the extent such losses were
deducted in computing such Consolidated Net Income), plus (ii) provision for
taxes based on income or profits of such Person and its Restricted Subsidiaries
for such period, to the extent that such provision for taxes was included in
computing such Consolidated Net Income, plus (iii) consolidated interest expense
of such Person and its Restricted Subsidiaries for such period, whether paid or
accrued and whether or not capitalized (including, without limitation,
amortization of original issue discount, non-cash interest payments, the
interest component of any deferred payment obligations, the interest component
of all payments associated with Capital Lease Obligations, commissions,
discounts and other fees and charges incurred in respect of letter of credit or
bankers' acceptance financings, and net payments (if any) pursuant to Hedging
Obligations), to the extent that any such expense was deducted in computing such
Consolidated Net Income, plus (iv) depreciation and amortization (including
amortization of goodwill and other intangibles but excluding amortization of
prepaid cash expenses that were paid in a prior period) of such Person and its
Restricted Subsidiaries for such period to the extent that such depreciation and
amortization was deducted in computing such Consolidated Net Income, in each
case, on a consolidated basis and determined in accordance with GAAP.
Notwithstanding the foregoing, the provision for taxes on the income or profits
of, and the depreciation and amortization of, a Subsidiary of the referent
Person shall be added to Consolidated Net Income to compute Consolidated Cash
Flow only to the extent (and in same proportion) that the Net Income of such
Subsidiary was included in calculating the Consolidated Net Income of such
Person and only if a corresponding amount would be permitted at the date of
determination to be dividended, directly or indirectly, to the Company by such
Subsidiary without prior governmental approval (that has not been obtained), and
without direct or indirect restriction pursuant to the terms of its charter and
all agreements, instruments, judgments, decrees, orders, statutes, rules and
governmental regulations applicable to that Subsidiary or its stockholders.
"Consolidated Net Income" means, with respect to any Person for any period,
the aggregate of the Net Income of such Person and its Restricted Subsidiaries
for such period, on a consolidated basis, determined in accordance with GAAP;
PROVIDED that (i) the Net Income (but not loss) of any Person that is not a
Subsidiary
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or that is accounted for by the equity method of accounting shall be included
only to the extent of the amount of dividends or distributions paid in cash to
the referent Person or a Wholly Owned Restricted Subsidiary thereof, (ii) the
Net Income of any Restricted Subsidiary shall be excluded to the extent that the
declaration or payment of dividends or similar distributions by that Restricted
Subsidiary of that Net Income is not at the date of determination permitted
without any prior governmental approval (that has not been obtained) or,
directly or indirectly, by operation of the terms of its charter or any
agreement, instrument, judgment, decree, order, statute, rule or governmental
regulation applicable to that Restricted Subsidiary or its stockholders, (iii)
the Net Income of any Person acquired in a pooling of interests transaction for
any period prior to the date of such acquisition shall be excluded, (iv) the
cumulative effect of a change in accounting principles shall be excluded and (v)
the Net Income of any Unrestricted Subsidiary shall be excluded, whether or not
distributed to the Company or one of its Restricted Subsidiaries.
"Consolidated Net Worth" means, with respect to any Person as of any date,
the sum of (i) the consolidated equity of the common stockholders of such Person
and its Restricted Subsidiaries as of such date plus (ii) the respective amounts
reported on such Person's balance sheet as of such date with respect to any
series of preferred stock (other than Disqualified Stock) that by its terms is
not entitled to the payment of dividends unless such dividends may be declared
and paid only out of net earnings in respect of the year of such declaration and
payment, but only to the extent of any cash received by such Person upon
issuance of such preferred stock, less (x) all write-ups (other than write-ups
resulting from foreign currency translations and write-ups of tangible assets of
a going concern business made within 12 months after the acquisition of such
business) subsequent to the date of the Indenture in the book value of any asset
owned by such Person or a consolidated Subsidiary of such Person, (y) all
investments as of such date in unconsolidated Subsidiaries and in Persons that
are not Subsidiaries (except, in each case, Permitted Investments), and (z) all
unamortized debt discount and expense and unamortized deferred charges as of
such date, all of the foregoing determined in accordance with GAAP.
"Contribution Agreement" means the Contribution Agreement, dated as of the
date of the Indenture, by and among the Company's Restricted Subsidiaries, as
such agreement may be amended, modified or supplemented from time to time.
"Default" means any event that is or with the passage of time or the giving
of notice or both would be an Event of Default.
"Disqualified Stock" means any Capital Stock that, by its terms (or by the
terms of any security into which it is convertible or for which it is
exchangeable), or upon the happening of any event, matures or is mandatorily
redeemable, pursuant to a sinking fund obligation or otherwise, or redeemable at
the option of the Holder thereof, in whole or in part, on or prior to the date
that is 91 days after the date on which the New Notes mature.
"Equity Interests" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock).
"Event of Loss" means (i) the loss or destruction of or damage to any assets
of the Company or any of its Restricted Subsidiaries, (ii) the condemnation,
seizure, confiscation, requisition of the use or taking by exercise of the power
of eminent domain or otherwise of any assets of the Company or any of its
Restricted Subsidiaries or (iii) any consensual settlement in lieu of any event
listed in clause (ii), in each case whether in a single event or a series of
related events, that results in net proceeds from all sources in excess of $1.0
million.
"Event of Loss Account" means a cash collateral account in which the Net
Proceeds from Events of Loss shall be deposited pursuant to the Indenture.
"Existing Indebtedness" means Indebtedness of the Company and its
Subsidiaries (other than Indebtedness under the Credit Facility) in existence on
the date of the Indenture, until such amounts are repaid.
"Fixed Charges" means, with respect to any Person for any period, the sum,
without duplication, of (i) the consolidated interest expense of such Person and
its Restricted Subsidiaries for such period, whether
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paid or accrued (including, without limitation, amortization of original issue
discount, non-cash interest payments, the interest component of any deferred
payment obligations, the interest component of all payments associated with
Capital Lease Obligations, commissions, discounts and other fees and charges
incurred in respect of letter of credit or bankers' acceptance financings, and
net payments (if any) pursuant to Hedging Obligations) and (ii) the consolidated
interest expense of such Person and its Restricted Subsidiaries that was
capitalized during such period, and (iii) any interest expense on Indebtedness
of another Person that is Guaranteed by such Person or one of its Restricted
Subsidiaries or secured by a Lien on assets of such Person or one of its
Restricted Subsidiaries (whether or not such Guarantee or Lien is called upon)
and (iv) the product of (a) all dividend payments on any series of preferred
stock of such Person, other than dividend payments on preferred stock of the
Company paid solely in additional shares of such preferred stock, times (b) a
fraction, the numerator of which is one and the denominator of which is one
minus the then current combined federal, state and local statutory tax rate of
such Person, expressed as a decimal, in each case, on a consolidated basis and
in accordance with GAAP.
"Fixed Charge Coverage Ratio" means with respect to any Person for any
period, the ratio of the Consolidated Cash Flow of such Person for such period
to the Fixed Charges of such Person for such period. In the event that the
Company or any of its Restricted Subsidiaries incurs, assumes, Guarantees or
redeems any Indebtedness (other than revolving credit borrowings) or issues
preferred stock subsequent to the commencement of the period for which the Fixed
Charge Coverage Ratio is being calculated but prior to the date on which the
event for which the calculation of the Fixed Charge Coverage Ratio is made (the
"Calculation Date"), then the Fixed Charge Coverage Ratio shall be calculated
giving pro forma effect to such incurrence, assumption, Guarantee or redemption
of Indebtedness, or such issuance or redemption of preferred stock, as if the
same had occurred at the beginning of the applicable four-quarter reference
period. In addition, for purposes of making the computation referred to above,
(i) acquisitions that have been made by the Company or any of its Restricted
Subsidiaries, including through mergers or consolidations and including any
related financing transactions, during the four-quarter reference period or
subsequent to such reference period and on or prior to the Calculation Date
shall be deemed to have occurred on the first day of the four-quarter reference
period and Consolidated Cash Flow for such reference period shall be calculated
without giving effect to clause (iii) of the proviso set forth in the definition
of Consolidated Net Income, and (ii) the Consolidated Cash Flow attributable to
discontinued operations, as determined in accordance with GAAP, and operations
or businesses disposed of prior to the Calculation Date, shall be excluded, and
(iii) the Fixed Charges attributable to discontinued operations, as determined
in accordance with GAAP, and operations or businesses disposed of prior to the
Calculation Date, shall be excluded, but only to the extent that the obligations
giving rise to such Fixed Charges will not be obligations of the referent Person
or any of its Restricted Subsidiaries following the Calculation Date.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as have been approved by a significant segment of the accounting
profession, which are in effect on the date of the Indenture.
"Guarantee" means a guarantee (other than by endorsement of negotiable
instruments for collection in the ordinary course of business), direct or
indirect, in any manner (including, without limitation, letters of credit and
reimbursement agreements in respect thereof), of all or any part of any
Indebtedness.
"Hedging Obligations" means, with respect to any Person, the obligations of
such Person under (i) interest rate swap agreements, interest rate cap
agreements and interest rate collar agreements and (ii) other agreements or
arrangements designed to protect such Person against fluctuations in interest
rates.
"Indebtedness" means, with respect to any Person, any indebtedness of such
Person, whether or not contingent, in respect of borrowed money or evidenced by
bonds, notes, debentures or similar instruments or letters of credit (or
reimbursement agreements in respect thereof) or banker's acceptances or
representing Capital Lease Obligations or the balance deferred and unpaid of the
purchase price of any property or representing any Hedging Obligations, except
any such balance that constitutes an accrued expense or trade
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payable, if and to the extent any of the foregoing indebtedness (other than
letters of credit and Hedging Obligations) would appear as a liability upon a
balance sheet of such Person prepared in accordance with GAAP, as well as all
indebtedness of others secured by a Lien on any asset of such Person (in which
case the amount of such Indebtedness shall be deemed to be the lesser of (a) the
amount of such Indebtedness and (b) the fair market value of the asset that
secures such Indebtedness), and, to the extent not otherwise included, the
Guarantee by such Person of any indebtedness of any other Person.
"Investments" means, with respect to any Person, all investments by such
Person in other Persons (including Affiliates) in the forms of direct or
indirect loans (including guarantees of Indebtedness or other obligations),
advances or capital contributions (excluding commission, travel and similar
advances to officers and employees made in the ordinary course of business),
purchases or other acquisitions for consideration of Indebtedness, Equity
Interests or other securities, together with all items that are or would be
classified as investments on a balance sheet prepared in accordance with GAAP;
PROVIDED that an acquisition of assets, Equity Interests or other securities by
the Company for consideration consisting of common equity securities of the
Company shall not be deemed to be an Investment.
"Lien" means, with respect to any asset, any mortgage, lien, pledge, charge,
security interest or encumbrance of any kind in respect of such asset, whether
or not filed, recorded or otherwise perfected under applicable law (including
any conditional sale or other title retention agreement, any lease in the nature
thereof, any option or other agreement to sell or give a security interest in
and any filing of or agreement to give any financing statement under the Uniform
Commercial Code (or equivalent statutes) of any jurisdiction).
"Make-Whole Premium" with respect to a New Note means an amount equal to the
greater of (i) 106% of the outstanding principal amount of such New Note and
(ii) the excess of (A) the present value of the remaining interest, premium and
principal payments due on such New Note as if such Note were redeemed on June 1,
2001, computed using a discount rate equal to the Treasury Rate plus 50 basis
points, over (B) the outstanding principal amount of such New Note.
"Net Income" means, with respect to any Person, the net income (loss) of
such Person, determined in accordance with GAAP and before any reduction in
respect of preferred stock dividends, excluding, however, (i) any gain (but not
loss), together with any related provision for taxes on such gain (but not
loss), realized in connection with (a) any Asset Sale (including, without
limitation, dispositions pursuant to sale and leaseback transactions) or (b) the
disposition of any securities by such Person or any of its Restricted
Subsidiaries or the extinguishment of any Indebtedness of such Person or any of
its Restricted Subsidiaries and (ii) any extraordinary or nonrecurring gain (but
not loss), together with any related provision for taxes on such extraordinary
or nonrecurring gain (but not loss).
"Net Proceeds" means the aggregate cash proceeds received by the Company or
any of its Restricted Subsidiaries in respect of any Asset Sale or Event of Loss
(including, without limitation, any cash received upon the sale or other
disposition of any non-cash consideration received in any Asset Sale or Event of
Loss), net of the direct costs relating to such Asset Sale or Event of Loss
(including, without limitation, legal, accounting and investment banking fees,
and sales commissions) and any relocation expenses incurred as a result thereof,
taxes paid or payable as a result thereof (after taking into account any
available tax credits or deductions and any tax sharing arrangements), amounts
required to be applied to the repayment of Indebtedness secured by a Lien on the
asset or assets that were the subject of such Asset Sale or Event of Loss and
any reserve for adjustment in respect of the sale price of such asset or assets
established in accordance with GAAP.
"Non-Recourse Debt" means Indebtedness (i) as to which neither the Company
nor any of its Restricted Subsidiaries (a) provides credit support of any kind
(including any undertaking, agreement or instrument that would constitute
Indebtedness), (b) is directly or indirectly liable (as a guarantor or
otherwise), or (c) constitutes the lender; and (ii) no default with respect to
which (including any rights that the holders thereof may have to take
enforcement action against an Unrestricted Subsidiary) would permit (upon
notice, lapse of time or both) any holder of any other Indebtedness (other than
the New Notes being offered hereby) of the Company or any of its Restricted
Subsidiaries to declare a default on such other
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Indebtedness or cause the payment thereof to be accelerated or payable prior to
its stated maturity; and (iii) as to which the lenders have been notified in
writing that they will not have any recourse to the stock or assets of the
Company or any of its Restricted Subsidiaries.
"Obligations" means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Indebtedness.
"Permitted Investments" means (a) any Investment in the Company or in a
Wholly Owned Restricted Subsidiary of the Company; (b) any Investment in Cash
Equivalents; (c) any Investment by the Company or any Restricted Subsidiary of
the Company in a Person, if as a result of such Investment (i) such Person
becomes a Wholly Owned Restricted Subsidiary of the Company and a Guarantor or
(ii) such Person is merged, consolidated or amalgamated with or into, or
transfers or conveys substantially all of its assets to, or is liquidated into,
the Company or a Wholly Owned Restricted Subsidiary of the Company; (d) any
Investment made as a result of the receipt of non-cash consideration from an
Asset Sale that was made pursuant to and in compliance with the covenant
described above under the caption "--Repurchase at the Option of Holders--Asset
Sales and Events of Loss"; (e) Investments in the Joint Venture pursuant to the
Subordinated Credit Facility in an aggregate amount not to exceed $10.0 million
at any one time outstanding; and (f) Investments in the Joint Venture pursuant
to the Indemnification Reimbursement Agreement as in effect on the date of the
Indenture; (g) Investments to purchase equity interests of MannKraft Corporation
not owned by the Company or any Affiliate of the Company in an aggregate amount
not to exceed $4.5 million; (h) Investments in Persons engaged in the same line
of business as the Company, or any business incidental or related thereto, in an
amount not to exceed (i) $3.5 million during the period from the date of the
Indenture through July 31, 1997, (ii) $3.5 million during the period from August
1, 1997 through July 31, 1998 and (iii) an aggregate of $7.0 million at any one
time outstanding after July 31, 1998, plus to the extent that any such
Investment is sold for cash or otherwise liquidated or repaid for cash, the
lesser of (A) the cash return of capital with respect to such Investment (less
the cost of disposition, if any) and (B) the initial amount of such Investment,
plus (iv) to the extent that any Person in which any such Investment is made
becomes a Wholly Owned Restricted Subsidiary and a Guarantor, the lesser of (A)
the fair market value of the common equity of such Person at the time such
Person becomes a Wholly Owned Restricted Subsidiary and a Guarantor and (B) the
initial amount of such Investment; and (i) Investments in Box USA of Florida,
L.P. in an aggregate amount not to exceed $5.0 million.
"Permitted Liens" means (i) Liens securing the New Notes; (ii) Liens on
Excluded Property described in clause (1) of the definition of such term in the
Security Agreement securing Indebtedness under the Credit Facility, provided
that such Indebtedness was permitted by the terms of the Indenture to be
incurred; (iii) Liens in favor of the Company; (iv) Liens on property of a
Person existing at the time such Person is merged into or consolidated with the
Company or any Restricted Subsidiary of the Company; PROVIDED that such Liens
were in existence prior to the contemplation of such merger or consolidation and
do not extend to any assets other than those of the Person merged into or
consolidated with the Company; (v) Liens on property existing at the time of
acquisition thereof by the Company or any Restricted Subsidiary of the Company,
PROVIDED that such Liens were in existence prior to the contemplation of such
acquisition; (vi) Liens to secure the performance of statutory obligations,
surety or appeal bonds, performance bonds or other obligations of a like nature
incurred in the ordinary course of business; (vii) Liens to secure Indebtedness
(including Capital Lease--Obligations) permitted by clause (iv) of the second
paragraph of the covenant entitled "--Certain Covenants--Incurrence of
Indebtedness," covering only the assets acquired with such Indebtedness; (viii)
Liens existing on the date of the Indenture excluding (a) Liens on Indebtedness
to be repaid with the proceeds of this Offering and (b) Liens securing
Indebtedness under the Credit Facility; (ix) Liens for taxes, assessments or
governmental charges or claims that are not yet delinquent or that are being
contested in good faith by appropriate proceedings promptly instituted and
diligently concluded, PROVIDED that any reserve or other appropriate provision
as shall be required in conformity with GAAP shall have been made therefor; (x)
Liens incurred in the ordinary course of business of the Company or any
Restricted Subsidiary of the Company with respect to obligations that do not
exceed $2.0 million at any one time outstanding and that (a) are not incurred in
connection with the borrowing of money or the obtaining of advances or credit
(other than trade credit in the ordinary course of business) and (b) do not in
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the aggregate materially detract from the value of the property or materially
impair the use thereof in the operation of business by the Company or such
Restricted Subsidiary; (xi) renewals or refundings of any Liens referred to in
clauses (ii) through (x) above, PROVIDED that any such renewal or refunding does
not extend to any assets or secure any Indebtedness not securing or secured by
the Liens being renewed or refinanced; and (xii) Liens on assets of Unrestricted
Subsidiaries that secure Non-Recourse Debt of Unrestricted Subsidiaries.
"Permitted Refinancing Debt" means any Indebtedness of the Company or any of
its Restricted Subsidiaries issued in exchange for, or the net proceeds of which
are used to extend, refinance, renew, replace, defease or refund other
Indebtedness of the Company or any of its Restricted Subsidiaries; PROVIDED
that: (i) the principal amount (or accreted value, if applicable) of such
Permitted Refinancing Debt does not exceed the principal amount (or accreted
value, if applicable) of the Indebtedness so extended, refinanced, renewed,
replaced, defeased or refunded (plus the amount of reasonable expenses incurred
in connection therewith); (ii) such Permitted Refinancing Debt has a final
maturity date no earlier than the final maturity date of, and has a Weighted
Average Life to Maturity equal to or greater than the Weighted Average Life to
Maturity of, the Indebtedness being extended, refinanced, renewed, replaced,
defeased or refunded; (iii) if the Indebtedness being extended, refinanced,
renewed, replaced, defeased or refunded is subordinated in right of payment to
the New Notes, such Permitted Refinancing Debt has a final maturity date no
earlier than the final maturity date of, and is subordinated in right of payment
to, the New Notes on terms at least as favorable to the Holders of New Notes as
those contained in the documentation governing the Indebtedness being extended,
refinanced, renewed, replaced, defeased or refunded; and (iv) such Indebtedness
is incurred either by the Company or by the Restricted Subsidiary who is the
obligor on the Indebtedness being extended, refinanced, renewed, replaced,
defeased or refunded.
"Pledged Collateral" means (i) any and all accounts at any time identified
as Collateral in the Indenture or in any Collateral Document, all funds at any
time on deposit in any such account, all investments of any such funds and all
interest and dividends thereon, and (ii) all other assets of the Company or the
Restricted Subsidiaries defined as Collateral in any of the Collateral
Documents, excluding "Excluded Property" as that term is defined in the Security
Agreement and in the Subsidiary Security Agreement, respectively.
"Restricted Investment" means an Investment other than a Permitted
Investment.
"Restricted Subsidiary" of a Person means any Subsidiary of the referent
Person that is not an Unrestricted Subsidiary.
"Significant Subsidiary" means any Restricted Subsidiary that would be a
"significant subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X,
promulgated pursuant to the Act, as such Regulation is in effect on the date
hereof.
"Subsidiary" means, with respect to any Person, (i) any corporation,
association or other business entity of which more than 50% of the total voting
power of shares of Capital Stock entitled (without regard to the occurrence of
any contingency) to vote in the election of directors, managers or trustees
thereof is at the time owned or controlled, directly or indirectly, by such
Person or one or more of the other Subsidiaries of that Person (or a combination
thereof) and (ii) any partnership (a) the sole general partner or the managing
general partner of which is such Person or a Subsidiary of such Person or (b)
the only general partners of which are such Person or of one or more
Subsidiaries of such Person (or any combination thereof).
"Treasury Rate" means the yield to maturity at the time of the computation
of United States Treasury securities with a constant maturity (as compiled by
and published in the most recent Federal Reserve Statistical Release H.15(519)),
which has become publicly available at least two Business Days prior to the date
fixed for prepayment (or, if such Statistical Release is no longer published,
any publicly available source of similar market data) most nearly equal to the
then remaining average life of the series of New Notes for which a Make-Whole
Premium is being calculated; PROVIDED, HOWEVER, that if the average life of such
note is not equal to the constant maturity of the United States Treasury
security for which a weekly average yield is given, the Treasury Rate shall be
obtained by linear interpolation (calculated to the nearest one-twelfth of a
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year) from the weekly average yields of United States Treasury securities for
which such yields are given, except that if the average life of such Notes is
less than one year, the weekly average yield on actually traded United States
Treasury securities adjusted to a constant maturity of one year shall be used.
"Unrestricted Subsidiary" means (i) any Subsidiary that is designated by the
Board of Directors as an Unrestricted Subsidiary pursuant to a Board Resolution;
but only to the extent that such Subsidiary: (a) has no Indebtedness other than
Non-Recourse Debt; (b) is not party to any agreement, contract, arrangement or
understanding with the Company or any Restricted Subsidiary of the Company
unless the terms of any such agreement, contract, arrangement or understanding
are no less favorable to the Company or such Restricted Subsidiary than those
that might be obtained at the time from Persons who are not Affiliates of the
Company; (c) is a Person with respect to which neither the Company nor any of
its Restricted Subsidiaries has any direct or indirect obligation (x) to
subscribe for additional Equity Interests or (y) to maintain or preserve such
Person's financial condition or to cause such Person to achieve any specified
levels of operating results; (d) has not guaranteed or otherwise directly or
indirectly provided credit support for any Indebtedness of the Company or any of
its Restricted Subsidiaries; (e) has at least one director on its board of
directors that is not a director or executive officer of the Company or any of
its Restricted Subsidiaries and has at least one executive officer that is not a
director or executive officer of the Company or any of its Restricted
Subsidiaries; and (f) does not own any Pledged Collateral. Any such designation
by the Board of Directors shall be evidenced to the Trustee by filing with the
Trustee a certified copy of the Board Resolution giving effect to such
designation and an Officers' Certificate certifying that such designation
complied with the foregoing conditions and was permitted by the covenant
described above under the caption "--Certain Covenants--Restricted Payments."
If, at any time, any Unrestricted Subsidiary would fail to meet the foregoing
requirements as an Unrestricted Subsidiary, it shall thereafter cease to be an
Unrestricted Subsidiary for purposes of the Indenture and any Indebtedness of
such Subsidiary shall be deemed to be incurred by a Restricted Subsidiary of the
Company as of such date (and, if such Indebtedness is not permitted to be
incurred as of such date under the covenant described under the caption
"Incurrence of Indebtedness," the Company shall be in default of such covenant).
The Board of Directors of the Company may at any time designate any Unrestricted
Subsidiary to be a Restricted Subsidiary; PROVIDED that such designation shall
be deemed to be an incurrence of Indebtedness by a Restricted Subsidiary of the
Company of any outstanding Indebtedness of such Unrestricted Subsidiary and such
designation shall only be permitted if (i) such Indebtedness is permitted under
the covenant described above under the caption "--Certain Covenants--Incurrence
of Indebtedness," and (ii) no Default or Event of Default would be in existence
following such designation.
"Weighted Average Life to Maturity" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing (i) the sum of the
products obtained by multiplying (a) the amount of each then remaining
installment, sinking fund, serial maturity or other required payments of
principal, including payment at final maturity, in respect thereof, by (b) the
number of years (calculated to the nearest one-twelfth) that will elapse between
such date and the making of such payment, by (ii) the then outstanding principal
amount of such Indebtedness.
"Wholly Owned Restricted Subsidiary" of any Person means a Restricted
Subsidiary of such Person all of the outstanding Capital Stock or other
ownership interests of which (other than directors' qualifying shares) shall at
the time be owned by such Person or by one or more Wholly Owned Restricted
Subsidiaries of such Person and one or more Wholly Owned Restricted Subsidiaries
of such Person.
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DESCRIPTION OF CREDIT FACILITY
On May 30, 1996, the Company entered into the Credit Facility with the
financial institutions which are parties thereto (the "Lenders") and
NationsBank, N.A., as agent for the Lenders (the "Agent"), which provides for an
aggregate revolving credit facility of $80.0 million under which approximately
$28.5 million was drawn upon the consummation of the Acquisition. The Credit
Facility will expire in 2001. Amounts outstanding under the Credit Facility
bears interest at a rate per annum equal to one of the following rates, as
selected and specified by the Company: (i) if the ratio of Funded Debt (as
defined) to Tangible Net Worth (as defined) is less than 7:1, (a) the sum of the
prime commercial lending rate of NationsBank, N.A. plus 0.5% per annum, or (b)
LIBOR plus 2.5% per annum; and (ii) otherwise (a) the sum of the prime
commercial lending rate of NationsBank, N.A. plus 0.75% per annum, or (b) LIBOR
plus 2.75% per annum. The Company paid an arrangement fee of $1.0 million on May
30, 1996, the date of closing of the Acquisition. The Company will pay a
quarterly commitment fee of 0.375% per annum on unused amounts of the revolving
credit facility and a quarterly servicing fee of $12,500.
The Company's indebtedness under the Credit Facility is secured by a first
priority security interest in the Company's existing and hereafter acquired
accounts receivable, inventory, chattel paper and other like assets. In
addition, all loans and the performance by each of Four M and its subsidiaries
entering into the Credit Facility is guaranteed by each of the other borrowers.
A default with respect to any loan under the Credit Agreement will be a default
with respect to all loans thereunder.
Availability of initial and subsequent advances under the Credit Facility is
subject to a borrowing base test. The borrowing base means, at any time, an
amount equal to the aggregate of (i) 85% of the amount of eligible accounts
receivable plus (ii) the lesser of 60% of the amount of eligible inventory or
$40.0 million. The Credit Facility provides that the amount of Credit Facility
borrowings must be at least $5.0 million less than the Borrowing Base after May
30, 1996. The Credit Facility limits advances by the Company to the Mill Joint
Venture to $10.0 million.
The Credit Facility requires mandatory prepayments of amounts outstanding
if, and to the extent that, such amounts exceed the Borrowing Base minus $5.0
million. In addition, the Agent may apply portions of the net proceeds of
certain cash proceeds of the collateral to repayment of the Credit Facility.
The obligation of the Lenders under the Credit Facility to advance funds is
subject to certain conditions customary for facilities of similar size and
nature. In addition, the Company is subject to certain affirmative and negative
covenants customarily found in agreements of this type, including, without
limitation, covenants that restrict, subject to specified exceptions (i)
mergers, consolidations, asset sales or changes in capital structure, (ii)
creation or acquisition of subsidiaries, (iii) purchase or redemption of the
Company's capital stock or declaration or payment of dividends or distributions
on such capital stock, (iv) incurrence of additional indebtedness, (v)
investment activities, (vi) capital expenditures, (vii) granting or incurrence
of liens to secure other indebtedness, (viii) prepayment or modification of the
terms of subordinated indebtedness and (ix) transactions with affiliates. In
addition, the Credit Facility requires that the Company maintain certain
specified financial covenants, including, without limitation, a minimum tangible
net worth, a minimum interest coverage ratio, ranging from 1.20 to 1.0 for the
fiscal quarter ended October 31, 1996 to 2.50 to 1.0 for the fiscal quarter
ended July 31, 1999 and thereafter; a maximum funded debt to EBITDA ratio,
ranging from 30.00 to 1.0 for the fiscal quarter ended October 31, 1996 to 3.00
to 1.0 for the fiscal quarter ended July 31, 1999 and thereafter; and a minimum
fixed charge coverage ratio, ranging from 0.90 to 1.0 for the fiscal quarter
ended October 31, 1996 to 1.10 to 1.0 for the fiscal quarter ended April 30,
2001.
The Credit Facility also provides for customary events of default.
Occurrence of any such events of default could result in acceleration of the
Company's obligations under the Credit Facility and foreclosure on the
collateral securing such obligations.
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PLAN OF DISTRIBUTION
Based on interpretations by the staff of the Commission set forth in
no-action letters issued to third parties, the Company believes that New Notes
issued pursuant to the Exchange Offer to an Eligible Holder in exchange for Old
Notes may be offered for resale, resold and otherwise transferred by such
Eligible Holder (other than (i) a broker-dealer who purchased the Old Notes
directly from the Company for resale pursuant to Rule 144A under the Securities
Act or any other available exemption under the Securities Act, or (ii) a person
that is an affiliate of the Company within the meaning of Rule 405 under the
Securities Act), without compliance with the registration and prospectus
delivery provisions of the Securities Act, provided that the Eligible Holder is
acquiring the New Notes in the ordinary course of business and is not
participating, and has no arrangement or understanding with any person to
participate, in a distribution of the New Notes.
Each broker-dealer that holds Old Notes which were acquired for its own
account as a result of market-making activities or other trading activities
(other than Old Notes acquired directly from the Company or an affiliate of the
Company), may exchange the Old Notes for New Notes in the Exchange Offer.
However, such broker-dealer may be deemed an "underwriter" within the meaning of
the Act and, therefore, must deliver a prospectus in connection with any resales
of the New Notes received by such broker-dealer in the Exchange Offer. This
prospectus delivery requirement may be satisfied by delivery of this Prospectus,
as it may be amended or supplemented from time to time. The Company and the
Guarantors have agreed that they will provide sufficient copies of the latest
version of the Prospectus to broker-dealers promptly upon request at any time
during the 270 day period following the effective date of the Exchange Offer
Registration Statement to facilitate such resales.
The Company will not receive any proceeds from any sale of the New Notes by
broker-dealers. New Notes received by broker-dealers for their own accounts
pursuant to the Exchange Offer may be sold from time to time in one or more
transactions in the over-the-counter market, in negotiated transactions, through
the writing of options on the New Notes or a combination of such methods of
resale, at market prices at the time of resale, at prices related to such
prevailing market prices or negotiated prices. Any such resale may be made
directly to purchasers or to or through brokers or dealers who may receive
compensation in the form of commissions or concessions from any such
broker-dealer and/or the purchasers of any such New Notes. Any broker-dealer
that resells New Notes that were received by it for its own account pursuant to
the Exchange Offer and any broker or dealer that participates in a distribution
of such New Notes may be deemed to be an "underwriter" within the meaning of the
Securities Act and any profit on any such resale of New Notes and any
commissions or concessions received by any such persons may be deemed to be
underwriting compensation under the Securities Act. The Letter of Transmittal
states that, by acknowledging that it will deliver and by delivering a
prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act.
By acceptance of the Exchange Offer, each broker-dealer and Holder that
receives the New Notes pursuant to the Exchange Offer hereby agrees to notify
the Company prior to using the Prospectus in connection with the sale or
transfer of New Notes, and each broker-dealer and Holder agrees that upon
receipt of any notice from the Company of the existence of any fact or the
happening of any event that makes any statement of a material fact in the
Prospectus, or any amendment or supplement hereto, or any document incorporated
herein by reference untrue or requires the making of any additions or changes in
the Prospectus (the "Notice"), such holder will forthwith discontinue the
disposition of the New Notes until such Holder (i) receives copies of a
supplemental Prospectus or (ii) is advised in writing by the Company that the
use of the Prospectus may be resumed and has received copies of any additional
or supplemental filings that are incorporated herein by reference. Upon the
Company's request and at its expense, each Holder will deliver to the Company
all copies, other than permanent file copies in such Holder's possession, of the
Prospectus covering such New Notes that was current at the time of receipt of
such Notice.
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LEGAL MATTERS
The legality of the New Notes and Guarantees being issued in connection with
the Exchange Offer will be passed upon for the Company by Kramer, Levin,
Naftalis & Frankel, New York, New York.
EXPERTS
The consolidated financial statements of the Company as of July 31, 1994 and
1995 and for each of the two years in the period ended July 31, 1995 have been
included herein upon reliance upon the report of BDO Seidman, LLP, independent
certified public accountants, and upon the authority of such firm as experts in
accounting and auditing.
The consolidated financial statements of Four M Corporation for the year
ended July 31, 1993 and the financial statements of St. Joe Container Company
and St. Joe Forest Products Company--Linerboard Mill Operations ("St. Joe
Forest") as of December 31, 1994 and 1995, and for each of the years in the
three-year period ended December 31, 1995, have been included herein and in the
Registration Statement in reliance upon the reports of KPMG Peat Marwick LLP,
independent certified public accountants, appearing elsewhere herein, and upon
the authority of said firm as experts in accounting and auditing. The report of
KPMG Peat Marwick LLP on St. Joe Container Company refers to changes in the
method of accounting for income taxes and investments. The report of KPMG Peat
Marwick LLP on St. Joe Forest refers to a change in the method of accounting for
income taxes.
CHANGE IN CERTIFYING ACCOUNTANTS
In 1994, the Company changed its certifying accountants from KPMG Peat
Marwick LLP (the "Former Accountants") to BDO Seidman, LLP. The Company's audit
committee recommended the appointment of BDO Seidman, LLP as its certifying
accountants which appointment was ratified by the Company's Board of Directors.
During the fiscal year ended July 31, 1993 and the subsequent interim period
preceding the hiring of BDO Seidman, LLP, there were no disagreements with the
Former Accountants on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure, which
disagreements, if not resolved to the satisfaction of the Former Accountants,
would have caused them to make reference to the subject matter of the
disagreement in their report. The Former Accountants' report on the Company's
financial statements for the fiscal year ended July 31, 1993 did not contain an
adverse opinion or disclaimer of opinion, or was modified as to uncertainty,
audit scope, or accounting principles.
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INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
FOUR M CORPORATION AND SUBSIDIARIES
Independent Auditors' Report............................................................................ F-2
Independent Auditors' Report............................................................................ F-3
Consolidated Balance Sheets as of July 31, 1994 and 1995 and April 30, 1996 (unaudited)................. F-4
Consolidated Statements of Operations and Retained Earnings for the years ended July 31, 1993, 1994 and
1995 and the nine months ended April 30, 1995 and 1996 (unaudited)..................................... F-5
Consolidated Statements of Cash Flows for the years ended July 31, 1993, 1994 and 1995 and the nine
months ended April 30, 1995 and 1996 (unaudited)....................................................... F-6
Notes to Consolidated Financial Statements.............................................................. F-7
ST. JOE CONTAINER COMPANY
Independent Auditors' Report............................................................................ F-17
Statement of Financial Position as of December 31, 1994 and 1995........................................ F-18
Statement of Operations for the years ended December 31, 1993, 1994 and 1995............................ F-19
Statement of Cash Flows for the years ended December 31, 1993, 1994 and 1995............................ F-20
Statement of Changes in Equity for the years ended December 31, 1993, 1994 and 1995..................... F-21
Notes to Financial Statements........................................................................... F-22
Unaudited Statement of Financial Position as of March 31, 1996.......................................... F-27
Unaudited Statement of Operations for the three months ended March 31, 1995 and 1996.................... F-28
Unaudited Statement of Cash Flows for the three months ended March 31, 1995 and 1996.................... F-29
Notes to Unaudited Financial Statements................................................................. F-30
ST. JOE FOREST PRODUCTS COMPANY--LINERBOARD MILL OPERATIONS
Independent Auditors' Report............................................................................ F-32
Statement of Financial Position as of December 31, 1994 and 1995........................................ F-33
Statement of Operations for the years ended December 31, 1993, 1994 and 1995............................ F-34
Statement of Cash Flows for the years ended December 31, 1993, 1994 and 1995............................ F-35
Statement of Changes in Equity for the years ended December 31, 1993, 1994 and 1995..................... F-36
Notes to Financial Statements........................................................................... F-37
Unaudited Statement of Financial Position as of March 31, 1996.......................................... F-41
Unaudited Statement of Operations for the three months ended March 31, 1995 and 1996.................... F-42
Unaudited Statement of Cash Flows for the three months ended March 31, 1995 and 1996.................... F-43
Notes to Unaudited Financial Statements................................................................. F-44
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholder
Four M Corporation and Subsidiaries
We have audited the accompanying consolidated balance sheets of Four M
Corporation and subsidiaries (the "Company") as of July 31, 1994 and 1995 and
the related consolidated statements of operations and retained earnings and of
cash flows for each of the years ended July 31, 1994 and 1995. 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 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of the Company
at July 31, 1994 and 1995 and the results of their operations and their cash
flows for each of the years ended July 31, 1994 and 1995 in conformity with
generally accepted accounting principles.
/s/ BDO SEIDMAN, LLP
BDO SEIDMAN, LLP
Valhalla, New York
September 22, 1995, except for Note 3
for which the date is November 1, 1995.
F-2
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholder
Four M Corporation:
We have audited the accompanying consolidated statements of operations and
retained earnings and cash flows of Four M Corporation and subsidiaries for the
year ended July 31, 1993. 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 results of operations and the cash
flows of Four M Corporation and subsidiaries for the year ended July 31, 1993,
in conformity with generally accepted accounting principles.
/s/ KPMG PEAT MARWICK LLP
KPMG Peat Marwick LLP
Stamford, Connecticut
October 29, 1993
F-3
<PAGE>
FOUR M CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
JULY 31, JULY 31,
1994 1995
----------- ----------- APRIL 30,
1996
--------------
(UNAUDITED)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents......................................... $ 1,900,000 $ 1,226,000 $ 1,949,000
Accounts receivable, less allowance for doubtful accounts of
$1,542,000, $1,778,000 and $1,368,000 (Note 6)................... 26,570,000 22,867,000 21,997,000
Notes, advances and other receivables............................. 1,752,000 1,452,000 1,460,000
Inventories (Notes 4 and 6)....................................... 18,683,000 15,110,000 11,019,000
Deferred income taxes (Note 8).................................... 3,400,000 2,001,000 1,825,000
----------- ----------- --------------
TOTAL CURRENT ASSETS............................................ 52,305,000 42,656,000 38,250,000
Property, plant and equipment, net of accumulated depreciation
(Notes 5 and 6).................................................... 36,536,000 27,044,000 34,977,000
Goodwill and other intangibles, net of accumulated amortization of
$602,000, $546,000 and $647,000.................................... 1,362,000 1,007,000 987,000
Other assets (Note 11).............................................. 3,730,000 2,430,000 3,040,000
----------- ----------- --------------
$93,933,000 $73,137,000 $ 77,254,000
----------- ----------- --------------
----------- ----------- --------------
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued liabilities.......................... $35,194,000 $24,703,000 $ 21,167,000
Current maturities of long-term debt (Notes 6 and 7).............. 8,208,000 3,449,000 4,158,000
----------- ----------- --------------
TOTAL CURRENT LIABILITIES....................................... 43,402,000 28,152,000 25,325,000
Long-term debt, less current maturities (Note 6).................... 36,332,000 29,918,000 33,279,000
Subordinated debt, less current maturities (Note 7)................. 7,773,000 1,080,000 --
Deferred income taxes (Note 8)...................................... 4,700,000 3,663,000 4,410,000
Minority interest (Note 9).......................................... 180,000 326,000 --
Other liabilities................................................... 268,000 1,349,000 847,000
----------- ----------- --------------
TOTAL LIABILITIES............................................... 92,655,000 64,488,000 63,861,000
----------- ----------- --------------
COMMITMENTS AND CONTINGENCIES (NOTES 10, 11 AND 12)
STOCKHOLDER'S EQUITY:
Common stock, $.125 par value, 10,000,000 shares authorized;
7,229,770 shares issued and 6,815,867 outstanding................ 904,000 904,000 904,000
Additional paid-in capital........................................ 117,000 117,000 117,000
Retained earnings................................................. 1,219,000 8,590,000 13,334,000
----------- ----------- --------------
2,240,000 9,611,000 14,355,000
Less treasury stock, at cost (413,903 shares)..................... 962,000 962,000 962,000
----------- ----------- --------------
TOTAL STOCKHOLDER'S EQUITY...................................... 1,278,000 8,649,000 13,393,000
----------- ----------- --------------
$93,933,000 $73,137,000 $ 77,254,000
----------- ----------- --------------
----------- ----------- --------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
FOUR M CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
<TABLE>
<CAPTION>
NINE MONTHS NINE MONTHS
YEARS ENDED JULY 31, ENDED ENDED
---------------------------------------------- APRIL 30, APRIL 30,
1993 1994 1995 1995 1996
-------------- -------------- -------------- -------------- --------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
NET SALES........................ $ 214,936,000 $ 228,563,000 $ 271,994,000 $ 213,723,000 $ 164,736,000
COST OF GOODS SOLD............... 192,208,000 205,025,000 232,154,000 181,870,000 141,973,000
-------------- -------------- -------------- -------------- --------------
GROSS PROFIT................. 22,728,000 23,538,000 39,840,000 31,853,000 22,763,000
-------------- -------------- -------------- -------------- --------------
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES......... 21,813,000 22,018,000 19,703,000 15,810,000 11,664,000
-------------- -------------- -------------- -------------- --------------
INCOME FROM OPERATIONS....... 915,000 1,520,000 20,137,000 16,043,000 11,099,000
OTHER INCOME (EXPENSE):
Interest expense............... (4,948,000) (5,448,000) (5,607,000) (4,672,000) (2,697,000)
Gain on closure/sale of
subsidiary (Note 3)........... 3,906,000 -- -- -- --
(Loss) gain on sale of assets
and other (Note 3)............ (255,000) 126,000 1,927,000 1,761,000 --
-------------- -------------- -------------- -------------- --------------
INCOME (LOSS) BEFORE
PROVISION (BENEFIT) FOR
INCOME TAXES, MINORITY
INTEREST AND EXTRAORDINARY
GAIN ON EARLY RETIREMENT OF
DEBT........................ (382,000) (3,802,000) 16,457,000 13,132,000 8,402,000
PROVISION (BENEFIT) FOR INCOME
TAXES (NOTE 8).................. 453,000 (325,000) 5,483,000 4,350,000 3,658,000
-------------- -------------- -------------- -------------- --------------
INCOME (LOSS) BEFORE MINORITY
INTEREST AND EXTRAORDINARY
GAIN ON EARLY RETIREMENT OF
DEBT........................ (835,000) (3,477,000) 10,974,000 8,782,000 4,744,000
MINORITY INTEREST (NOTE 9)....... -- (180,000) (146,000) -- --
CUMULATIVE EFFECT OF CHANGE IN
METHOD OF ACCOUNTING FOR TAXES
ON INCOME (NOTE 8).............. -- 381,000 -- -- --
EXTRAORDINARY GAIN ON EARLY
RETIREMENT OF DEBT (NOTES 6 AND
7).............................. -- -- 2,219,000 2,219,000 --
-------------- -------------- -------------- -------------- --------------
NET INCOME (LOSS)................ (835,000) (3,276,000) 13,047,000 11,001,000 4,744,000
RETAINED EARNINGS, BEGINNING OF
PERIOD.......................... 5,330,000 4,495,000 1,219,000 1,219,000 8,590,000
DISTRIBUTION (NOTE 3)............ -- -- (5,676,000) (5,676,000) --
-------------- -------------- -------------- -------------- --------------
RETAINED EARNINGS, END OF
PERIOD.......................... $ 4,495,000 $ 1,219,000 $ 8,590,000 $ 6,544,000 $ 13,334,000
-------------- -------------- -------------- -------------- --------------
-------------- -------------- -------------- -------------- --------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
FOUR M CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS NINE MONTHS
YEARS ENDED JULY 31, ENDED ENDED
--------------------------------------- APRIL 30, APRIL 30,
1993 1994 1995 1995 1996
----------- ----------- ------------- ------------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)................................ $ (835,000) $(3,276,000) $ 13,047,000 $ 11,001,000 $4,744,000
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization.................. 5,294,000 5,276,000 5,245,000 3,990,000 2,852,000
Allowance for doubtful accounts................ -- 678,000 467,000 441,000 (331,000)
Gain on sale/closure of subsidiary............. (3,906,000) -- (1,618,000) (1,618,000) (166,000)
Gain from debt forgiveness..................... -- (381,000) (2,393,000) (2,393,000) --
Non-cash interest expense...................... 1,355,000 1,123,000 499,000 499,000 --
Loss (gain) on sale of fixed assets............ 182,000 (830,000) 32,000 32,000 168,000
Deferred income taxes.......................... (209,000) (600,000) (312,000) (822,000) 930,000
Change in assets and liabilities, net of
effects of acquisitions and disposals:
Accounts, notes and other receivables........ 158,000 (5,061,000) (4,273,000) (6,909,000) (542,000)
Inventories.................................. (35,000) (1,194,000) (10,594,000) (10,897,000) 3,752,000
Other assets, net of other liabilities....... 87,000 (387,000) 275,000 (1,535,000) (1,398,000)
Accounts payable and accrued liabilities..... 6,769,000 9,446,000 (2,592,000) 3,146,000 (2,690,000)
----------- ----------- ------------- ------------- ------------
NET CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES.................................. 8,860,000 4,794,000 (2,217,000) (5,065,000) 7,319,000
----------- ----------- ------------- ------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures............................. (3,935,000) (3,916,000) (3,690,000) (2,950,000) (4,281,000)
Proceeds from sale of subsidiaries............... -- 1,401,000 1,618,000 1,618,000 898,000
Proceeds from sale or exchange of fixed assets... 121,000 174,000 397,000 397,000 679,000
Payment for acquisitions, net of cash acquired... 93,000 (6,601,000) -- -- --
Payment related to subsidiary spin-off, net of
common stock sold............................... -- -- (300,000) (300,000) --
Loans made to employees, net of payments......... (414,000) (184,000) -- -- --
----------- ----------- ------------- ------------- ------------
NET CASH USED BY INVESTING ACTIVITIES........ (4,135,000) (9,126,000) (1,975,000) (1,235,000) (2,704,000)
----------- ----------- ------------- ------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Short-term borrowings............................ -- 3,428,000 -- -- 7,161,000
Repayment of short-term borrowings............... (5,127,000) -- -- -- (7,656,000)
Payments to pre-petition creditors............... (720,000) (274,000) (180,000) (180,000) --
Secured term, mortgage, equipment and other
borrowings...................................... 5,500,000 7,446,000 9,094,000 6,454,000 --
Repayments of long-term debt..................... (3,494,000) (5,418,000) (5,396,000) (1,195,000) (3,397,000)
----------- ----------- ------------- ------------- ------------
NET CASH (USED IN) PROVIDED BY FINANCING
ACTIVITIES.................................. (3,841,000) 5,182,000 3,518,000 5,079,000 (3,892,000)
----------- ----------- ------------- ------------- ------------
TOTAL (DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS....................................... 884,000 850,000 (674,000) (1,221,000) 723,000
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD..... 166,000 1,050,000 1,900,000 1,900,000 1,226,000
----------- ----------- ------------- ------------- ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD........... $ 1,050,000 $ 1,900,000 $ 1,226,000 $ 679,000 $1,949,000
----------- ----------- ------------- ------------- ------------
----------- ----------- ------------- ------------- ------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest....................................... $ 3,372,000 $ 4,015,000 $ 4,822,000 $ 3,005,000 $2,930,000
Income taxes, net of refunds................... 234,000 1,080,000 6,052,000 1,678,000 1,990,000
SUPPLEMENTAL INFORMATION ON NON-CASH INVESTING
ACTIVITIES:
Purchase of equipment under capital leases....... -- -- -- -- 7,623,000
Non-cash distribution and other.................. -- 1,262,000 5,676,000 5,676,000 --
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
FOUR M CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
Four M Corporation and subsidiaries ("Four M" or the "Company") are
manufacturers of corrugated paper, rolled paper and other paper products, such
as cartons, displays, partitions and, prior to the distribution of The Fonda
Group, Inc. ("Fonda") (see Note 3), paper cups and plates. The Company uses the
trade name Box USA to conduct its business activities.
Four M has no assets or independent business operations other than its
ownership interest in its subsidiaries.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Four M
Corporation and its subsidiaries. All of the capital stock of Four M is owned by
its Chairman of the Board and Chief Executive Officer, Dennis Mehiel (the
"Stockholder"). Intercompany accounts and transactions have been eliminated.
INTERIM FINANCIAL INFORMATION:
The financial statements as of April 30, 1996 and for the nine months ended
April 30, 1995 and 1996 are unaudited but, in the opinion of management, include
all adjustments (consisting only of normal recurring adjustments and accruals)
which the Company considers necessary for a fair presentation of the operating
results and cash flows for that period. Results for interim periods are not
necessarily indicative of results for the entire year.
INVENTORIES
Inventories are valued at the lower of cost (first-in, first-out) or market.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost, less accumulated
depreciation. Depreciation is based on estimated useful lives of the assets and
is provided using the straight-line method. For income tax purposes, statutory
accelerated methods of depreciation are used.
GOODWILL AND OTHER INTANGIBLES
Goodwill and other intangibles principally relate to the excess of the
purchase price of certain acquisitions over the fair value of the net assets
acquired and are being amortized over their estimated useful lives, not
exceeding a 40-year period, using the straight-line method.
ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accrued liabilities were approximately $7,320,000, $4,603,000 and $3,375,000
at July 31, 1994 and 1995 and April 30, 1996, respectively. Accrued expenses
consisted of various items including employee benefits, utilities, interest and
plant repairs.
REVENUE RECOGNITION
Revenue is recognized when products are shipped.
INCOME TAXES
Deferred taxes are provided on the differences between the basis of assets
and liabilities for financial reporting and income tax purposes using the
statutory rates enacted for future periods. A consolidated federal income tax
return is filed. State income tax returns are filed separately.
CASH AND CASH EQUIVALENTS
For purposes of the statement of cash flows, the Company considers all
highly liquid debt instruments purchased with an original maturity of three
months or less to be cash equivalents.
F-7
<PAGE>
FOUR M CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECLASSIFICATIONS
Certain prior year balances have been reclassified to conform with the 1995
presentation.
ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
LONG-LIVED ASSETS
As prescribed in Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-lived Assets and for Long-lived Assets to
be Disposed Of," long-lived assets are required to be adjusted to net realizable
value if, in the opinion of management, there is a permanent diminution in
value. The adoption of this pronouncement does not have a significant impact on
the Company's financial statements.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of financial instruments including cash, accounts
receivable, notes, advances and other receivables and accounts payable
approximate fair value because of the relatively short maturities of these
instruments. The carrying value of long term debt, including the current portion
and subordinated debt, approximate fair value based upon market rates for
similar instruments.
2. CREDIT RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of temporary cash investments
and trade receivables. The Company places its temporary cash investments with
financial institutions having high credit ratings. Concentrations of credit risk
with respect to trade receivables are limited due to the large number of
customers comprising the Company's customer base, and their dispersion across
many different geographical regions. At July 31, 1995, the Company had no
significant concentrations of credit risk. No single customer accounted for 10%
or more of net sales during any of the reported periods.
3. ACQUISITIONS AND DISPOSITIONS
ST. JOE CONTAINER COMPANY
The Company entered into an agreement on November 1, 1995, as amended, to
acquire substantially all the assets and liabilities of St. Joe Container
Company for approximately $160 million. On May 30, 1996, the Company issued
senior secured notes for $170 million to finance the purchase. The Series B
Senior Secured Notes due 2006 of Four M Corporation in the principal amount of
$170,000,000 (the "Notes") will be guaranteed by Box USA Group, Inc., Four M
Paper Corporation, Page Packaging Corporation, Box USA, Inc., and Four M
Manufacturing Group of Georgia, Inc. which are all of the direct and indirect,
wholly-owned subsidiaries of Four M Corporation other than Box USA Paper
Corporation (the "Guarantors"). All direct and indirect subsidiaries of Four M
Corporation that are not guaranteeing such Notes are, individually and in the
aggregate, inconsequential. The guarantees by the Guarantors are full and
unconditional, joint and several. Four M Corporation is a holding company with
no operations or assets other than its investment in its subsidiaries. Separate
financial statements of each Guarantor have not been presented because
management has determined that they are not material to investors.
Subsequent to May 30, 1996, the Company acquired a 50% interest in Florida
Coast Paper Company, L.L.C and a 49% interest in MannKraft Corporation.
Therefore, subsequent to such date, such subsidiaries
F-8
<PAGE>
FOUR M CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. ACQUISITIONS AND DISPOSITIONS (CONTINUED)
which are not guaranteeing the Notes will become consequential. In the future,
the Company will provide condensed consolidating financial statements regarding
the Company, the guarantor subsidiaries and the non-guaranteeing subsidiaries.
TIMBERLINE PACKAGING, INC.
In August 1995, the Company sold its 67% interest in Timberline Packaging,
Inc. The sale resulted in a gain of approximately $166,000.
THE FONDA GROUP, INC.
In March 1995, Fonda concluded a purchase agreement with the Scott Paper
Company to acquire certain net assets and the business of its Scott Foodservice
Division for approximately $30 million in cash plus the assumption of certain
liabilities.
In March 1995, the stock of Fonda was distributed to the Stockholder, except
for 3.5% which was distributed to a creditor as described in Note 7. The
distribution to the Stockholder amounted to 96.5% of the net assets of Fonda as
of March 31, 1995.
Accordingly, the results of operations of Fonda are not included in the
financial statements after March 31, 1995.
The accounts of Fonda as of and for the years ended July 31, 1993 and 1994
and for the eight months ended March 31, 1995 are summarized as follows (in
thousands):
<TABLE>
<CAPTION>
JULY 31, MARCH 31,
-------------------- -----------
1993 1994 1995
--------- --------- -----------
<S> <C> <C> <C>
Net sales............................................................. $61,079 $61,839 $42,413
Operating income...................................................... 2,835 1,788 1,352
Net (loss) income..................................................... 960 251 (57 )
Total assets.......................................................... 23,598 24,668 33,332
Stockholder's equity.................................................. 3,717 5,977 5,882
</TABLE>
FIBER PARTITION PRODUCTS
Effective March 20, 1995, the Company disposed of certain assets relating to
its fiber partition products which resulted in a gain before income taxes of
approximately $1,618,000.
CONSOLIDATING PACKAGING CORPORATION, DEBTOR-IN-POSSESSION
On January 5, 1994, the Company acquired certain assets of Consolidated
Packaging Corporation, Debtor-in-Possession (the "CPC Acquisition"). The
purchase price was approximately $5,285,000. Assets acquired included accounts
receivable, inventories, equipment and certain real estate and leasehold
interests, including a paper mill located in Ft. Madison, Iowa. The assets were
transferred to certain subsidiaries. These financial statements reflect the
operations of those subsidiaries from the date of acquisition.
Effective July 31, 1994, the Company disposed of certain of the assets
purchased in the CPC Acquisition, resulting in a gain before income taxes of
approximately $622,000.
In November 1994, the Company sold certain additional assets purchased in
the CPC Acquisition, consisting of substantially all of the inventory, property
and equipment and certain tangible assets of Four M Manufacturing Group of
Somerset, Inc. The sale resulted in a loss of approximately $73,000 which was
recorded in 1994.
F-9
<PAGE>
FOUR M CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. ACQUISITIONS AND DISPOSITIONS (CONTINUED)
GRAND CORRUGATED CONTAINER CORPORATION
On May 31, 1993, one of the Company's subsidiaries, Grand Corrugated
Container Corporation, ceased operations. Grand's assets and related
liabilities, consisting principally of trade payables and accrued liabilities,
were transferred to the respective creditors holding security interests in the
assets. In connection with the closure of this subsidiary, the Company realized
a gain of $3,906,000.
4. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
JULY 31,
----------------------------
1994 1995
------------- ------------- APRIL 30,
-------------
1996
-------------
(UNAUDITED)
<S> <C> <C> <C>
Raw materials............................................. $ 12,453,000 $ 10,710,000 $ 7,894,000
Work-in-process........................................... 570,000 632,000 562,000
Finished goods............................................ 5,660,000 3,768,000 2,563,000
------------- ------------- -------------
$18,683,000 $15,110,000 $11,019,000
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following:
<TABLE>
<CAPTION>
JULY 31,
LIVES IN ----------------------------
YEARS 1994 1995
--------- ------------- ------------- APRIL 30,
-------------
1996
-------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Land and buildings.............................. 20 $ 12,797,000 $ 9,107,000 $ 8,675,000
Machinery and equipment......................... 3-20 42,107,000 31,819,000 41,622,000
Leasehold improvements.......................... 5-10 1,942,000 1,362,000 1,384,000
Furniture and fixtures.......................... 5 3,275,000 2,987,000 2,825,000
Autos and trucks................................ 5 318,000 306,000 457,000
------------- ------------- -------------
60,439,000 45,581,000 54,963,000
Less: accumulated depreciation.................. 23,903,000 18,537,000 19,986,000
------------- ------------- -------------
$36,536,000 $27,044,000 $34,977,000
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
Depreciation expense was approximately $5,060,000, $5,014,000, $4,887,000,
$2,549,000 and $2,540,000 for the years ended July 31, 1993, 1994 and 1995 and
the nine months ended April 30, 1995 and 1996, respectively.
F-10
<PAGE>
FOUR M CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. PROPERTY, PLANT AND EQUIPMENT (CONTINUED)
Property, plant and equipment includes property under capital leases as
follows:
<TABLE>
<CAPTION>
JULY 31, APRIL 30,
-------------------------- ------------
1994 1995 1996
------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
Building...................................................... $ 2,217,000 $ -- $ --
Equipment..................................................... 2,489,000 1,170,000 8,117,000
Less: accumulated depreciation................................ 1,614,000 311,000 386,000
------------ ------------ ------------
$ 3,092,000 $ 859,000 $ 7,731,000
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
6. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
JULY 31, APRIL 30,
---------------------------- -------------
1994 1995 1996
------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Revolving credit agreements(a)............................ $18,900,000 $16,110,000 $15,297,000
Term loans(b)............................................. 12,173,000 9,913,000 8,922,000
Mortgages (weighted average rate as of
April 30, 1996 7.8%)..................................... 2,778,000 2,620,000 2,498,000
Pre-petition creditors (discounted at 9%)(c).............. 795,000 275,000 --
Other..................................................... 5,190,000 2,857,000 2,048,000
------------- ------------- -------------
39,836,000 31,775,000 28,765,000
Capital lease obligations (Note 10)....................... 2,204,000 592,000 7,592,000
------------- ------------- -------------
42,040,000 32,367,000 36,357,000
Less: current portion..................................... 5,708,000 2,449,000 3,078,000
------------- ------------- -------------
Long-term debt............................................ $36,332,000 $29,918,000 $33,279,000
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
- ------------------------
(a) Revolving credit agreements are secured by certain machinery and equipment,
accounts receivable and inventories and are limited to 85% of eligible
receivables and up to 60% of eligible inventories. The loans mature at
various dates through 1998 and are automatically renewed for one year terms
unless terminated. Interest rates at April 30, 1996 varied from prime plus
2 1/4% to prime plus 2 3/4%. The prime rate was 8 1/2% at April 30, 1996. At
April 30, 1996, the Company had available approximately $14,149,000 of
additional credit under these agreements. On May 30, 1996, the Company
negotiated a new Credit Facility with similar terms in the amount of $80.0
million.
(b) Term loans are secured by property, plant and equipment and are payable in
monthly installments over seven years through 2002 at interest rates of
prime plus 2 3/4% at April 30, 1996.
(c) In January 1995, Four M assumed certain outstanding pre-petition creditor
liabilities from Fonda aggregating $870,000 in exchange for partial
settlement of amounts owed to Fonda by Four M. In July 1995, this assumed
liability of $870,000 was settled for $455,000, resulting in an
extraordinary gain of $241,000, net of income taxes.
The Company is subject to certain financial covenants, the most restrictive
of which limits capital expenditures. The Company has obtained waivers of
non-compliance with this covenant at July 31, 1995.
F-11
<PAGE>
FOUR M CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. LONG-TERM DEBT (CONTINUED)
Long-term debt, excluding capital lease obligations, is payable as follows:
<TABLE>
<CAPTION>
PERIOD ENDING APRIL 30,
- -----------------------------------------------------------------------------------------
<S> <C>
1997..................................................................................... $ 2,129,000
1998..................................................................................... 17,328,000
1999..................................................................................... 1,848,000
2000..................................................................................... 1,354,000
2001..................................................................................... 1,334,000
Thereafter............................................................................... 4,772,000
-------------
$28,765,000
-------------
-------------
</TABLE>
7. SUBORDINATED DEBT
Subordinated debt consists of the following:
<TABLE>
<CAPTION>
JULY 31,
--------------------------- APRIL 30,
1994 1995 1996
------------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
Debt with Warrants(a):
Face value................................................ $ 4,000,000 $ 2,080,000 $ 1,080,000
Accretion to redemption value............................. 1,760,000 -- --
Deferred interest......................................... 2,013,000 -- --
Debentures(b)............................................... 2,500,000 -- --
------------- ------------ ------------
10,273,000 2,080,000 1,080,000
Less: current portion....................................... 2,500,000 1,000,000 1,080,000
------------- ------------ ------------
Long-term subordinated debt................................. $ 7,773,000 $ 1,080,000 $ --
------------- ------------ ------------
------------- ------------ ------------
</TABLE>
- ------------------------
(a) In January 1990, the Company borrowed $4,000,000 (the "Subordinated Debt")
from a lender (the "Holder") and issued a warrant (the "Warrant") to the
Holder to purchase 513,000 shares of its common stock. Interest on the
Warrant was accreted such that at March 31, 1995, the Warrant had a value of
$2,184,000. In March 1995, the Subordinated Debt was restructured as
follows: (i) the Company distributed 35 shares (3.5%) of the issued and
outstanding stock of Fonda to the Holder (see Note 3), in exchange for the
cancellation of a portion of the outstanding principal balance of the
Subordinated Debt; and (ii) in consideration of the Holder's surrendering
the Warrants, and in satisfaction of the remaining portion of the
Subordinated Debt and interest accrued thereon, payments aggregating
$4,000,000 were made, with a final payment of $1,080,000 to be made on July
31, 1996, together with interest accrued thereon. As a result, the Company
recognized an extraordinary gain of $1,978,000 which represented the excess
of the recorded value of the Warrant settled less $206,000, representing
3.5% of the net assets of Fonda at March 31, 1995.
(b) On July 31, 1987, the Company borrowed $3,000,000 from an investor, with
interest at 12%, payable quarterly commencing in the first quarter of fiscal
year 1991, and with equal annual principal payments beginning in 1993
through 1995. In April of 1992, $2,500,000 of principal payments and a
portion of future interest payments were deferred. In August 1994, the terms
of the debentures evidencing such borrowings were modified and, as a result,
principal payments aggregating $1,911,000 were made and the rights to
convert the debentures into 890,000 shares of common stock were terminated.
The balance was paid during 1995.
F-12
<PAGE>
FOUR M CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. TAXES PROVISION (BENEFIT) FOR INCOME (RECOVERIES)
Components of provision (benefit) for income taxes are as follows:
<TABLE>
<CAPTION>
APRIL 30,
JULY 31, 1995
------------------------------------- ------------
1993 1994 1995
---------- ----------- ------------ (UNAUDITED) APRIL 30,
1996
------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Current:
Federal.................................... $199,000 $ -- $ 4,675,000 $ 4,603,000 $ 2,428,000
State...................................... 429,000 275,000 1,120,000 569,000 300,000
---------- ----------- ------------ ------------ ------------
628,000 275,000 5,795,000 5,172,000 2,728,000
---------- ----------- ------------ ------------ ------------
Deferred:
Federal.................................... (153,000) (481,000) (250,000) (712,000) 821,000
State...................................... (22,000) (119,000) (62,000) (110,000) 109,000
---------- ----------- ------------ ------------ ------------
(175,000) (600,000) (312,000) (822,000) 930,000
---------- ----------- ------------ ------------ ------------
Provision (benefit) for income taxes before
extraordinary item.......................... 453,000 (325,000) 5,483,000 4,350,000 3,658,000
---------- ----------- ------------ ------------ ------------
Taxes on extraordinary item.................. -- -- 174,000 174,000 --
---------- ----------- ------------ ------------ ------------
$453,000 $(325,000) $5,657,000 $4,524,000 $3,658,000
---------- ----------- ------------ ------------ ------------
---------- ----------- ------------ ------------ ------------
</TABLE>
Deferred income taxes reflect the tax effect of temporary differences
between amounts of assets and liabilities for financial reporting and income tax
purposes. Deferred tax assets (liabilities) result from temporary differences as
follows:
<TABLE>
<CAPTION>
JULY 31,
----------------------------
1994 1995
------------- ------------- APRIL 30,
-------------
1996
-------------
(UNAUDITED)
<S> <C> <C> <C>
Allowance for doubtful accounts receivable...................... $ 587,000 $ 751,000 $ 520,000
Capitalized inventory costs..................................... 768,000 762,000 628,000
Accrued salaries and benefits................................... 849,000 299,000 380,000
Other........................................................... 206,000 189,000 297,000
Net operating loss carryover.................................... 990,000 -- --
------------- ------------- -------------
Gross deferred tax assets....................................... 3,400,000 2,001,000 1,825,000
Property, plant and equipment................................... (4,700,000) (3,663,000) (4,410,000)
------------- ------------- -------------
Net deferred tax liabilities.................................... $(1,300,000) $(1,662,000) $(2,585,000)
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
The effective tax rate was different than the federal statutory rate due to
the following:
<TABLE>
<CAPTION>
JULY 31,
------------------------------- APRIL 30, APRIL 30,
1993 1994 1995 1995 1996
--------- --------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Tax (benefit) at the statutory Federal rate.................. (34.0)% (34.0)% 34.0% 34.0% 34.0%
State income taxes (net of Federal benefit).................. 70.0 7.0 4.0 4.0 4.0
Non-deductible interest...................................... 39.0 5.3 3.0 3.0
Goodwill amortization........................................ 14.4 1.4 .1 .1 .1
Officers' life insurance..................................... 12.5 .1 -- -- --
Provision for (reversal of) valuation allowance.............. -- 11.7 (3.7) (3.7) --
Permanent differences related to sale of subsidiary, ceased
operations and other........................................ 11.3 -- (4.1) (4.1) 3.3
Meals and entertainment...................................... 5.8 -- -- -- 2.1
--------- --------- --- --- ---
119.0% (8.5)% 33.3% 33.3% 43.5%
--------- --------- --- --- ---
--------- --------- --- --- ---
</TABLE>
F-13
<PAGE>
FOUR M CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. TAXES PROVISION (BENEFIT) FOR INCOME (RECOVERIES) (CONTINUED)
During 1994, the Company adopted the provisions of Financial Accounting
Standards Board Statement No. 109, "Accounting for Income Taxes" ("FASB 109").
The cumulative effect of this change in method of accounting for taxes on income
has been reported as of the beginning of the 1994 fiscal year in the
consolidated statement of operations.
During 1993, the Company accounted for income taxes under the provisions of
Financial Accounting Standards Board Statement No. 96, "Accounting for Income
Taxes."
9. MINORITY INTEREST
Minority interest represents the minority stockholders' investment plus
their proportionate share of the income or loss of the respective subsidiary.
10. LEASES
The Company leases several facilities and certain equipment used in
connection with its manufacturing operations. Future minimum payments for
capital leases and noncancellable operating leases with initial or remaining
terms of one year or more are:
<TABLE>
<CAPTION>
CAPITAL OPERATING
YEAR ENDING APRIL 30, LEASES LEASES
- ------------------------------------------------------------------------- ------------- -------------
<S> <C> <C>
1997..................................................................... $ 1,828,000 $ 3,779,000
1998..................................................................... 1,796,000 3,489,000
1999..................................................................... 1,734,000 2,933,000
2000..................................................................... 1,611,000 2,328,000
2001..................................................................... 1,609,000 1,900,000
Thereafter............................................................... 2,143,000 12,332,000
------------- -------------
Total minimum lease payments............................................. 10,721,000 $ 26,761,000
-------------
-------------
Less: amount representing interest....................................... 3,129,000
-------------
Present value of capital lease obligations............................... $ 7,592,000
-------------
-------------
</TABLE>
Rent expense under operating leases was approximately $4,997,000,
$4,984,000, $4,613,000, $3,460,000 and $3,206,000 for the years ended July 31,
1993, 1994 and 1995 and for the nine months ended April 30, 1995 and 1996,
respectively.
11. RELATED PARTY TRANSACTIONS
The Stockholder is an owner of entities from which the Company rents certain
property, plant and equipment. Rent expense for the years ended July 31, 1993,
1994 and 1995 and for the nine months ended April 30, 1995 and 1996 was
$883,000, $1,120,000, $929,000, $697,000 and $771,000, respectively. Included in
lease commitments at April 30, 1996 are approximately $16,589,000 relating to
operating leases with these entities.
The Stockholder is part owner in an entity to which the Company sold
$15,000,000, $3,300,000 and $1,351,000 for the years ended July 31, 1993, 1994
and for the nine months ended April 30, 1996, respectively. There were no
material sales to this entity for the year ended July 31, 1995 or for the nine
months ended April 30, 1995.
The Company had outstanding notes and loans receivable from officers and
employees in the amount of $1,264,000, $1,474,000 and $1,605,000, at July 31,
1994 and 1995 and April 30, 1996, respectively, all of which were non-interest
bearing. These notes and loans are classified as other assets.
F-14
<PAGE>
FOUR M CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. RELATED PARTY TRANSACTIONS (CONTINUED)
An officer of the Company owns a minority interest in a subsidiary which had
sales of $5,884,000, $7,558,000, $13,579,000, $10,061,000 and $1,398,000 for the
years ended July 31, 1993, 1994 and 1995 and for the nine months ended April 30,
1995 and 1996, respectively.
12. COMMITMENT AND CONTINGENCIES
PURCHASE COMMITMENTS
The Company has commitments to purchase paperboard inventory from four major
vendors. The total commitment is for the purchase of 160,000 tons of inventory
through December 2001. The prices per ton will be based on market rates, less
applicable rebates.
LITIGATION
The Company is involved in various legal actions and claims arising in the
ordinary course of its business. Management believes that current litigation and
claims will be resolved without any material effect on the Company's financial
position or results of operations.
SAVINGS AND INVESTMENT PLANS
The Company has two defined contribution savings and investment plans
covering most of its non-union employees with at least one year of service. One
plan does not provide for matching of employee contributions. Under the other
plan, employee contributions up to 6% of their salary are matched at 20%.
Expenses incurred under both plans amounted to approximately $70,000, $81,000,
$107,000, $82,000 and $50,000 for the years ended July 31, 1993, 1994 and 1995,
and the nine months ended April 30, 1995 and 1996, respectively.
PENSION PLANS
The Company has a defined contribution plan for its union employees.
Contributions are made by the Company at a defined rate per hour worked. Expense
incurred under these plans amounted to approximately $518,000, $431,000,
$67,000, $43,000 and $57,000 for the years ended July 31, 1993, 1994 and 1995
and the nine months ended April 30, 1995 and 1996, respectively.
STOCK APPRECIATION UNIT PLAN
On September 8, 1993, the Company's Board of Directors approved a Stock
Appreciation Unit Plan (the "Plan"). Pursuant to the Plan units may be granted
to key employees at the discretion of the Chief Executive Officer and the
non-employee directors of the Company. Units awarded under the Plan are subject
to the vesting and redemption terms of the Plan. Employees may elect to redeem
vested units awarded under the Plan. Units to be redeemed will be paid in cash
over a period of time at an amount based on earnings and increases in book
value.
13. SUBSEQUENT EVENTS
PURCHASE OF FIBRE MARKETING
Pursuant to a Limited Liability Company Agreement dated as of May 24, 1996,
the Company acquired a 50% interest in Fibre Marketing Company, L.L.C. ("Fibre
Marketing"). The Company made an aggregate capital contribution of $280,000 to
Fibre Marketing in August 1996.
DISPOSITION OF FLINT
On August 16, 1996, Box USA discontinued its operations at its Flint,
Michigan facility and disposed of substantially all of the machinery and
equipment, finished goods and work-in-progress inventory and certain related
assets utilized at such facility for a purchase price of approximately $2.6
million. Box USA retained all accounts receivable, accounts payable and raw
material inventory. The equipment was transferred pursuant to a like-kind
exchange within the meaning of section 1031 of the Code, as amended.
F-15
<PAGE>
FOUR M CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. SUBSEQUENT EVENTS (CONTINUED)
PURCHASE OF MANNKRAFT
On August 5, 1996, the Company acquired 490 shares of the common stock of
MannKraft Corporation ("MannKraft") from Stone Container Corporation. The
purchase represented 49% of MannKraft's outstanding shares and was acquired by
the Company for $5.5 million, which was paid on August 6, 1996. The Company's
interest in MannKraft is now 50%. This transaction was made in compliance with
the covenants contained in the Indenture. The Company's interest in MannKraft
will be accounted for under the consolidation method.
F-16
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
St. Joe Container Company:
We have audited the accompanying statements of financial position of St. Joe
Container Company as of December 31, 1994 and 1995, and the related statements
of operations, cash flows and changes in equity for each of the years in the
three-year period ended December 31, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our 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 financial position of St. Joe Container Company as
of December 31, 1994 and 1995, and the results of its operations and its cash
flows for each of the years in the three-year period ended December 31, 1995, in
conformity with generally accepted accounting principles.
As disclosed in note 3(f) to the financial statements, St. Joe Container
Company changed its method of accounting for income taxes effective January 1,
1993 to adopt the provisions of the Financial Accounting Standards Board's
Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for
Income Taxes." As disclosed in note 3(g), St. Joe Container Company changed its
method of accounting for investments to adopt the provisions of the Financial
Accounting Standards Board's SFAS No. 115, "Accounting for Certain Investments
in Debt and Equity Securities" at December 31, 1993.
/s/ KPMG PEAT MARWICK LLP
KPMG Peat Marwick LLP
Jacksonville, Florida
February 12, 1996
F-17
<PAGE>
ST. JOE CONTAINER COMPANY
STATEMENT OF FINANCIAL POSITION
DECEMBER 31, 1994 AND 1995
ASSETS
<TABLE>
<CAPTION>
1994 1995
---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents............................................................... $ 2,220 1,143
Accounts receivable..................................................................... 29,885 28,566
Inventories............................................................................. 24,910 36,012
Prepaid and other assets................................................................ 957 886
---------- ----------
TOTAL CURRENT ASSETS................................................................ 57,972 66,607
---------- ----------
Investments and other assets:
Other investments....................................................................... 2,977 3,088
Other assets............................................................................ 118 174
---------- ----------
TOTAL INVESTMENTS AND OTHER ASSETS.................................................. 3,095 3,262
---------- ----------
Property, plant and equipment, net........................................................ 45,395 37,306
---------- ----------
TOTAL ASSETS........................................................................ $ 106,462 107,175
---------- ----------
---------- ----------
LIABILITIES AND EQUITY
CURRENT LIABILITIES:
Accounts payable........................................................................ $ 8,257 5,372
Accrued reserves........................................................................ 1,851 1,659
Property and other taxes................................................................ 521 602
Accrued liabilities..................................................................... 463 522
Notes payable to banks.................................................................. 5,400 --
Long-term debt due within one year...................................................... 1,185 --
---------- ----------
TOTAL CURRENT LIABILITIES........................................................... 17,677 8,155
---------- ----------
Accrued reserves.......................................................................... 1,693 1,939
Long-term debt due after one year......................................................... 2,401 --
Deferred income taxes..................................................................... 5,639 4,459
---------- ----------
TOTAL LIABILITIES................................................................... 27,410 14,553
---------- ----------
EQUITY:
Equity in net assets.................................................................... 77,302 90,798
Net unrealized gain on marketable equity securities..................................... 1,750 1,824
---------- ----------
79,052 92,622
---------- ----------
TOTAL LIABILITIES AND EQUITY........................................................ $ 106,462 107,175
---------- ----------
---------- ----------
</TABLE>
See accompanying notes to financial statements.
F-18
<PAGE>
ST. JOE CONTAINER COMPANY
STATEMENT OF OPERATIONS
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
<TABLE>
<CAPTION>
1993 1994 1995
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
NET SALES.................................................................... $ 237,539 283,902 326,713
COST OF SALES................................................................ 227,401 270,913 299,907
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES................................. 20,806 23,493 23,184
---------- ---------- ----------
OPERATING INCOME (LOSS).................................................. (10,668) (10,504) 3,622
---------- ---------- ----------
OTHER INCOME (EXPENSE):
Interest income............................................................ 69 99 110
Interest expense........................................................... (388) (408) (373)
Gain on sale of property................................................... -- -- 1,816
Other, net................................................................. (23) (79) --
---------- ---------- ----------
(342) (388) 1,553
---------- ---------- ----------
Income (loss) before income taxes and cumulative effect of change in
accounting principle........................................................ (11,010) (10,892) 5,175
Provision for income taxes:
Current.................................................................... (3,532) (3,412) 2,983
Deferred................................................................... (273) (448) (1,149)
---------- ---------- ----------
TOTAL PROVISION FOR INCOME TAXES......................................... (3,805) (3,860) 1,834
---------- ---------- ----------
Income (loss) before cumulative effect of change in accounting principle..... (7,205) (7,032) 3,341
Cumulative effect of change in accounting principle for income taxes......... (184) -- --
---------- ---------- ----------
NET INCOME (LOSS)........................................................ $ (7,389) (7,032) 3,341
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
See accompanying notes to financial statements.
F-19
<PAGE>
ST. JOE CONTAINER COMPANY
STATEMENT OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
<TABLE>
<CAPTION>
1993 1994 1995
---------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).............................................................. $ (7,389) (7,032) 3,341
Adjustments to reconcile net income (loss) to cash used in operating
activities:
Cumulative effect of change in accounting principle.......................... 184 -- --
Depreciation................................................................. 7,823 7,845 7,837
Gain on sale of property..................................................... -- -- (1,816)
Decrease in deferred income taxes............................................ (273) (448) (1,149)
Changes in operating assets and liabilities:
Accounts receivable........................................................ 389 (8,681) 1,319
Inventories................................................................ (2,625) 2,097 (11,102)
Prepaid and other assets................................................... 152 (55) (53)
Accounts payable........................................................... 42 3,441 (2,885)
Accrued liabilities........................................................ (382) 165 59
Property and other taxes................................................... (11) 12 81
Accrued reserves........................................................... (278) 594 54
---------- --------- ---------
CASH USED IN OPERATING ACTIVITIES........................................ (2,368) (2,062) (4,314)
---------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment..................................... (5,412) (7,574) (905)
Proceeds from sale of property................................................. -- -- 2,973
Purchases of available for sale investments.................................... (50) (99) --
---------- --------- ---------
CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES.......................... (5,462) (7,673) 2,068
---------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in notes payable to banks........................................... 1,200 4,200 (5,400)
Repayment of long-term debt.................................................... (1,126) (1,182) (3,586)
Changes in intercompany accounts............................................... 6,629 6,152 10,155
---------- --------- ---------
CASH PROVIDED BY FINANCING ACTIVITIES.................................... 6,703 9,170 1,169
---------- --------- ---------
NET DECREASE IN CASH AND CASH EQUIVALENTS........................................ (1,127) (565) (1,077)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD................................. 3,912 2,785 2,220
---------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD....................................... $ 2,785 2,220 1,143
---------- --------- ---------
---------- --------- ---------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for interest......................................... $ 381 408 351
---------- --------- ---------
---------- --------- ---------
</TABLE>
See accompanying notes to financial statements.
F-20
<PAGE>
ST. JOE CONTAINER COMPANY
STATEMENT OF CHANGES IN EQUITY
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
<TABLE>
<CAPTION>
1993 1994 1995
----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Common stock............................................................... $ 4,900 4,900 4,900
----------- ----------- -----------
----------- ----------- -----------
Additional paid in capital................................................. $ 110,919 110,919 110,919
----------- ----------- -----------
----------- ----------- -----------
Retained deficit:
Balance at beginning of year............................................. $ (96,420) (103,809) (110,841)
Net income (loss)........................................................ (7,389) (7,032) 3,341
----------- ----------- -----------
Balance at end of year................................................... $ (103,809) (110,841) (107,500)
----------- ----------- -----------
----------- ----------- -----------
Intercompany accounts:
Balance at beginning of year............................................. $ 59,543 66,172 72,324
Net change............................................................... 6,629 6,152 10,155
----------- ----------- -----------
Balance at end of year................................................... $ 66,172 72,324 82,479
----------- ----------- -----------
----------- ----------- -----------
Unrealized gain on marketable equity securities:
Balance at beginning of year............................................. $ -- 1,743 1,750
Increase in net unrealized gain, net of tax effect....................... -- 7 74
Cumulative effect of change in accounting principle for investments...... 1,743 -- --
----------- ----------- -----------
Balance at end of year................................................... $ 1,743 1,750 1,824
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
See accompanying notes to financial statements.
F-21
<PAGE>
ST. JOE CONTAINER COMPANY
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1993, 1994 AND 1995
(DOLLARS IN THOUSANDS)
(1) NATURE OF OPERATIONS
St. Joe Container Company (SJCC), a wholly owned subsidiary of St. Joe
Forest Products Company (SJFP), is engaged in the manufacture of corrugated
containers. SJCC operates sixteen production facilities which are located in the
eastern half of the United States. Corrugated containers are typically
manufactured to customer order. SJCC supplies manufacturers and distributors in
the food and beverage (approximately 31% of revenues for the year ended December
31, 1995), paper and printing (approximately 21%) and rubber and plastic
industries (approximately 32%) among others.
(2) BASIS OF PRESENTATION
The accompanying financial statements include all of the relevant assets,
liabilities, revenues and expenses attributable to the container operation of
SJCC. Certain of the assets and liabilities are under contract for sale as
defined in the asset purchase agreement between St. Joe Paper Company (SJPC),
SJFP, SJCC, Florida Coast Paper Company, L.L.C. and Four M Corporation dated
November 1, 1995.
(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(B) CASH AND CASH EQUIVALENTS
For purposes of the statement of cash flows, cash and cash equivalents
include cash on hand, bank demand accounts, money market accounts, remarketed
certificates of participation and repurchase agreements having original
maturities of three months or less.
(C) INVENTORIES
Inventories are stated at the lower of cost or market. Costs for
manufactured paper products and associated raw materials are determined under
the last-in, first-out (LIFO) method. Costs for substantially all other
inventories are determined under the first in, first out (FIFO) or the average
cost method.
(D) PROPERTY, PLANT AND EQUIPMENT
Depreciation is computed using both straight-line and accelerated methods
over the useful lives of various assets.
(E) FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of investments differs from cost as disclosed in note 4.
(F) INCOME TAXES
SJCC's results of operations are included in the consolidated U.S. federal
and Florida income tax returns of SJPC. In other states, SJCC files a separate
return. The tax provisions and deferred tax liabilities presented have been
determined as if SJCC was a stand-alone business filing separate returns, except
to the extent that an operating loss can be utilized by SJPC, the benefit is
allocated to SJCC. Current tax liabilities or benefits are paid to or refunded
by SJPC, the parent company.
SJCC follows the asset and liability method of accounting for income taxes
in accordance with Statement of Financial Accounting Standards (SFAS) No. 109
"Accounting for Income Taxes." Under SFAS 109, deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences
F-22
<PAGE>
ST. JOE CONTAINER COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1993, 1994 AND 1995
(DOLLARS IN THOUSANDS)
(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. 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. Under SFAS 109, 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. Effective January 1, 1993, SJCC adopted SFAS 109 and has
reported the cumulative effect of that change in the method of accounting for
income taxes of ($184) in the 1993 statement of operations.
(G) INVESTMENTS
Investments consist of common stocks, which are classified as other
investments. SJCC adopted the provisions of SFAS No. 115, "Accounting for
Certain Investments in Debt and Equity Securities" at December 31, 1993. Under
SFAS 115, SJCC classifies its marketable equity securities as
available-for-sale. Available-for-sale securities are recorded at fair value and
unrealized holding gains and losses, net of the related income tax, are excluded
from earnings and are reported as a separate component of equity until realized.
A decline in the fair value of any available-for-sale security below cost that
is deemed other than temporary is charged to earnings resulting in the
establishment of a new cost basis for the security. Realized gains and losses
for securities classified as available-for-sale are included in earnings and are
derived using the specific identification method for determining the cost of
securities sold.
(4) INVESTMENTS
Investments at December 31 consist of marketable equity securities as
follows:
<TABLE>
<CAPTION>
FAIR GROSS UNREALIZED
COST VALUE HOLDING GAIN
--------- --------- -----------------
<S> <C> <C> <C>
1994.................................................................. $ 266 2,977 2,711
1995.................................................................. $ 266 3,088 2,822
</TABLE>
(5) INVENTORIES
Inventories as of December 31 consist of:
<TABLE>
<CAPTION>
1994 1995
--------- ---------
<S> <C> <C>
Manufactured paper products and associated raw materials.......................... $ 17,918 29,769
Materials and supplies............................................................ 6,992 6,243
--------- ---------
$ 24,910 36,012
--------- ---------
--------- ---------
</TABLE>
The replacement cost of manufactured paper products and associated raw
material inventories was in excess of LIFO stated cost by approximately $26,824
as of December 31, 1995 ($18,439 in 1994). During 1994, inventory quantities
were reduced, resulting in a LIFO liquidation that decreased net loss by $646.
F-23
<PAGE>
ST. JOE CONTAINER COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1993, 1994 AND 1995
(DOLLARS IN THOUSANDS)
(6) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, at cost, as of December 31 consists of:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL
1994 1995 LIFE
---------- ---------- ----------
<S> <C> <C> <C>
Land............................................................... $ 857 803 --
Land improvements.................................................. 1,873 1,792 20
Buildings.......................................................... 27,966 26,278 45
Machinery and equipment............................................ 103,790 104,095 12-30
Office equipment................................................... 2,859 2,678 10
Autos and trucks................................................... 1,958 2,007 3-6
Construction in progress........................................... 632 160 --
---------- ----------
139,935 137,813
Accumulated depreciation........................................... 94,540 100,507
---------- ----------
$ 45,395 37,306
---------- ----------
---------- ----------
</TABLE>
(7) INCOME TAXES
Total income tax expense (benefit) for the years ended December 31, 1993,
1994 and 1995 was allocated as follows:
<TABLE>
<CAPTION>
1993 1994 1995
--------- --------- ---------
<S> <C> <C> <C>
Income (loss) from continuing operations.................................. $ (3,805) (3,860) 1,834
Equity, for recognition of unrealized gain on marketable equity
securities............................................................... 957 4 37
--------- --------- ---------
$ (2,848) (3,856) 1,871
--------- --------- ---------
--------- --------- ---------
</TABLE>
Income tax expense (benefit) attributable to income (loss) from continuing
operations differed from the amount computed by applying the statutory federal
income tax rate to pre-tax income (loss) as a result of the following:
<TABLE>
<CAPTION>
1993 1994 1995
--------- --------- ---------
<S> <C> <C> <C>
Tax at the statutory federal rate......................................... $ (3,854) (3,812) 1,811
State income taxes (net of federal benefit)............................... (49) (48) 23
Adjustment to deferred tax assets and liabilities for enacted changes in
tax laws and rates....................................................... 98 -- --
--------- --------- ---------
$ (3,805) (3,860) 1,834
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-24
<PAGE>
ST. JOE CONTAINER COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1993, 1994 AND 1995
(DOLLARS IN THOUSANDS)
(7) INCOME TAXES (CONTINUED)
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and deferred tax liabilities at December 31,
1994 and 1995, are presented below:
<TABLE>
<CAPTION>
1994 1995
--------- ---------
<S> <C> <C>
Deferred tax liabilities:
Property, plant and equipment, principally due to differences in depreciation...... $ 5,275 4,377
Unrealized gain on marketable equity securities.................................... 961 998
--------- ---------
Total gross deferred tax liabilities........................................... 6,236 5,375
--------- ---------
Deferred tax assets:
Current:
Accrued expenses................................................................. 656 588
Noncurrent:
Accrued reserves................................................................. 597 916
State net operating loss carryforward............................................ 6,371 6,034
--------- ---------
Gross noncurrent deferred tax assets............................................... 6,968 6,950
Valuation allowance................................................................ 6,371 6,034
--------- ---------
Net noncurrent deferred tax assets................................................. 597 916
--------- ---------
Net deferred tax assets........................................................ 1,253 1,504
--------- ---------
Net deferred tax liability..................................................... $ 4,983 3,871
--------- ---------
--------- ---------
</TABLE>
Based on the timing of reversal of future taxable amounts and SJPC's history
of reporting taxable income, SJCC believes that the deferred tax assets will be
realized and a valuation allowance is not considered necessary except for those
resulting from the net operating loss carryforward available for state income
taxes. Because of SJCC's history of reporting tax losses in certain states, SJCC
believes that substantially all carryforwards will not be realized and,
accordingly, has recorded a valuation allowance equal to the entire amount. This
valuation allowance was $6,371 and $6,034 at December 31, 1994 and 1995, which
increased $188 and decreased $337 in 1994 and 1995, respectively. The current
deferred tax asset of $656 and $588 is recorded in other current assets as of
December 31, 1994 and 1995, respectively.
(8) PENSION AND RETIREMENT PLANS
Substantially all of SJCC's employees, along with other SJPC and
subsidiaries eligible employees, participate in SJPC pension plans. During the
past three years, the assets of the SJPC pension plan have exceeded benefit
obligations under such plans, resulting in pension income under SFAS No. 87
"Employers' Accounting for Pensions." SJPC has an Employee Stock Ownership Plan
(ESOP) for the purpose of purchasing stock of SJPC for the benefit of qualified
employees. Contributions to the ESOP are limited to .5% of compensation of
employees covered under the ESOP. No assets of the SJPC pension plan or the ESOP
will be transferred as a result of the asset purchase agreement. No allocation
of benefit or expense from the pension plans or ESOP has been made to SJCC
during the years ended December 31, 1993, 1994 and 1995.
SJPC also has other defined contribution plans which, in conjunction with
the ESOP, cover substantially all its salaried employees. Contributions are at
the employees' discretion and are matched by SJPC up to certain limits. SJCC's
expense for these defined contribution plans was $365 in 1993 and $380 in 1994
and
F-25
<PAGE>
ST. JOE CONTAINER COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1993, 1994 AND 1995
(DOLLARS IN THOUSANDS)
(8) PENSION AND RETIREMENT PLANS (CONTINUED)
1995. Pursuant to the asset purchase agreement, the assets of the defined
contribution plans attributable to transferred SJCC employees may be paid out
immediately to the employee, left in the plans or rolled over into a qualified
plan of the buyer, if such plan exists.
(9) RELATED PARTY TRANSACTIONS
Intercompany due to and due from balances between SJCC and SJPC and its
affiliates have been included in equity. The net intercompany due to SJPC was
$72,324 and $82,479 at December 31, 1994 and 1995, respectively. The
intercompany transactions described below may or may not be indicative of what
such transactions would have been had SJCC operated either as an unaffiliated
entity or in affiliation with another entity.
An allocation of costs of overhead of SJPC is included in selling, general
and administrative expenses. SJPC provides services for SJCC in treasury, taxes,
benefits administration and legal support and other financial systems and
support. SJPC's budgeted overhead was allocated based on a formula which equally
weighted each subsidiary's proportional share of payroll, sales and fixed
assets. This formula is similar to that which is used by many states to
determine the economic activity of an entity and is considered by management to
be a reasonable measure of the use of corporate resources by each subsidiary.
SJCC was billed approximately $931 annually for such services in 1993, 1994 and
1995.
Purchases from SJFP, the parent of SJCC, amounted to approximately $87,015,
$97,691 and $126,410 representing approximately 251,000, 248,000 and 238,000
tons for the years ended December 31, 1993, 1994 and 1995, respectively. Pricing
for these transactions was based on the PULP & PAPER WEEK Price Watch: Paper and
Paperboard. In addition, SJFP purchases both linerboard and corrugating medium
for SJCC from outside suppliers. The price paid by SJFP for this rollstock was
negotiated with each supplier. SJCC was charged for the rollstock at the prices
published in PULP & PAPER WEEK.
(10)CONTINGENCIES
SJCC is involved in litigation on a number of matters and is subject to
certain claims which arise in the normal course of business, none of which, in
the opinion of management, is expected to have a material adverse effect on
SJCC's financial position or results of operations.
SJCC has retained certain self-insurance risks with respect to losses for
third party liability, property damage and group health insurance provided to
employees. Aggregate related accruals were $3,244 and $2,848 as of December 31,
1994 and 1995, respectively.
SJCC is subject to costs arising out of environmental laws and regulations,
which include obligations to remove or limit the effects on the environment of
the disposal or release of certain wastes or substances at various sites. It is
SJCC's policy to accrue and charge against earnings environmental cleanup costs
when it is probable that a liability has been incurred and an amount is
reasonably estimable. As assessments and cleanups proceed, these accruals are
reviewed and adjusted, if necessary, as additional information becomes
available.
SJCC is currently a party to, or involved in, legal proceedings involving
environmental matters such as alleged discharges into water or soil. It is not
possible to quantify future environmental costs because many issues relate to
actions by third parties or changes in environmental regulation. Environmental
liabilities are paid over an extended period and the timing of such payments
cannot be predicted with any confidence. Based on information presently
available, management believes that the ultimate disposition of currently known
matters will not have a material effect on the financial position, liquidity, or
results of operations of SJCC. Aggregate environmental related accruals were
$300 and $750 as of December 31, 1994 and 1995, respectively.
F-26
<PAGE>
ST. JOE CONTAINER COMPANY
UNAUDITED STATEMENT OF FINANCIAL POSITION
MARCH 31, 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<S> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents....................................................... $ 871
Accounts receivable............................................................. 28,837
Inventories..................................................................... 30,128
Prepaid and other assets........................................................ 687
-----------
TOTAL CURRENT ASSETS.......................................................... 60,523
-----------
Investments and other assets:
Other investments............................................................... 3,113
Other assets.................................................................... 128
-----------
TOTAL INVESTMENTS AND OTHER ASSETS............................................ 3,241
Property, plant and equipment, net................................................ 35,298
-----------
TOTAL ASSETS.................................................................. $ 99,062
-----------
-----------
LIABILITIES AND EQUITY
CURRENT LIABILITIES:
Accounts payable................................................................ $ 6,092
Accrued liabilities............................................................. 3,656
-----------
TOTAL CURRENT LIABILITIES..................................................... 9,748
Accrued reserves.................................................................. 1,939
Deferred income taxes............................................................. 4,234
-----------
TOTAL LIABILITIES............................................................. 15,921
EQUITY:
Equity in net assets............................................................ 81,318
Net unrealized gain on marketable equity securities............................. 1,823
-----------
83,141
-----------
TOTAL LIABILITIES AND EQUITY.................................................. $ 99,062
-----------
-----------
</TABLE>
See accompanying notes to unaudited financial statements.
F-27
<PAGE>
ST. JOE CONTAINER COMPANY
UNAUDITED STATEMENT OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1995 AND 1996
<TABLE>
<CAPTION>
1995 1996
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
NET SALES............................................................................... $ 83,093 71,886
COST OF SALES........................................................................... 72,675 66,576
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES............................................ 6,044 6,438
----------- -----------
OPERATING INCOME (LOSS)............................................................... 4,374 (1,128)
OTHER INCOME (EXPENSE):
Interest income....................................................................... 35 --
Interest expense...................................................................... (168) --
Other, net............................................................................ 14 1
----------- -----------
(119) 1
----------- -----------
Income (loss) before income taxes....................................................... 4,255 (1,127)
Provision for income taxes:
Current............................................................................... 1,695 (175)
Deferred.............................................................................. (187) (224)
----------- -----------
TOTAL PROVISION FOR INCOME TAXES.................................................... 1,508 (399)
----------- -----------
NET INCOME (LOSS)................................................................... $ 2,747 (728)
----------- -----------
----------- -----------
</TABLE>
See accompanying notes to unaudited financial statements.
F-28
<PAGE>
ST. JOE CONTAINER COMPANY
UNAUDITED STATEMENT OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1995 AND 1996
<TABLE>
<CAPTION>
1995 1996
--------- ---------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)........................................................................ $ 2,747 (728)
Adjustments to reconcile net income (loss) to cash provided by operating activities:
Depreciation........................................................................... 2,008 1,945
Decrease in deferred income taxes...................................................... (187) (224)
Changes in operating assets and liabilities:
Accounts receivable.................................................................. (2,918) (271)
Inventories.......................................................................... (3,296) 5,884
Prepaid and other assets............................................................. (149) 245
Accounts payable..................................................................... 1,923 720
Accrued liabilities and reserves..................................................... 1,254 873
--------- ---------
CASH PROVIDED BY OPERATING ACTIVITIES.............................................. 1,382 8,444
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment, net of disposals............................. (372) 63
Purchases of available for sale investments.............................................. (26) (25)
--------- ---------
CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES.................................... (398) 38
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of long-term debt.............................................................. (84) --
Changes in intercompany accounts......................................................... (1,529) (8,754)
--------- ---------
CASH USED IN FINANCING ACTIVITIES.................................................. (1,613) (8,754)
--------- ---------
NET DECREASE IN CASH AND CASH EQUIVALENTS.................................................. (629) (272)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD........................................... 2,220 1,143
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD................................................. $ 1,591 871
--------- ---------
--------- ---------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest................................................. $ 120 --
--------- ---------
--------- ---------
</TABLE>
See accompanying notes to unaudited financial statements.
F-29
<PAGE>
ST. JOE CONTAINER COMPANY
NOTES TO UNAUDITED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
1. In the opinion of St. Joe Container Company (SJCC), the accompanying
unaudited financial statements contain all adjustments (consisting of only
normal recurring accruals) necessary to present fairly the financial
position as of March 31, 1996 and the results of operations and cash flows
for the three month periods ended March 31, 1995 and 1996.
2. The accompanying financial statements include all of the relevant assets,
liabilities, revenues and expenses attributable to the container operations
of SJCC. Certain of the assets and liabilities are under contract for sale
as defined in the asset purchase agreement between St. Joe Paper Company
("SJPC"), St. Joe Forest Products Company ("SJFP"), SJCC, Florida Coast
Paper Company, L.L.C. and Four M Corporation dated November 1, 1995.
3. The results of operations for the three month periods ended March 31, 1995
and 1996 are not necessarily indicative of the results that may be expected
for the full year.
4. Inventories as of March 31, 1996 consist of:
<TABLE>
<S> <C>
Manufactured paper products and associated raw materials.................... $ 28,733
Materials and supplies...................................................... 1,395
-----------
$ 30,128
-----------
-----------
</TABLE>
5. Intercompany due to and due from balances between SJCC and SJPC and its
affiliates have been included in equity. The net intercompany due to SJPC
was $74,505 at March 31, 1996. The intercompany transactions described below
may or may not be indicative of what such transactions would have been had
SJCC operated either as an unaffiliated entity or in affiliation with
another entity.
An allocation of costs of overhead of SJPC is included in selling, general
and administrative expenses. SJPC provides services for SJCC in treasury,
taxes, benefits administration and legal support and other financial systems
and support. SJPC's budgeted overhead was allocated based on a formula which
equally weighted each subsidiary's proportional share of payroll, sales and
fixed assets. This formula is similar to that which is used by many states
to determine the economic activity of an entity and is considered by
management to be a reasonable measure of the use of corporate resources by
each subsidiary. SJCC was billed approximately $233 for such services in the
three month periods ended March 31, 1995 and 1996.
Purchases from SJFP, the parent of SJCC, amounted to approximately $30,161
and $27,245 representing approximately 62,000 and 56,000 tons for the three
month periods ended March 31, 1995 and 1996, respectively. Pricing for these
transactions was based on the PULP & PAPER WEEK Price Watch: Paper and
Paperboard. In addition, SJFP purchases both linerboard and corrugating
medium for SJCC from outside suppliers. The price paid by SJFP for this
rollstock was negotiated with each supplier. SJCC was charged for the
rollstock at the prices published in PULP & PAPER WEEK.
6. SJCC is involved in litigation on a number of matters and is subject to
certain claims which arise in the normal course of business, none of which,
in the opinion of management, is expected to have a material adverse effect
on SJCC's financial position or results of operations.
SJCC has retained certain self-insurance risks with respect to losses for
third-party liability, property damage and group health insurance provided
to employees. Aggregate related accruals were $2,848 as of March 31, 1996.
F-30
<PAGE>
ST. JOE CONTAINER COMPANY
NOTES TO UNAUDITED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
6. (Continued)
SJCC is subject to costs arising out of environmental laws and regulations,
which include obligations to remove or limit the effects on the environment
of the disposal or release of certain wastes or substances at various sites.
It is SJCC's policy to accrue and charge against earnings environmental
cleanup costs when it is probable that a liability has been incurred and an
amount is reasonably estimable. As assessments and cleanups proceed, these
accruals are reviewed and adjusted, if necessary, as additional information
becomes available.
SJCC is currently a party to, or involved in, legal proceedings, involving
environmental matters such as alleged discharges into water or soil. It is
not possible to quantify future environmental costs because many issues
relate to actions by third parties or changes in environmental regulation.
Environmental liabilities are paid over an extended period and the timing of
such payments cannot be predicted with any confidence. Based on information
presently available, management believes that the ultimate disposition of
currently known matters will not have a material effect on the financial
position, liquidity, or results of operations of SJCC. Aggregate
environmental related accruals were $750 as of March 31, 1996.
F-31
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
St. Joe Forest Products Company:
We have audited the accompanying statements of financial position of St. Joe
Forest Products Company--Linerboard Mill Operations as of December 31, 1994 and
1995, and the related statements of operations, cash flows and changes in equity
for each of the years in the three-year period ended December 31, 1995. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our 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 financial position of St. Joe Forest Products
Company--Linerboard Mill Operations as of December 31, 1994 and 1995, and the
results of its operations and its cash flows for each of the years in the
three-year period ended December 31, 1995, in conformity with generally accepted
accounting principles.
As disclosed in note 3(g) to the financial statements, St. Joe Forest
Products Company--Linerboard Mill Operations changed its method of accounting
for income taxes effective January 1, 1993 to adopt the provisions of the
Financial Accounting Standards Board's Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes."
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Jacksonville, Florida
February 12, 1996
F-32
<PAGE>
ST. JOE FOREST PRODUCTS COMPANY--LINERBOARD MILL OPERATIONS
STATEMENT OF FINANCIAL POSITION
DECEMBER 31, 1994 AND 1995
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1994 1995
---------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................................................ $ 13,561 --
Accounts receivable...................................................................... 12,292 9,249
Inventories, net......................................................................... 12,108 14,632
Other assets............................................................................. 831 1,143
---------- ---------
Total current assets................................................................... 38,792 25,024
Property, plant and equipment, net......................................................... 171,021 169,424
---------- ---------
Total assets........................................................................... $ 209,813 194,448
---------- ---------
---------- ---------
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable......................................................................... $ 8,556 7,746
Accrued liabilities...................................................................... 796 1,354
Accrued reserves......................................................................... 1,424 2,056
---------- ---------
Total current liabilities.............................................................. 10,776 11,156
Accrued reserves........................................................................... 1,799 2,379
Deferred income taxes...................................................................... 34,020 33,553
---------- ---------
Total liabilities...................................................................... 46,595 47,088
---------- ---------
Equity in net assets....................................................................... 163,218 147,360
---------- ---------
Total liabilities and equity........................................................... $ 209,813 194,448
---------- ---------
---------- ---------
</TABLE>
See accompanying notes to financial statements.
F-33
<PAGE>
ST. JOE FOREST PRODUCTS COMPANY--LINERBOARD MILL OPERATIONS
STATEMENT OF OPERATIONS
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1993 1994 1995
---------- --------- ---------
<S> <C> <C> <C>
Net sales....................................................................... $ 153,005 192,886 239,165
Cost of sales................................................................... 167,247 183,800 180,788
Selling, general and administrative expenses.................................... 4,199 3,077 4,672
---------- --------- ---------
Operating profit (loss)..................................................... (18,441) 6,009 53,705
---------- --------- ---------
Other income:
Interest income............................................................... 97 383 962
Other, net.................................................................... 430 227 95
---------- --------- ---------
527 610 1,057
---------- --------- ---------
Income (loss) before income taxes and cumulative
effect of change in accounting principle....................................... (17,914) 6,619 54,762
Provision for income taxes:
Current....................................................................... (8,518) (494) 20,995
Deferred...................................................................... 2,647 2,947 (701)
---------- --------- ---------
Total provision for income taxes............................................ (5,871) 2,453 20,294
---------- --------- ---------
Income (loss) before cumulative effect of change in
accounting principle........................................................... (12,043) 4,166 34,468
Cumulative effect of change in accounting principle
for income taxes............................................................... 5,003 -- --
---------- --------- ---------
Net income (loss)........................................................... $ (7,040) 4,166 34,468
---------- --------- ---------
---------- --------- ---------
</TABLE>
See accompanying notes to financial statements.
F-34
<PAGE>
ST. JOE FOREST PRODUCTS COMPANY--LINERBOARD MILL OPERATIONS
STATEMENT OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1993 1994 1995
---------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)............................................................... $ (7,040) 4,166 34,468
Adjustments to reconcile net income (loss) to cash
provided by operating activities:
Cumulative effect of change in accounting principle........................... (5,003) -- --
Depreciation.................................................................. 24,451 23,678 24,054
Increase (decrease) in deferred income taxes.................................. 2,647 2,947 (701)
Changes in operating assets and liabilities:
Accounts receivable......................................................... (1,913) (3,920) 3,043
Inventories, net............................................................ (2,543) 2,370 (2,524)
Other assets................................................................ (31) (4) (78)
Accounts payable............................................................ 338 426 (810)
Accrued liabilities......................................................... (212) 333 558
Accrued expenses and reserves............................................... 565 (153) 1,212
---------- --------- ---------
Cash provided by operating activities..................................... 11,259 29,843 59,222
---------- --------- ---------
Cash flows from investing activities:
Purchases of property, plant and equipment...................................... (13,381) (8,321) (22,457)
Purchases of held to maturity investments....................................... -- (3,951) (8,850)
Proceeds from maturity of investments........................................... -- 3,951 8,850
---------- --------- ---------
Cash used in investing activities......................................... (13,381) (8,321) (22,457)
---------- --------- ---------
Cash flows from financing activities:
Change in intercompany accounts................................................. 3,276 (8,434) (50,326)
---------- --------- ---------
Cash (used in) provided by financing activities........................... 3,276 (8,434) (50,326)
---------- --------- ---------
Net (decrease) increase in cash and cash equivalents.............................. 1,154 13,088 (13,561)
Cash and cash equivalents (deficit) at beginning of period........................ (681) 473 13,561
---------- --------- ---------
Cash and cash equivalents at end of period........................................ $ 473 13,561 --
---------- --------- ---------
---------- --------- ---------
</TABLE>
See accompanying notes to financial statements.
F-35
<PAGE>
ST. JOE FOREST PRODUCTS COMPANY--LINERBOARD MILL OPERATIONS
STATEMENT OF CHANGES IN EQUITY
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1993 1994 1995
---------- --------- ---------
<S> <C> <C> <C>
Common stock.................................................................... $ 10 10 10
---------- --------- ---------
---------- --------- ---------
Additional paid in capital...................................................... $ 75,014 75,014 75,014
---------- --------- ---------
---------- --------- ---------
Retained earnings:
Balance at beginning of year.................................................. $ 127,090 120,050 124,216
Net income (loss)............................................................. (7,040) 4,166 34,468
---------- --------- ---------
Balance at end of year........................................................ $ 120,050 124,216 158,684
---------- --------- ---------
---------- --------- ---------
Intercompany accounts:
Balance at beginning of year.................................................. $ (30,864) (27,588) (36,022)
Net change.................................................................... 3,276 (8,434) (50,326)
---------- --------- ---------
Balance at end of year........................................................ $ (27,588) (36,022) (86,348)
---------- --------- ---------
---------- --------- ---------
</TABLE>
See accompanying notes to financial statements.
F-36
<PAGE>
ST. JOE FOREST PRODUCTS COMPANY--LINERBOARD MILL OPERATIONS
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1993, 1994 AND 1995
(DOLLARS IN THOUSANDS)
(1) NATURE OF OPERATIONS
St. Joe Forest Products Company (SJFP) is engaged in the manufacture of
mottled white and unbleached kraft linerboard. SJFP operates one production
facility which is located in Port St. Joe, Florida. Sales are primarily to
manufacturers of corrugated containers, both domestic and foreign.
(2) BASIS OF PRESENTATION
The accompanying financial statements include all of the relevant assets,
liabilities, revenues and expenses attributable to the linerboard mill operation
of SJFP. Certain of the assets and liabilities are under contract for sale as
defined in the asset purchase agreement between St. Joe Paper Company (SJPC),
SJFP, St. Joe Container Company (SJCC), Florida Coast Paper Company, L.L.C. and
Four M Corporation dated November 1, 1995. The financial statements do not
reflect SJFP's wholly-owned subsidiaries.
(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(B) REVENUE RECOGNITION
Revenue from the sale of linerboard is recognized generally on delivery of
the product to the common carrier.
(C) CASH AND CASH EQUIVALENTS
For purposes of the statement of cash flows, cash and cash equivalents
include cash on hand, bank demand accounts, money market accounts, remarketed
certificates of participation and repurchase agreements having original
maturities of three months or less.
(D) INVENTORIES
Inventories are stated at the lower of cost or market. Costs for
manufactured paper products and associated raw materials are determined under
the last-in, first-out (LIFO) method. Costs for substantially all other
inventories are determined under the first in, first out (FIFO) or the average
cost method. A reserve for obsolescence is established for materials and
supplies having no activity in the previous seven years.
(E) PROPERTY, PLANT AND EQUIPMENT
Depreciation is computed using both straight-line and accelerated methods
over the useful lives of various assets.
(F) SELF-INSURANCE
Self-insurance reserves are established for automobile liability, workers'
compensation, group health insurance provided to employees and property losses
based on claims filed and claims incurred but not reported, with a maximum per
occurrence of $25 for automobile liability, $600 for workers' compensation, $50
for property loss, other than windstorm, and $250 for damage due to windstorm.
SJFP is insured for insurance costs in excess of these limits.
(G) INCOME TAXES
SJFP's results of operations are included in the consolidated U.S. federal
and Florida income tax returns of SJPC. The tax provisions and deferred tax
liabilities presented have been determined as if SJFP was a stand-alone business
filing separate returns, except to the extent that an operating loss can be
utilized by SJPC, the benefit is allocated to SJFP. Current tax liabilities are
paid to or refunded by SJPC.
F-37
<PAGE>
ST. JOE FOREST PRODUCTS COMPANY--LINERBOARD MILL OPERATIONS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1993, 1994 AND 1995
(DOLLARS IN THOUSANDS)
(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SJFP follows the asset and liability method of accounting for income taxes
in accordance with Statement of Financial Accounting Standards (SFAS) No. 109
"Accounting for Income Taxes." Under SFAS 109, 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. 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. Under SFAS 109, 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. Effective January 1, 1993, SJFP adopted SFAS 109
and has reported the cumulative effect of that change in the method of
accounting for income taxes of $5,003 in the 1993 statement of operations.
(4) INVENTORIES
Inventories as of December 31 consist of:
<TABLE>
<CAPTION>
1994 1995
--------- ---------
<S> <C> <C>
Manufactured paper products and associated raw materials........................... $ 2,157 3,886
Materials and supplies............................................................. 9,951 10,746
--------- ---------
$ 12,108 14,632
--------- ---------
--------- ---------
</TABLE>
The replacement cost of manufactured paper products and associated raw
material inventories was in excess of LIFO stated cost by approximately $2,750
as of December 31, 1995 ($2,662 in 1994). The reserve for obsolescence was
approximately $2,100 at December 31, 1994 and 1995.
(5) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, at cost, as of December 31 consists of:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL
1994 1995 LIFE
---------- --------- ----------
<S> <C> <C> <C>
Land................................................................ $ 200 200 --
Land improvements................................................... 4,020 4,123 20
Buildings........................................................... 10,584 11,474 45
Machinery and equipment............................................. 345,965 366,225 12 - 30
Office equipment.................................................... 701 732 10
Autos and trucks.................................................... 744 861 3 - 6
Construction in progress............................................ 6,402 1,796 --
---------- ---------
368,616 385,411
Accumulated depreciation............................................ 197,595 215,987
---------- ---------
$ 171,021 169,424
---------- ---------
---------- ---------
</TABLE>
(6) INCOME TAXES
Total income tax expense (benefit) for the year ended December 31, 1993,
1994 and 1995, was attributable to income (loss) from continuing operations and
was ($5,871), $2,453 and $20,294, respectively.
F-38
<PAGE>
ST. JOE FOREST PRODUCTS COMPANY--LINERBOARD MILL OPERATIONS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1993, 1994 AND 1995
(DOLLARS IN THOUSANDS)
(6) INCOME TAXES (CONTINUED)
Income tax expense (benefit) attributable to income (loss) from continuing
operations differed from the amount computed by applying the statutory federal
income tax rate to pre-tax income (loss) as a result of the following:
<TABLE>
<CAPTION>
1993 1994 1995
--------- --------- ---------
<S> <C> <C> <C>
Tax at the statutory federal rate....................................... $ (6,270) 2,317 19,167
State income taxes (net of federal benefit)............................. (367) 136 1,127
Adjustment to deferred tax assets and liabilities for enacted changes in
tax laws and rates..................................................... 766 -- --
--------- --------- ---------
$ (5,871) 2,453 20,294
--------- --------- ---------
--------- --------- ---------
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of deferred tax liabilities and deferred tax assets at December 31,
1994 and 1995, are presented below:
<TABLE>
<CAPTION>
1994 1995
--------- ---------
<S> <C> <C>
Deferred tax liabilities:
Property, plant and equipment, principally due to differences in depreciation.... $ 35,448 35,197
Deferred tax assets:
Current:
Accrued reserves............................................................... 528 762
Noncurrent:
Accrued reserves............................................................... 1,428 1,644
--------- ---------
Total deferred tax assets.................................................... 1,956 2,406
--------- ---------
Net deferred tax liability......................................................... $ 33,492 32,791
--------- ---------
--------- ---------
</TABLE>
Based on the timing of reversal of future taxable amounts and SJFP's history
of reporting taxable income, SJFP believes that the deferred tax assets will be
realized and a valuation allowance is not considered necessary. The current
deferred tax asset of $528 and $762 is recorded in other assets as of December
31, 1994 and 1995, respectively.
(7) PENSION AND RETIREMENT PLANS
Substantially all of SJFP's employees, along with other SJPC and
subsidiaries eligible employees, participate in SJPC pension plans. During the
past three years, the assets of the SJPC pension plan have exceeded benefit
obligations under such plans, resulting in pension income under SFAS No. 87
"Employers' Accounting for Pensions." SJPC has an Employee Stock Ownership Plan
(ESOP) for the purpose of purchasing stock of SJPC for the benefit of qualified
employees. Contributions to the ESOP are limited to .5% of compensation of
employees covered under the ESOP. No assets of the SJPC pension plan or the ESOP
will be transferred as a result of the asset purchase agreement. No allocation
of benefit or expense from the pension plans or ESOP has been made to SJFP
during the years ended December 31, 1993, 1994 and 1995 due to immateriality.
SJPC also has other defined contribution plans which, in conjunction with
the ESOP, cover substantially all its salaried employees. Contributions are at
the employees' discretion and are matched by SJPC up to certain limits. SJFP's
expense for these defined contribution plans was $132, $133, and $131 in 1993,
1994 and 1995, respectively. Pursuant to the asset purchase agreement, the
assets of the defined contribution plans attributable to transferred SJFP
employees may be paid out immediately to the employee, left in the plans or
rolled over into a qualified plan of the buyer, if such plan exists.
F-39
<PAGE>
ST. JOE FOREST PRODUCTS COMPANY--LINERBOARD MILL OPERATIONS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1993, 1994 AND 1995
(DOLLARS IN THOUSANDS)
(8) RELATED PARTY TRANSACTIONS
Intercompany due to and due from balances between SJFP and SJPC and its
affiliates have been included in equity. The net intercompany due to SJFP was
$36,022 and $86,348 at December 31, 1994 and 1995, respectively. The
intercompany transactions described below may or may not be indicative of what
such transactions would have been had SJFP operated either as an unaffiliated
entity or in affiliation with another entity.
An allocation of costs of overhead of SJPC is included in selling, general
and administrative expenses. SJPC provides services for SJFP in treasury, taxes,
benefits administration and legal support and other financial systems and
support. SJPC's budgeted overhead was allocated based on a formula which equally
weighted each subsidiary's proportional share of payroll, sales and fixed
assets. This formula is similar to that which is used by many states to
determine the economic activity of any entity and is considered by management to
be a reasonable measure of the use of corporate resources by each subsidiary.
SJFP was billed approximately $960 annually for such services in 1993, 1994 and
1995.
Sales to SJCC, a wholly owned subsidiary of SJFP, amounted to approximately
$87,015, $97,691, and $126,410 representing approximately 251,000, 248,000 and
238,000 tons for the years ended December 31, 1993, 1994 and 1995, respectively.
Pricing for these transactions was based on the PULP & PAPER WEEK Price Watch:
Paper and Paperboard. In addition, SJFP purchases both linerboard and
corrugating medium for SJCC from outside suppliers. The price paid by SJFP for
this rollstock was negotiated with each supplier. SJCC was charged for this
rollstock at the prices published in PULP & PAPER WEEK.
Purchases of pulpwood and wood chips from St. Joseph Land and Development
Company, a wholly owned subsidiary of SJFP, amounted to approximately $53,994,
$54,321 and $55,225 representing approximately 2,038,000, 2,028,000 and
2,033,000 tons for the years ended December 31, 1993, 1994 and 1995,
respectively.
SJFP ships the majority of its product via Apalachicola Northern Railroad, a
subsidiary of SJPC. Amounts billed for freight amounted to approximately $4,409,
$4,489 and $4,310 for the years ended December 31, 1993, 1994 and 1995,
respectively.
(9) CONTINGENCIES
SJFP is involved in litigation on a number of matters and is subject to
certain claims which arise in the normal course of business, none of which, in
the opinion of management, is expected to have a material adverse effect on
SJFP's financial position, liquidity or results of operations.
SJFP has retained certain self-insurance risks with respect to losses for
third party liability, property damage and group health insurance provided to
employees.
SJFP is subject to costs arising out of environmental laws and regulations,
which include obligations to remove or limit the effects on the environment of
the disposal or release of certain wastes or substances at various sites. It is
SJFP's policy to accrue and charge against earnings environmental cleanup costs
when it is probable that a liability has been incurred and an amount is
reasonably estimable. As assessments and cleanups proceed, these accruals are
reviewed and adjusted, if necessary, as additional information becomes
available.
SJFP is currently a party to, or involved in, legal proceedings involving
environmental matters such as alleged discharges into water or soil. It is not
possible to quantify future environmental costs because many issues relate to
actions by third parties or changes in environmental regulation. Environmental
liabilities are paid over an extended period and the timing of such payments
cannot be predicted with any confidence. Based on information presently
available, management believes that the ultimate disposition of currently known
matters will not have a material effect on the financial position, liquidity, or
results of operations of SJFP. Aggregate environmental related accruals were
approximately $1,000 as of December 31, 1994 and 1995.
F-40
<PAGE>
ST. JOE FOREST PRODUCTS COMPANY--LINERBOARD MILL OPERATIONS
UNAUDITED STATEMENT OF FINANCIAL POSITION
MARCH 31, 1996
(DOLLARS IN THOUSANDS)
ASSETS
<TABLE>
<S> <C>
Current assets:
Accounts receivable............................................................. $ 10,629
Inventories, net................................................................ 15,635
Other assets.................................................................... 1,071
---------
Total current assets........................................................ 27,335
Property, plant and equipment, net................................................ 165,669
---------
Total assets................................................................ $ 193,004
---------
---------
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable................................................................ $ 3,328
Accrued liabilities............................................................. 1,605
Accrued reserves................................................................ 2,056
---------
Total current liabilities................................................... 6,989
---------
Accrued reserves.................................................................. 2,379
Deferred income taxes............................................................. 33,453
---------
Total liabilities........................................................... 42,821
---------
Equity in net assets.............................................................. 150,183
---------
Total liabilities and equity................................................ $ 193,004
---------
---------
</TABLE>
See accompanying notes to unaudited financial statements.
F-41
<PAGE>
ST. JOE FOREST PRODUCTS COMPANY--LINERBOARD MILL OPERATIONS
UNAUDITED STATEMENT OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1995 AND 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1995 1996
---------- ----------
<S> <C> <C>
Net sales................................................................................. $ 62,375 49,759
Cost of sales............................................................................. 47,331 45,106
Selling, general and administrative expenses.............................................. 800 766
---------- ----------
Operating profit...................................................................... 14,244 3,887
Other income:
Interest income......................................................................... 355 --
Other, net.............................................................................. 33 122
---------- ----------
388 122
---------- ----------
Income before income taxes................................................................ 14,632 4,009
Provision for income taxes:
Current................................................................................. 5,360 1,586
Deferred................................................................................ 63 (100)
---------- ----------
Total provision for income taxes...................................................... 5,423 1,486
---------- ----------
Net income................................................................................ $ 9,209 2,523
---------- ----------
---------- ----------
</TABLE>
See accompanying notes to unaudited financial statements.
F-42
<PAGE>
ST. JOE FOREST PRODUCTS COMPANY--LINERBOARD MILL OPERATIONS
UNAUDITED STATEMENT OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1995 AND 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1995 1996
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income................................................................................. $ 9,209 2,523
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation............................................................................. 5,920 6,241
Increase (decrease) in deferred income taxes............................................. 63 (100)
Changes in operating assets and liabilities:
Accounts receivable.................................................................... (308) (1,380)
Inventories, net....................................................................... (95) (1,003)
Other assets........................................................................... (430) 72
Accounts payable....................................................................... (3,316) (4,418)
Accrued liabilities.................................................................... 1,032 251
--------- ---------
Cash provided by operating activities................................................ 12,075 2,186
--------- ---------
Cash flows from investing activities:
Purchases of property, plant and equipment................................................. (3,140) (2,486)
--------- ---------
Cash used in investing activities.................................................... (3,140) (2,486)
--------- ---------
Cash flows from financing activities:
Change in intercompany accounts............................................................ 388 300
--------- ---------
Cash provided by financing activities................................................ 388 300
--------- ---------
Net increase in cash and cash equivalents.................................................... 9,323 --
Cash and cash equivalents at beginning of period............................................. 13,561 --
--------- ---------
Cash and cash equivalents at end of period................................................... $ 22,884 --
--------- ---------
--------- ---------
</TABLE>
See accompanying notes to unaudited financial statements.
F-43
<PAGE>
ST. JOE FOREST PRODUCTS COMPANY - LINERBOARD MILL OPERATIONS
NOTES TO UNAUDITED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
1. In the opinion of St. Joe Forest Products Company (SJFP), the accompanying
unaudited financial statements contain all adjustments (consisting of only
normal recurring accruals) necessary to present fairly the financial
position as of March 31, 1996 and the results of operations and cash flows
for the three month periods ended March 31, 1995 and 1996.
2. The accompanying financial statements include all of the relevant assets,
liabilities, revenues and expenses attributable to the linerboard mill
operation of SJFP. Certain of the assets and liabilities are under contract
for sale as defined in the asset purchase agreement between St. Joe Paper
Company (SJPC), SJFP, St. Joe Container Company (SJCC), Florida Coast Paper
Company, L.L.C. and Four M Corporation dated November 1, 1995. The financial
statements do not reflect SJFP's wholly-owned subsidiaries.
3. The results of operations for the three month periods ended March 31, 1995
and 1996 are not necessarily indicative of the results that may be expected
for the full year.
4. Inventories as of March 31, 1996 consist of:
<TABLE>
<S> <C>
Manufactured paper products and associated raw materials...................... $ 5,040
Materials and supplies........................................................ 10,595
-----------
$ 15,635
-----------
-----------
</TABLE>
5. Intercompany due to and due from balances between SJFP and SJPC and its
affiliates have been included in equity. The net intercompany due to SJFP
was $86,049 at March 31, 1996. The intercompany transactions described below
may or may not be indicative of what such transactions would have been had
SJFP operated either as an unaffiliated entity or in affiliation with
another entity.
An allocation of costs of overhead of SJPC is included in selling, general
and administrative expenses. SJPC provides services for SJFP in treasury,
taxes, benefits administration and legal support and other financial systems
and support. SJPC's budgeted overhead was allocated based on a formula which
equally weighted each subsidiary's proportional share of payroll, sales and
fixed assets. This formula is similar to that which is used by many states
to determine the economic activity of any entity and is considered by
management to be a reasonable measure of the use of corporate resources by
each subsidiary. SJFP was billed approximately $240 for such services for
the three months ended March 31, 1995 and 1996.
Sales to SJCC, a wholly owned subsidiary of SJFP, amounted to approximately
$30,161 and $27,245 representing approximately 62,000 and 56,000 tons for
the three months ended March 31, 1995 and 1996, respectively. Pricing for
these transactions was based on the PULP & PAPER WEEK Price Watch: Paper and
Paperboard. In addition, SJFP purchases both linerboard and corrugating
medium for SJCC from outside suppliers. The price paid by SJFP for this
rollstock was negotiated with each supplier. SJCC was charged for this
rollstock at the prices published in PULP & PAPER WEEK.
Purchases of pulpwood and wood chips from St. Joseph Land and Development
Company, a wholly owned subsidiary of SJFP, amounted to approximately
$13,793 and $14,218 representing approximately 508,000 and 474,000 tons for
the three months ended March 31, 1995 and 1996, respectively.
SJFP ships the majority of its product via Apalachicola Northern Railroad, a
subsidiary of SJPC. Amounts billed for freight amounted to approximately
$1,189 and $941 for the three months ended March 31, 1995 and 1996,
respectively.
F-44
<PAGE>
ST. JOE FOREST PRODUCTS COMPANY - LINERBOARD MILL OPERATIONS
NOTES TO UNAUDITED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
6. SJFP is involved in litigation on a number of matters and is subject to
certain claims which arise in the normal course of business, none of which,
in the opinion of management, is expected to have a material adverse effect
on SJFP's financial position, liquidity or results of operations.
SJFP has retained certain self-insurance risks with respect to losses for
third party liability, property damage and group health insurance provided
to employees.
SJFP is subject to costs arising out of environmental laws and regulations,
which include obligations to remove or limit the effects on the environment
of the disposal or release of certain wastes or substances at various sites.
It is SJFP's policy to accrue and charge against earnings environmental
cleanup costs when it is probable that a liability has been incurred and an
amount is reasonably estimable. As assessments and cleanups proceed, these
accruals are reviewed and adjusted, if necessary, as additional information
becomes available.
SJFP is currently a party to, or involved in, legal proceedings involving
environmental matters such as alleged discharges into water or soil. It is
not possible to quantify future environmental costs because many issues
relate to actions by third parties or changes in environmental regulation.
Environmental liabilities are paid over an extended period and the timing of
such payments cannot be predicted with any confidence. Based on information
presently available, management believes that the ultimate disposition of
currently known matters will not have a material effect on the financial
position, liquidity, or results of operations of SJFP. Aggregate
environmental related accruals were approximately $1,000 as of March 31,
1996.
F-45
<PAGE>
- -------------------------------------------
-------------------------------------------
- -------------------------------------------
-------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO
WHICH IT RELATES OR ANY OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY
SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS
UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT ANY
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Available Information.......................... i
Prospectus Summary............................. 1
Risk Factors................................... 12
The Exchange Offer............................. 17
The Acquisition................................ 24
Capitalization................................. 25
Selected Historical Financial Data............. 26
Unaudited Pro Forma Combined Condensed
Financial Data............................... 28
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................... 37
Industry Overview.............................. 44
Business....................................... 46
Management..................................... 56
Security Ownership............................. 60
Related Party Transactions..................... 60
Description of New Notes....................... 61
Description of Credit Facility................. 84
Plan of Distribution........................... 85
Legal Matters.................................. 86
Experts........................................ 86
Change in Certifying Accountants............... 86
Index to Financial Statements.................. F-1
</TABLE>
FOUR M CORPORATION
OFFER TO EXCHANGE ITS
12% SERIES B SENIOR
SECURED NOTES DUE 2006
WHICH HAVE BEEN REGISTERED
UNDER THE SECURITIES ACT
FOR ANY AND ALL OF ITS
OUTSTANDING
12% SERIES A SENIOR
SECURED NOTES DUE 2006
---------------------
PROSPECTUS
---------------------
- -------------------------------------------
-------------------------------------------
- -------------------------------------------
-------------------------------------------
