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Filed Pursuant to Rule 424(b)(3)
Registration File No.: 333-24939
PROSPECTUS
THE FONDA GROUP, INC.
OFFER TO EXCHANGE ITS
9 1/2% SERIES B SENIOR SUBORDINATED NOTES DUE 2007
WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT FOR
ANY AND ALL OF ITS OUTSTANDING
9 1/2% SERIES A SENIOR SUBORDINATED NOTES DUE 2007
($120,000,000 PRINCIPAL AMOUNT OUTSTANDING)
THE EXCHANGE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 5:00 P.M., NEW
YORK CITY TIME, ON JULY 30, 1997 (AS SUCH DATE MAY BE EXTENDED, THE
"EXPIRATION DATE").
The Fonda Group, Inc. (the "Company") 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 $120,000,000 principal
amount of 9 1/2% Series B Senior Subordinated Notes due 2007 (the "New
Notes") for an identical face amount of the outstanding 9 1/2% Series A
Senior Subordinated Notes due 2007 (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 February 27, 1997 (the
"Registration Rights Agreement") among the Company, Bear, Stearns & Co., Inc.
and Dillon, Read Co. Inc. (the "Initial Purchasers"). 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 a rate of 9 1/2% per annum, payable
semi-annually in arrears on March 1 and September 1 of each year, commencing
September 1, 1997. 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 will be redeemable at the option of the Company, in
whole or in part, at any time after March 1, 2002 at the redemption prices
set forth herein. In addition, at the option of the Company, up to one-third
of the Notes may be redeemed prior to March 1, 2000 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 originally issued under the Indenture (as defined
herein) remain outstanding following such redemption. In addition, upon the
occurrence of a Change of Control (as defined herein) prior to March 1, 2002,
the Company, at its option, may redeem all, but not less than all, of the
outstanding New Notes as 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 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 necessary or the ability
to repurchase the New Notes upon a Change of Control. The New Notes will be
general unsecured obligations of the Company and will be subordinate in right
of payment to all existing and future Senior Debt (as defined herein) and
will be senior or pari passu in right of payment to all existing and future
subordinated indebtedness of the Company. As of April 27, 1997, the Company
had $3.1 million of Senior Debt outstanding. See "Description of New Notes"
and "Description of Certain Indebtedness."
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 The Bank of New York,
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. 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 this Exchange
Offer and entitled to be resold to the public by the holder thereof without
complying with the prospectus delivery provisions 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, if applicable, 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."
The Company will not receive any proceeds from the Exchange Offer and will
pay all the expenses incident to the Exchange Offer. If the Company
terminates the Exchange Offer and does not accept for exchange any Old Notes,
it will promptly return the Old Notes to the holders thereof. See "The
Exchange Offer."
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. Any broker-dealer that acquired Old
Notes directly from the Company and not as a result of market-making
activities or other trading activities, in the absence of an exemption from
the registration requirements of the Securities Act, must comply with such
registration requirements and the prospectus delivery requirements of the
Securities Act in connection with any secondary resales of New Notes received
in exchange for such Old Notes. The Company has agreed that, for a period of
270 days after the effective date hereof, 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
Notes. 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. If a market for the New Notes should develop, the New Notes could
trade at a discount from their principal amount. The Company does not
currently intend to list the New Notes on any securities exchange or to seek
approval for quotation through any automated quotation system. There can be
no assurance that an active public market for the New Notes will develop.
The Exchange Agent for the Exchange Offer is The Bank of New York.
SEE "RISK FACTORS" BEGINNING ON PAGE 14 HEREIN FOR A DISCUSSION OF CERTAIN
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 JUNE 30, 1997.
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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
this 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
Commission also maintains a Web site that contains reports, proxy and
information statements and other information regarding registrants. The
Commission's Web site can be accessed on the World Wide Web at
http://www.sec.gov. 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 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 THE FONDA GROUP, INC., 21 LOWER NEWTON
STREET, ST. ALBANS, VERMONT 05478, ATTENTION: CHIEF FINANCIAL OFFICER.
TELEPHONE REQUESTS MAY BE DIRECTED TO THE COMPANY AT (802) 524-5966. IN ORDER
TO ENSURE TIMELY DELIVERY OF THE DOCUMENTS, ANY SUCH REQUEST SHOULD BE MADE
BY JULY 20, 1997.
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. The Company's fiscal year ends on the last
Sunday in July, and references to particular fiscal years of the Company
refer to the 52 weeks (or 53 weeks for Fiscal 1994) ended on the last Sunday
of July of the year indicated. Portions of this Prospectus may constitute
forward-looking statements. See "Risk Factors--Forward-Looking Statements."
All capitalized terms used in this Prospectus without definition are defined
as set forth below under the caption "Description of New Notes--Certain
Definitions."
THE COMPANY
The Company believes it is a leading converter and marketer of a broad
line of disposable paper food service products. The Company sells its
products under both branded and private labels to the consumer and
institutional markets and participates at all major price points. The Company
believes it is a market leader in the sale of premium white, colored and
custom-printed napkins, placemats, tablecovers and food trays and in the sale
of private label consumer paper plates, bowls and cups. The Company's
Sensations, Splash(Registered Trademark) and Party Creations(Registered
Trademark) brands are well recognized in the consumer markets and its
Hoffmaster(Registered Trademark) brand is well recognized in the
institutional markets.
During the past two years, the Company has grown rapidly, principally
through the completion of four acquisitions (the "Acquisitions"). As the
Company completes the integration of the Acquisitions, it expects to continue
to improve manufacturing efficiencies, achieve further cost savings and
increase profitability. As evidence of the Company's rapid growth, its net
sales, net income and EBITDA (as defined herein) increased from $61.8
million, $0.3 million and $3.0 million, respectively, in Fiscal 1994 to
$204.9 million, $3.4 million and $17.3 million, respectively, in Fiscal 1996.
For Fiscal 1996, after giving pro forma effect to the three acquisitions
consummated during Fiscal 1996 (collectively, the "Fiscal 1996
Acquisitions"), the Company would have had net sales of $262.5 million, net
income of $4.3 million and EBITDA of $24.2 million.
The Company offers a broad range of products, enabling it to offer its
customers "one-stop" shopping for their disposable food service product
needs. The Company's principal products include (i) paperboard products, such
as white, colored and printed paper plates and bowls (approximately 31% of
gross sales), paper cups for both hot and cold drinks (approximately 10%),
handled food pails for take-out food and food trays (approximately 6%); (ii)
tissue products, such as printed and solid napkins (approximately 21%) and
printed and solid paper tablecovers and crepe paper (approximately 9%); (iii)
specialty products, such as placemats (approximately 9%), doilies, tray
covers and fluted products including baking cups (approximately 8%); and (iv)
products for resale, such as plastic cutlery, coasters, plastic cups and
plastic toothpicks (approximately 6%). See "Business--Products." The Company
is principally a converter and marketer of paperboard and tissue products,
the prices of which typically follow the general movement in the costs of
such principal raw materials. The Company believes it is generally able to
maintain relatively stable margins between its selling prices and its raw
materials costs.
According to the Pulp & Paper Fact Book published by Miller Freeman
(1996), growth in unit production of disposable paper food service products
has been relatively stable during the past decade and tracks the growth of
end-users of these products. The Company believes recent growth in the
disposable paper food service products industry has been and will continue to
be influenced principally by increased away-from-home dining, take-out
convenience and sanitary considerations. In addition, management believes
that the industry has experienced consolidation in recent years and will
further consolidate over the next several years as smaller local and regional
competitors experience greater difficulty competing with larger national
competitors. The Company believes that it is well positioned to take
advantage of and benefit from this consolidation.
The Company sells its products to more than 2,500 consumer and
institutional customers located throughout the United States and has
developed and maintained long-term relationships with many of
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these customers. The Company's consumer customers include (i) supermarkets,
(ii) mass merchandisers and (iii) warehouse clubs and other retailers. The
Company's institutional customers include major food service distributors as
well as restaurants, schools, hospitals and other major institutions with
dining facilities.
BUSINESS AND GROWTH STRATEGY
The Company believes that it can maintain and improve its position in the
disposable paper food service products industry by (i) selectively pursuing
and successfully integrating strategic acquisitions, (ii) continuing to
provide value-added products and services, (iii) continuing to be responsive
to customer demands and (iv) increasing its production of specialty and
deep-tone colored tissue. The Company will pursue its growth strategy
through:
o Strategic Acquisitions. The Company targets acquisitions for their
ability to complement and broaden existing product lines, penetrate
additional end-use markets, strengthen existing market positions,
expand the Company's geographic scope and provide manufacturing, sales
and marketing economies. When integrating acquisitions, the Company
seeks to (i) reduce manufacturing and production costs through the
elimination of redundant facilities, the consolidation of overhead and
the more efficient use of its manufacturing equipment; (ii) achieve
sales and marketing economies of scale through consolidation; (iii)
reduce procurement costs by leveraging its purchasing power; (iv)
improve customer service through geographic diversification; and (v)
increase net sales by cross-marketing the Company's products to an
expanded customer base.
o Value-Added Products and Services. The Company has focused and expects
to continue to focus on higher margin, value-added products where it
has a competitive advantage while continuing to produce high volume
commodity-oriented product lines. These niche value-added products
include print-to-the-edge napkins and premium table top products, which
are not the principal focus of the Company's larger competitors. In
addition, the Company believes its processing of custom orders
differentiates it from its competitors. The Company also intends to
continue to provide value-added services, such as Electronic Data
Interchange ("EDI") capabilities, automatic shipment notification to
customers, sales training for distributors, promotional support,
brochures and catalogs, state-of-the-art graphics services,
merchandising programs, prompt delivery of products and information
systems that provide detailed sales data to customers.
In order to better serve its customers, the Company is focusing on
the development of new product designs, increasing brand awareness and
channel marketing. Management believes that new product designs provide
customers recognized value by offering alternatives in color and style.
In addition, the Company believes that its brand names are associated
with high quality products. The Company supports its brand identity and
private label program through enhanced packaging and promotion.
Products and programs will be developed for specific distribution
channels. Additionally, the Company seeks, through its direct sales
force, to create "pull-through" demand by marketing directly to
end-users in order to create additional demand from institutional
distributors for the Company's products.
o Natural Dam Expansion. The Company expects to complete the installation
of an existing second paper machine at the Company's Natural Dam mill
by the end of 1997 which will produce specialty and deep-tone colored
tissue paper, the primary raw material used in the conversion of
colored napkins and tablecovers. This expansion is expected to (i)
double the mill's production capacity; (ii) significantly lower its
unit cost of production; and (iii) provide the Company with greater
operating flexibility to source tissue paper for its own converting
operations as well as sell specialty tissue to third parties.
The Company's principal executive offices are located at 21 Lower Newton
Street, St. Albans, Vermont 05478, and its telephone number is (802) 524-5966.
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ISSUANCE OF THE OLD NOTES
The outstanding $120.0 million principal amount of 9 1/2% Series A Senior
Subordinated Notes due 2007 (the "Old Notes") were sold by the Company to
Bear, Stearns & Co. Inc. and Dillon, Read & Co. Inc. (the "Initial
Purchasers") on February 27, 1997 (the "Closing Date") pursuant to a Purchase
Agreement, dated as of February 24, 1997 (the "Purchase Agreement"), among
the Company and the Initial Purchasers. The Initial Purchasers subsequently
resold the Old Notes in reliance on Rule 144A under the Securities Act and
other available exemptions under the Securities Act on or about February 27,
1997. The Company and the Initial Purchasers also entered into a Registration
Rights Agreement, dated as of February 27, 1997 (the "Registration Rights
Agreement"), among the Company and the Initial Purchasers, 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--Purpose and Effects."
The Old Notes were issued under an indenture, dated as of February 27,
1997 (the "Indenture"), between the Company and The Bank of New York 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) is continuing (the "Liquidated
Damages") and (iii) holders of New Notes will not 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 of the Company to the Exchange Agent
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 repay certain existing indebtedness of the Company, for capital
expenditures, to pay certain fees and expenses associated with the issuance
of the Old Notes and for general corporate purposes. A maximum of up to $10.0
million from the net proceeds from the issuance of the Old Notes may be used
to repurchase up to 74,000 shares of common stock of the Company at $135.00
per share from the Company's stockholders pursuant to a pro rata offer made
to them by the Company (the "Stock Repurchase"). Any proceeds from the
issuance of the Old Notes not used for the Stock Repurchase may be used for
general corporate purposes. There will be no proceeds to the Company from any
exchange pursuant to the Exchange Offer.
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THE EXCHANGE OFFER
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 (the "Letter of Transmittal"),
to exchange its 9 1/2% Series B Senior
Subordinated Notes due 2007 (the "New
Notes," and, with the Old Notes, the
"Notes") for an identical face amount of the
outstanding Old Notes (the "Exchange
Offer"). As of the date of this Prospectus,
$120.0 million in aggregate principal amount
of the Old Notes is outstanding, the maximum
amount authorized by the Indenture for all
Notes. As of June 30, 1997, there was one
registered holder of the Old Notes, Cede &
Co. ("Cede"), which held $120.0 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 July 30,
1997, 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 9 1/2% 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 9
1/2% 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
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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 that
neither the holder nor any such other person
is an "affiliate," as defined under Rule 405
of the Securities Act, of the Company. 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--Procedures for Tendering."
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. See "The Exchange
Offer--Withdrawal of Tenders."
THE EXCHANGE AGENT ............ The Bank of New York 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."
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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 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 "The Exchange
Offer--Purpose and Effects" and "Plan of
Distribution."
8
<PAGE>
DESCRIPTION OF NEW NOTES
The Exchange Offer applies to $120.0 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."
SECURITIES OFFERED ............ $120.0 million in aggregate principal amount
of 9 1/2% Series B Senior Subordinated Notes
due 2007.
MATURITY ...................... March 1, 2007.
INTEREST ...................... The New Notes will bear interest at the rate
of 9 1/2% per annum, payable semi-annually
in arrears on March 1 and September 1 of
each year, commencing September 1, 1997.
RANKING ....................... The New Notes will be general unsecured
obligations of the Company and will be
subordinate in right of payment to all
existing and future Senior Debt, and will be
senior or pari passu in right of payment to
all existing and future subordinated
indebtedness of the Company. As of April 27,
1997, the Company had $3.1 million of Senior
Debt and no indebtedness ranking pari passu
with the New Notes outstanding.
REDEMPTION .................... Except as set forth below, the New Notes
will not be redeemable at the option of the
Company prior to March 1, 2002. 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 March 1, 2000, the Company may
redeem up to one-third in aggregate
principal amount of the New Notes at a
redemption price of 109.5% of the principal
amount thereof, 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 public offering of common stock of the
Company. In addition, upon the occurrence of
a Change of Control prior to March 1, 2002,
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."
9
<PAGE>
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 to
incur additional indebtedness, issue
preferred stock, pay dividends or make other
distributions, repurchase Equity Interests
(as defined herein), repay subordinated
indebtedness or make 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 Restricted
Subsidiaries (as defined herein) or enter
into certain mergers and consolidations.
Subject to certain exceptions, pursuant to
the Indenture, the Company may incur certain
Indebtedness if the Fixed Charge Coverage
Ratio (as defined in "Description of New
Notes--Certain Definitions") for the
Company's most recently ended four full
fiscal quarters would be at least 2.0 to 1,
determined on a pro forma basis, as if the
additional Indebtedness had been incurred at
the beginning of such four-quarter period.
In addition, the Indenture requires the
Company to repurchase the Notes upon a
Change of Control or an Event of Default.
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 to engage in certain
transactions except under certain
circumstances, the Company 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 repay certain
existing indebtedness of the Company, for
capital expenditures, to pay certain fees
and expenses associated with the issuance of
the Old Notes and for general corporate
purposes. A maximum of up to $10.0 million
from the net proceeds of the issuance of the
Old Notes may be used for the Stock
Repurchase; any proceeds from the issuance
of the Old Notes not used for the Stock
Repurchase may be used for general corporate
purposes.
10
<PAGE>
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 Purchasers
have advised the Company that they currently
make a market in the Notes. The Company does
not currently intend to apply for listing of
the New Notes on any securities exchange.
RISK FACTORS
See "Risk Factors" for a discussion of factors that should be considered
by Eligible Holders evaluating the Exchange Offer.
11
<PAGE>
SUMMARY FINANCIAL DATA (1)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JULY(2)
-------------------------------------------
PRO FORMA
1994 1995 1996 1996 (3)
--------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales ...................... $61,839 $ 97,074 $204,903 $262,459
Cost of goods sold ............. 51,643 76,252 161,304 208,055
--------- ---------- ---------- -----------
Gross profit ................... 10,196 20,822 43,599 54,404
Selling, general and
administrative expenses ....... 8,438 14,112 29,735 34,576
--------- ---------- ---------- -----------
Income from operations ......... 1,758 6,710 13,864 19,828
Interest expense, net .......... 1,268 2,943 7,934 12,464
--------- ---------- ---------- -----------
Income before taxes and
extraordinary expense ......... 490 3,767 5,930 7,364
Income taxes ................... 239 1,585 2,500 3,103
--------- ---------- ---------- -----------
Income before extraordinary
expense ....................... 251 2,182 3,430 4,261
Extraordinary expense, net (11). -- -- -- --
Net income (loss)............... $ 251 $ 2,182 $ 3,430 $ 4,261
========= ========== ========== ===========
OTHER GAAP FINANCIAL DATA:
Net cash provided by (used in)
operating activities (5) ..... $ 140 $ (4,774) $ 17,673
Net cash (used in) investing
activities .................... (1,272) (29,593) (46,532)
Net cash provided by financing
activities .................... 992 34,262 30,206
Cash interest expense, net .... 1,268 2,383 6,748 $ 12,034
Capital expenditures (6) ...... 1,272 1,608 1,314 2,435
Depreciation and amortization .. 1,246 1,669 3,450 4,386
Ratio of earnings to fixed
charges (7) ................... 1.3x 2.1x 1.7x 1.6x
OTHER NON-GAAP FINANCIAL DATA:
EBITDA (4) ..................... $ 3,004 $ 8,379 $ 17,314 $ 24,214
Ratio of EBITDA to cash
interest expense, net (8) ..... 2.4x 3.5x 2.6x 2.0x
Ratio of EBITDA less capital
expenditures to cash interest
expense, net................... 1.4x 2.8x 2.4x 1.8x
Ratio of total indebtedness to
EBITDA (9) .................... 4.2x 5.7x 5.1x 5.1x
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
NINE MONTHS ENDED APRIL
---------------------------------
PRO FORMA
1996 1997 1997 (3)
---------- ---------- -----------
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales ...................... $138,546 $189,227 $189,227
Cost of goods sold ............. 110,202 149,165 148,953
---------- ---------- -----------
Gross profit ................... 28,344 40,062 40,274
Selling, general and
administrative expenses ....... 21,291 28,466 28,466
---------- ---------- -----------
Income from operations ......... 7,053 11,596 11,808
Interest expense, net .......... 4,538 6,798 9,183
---------- ---------- -----------
Income before taxes and
extraordinary expense ......... 2,515 4,798 2,625
Income taxes ................... 1,056 2,015 1,102
---------- ---------- -----------
Income before extraordinary
expense ....................... 1,459 2,783 $ 1,523
Extraordinary expense, net (11). -- 3,495
Net income (loss)............... $ 1,459 $ (712)
========== ==========
OTHER GAAP FINANCIAL DATA:
Net cash provided by (used in)
operating activities (5) ..... $ 14,767 $ 403
Net cash (used in) investing
activities .................... (38,356) (9,485)
Net cash provided by financing
activities .................... 23,899 31,749
Cash interest expense, net .... 3,794 5,924 $ 9,066
Capital expenditures (6) ...... 978 3,469 3,469
Depreciation and amortization .. 3,085 3,475 3,263
Ratio of earnings to fixed
charges (7) ................... 1.5x 1.7x 1.3x
<PAGE>
OTHER NON-GAAP FINANCIAL DATA:
EBITDA (4) ..................... $ 10,138 $ 15,071 $ 15,071
Ratio of EBITDA to cash
interest expense, net (8) ..... 2.7x 2.5x 1.7x
Ratio of EBITDA less capital
expenditures to cash interest
expense, net................... 2.4x 2.0x 1.3x
Ratio of total indebtedness to
EBITDA (9) .................... N/A N/A N/A
</TABLE>
<TABLE>
<CAPTION>
AS OF APRIL 27, 1997
--------------------
<S> <C>
BALANCE SHEET DATA:
Cash................................ $ 24,134
Working capital .................... 75,515
Property, plant and equipment, net 46,310
Total assets ....................... 172,368
Total indebtedness (9) ............. 123,143
Redeemable common stock (10) ...... 2,229
Total stockholders' equity ......... 11,112
</TABLE>
12
<PAGE>
- ------------
(1) The summary statement of operations and other financial data include
the results of operations of the Company and each of the Acquisitions
since their respective dates of acquisition as follows: Hoffmaster as
of March 31, 1995; Maspeth as of November 30, 1995; Chesapeake as of
December 29, 1995; and James River California/Natural Dam as of May
5, 1996. See "The Company," "Management's Discussion and Analysis of
Financial Condition and Results of Operations--General" and Note 3 of
the Notes to the Financial Statements of the Company.
(2) All fiscal years are 52 weeks, except for Fiscal 1994 which is 53
weeks.
(3) Gives pro forma effect to the Fiscal 1996 Acquisitions and the
issuance of the Old Notes and the use of proceeds therefrom as if
such transactions had occurred on July 31, 1995. See "Unaudited Pro
Forma Condensed Financial Data."
(4) EBITDA represents income from operations before interest expense,
provision for income taxes and depreciation and amortization. EBITDA
is generally accepted as providing information regarding a company's
ability to service debt. EBITDA should not be considered in isolation
or as a substitute for net income, cash flows from operations, or
other income or cash flow data prepared in accordance with generally
accepted accounting principles or as a measure of a company's
profitability or liquidity. In addition, although the EBITDA measure
of performance is not recognized under generally accepted accounting
principles, it is widely used by companies as a measure of operating
performance because it assists in comparing performance on a
relatively consistent basis across companies without regard to
depreciation and amortization, which can vary significantly depending
on accounting methods (particularly where acquisitions are involved)
or non-operating factors such as historical cost bases. Because
EBITDA is not calculated identically by all companies, the
presentation herein may not be comparable to other similarly titled
measures of other companies.
(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 and provision for
income taxes which are included when presenting net cash provided by
or used in operating activities but are not included in the
calculation of EBITDA.
(6) Excludes the costs of the Acquisitions.
(7) For purposes of calculating the ratio of earnings to fixed charges,
earnings consist of income before provision for income taxes and
extraordinary items plus fixed charges. Fixed charges consist of
interest expense (including the amortization of debt issuance costs)
plus that portion of rental payments on operating leases deemed
representative of the interest factor.
(8) Cash interest expense, net excludes (i) the amortization of debt
issuance costs of $560, $1,021, $430, $744, $672 and $323 for Fiscal
1995, Fiscal 1996, pro forma Fiscal 1996, the nine month April 1996
period, the nine month April 1997 period and the pro forma nine month
April 1997 period, respectively, and (ii) pay-in-kind interest
expense of $165 and $408 for Fiscal 1996 and the nine month April
1997 period, respectively.
(9) Total indebtedness includes short-term and long-term borrowings and
current maturities of long-term debt.
(10) See "Description of Capital Stock."
(11) The Company incurred extraordinary expenses in connection with the
repayment of debt consisting of the write-off of unamortized debt
issuance costs related to the debt being repaid, elimination of the
unamortized discount on debt being repaid, and prepayment penalties
on early retirement of debt totalling approximately $6.0 million. The
after-tax effect of this extraordinary item was $3.5 million.
13
<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; ABILITY TO SERVICE INDEBTEDNESS
Since the issuance of the Old Notes, the Company has become highly
leveraged. As of April 27, 1997, the Company had $123.1 million of
indebtedness outstanding and $50.0 million of borrowing capacity under the
New Credit Facility (as defined herein), subject to borrowing base
limitations. See "Capitalization." For the nine months ended April 27, 1997,
the Company's ratio of earnings to fixed charges was 1.3x.
The significant indebtedness incurred as a result of the issuance of the
Old Notes will have 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 the Company's 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 New Credit Facility and the Indenture will
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 an event of default, 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 and the Indenture, 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. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
If the Company is unable to generate sufficient cash flow to meet its debt
obligations, the Company may be required to renegotiate the payment terms or
to refinance all or a portion of the indebtedness under the New Credit
Facility or the New Notes, to sell assets or to obtain additional financing.
If the Company could not satisfy its obligations related to such
indebtedness, substantially all of the Company's long-term debt could be in
default and could be declared immediately due and payable.
SUBORDINATION OF NEW NOTES
The New Notes are not secured by any of the assets of the Company. In
addition, the payment of principal and accrued and unpaid interest, if any,
with respect to the New Notes will be subordinated, as set forth in the
Indenture, to the prior payment in full of all present and future Senior
Debt. Therefore, in the event of the liquidation, dissolution or
reorganization of, or any similar proceeding relating to, the Company, the
assets of the Company will not be available to pay the obligations on the New
Notes until the holders of the Senior Debt have been paid in full. In that
event, it is possible that the assets of the Company will be insufficient to
pay all or a portion of the obligations on the New Notes. In addition, the
Company may not pay principal and accrued and unpaid interest, if any, with
respect to the New Notes, or defease, purchase, redeem or otherwise acquire
any New Notes, under the circumstances described under "Description of New
Notes--Subordination."
NEW CREDIT FACILITY AND INDENTURE RESTRICTIONS
The New Credit Facility and the Indenture will contain numerous
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
14
<PAGE>
assets, or to merge or consolidate with another entity. The New Credit
Facility will also require the Company to meet certain financial tests. The
Company's failure to comply with its obligations under the New Credit
Facility or the Indenture, or in 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.
In addition, the Indenture requires the Company to repurchase the Notes
upon a Change of Control or an Event of Default. 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. Conversely, because the Indenture
limits the ability of the Company to engage in certain transactions except
under certain circumstances, the Company may be prohibited from entering into
transactions that could be beneficial to the Company. See "Description of New
Notes--Certain Covenants."
DEPENDENCE ON CERTAIN CUSTOMERS
The Company has a number of large national accounts which account for a
significant portion of its revenue. In Fiscal 1996, the five largest
customers represented 21.0% of the Company's net sales. During Fiscal 1996,
the Company had net sales to one customer, Sysco Corporation, which accounted
for 11.0% of net sales and less than 10.0% of net sales after giving pro
forma effect to the Fiscal 1996 Acquisitions. The loss of one or more large
national customers could adversely affect the Company's operating results.
Although the Company does not currently expect to lose any of its large
national customers, there can be no assurance that this will not occur. See
"Business--Marketing and Sales."
SUPPLY AND PRICING OF RAW MATERIALS
The Company purchases solid bleached sulfate paperboard and paper tissue
stock, among other raw materials, for the production of its products.
Although the Company believes that current sources of supply for its raw
materials are adequate to meet its requirements, occasional periods of short
supply of certain raw materials may occur. Some of the Company's competitors
own or control sources of supply, and may therefore have better access to
such raw materials during periods of short supply. In addition, prices for
the Company's raw materials fluctuate. When raw materials prices decrease,
the Company's selling prices have historically decreased. Conversely, when
raw materials prices increase, the Company's selling prices have historically
increased. The actual impact on the Company of raw materials price changes is
affected by a number of factors including the level of inventories at the
time of a price change, the specific timing and frequency of price changes,
and the lead and lag time that generally accompanies the implementation of
both raw materials and subsequent selling price changes. Accordingly, if the
Company has excess inventory at the time a raw materials price change is
announced, the Company may suffer margin erosion on the sale of such
inventory. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
BUSINESS PLAN AND FUTURE ACQUISITIONS
The integration of acquired businesses 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. While growth through acquisitions is part of the
Company's business strategy, there can be no assurance that suitable
additional acquisitions will be available to the Company, that future
acquisitions will be advantageous to the Company or that anticipated benefits
of such acquisitions will be realized. See "The Company" and
"Business--General."
SEASONALITY
Prior to March 1995, the Company's business was highly seasonal with over
30% of its net sales and 50% of its cash flow realized in the fourth quarter
of its fiscal year. As a result of the Acquisitions, its
15
<PAGE>
business has become less seasonal and the Company anticipates a continued
reduction in the seasonality of its business. Nevertheless, collections of
receivables will be greatest during the first and second quarters of the
fiscal year. Additionally, the Company will continue its practice of building
inventory at the Fonda division throughout the second and third quarters of
each fiscal year to satisfy the high seasonal demands of the summer months
when outdoor and away-from-home consumption increases. In the event the
Company's cash flow from operations during the second and third quarters of a
fiscal year are insufficient to provide working capital necessary to fund
production requirements during these quarters, the Company will need to
resort to borrowings under the New Credit Facility or other sources of
capital. Although the Company believes that funds available under the New
Credit Facility together with cash generated from operations will be adequate
to provide for the Company's cash requirements, there can be no assurance
that such capital resources will be sufficient in the future. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Introduction" and "--Liquidity and Capital Resources."
HIGHLY COMPETITIVE INDUSTRY
The disposable food service products industry is fragmented and highly
competitive. The Company's competitors include large, vertically integrated,
multinational companies as well as regional manufacturers. The Company's
competitors also include manufacturers of products made from plastics and
foam. Some of the Company's competitors have greater financial and other
resources than the Company. See "Business--Competition."
CONTROL BY PRINCIPAL STOCKHOLDER
Dennis Mehiel, the Chairman of the Board of Directors and Chief Executive
Officer of the Company, currently owns approximately 88.3% of the outstanding
shares of the Company's common stock on a fully diluted basis. Mr. Mehiel
will continue to own approximately 81.6% of the outstanding shares of the
Company's common stock on a fully diluted basis, after giving effect to the
Stock Repurchase and assuming that Mr. Mehiel sells to the Company the
maximum number of shares covered by the Stock Repurchase. See "Principal
Stockholders." As a result, Mr. Mehiel controls, and will continue to
control, the Company and has the power, and will continue to have the power,
to elect its entire board of directors, appoint new management and approve
any other action requiring the approval of the holders of the Company's
stock, including adopting certain amendments to the Company's articles of
incorporation and approving mergers or sales of all of the Company's assets.
See "Principal Stockholders."
In the event of the Spousal Repurchase (as defined herein), Mr. Mehiel
will continue to own approximately 66.5% of the outstanding shares of the
Company's common stock on a fully diluted basis, assuming the maximum number
of shares are repurchased pursuant thereto. In the event the Spousal
Repurchase is not consummated and Mr. Mehiel transfers shares of his common
stock to any person, including his spouse, whether at his option or by
operation of law, and by such transfer his voting power with respect to the
Company's voting stock is reduced to less than the voting power held by any
other beneficial owner of the Company's voting stock, then a Change of
Control would be deemed to have occurred under the Indenture. See "--Change
of Control Provisions" and "Principal Stockholders."
DEPENDENCE ON KEY PERSONNEL
The Company is dependent on the retention of, and continued performance
by, its senior management, including Dennis Mehiel, its Chairman and Chief
Executive Officer, and Thomas Uleau, its President and Chief Operating
Officer. The Company believes that the loss of the services of any of its
senior management could have a material adverse effect on the Company. The
Company does not have employment contracts with any of its senior management
and has not obtained disability or life insurance policies covering such
executive officers. In addition, Dennis Mehiel is also Chairman and Chief
Executive Officer of Four M Corporation ("Four M") and an executive officer
of other affiliates of the Company, and Thomas Uleau is also an executive
officer of certain affiliates of the Company. Mr. Mehiel devotes only a
portion of his time to Company business. The unavailability of Messrs. Mehiel
or Uleau as a result of other business commitments could have a material
adverse effect on the Company. See "Management."
16
<PAGE>
LABOR MATTERS
As of April 27, 1997, approximately 98% of the Company's hourly employees
were covered by collective bargaining agreements. The collective bargaining
agreements at three of the Company's facilities will expire in the second
half of 1997; the collective bargaining agreements at two of the Company's
facilities have expired. There can be no assurance that the Company will be
successful in renegotiating such agreements or that the Company will not
incur increased costs as a result of such negotiations. In addition, an
extended interruption of operations at these facilities could have a material
adverse effect on the Company's financial condition and results of
operations. The Company experienced a one-month work stoppage at its Three
Rivers facility in August 1996. See "Business--Employees."
ENVIRONMENTAL MATTERS
The Company and its operations are subject to comprehensive and frequently
changing Federal, state and local environmental and occupational health and
safety laws and regulations, including laws and regulations governing
emissions of air pollutants, discharges of waste and storm water, and the
disposal of hazardous wastes. The Company is subject to liability for the
investigation and remediation of environmental contamination (including
contamination caused by other parties) at properties that it owns or operates
and at other properties where the Company or its predecessors have arranged
for the disposal of hazardous substances. As a result, the Company is
involved from time to time in administrative and judicial proceedings and
inquiries relating to environmental matters. The Company believes there are
currently no pending investigations at the Company's plants and sites
relating to environmental matters. However, there can be no assurance that
the Company will not be involved in any such proceeding in the future and
that the aggregate amount of future clean up costs and other environmental
liabilities will not be material. See "Business--Environmental Matters."
The Company cannot predict what environmental legislation or regulations
will be enacted in the future, how existing or future laws or regulations
will be administered or interpreted or what environmental conditions may be
found to exist. Enactment of more stringent laws or regulations or more
strict interpretation of existing laws and regulations could require
additional expenditures by the Company, some of which could be material.
ABSENCE OF PUBLIC MARKET
Prior to this Prospectus, there has been no public market for the New
Notes, and there can be no assurance that such a market will develop. In
addition, the New Notes will not be listed on any national 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 Purchasers have made a market in
the Notes as permitted by applicable law and regulation; however, the Initial
Purchasers are 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 any of the New Notes will
develop after the Company's performance of its obligations under the
Registration Rights Agreement.
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 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 necessary to repurchase the New
Notes upon a Change of Control. In addition, the requirement to repurchase
the New Notes upon a Change of Control may discourage persons from making a
tender offer for or a bid to acquire the Company. 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 New Credit Facility.
See "Description of Certain Indebtedness."
17
<PAGE>
FRAUDULENT TRANSFER STATUTES
Under Federal or state fraudulent transfer laws, the Notes may be
subordinated to existing or future indebtedness of the Company 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 were issued, the Company was
insolvent, or was rendered insolvent by the issuance of the Notes, and the
substantially concurrent use of the proceeds therefrom, was engaged in a
business or transaction for which the assets remaining with the Company
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 subordinate the Notes to all
other indebtedness of the Company. 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 which is being applied. Generally, however,
the Company would be considered to have been insolvent at the time the Notes
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 what standard a court would
apply in order to determine whether the Company was insolvent as of the date
the Notes were issued, or that, regardless of the method of valuation, a
court would not determine that the Company was insolvent on that date, or
that, regardless of whether the Company was insolvent on the date the Notes
were issued, that the issuances constituted fraudulent transfers on another
of the grounds summarized above.
FORWARD-LOOKING STATEMENTS
Certain of the matters discussed in this Prospectus may constitute
forward-looking statements, and as such may involve known and unknown risks,
uncertainties and other factors which may cause the actual results,
performance or achievements of the Company to be materially different from
future results, performance or achievements expressed or implied by such
forward looking statements. Important factors that could cause the actual
results, performance or achievements of the Company to differ materially from
the Company's expectations are disclosed in this Prospectus ("Cautionary
Statements"), including, without limitation, those statements made in
conjunction with the forward-looking statements included under "Risk Factors"
and otherwise herein. All written forward looking statements attributable to
the Company are expressly qualified in their entirety by the Cautionary
Statements.
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 which 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 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
18
<PAGE>
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.
USE OF PROCEEDS
There will be no proceeds to the Company from the exchange pursuant to the
Exchange Offer. The net proceeds from the issuance of the Old Notes were used
as follows:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C>
SOURCES OF FUNDS:
Old Notes............................................... $120,000
========
USES OF FUNDS:
Repayment of Old Credit Facility(1) .................... $ 34,812
Repayment of Term Loans(1).............................. 26,824
Repayment of Old Subordinated Notes(2) ................. 17,640
Payments relating to the James River (defined herein)
transactions........................................... 8,237
Working capital......................................... 28,187
Fees and expenses....................................... 4,300
--------
TOTAL................................................. $120,000
========
</TABLE>
- ------------
(1) The Company was a party to a revolving credit, term loan and security
agreement with IBJ Schroder Bank and Trust Company ("IBJS"), as
agent, which, as of February 27, 1997, consisted of a (i) term loan
facility in the amount of $22.3 million (the "Term A Loan Facility");
(ii) term loan facility in the amount of $4.5 million (the "Term B
Loan Facility" and together with the Term A Loan Facility, the "Term
Loans"); and (iii) revolving credit facility in the amount of up to
$50.0 million (the "Old Credit Facility"). On February 27, 1997, the
Company repaid the Term Loans and the Old Credit Facility from the
net proceeds of the issuance of the Old Notes and entered into an
amended and restated revolving credit facility (the "New Credit
Facility") with IBJS, as agent, in the amount of up to $50.0 million
subject to certain borrowing base limitations. See "Description of
Certain Indebtedness."
(2) In 1995, the Company issued two senior subordinated notes (the "Old
Subordinated Notes") which matured in 2002 and bore interest at 14.0%
per annum. On February 27, 1997, the Company repaid the Old
Subordinated Notes from the net proceeds of the issuance of the Old
Notes.
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<PAGE>
THE EXCHANGE OFFER
PURPOSE AND EFFECTS
The Old Notes were sold by the Company on February 27, 1997 to the Initial
Purchasers, 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
Purchasers entered into a Registration Rights Agreement dated as of February
27, 1997 (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 The Bank of New York 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. 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 from registration requirements under the securities laws,
including the Securities Act, if they wish to sell their Old Notes.
Based on interpretations 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 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 be participating 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 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.,
20
<PAGE>
New York City time, on the Expiration Date (as defined below). The Company
will issue up to $120,000,000 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 (i) the New
Notes will be registered under the Securities Act and hence will not bear
legends restricting the transfer thereof, (ii) because the New Notes will be
registered, holders of the New Notes will not be entitled to Liquidated
Damages which would have been 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 was continuing and (iii) because the New Notes will be registered,
holders of New Notes will not 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.
Holders of Old Notes do not have any appraisal or dissenters' rights under
the General Corporation Law of the State of Delaware 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 July
30, 1997, 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
21
<PAGE>
amendment in a manner reasonably calculated to inform the holders of Old
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 Old 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."
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 successive 90-day period, or any portion
thereof, during which such Registration Default continues, up to a maximum
amount of 200 basis points per annum of the principal amount of the Old
Notes. For purposes of the Exchange Offer, a "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"); (iii) the Company fails to
consummate the Exchange Offer within 30 days of the Effectiveness Target Date
with respect to the Exchange Offer Registration Statement; or (iv) 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 without being succeeded immediately by a post-effective amendment to
the Exchange Offer Registration Statement that cures such failure and is
immediately declared effective. Following the cure of all Registration
Defaults, the accrual of Liquidated Damages will cease.
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 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 an Eligible Holder of Old Notes may tender such Old Notes in the
Exchange Offer. To tender in the Exchange Offer, an Eligible Holder 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 into 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 as 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.
22
<PAGE>
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 on
or 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 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 might, in the judgment of the Company or its counsel, 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 in its sole
discretion 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, to 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 the person 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.
23
<PAGE>
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 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" 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 tendered
for any New Notes 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:
24
<PAGE>
(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,
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
(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
25
<PAGE>
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.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
Kramer, Levin, Naftalis & Frankel, counsel to the Company, has advised the
Company that the exchange of the Old Notes for the New Notes in the Exchange
Offer should not constitute an exchange for federal income purposes.
Consequently, (i) no gain or loss should be realized by a U.S. Holder upon
receipt of a New Note; (ii) the holding period of the New Note should include
the holding period of the Old Note exchanged therefor and (iii) the adjusted
tax basis of the New Note should be the same as the adjusted tax basis of the
Old Note exchanged therefor immediately before the exchange. Even if the
exchange of an Old Note for a New Note were treated as an exchange, however,
such an exchange should constitute a tax-free recapitalization for federal
income tax purposes. Accordingly, a New Note should have the same issue price
as an Old Note and a U.S. Holder should have the same adjusted basis and
holding period in the New Note as it had in an Old Note immediately before
the exchange. As used herein, the term "U.S. Holder" means a person who is,
for United States federal income tax purposes, (i) a citizen or resident of
the United States; (ii) a corporation, partnership or other entity created or
organized in or under the laws of the United States or any political
subdivision thereof; or (iii) an estate or trust the income of which is
subject to United States federal income taxation regardless of its source.
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 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.
Participation in the Exchange Offer is voluntary and holders should
carefully consider whether to accept the Exchange Offer and tender their Old
Notes. Holders of Old Notes are urged to consult their financial and tax
advisors in making their own decisions on what action to take.
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.
26
<PAGE>
EXCHANGE AGENT
The Bank of New York 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>
<CAPTION>
BY HAND OR OVERNIGHT COURIER: BY MAIL:
(REGISTERED OR CERTIFED
RECOMMENDED)
<S> <C>
The Bank of New York The Bank of New York
101 Barclay Street 101 Barclay Street 7E
Corporate Trust Services Window New York, New York 10286
Ground Level Attn: Reorganization Section
New York, New York 10286
Attn: Reorganization Section
</TABLE>
Facsimile Number (for Eligible Institutions Only and Withdrawal Notices Only):
(212) 571-3080
Confirm Receipt of Notice of Guaranteed Delivery by Telephone:
(212) 815-3687
For Information Call:
(212) 515-3687
Requests for additional copies of this Prospectus or the Letter of
Transmittal should be directed to the Exchange Agent.
27
<PAGE>
THE COMPANY
The Company believes it is a leading converter and marketer of a broad
line of disposable paper food service products. The Company sells its
products under both branded and private labels to the consumer and
institutional markets and participates at all major price points. The Company
believes it is a market leader in the sale of premium white, colored and
custom-printed napkins, placemats, tablecovers and food trays and in the sale
of private label consumer paper plates, bowls and cups. The Company's
Sensations, Splash(Registered Trademark) and Party Creations(Registered
Trademark) brands are well recognized in the consumer market and its
Hoffmaster(Registered Trademark) brand is well recognized in the
institutional market. During the past two years, the Company has completed
four acquisitions which have enabled it to grow rapidly. Each acquisition was
targeted for its ability to complement and broaden existing product lines,
penetrate additional markets, improve existing market position, expand the
Company's geographic scope and provide sales and marketing economies.
The Company was founded in 1915. Prior to the Acquisitions, the Company's
business consisted of the Fonda division which manufactures paper plates,
bowls, cups, trays and handled food pails for both the institutional and
consumer markets. The Fonda division is a leading producer of private label
paper plates and cups to the consumer market.
In March 1995, the Company purchased its Oshkosh, Wisconsin operations
("Hoffmaster") from Scott Paper Company. The Hoffmaster line of premium
napkins is a recognized industry leader in the institutional market for high
quality napkins. This acquisition enabled the Company to substantially
increase its position in the institutional market and become an industry
leader in colored and custom-printed napkins and placemats. This acquisition
also provided the Company with access to fall and winter seasonal product
lines which complement its summer seasonal paper plate business. In addition,
Hoffmaster's printing capabilities have allowed the Company to meet the
increasing demand of restaurants and institutional food servers for
disposable tableware printed with the end-users' logos or personalized
colored designs.
In November 1995, the Company acquired its Maspeth, New York operations
("Maspeth") from private owners. Production at Maspeth augments the Company's
production of paper plates and cups for both the institutional and consumer
markets. In addition, this acquisition provided the Company entry into the
mass merchandise markets, access to seasonal product lines and enhanced
printing capabilities.
In December 1995, the Company expanded its product line of disposable
tableware products through the acquisition of its Appleton, Wisconsin
operations ("Chesapeake") from Chesapeake Corporation, a leading manufacturer
of design-intensive and solid-colored premium napkins, tablecovers and crepe
paper. This acquisition (i) enabled the Company to enter the specialty
consumer products business, complementing the Hoffmaster line, (ii) provided
the Company with sales and marketing economies and (iii) expanded the
Company's printing capabilities as the Company became one of a small number
of manufacturers with the capability to produce graphic-intensive
print-to-the-edge napkins for the premium party goods sector.
In order to increase the manufacturing capacity for its rapidly expanding
product line, in May 1996 the Company acquired the operations of the
Specialty Operations Division of James River Corporation ("James River"),
which included the Rancho Dominguez, California facility ("James River
California") and a tissue mill located in Gouverneur, New York ("Natural
Dam"). The James River California facility, which manufactures tissue-based
products, expanded the Company's geographic scope to the West Coast which
enabled the Company to improve its service levels in a ten-state region, open
new markets and expand the Company's customer base. The Natural Dam tissue
mill is one of only three mills in the United States currently producing
specialty and deep-tone colored tissue paper. The Natural Dam acquisition
provides the Company flexibility to vertically integrate its tissue-based
products and the opportunity to participate in a number of specialty markets
that historically have been served by Natural Dam.
28
<PAGE>
The Company is continually evaluating acquisition opportunities that may
meet its strategic objectives. On June 2, 1997, the Company completed the
acquisition of all of the outstanding capital stock of Heartland Mfg. Corp. a
privately owned manufacturer of paper plates, for a purchase price of $12.7
million. On June 16, 1997, the Company completed the acquisition of certain
assets of Tenneco, Inc. relating to the manufacture of placemats and other
disposable tabletop products for a purchase price of $7.0 million, subject to
working capital adjustment. There can be no assurance that suitable
additional acquisitions will be available to the Company, that these
acquisitions or any future acquisitions will be advantageous to the Company
or that anticipated benefits of such acquisitions will be realized.
29
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
April 27, 1997 which reflects the issuance of the Old Notes and the use of
proceeds therefrom. This table should be read in conjunction with the other
financial information appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
APRIL 27, 1997
--------------------
(DOLLARS IN
THOUSANDS)
<S> <C>
Short-term debt:
Current portion of long-term debt ......................................................... $ 454
========
Long-term debt:
New Credit Facility ....................................................................... --
9 1/2% Senior Subordinated Notes due 2007 ................................................. $120,000
Other long-term debt(1) ................................................................... 2,689
--------
Total long-term debt ..................................................................... 122,689
--------
Redeemable common stock, $.01 par value, 7,000 shares issued and outstanding ............. 2,229
--------
Stockholders' equity:
Preferred Stock, $.01 par value, 1,000 shares authorized, no shares issued; Preferred
Stock Class B, $.01 par value, 100,000 shares authorized, no shares issued .............. --
Common Stock Class A, $.01 par value, 400,000 shares authorized, 184,000 shares issued and
outstanding; Common Stock Class B, $.01 par value, 20,000 shares authorized, 3,666 shares
issued and outstanding and Common Stock Class C, $.01 par value, 200,000 shares
authorized, no shares issued ............................................................. 2
Additional paid-in capital ................................................................ 3,500
Retained earnings ......................................................................... 7,610
--------
Total stockholders' equity ............................................................... 11,112
--------
Total capitalization..................................................................... $136,030
========
</TABLE>
- ------------
(1) Consists principally of (i) a $1.7 million 9.75% promissory note due
November 2000 issued in connection with the Maspeth acquisition and
(ii) $1.0 million of other debt and capital lease obligations. See
"Description of Certain Indebtedness."
30
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA (1)
The following selected historical financial data have been derived from
the financial statements of the Company. The data as of and for the years
ended July 30, 1995 and July 28, 1996 are derived from the financial
statements of the Company audited by Deloitte & Touche LLP, independent
auditors, whose report with respect thereto is included elsewhere in this
Prospectus. The data for the year ended July 31, 1994 are derived from the
financial statements of the Company audited by BDO Seidman, LLP, independent
auditors, whose report with respect thereto is included elsewhere in this
Prospectus. The data as of July 25, 1993 and July 31, 1994 and for the years
ended July 26, 1992 and July 25, 1993 are derived from the financial
statements of the Company audited by BDO Seidman, LLP, independent auditors,
and are not included herein. The data as of July 26, 1992 are derived from
the Company's unaudited financial statements. The data as of April 27, 1997
and for the nine months ended April 28, 1996 and April 27, 1997 are derived
from the Company's unaudited financial statements included elsewhere in this
Prospectus. In the opinion of management, the unaudited financial statements
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 27, 1997 are not
necessarily indicative of the results that may be expected for any other
interim period or the entire year. The following data should be read in
conjunction with the Company's 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>
FISCAL YEAR ENDED JULY (2)
---------------------------------------------------
1992 1993 1994 1995 1996
--------- --------- --------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales .......................... $64,063 $61,079 $61,839 $ 97,074 $204,903
Cost of goods sold ................. 53,383 49,776 51,643 76,252 161,304
--------- --------- --------- ---------- ----------
Gross profit ....................... 10,680 11,303 10,196 20,822 43,599
Selling, general and administrative
expenses .......................... 8,317 8,686 8,438 14,112 29,735
--------- --------- --------- ---------- ----------
Income from operations ............. 2,363 2,617 1,758 6,710 13,864
Interest expense, net .............. 1,531 1,201 1,268 2,943 7,934
--------- --------- --------- ---------- ----------
Income before taxes and
extraordinary expense ............. 832 1,416 490 3,767 5,930
Income taxes ....................... 301 478 239 1,585 2,500
--------- --------- --------- ---------- ----------
Income before extraordinary expense 531 938 251 2,182 3,430
Extraordinary expense, net (9) .... -- -- -- -- --
Net income (loss)................... $ 531 $ 938 $ 251 $ 2,182 $ 3,430
========= ========= ========= ========== ==========
OTHER GAAP FINANCIAL DATA:
Net cash provided by (used in)
operating activities (4)........... $ 2,129 $ 2,797 $ 140 $ (4,774) $ 17,673
Net cash (used in) investing
activities......................... (577) (1,027) (1,272) (29,593) (46,532)
Net cash provided by financing ..... (1,713) (1,742) 992 34,262 30,206
Capital expenditures (5) ........... 577 1,027 1,272 1,608 1,314
Depreciation and amortization ..... 1,256 1,248 1,246 1,669 3,450
Ratio of earnings to fixed
charges (6) ....................... 1.4x 1.9x 1.3x 2.1x 1.7x
OTHER NON-GAAP FINANCIAL DATA:
EBITDA (3).......................... $ 3,619 $ 3,865 $ 3,004 $ 8,379 $ 17,314
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED APRIL
---------------------
1996 1997
---------- ----------
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales .......................... $138,546 $189,227
Cost of goods sold ................. 110,202 149,165
---------- ----------
Gross profit ....................... 28,344 40,062
Selling, general and administrative
expenses .......................... 21,291 28,466
---------- ----------
Income from operations ............. 7,053 11,596
Interest expense, net .............. 4,538 6,798
---------- ----------
Income before taxes and
extraordinary expense ............. 2,515 4,798
Income taxes ....................... 1,056 2,015
---------- ----------
Income before extraordinary expense 1,459 2,783
Extraordinary expense, net (9) .... -- 3,495
Net income (loss)................... $ 1,459 $ (712)
========== ==========
OTHER GAAP FINANCIAL DATA:
Net cash provided by (used in)
operating activities (4)........... $ 14,767 $ 403
Net cash (used in) investing
activities......................... (38,356) (9,485)
Net cash provided by financing ..... 23,899 31,749
Capital expenditures (5) ........... 978 3,469
Depreciation and amortization ..... 3,085 3,475
Ratio of earnings to fixed
charges (6) ....................... 1.5x 1.7x
OTHER NON-GAAP FINANCIAL DATA:
EBITDA (3).......................... $ 10,138 $ 15,071
</TABLE>
31
<PAGE>
<TABLE>
<CAPTION>
AS OF JULY
---------------------------------------------
1992 1993 1994 1995 1996
-------- -------- -------- -------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash............................... $ 337 $ 365 $ 225 $ 120 $ 1,467
Working capital ................... 2,094 1,738 2,731 28,079 38,931
Property, plant and equipment,
net............................... 7,649 7,428 7,454 26,933 46,350
Total assets ...................... 25,129 24,676 24,668 79,725 136,168
Total indebtedness (7) ............ 13,783 11,589 12,581 48,165 87,763
Redeemable common stock (8) ...... -- -- -- 2,115 2,179
Stockholders' equity............... 4,788 5,726 5,977 7,205 11,873
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
AS OF
APRIL
-------------------
1996 1997
--------- ---------
<S> <C> <C>
BALANCE SHEET DATA:
Cash............................... $ 430 $ 24,134
Working capital ................... 33,744 75,515
Property, plant and equipment,
net............................... 41,096 46,310
Total assets ...................... 122,252 172,368
Total indebtedness (7) ............ 74,910 123,143
Redeemable common stock (8) ...... 2,163 2,229
Stockholders' equity............... 8,432 11,112
</TABLE>
- ------------
(1) The selected historical statement of operations and other financial
data include the results of operations of the Company and each of the
Acquisitions since their respective dates of acquisition as follows:
Hoffmaster as of March 31, 1995; Maspeth as of November 30, 1995;
Chesapeake as of December 29, 1995; and James River California/Natural
Dam as of May 5, 1996. See "The Company," "Management's Discussion and
Analysis of Financial Condition and Results of Operations--General" and
Note 3 of the Notes to the Financial Statements of the Company.
(2) All fiscal years are 52 weeks, except for Fiscal 1994 which is 53
weeks.
(3) EBITDA represents income from operations before interest expense,
provision for income taxes and depreciation and amortization. EBITDA is
generally accepted as providing information regarding a company's
ability to service debt. EBITDA should not be considered in isolation
or as a substitute for net income, cash flows from operations, or other
income or cash flow data prepared in accordance with generally accepted
accounting principles or as a measure of a company's profitability or
liquidity. In addition, although the EBITDA measure of performance is
not recognized under generally accepted accounting principles, it is
widely used by companies as a measure of operating performance because
it assists in comparing performance on a relatively consistent basis
across companies without regard to depreciation and amortization, which
can vary significantly depending on accounting methods (particularly
where acquisitions are involved) or non-operating factors such as
historical cost bases. Because EBITDA is not calculated identically by
all companies, the presentation herein may not be comparable to other
similarly titled measures of other companies.
(4) 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 and provision for income
taxes which are included when presenting net cash provided by or used
in operating activities but are not included in the calculation of
EBITDA.
(5) Excludes the costs of the Acquisitions.
(6) For purposes of calculating the ratio of earnings to fixed charges,
earnings consist of income before provision for income taxes plus fixed
charges. Fixed charges consist of interest expense (including the
amortization of debt issuance costs) plus that portion of rental
payments on operating leases deemed representative of the interest
factor.
(7) Includes short-term and long-term borrowings and current maturities of
long-term debt.
(8) See "Description of Capital Stock."
(9) The Company incurred extraordinary expenses in connection with the
repayment of debt consisting of the write-off of unamortized debt
issuance costs related to the debt being repaid, elimination of the
unamortized discount on debt being repaid, and prepayment penalties on
early retirement of debt totalling approximately $6.0 million. The
after-tax effect of this extraordinary item was $3.5 million.
32
<PAGE>
UNAUDITED PRO FORMA CONDENSED FINANCIAL DATA
Set forth below are the unaudited pro forma condensed statements of
operations of the Company for the year ended July 28, 1996 and the nine
months ended April 27, 1997. The unaudited pro forma condensed statements of
operations include the historical results of the Company and give effect to
the Fiscal 1996 Acquisitions and to the issuance of the Old Notes and the use
of proceeds therefrom as if they had occurred as of July 31, 1995. The pro
forma financial data do not purport to be indicative of the Company's
financial position or results of operations that would actually have been
obtained had the Fiscal 1996 Acquisitions and the issuance of the Old Notes
and the use of proceeds therefrom been completed as of the date or for the
periods presented, or to project the Company's financial position or results
of operations at any future date or for any future period. The unaudited pro
forma adjustments are based upon available information and upon certain
assumptions that the Company believes are reasonable. The Company does not
believe that any variations from such assumptions and the following pro forma
adjustments would be material.
On November 30, 1995, pursuant to an Asset Purchase Agreement, the Company
purchased Maspeth from private owners. The aggregate purchase price for all
of the assets acquired was $10.0 million, comprised of $7.75 million in cash
and a $2.25 million promissory note of the Company. The Maspeth acquisition
was accounted for under the purchase method of accounting. The cash portion
of the purchase price was financed by borrowings. The aggregate purchase
price for Maspeth of $10 million has been allocated to the assets and
liabilities of the acquired business based upon the Company's estimates of
their fair value. The excess of the fair value of the net assets acquired
over the purchase price was $122,000 and has been allocated to long-term
assets.
On December 29, 1995, pursuant to a Stock Purchase Agreement, the Company
purchased Chesapeake from Chesapeake Corporation. The aggregate purchase
price for all of the assets acquired was $29.0 million. The Chesapeake
acquisition was accounted for under the purchase method of accounting. The
purchase price was financed by borrowings. The aggregate purchase price for
Chesapeake of $29 million has been allocated to the assets and liabilities of
the acquired business based upon the Company's estimates of their fair value.
The excess of the purchase price over the fair value of the net assets
acquired was $4.6 million and has been recorded as goodwill.
On May 5, 1996, pursuant to an Asset Purchase Agreement, the Company
purchased James River California and Natural Dam from James River. The
aggregate purchase price for all of the assets acquired was $15.0 million,
comprised of $8 million in cash and a $7 million promissory note of the
Company. After negotiation, on February 27, 1997, the Company and James River
consummated a settlement which has been accounted for as a reduction of the
purchase price to $13.1 million. As part of this settlement, the James River
note was reduced to $2.2 million. The James River acquisition was accounted
for under the purchase method of accounting. The cash portion of the purchase
price was financed by borrowings. The initial purchase price for James River
California and Natural Dam of $15.0 million has been allocated to the assets
and liabilities of the acquired businesses based upon the Company's estimates
of their fair value. The initial excess of the fair value of the net assets
acquired over the purchase price (prior to the adjustments noted in the
following sentence) was $5.5 million and has been allocated to long-term
assets. The net reduction of the purchase price ($1.9 million) has been
applied to reduce long-term assets. Natural Dam hosts a co-generation
facility on its property which produces steam for internal use and which is
expected to provide significant cost savings to the Company. Natural Dam will
receive all of its steam energy requirements at 50% of historical cost in
1997 and at no cost for the next 40 years thereafter, and Natural Dam will
receive land lease payments from the operator of the land occupied by the
co-generation facility. The $10 million in benefits from the co-generation
facility is included in long-term assets acquired and is being amortized
based upon the Company's annual savings over the 42-year remaining life of
the contract.
On February 27, 1997, the Company issued and sold $120.0 million principal
amount of Old Notes to the Initial Purchasers. The Old Notes bear interest at
a rate of 9 1/2% per annum, payable semi-annually in arrears on March 1 and
September 1 of each year beginning September 1, 1997. The Old Notes will
mature on March 1, 2007. Pursuant to the Registration Rights Agreement, the
Company agreed to file with the Commission a registration statement with
respect to an offer to exchange the Old Notes for New Notes. 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 the registration and other rights
relating to the exchange of Old Notes for New Notes and the restriction on
transfer of the Old Notes will not apply to the New Notes. See "Prospectus
Summary--Issuance of the Old Notes" and "Description of New Notes."
The unaudited 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 historical financial statements
of the Company, Scott Foodservice Division of Scott Paper Company and
Chesapeake Consumer Products Company and the notes thereto included elsewhere
in this Prospectus.
33
<PAGE>
UNAUDITED PRO FORMA CONDENSED STATEMENTS OF OPERATIONS (A)
<TABLE>
<CAPTION>
YEAR ENDED JULY 28, 1996
---------------------------------------------------------------------
HISTORICAL PRO FORMA HISTORICAL PRO FORMA HISTORICAL
HISTORICAL MASPETH ADJUSTMENTS CHESAPEAKE ADJUSTMENTS JAMES
COMPANY (C) MASPETH (C) CHESAPEAKE RIVER (C)
---------- ---------- ----------- ------------ ----------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Net sales.................. $204,903 $8,897 $24,908 $27,862
Cost of goods sold......... 161,304 7,681 $ (8)(e) 19,541 $(279)(f) 24,356
---------- ---------- ----------- ------------ ----------- ----------
Gross profit............... 43,599 1,216 8 5,367 279 3,506
Selling, general and
administrative expenses .. 29,735 173 3,720 (43)(d) 991
---------- ---------- ----------- ------------ ----------- ----------
Income from operations .... 13,864 1,043 8 1,647 322 2,515
Interest expense, net ..... 7,934 88 252 (g) 481 730 (g)
---------- ---------- ----------- ------------ ----------- ----------
Income (loss) before
taxes..................... 5,930 955 (244) 1,166 (408) 2,515
Income taxes (benefit)(i) . 2,500 401 (102) 502 (184) 1,057
---------- ---------- ----------- ------------ ----------- ----------
Net income (loss).......... $ 3,430 $ 554 $(142) $ 664 $(224) $ 1,458
========== ========== =========== ============ =========== ==========
OTHER GAAP FINANCIAL DATA:
Cash interest expense,
net....................... $ 6,748
Capital expenditures....... 1,314
Depreciation and
amortization (k).......... 3,450
Ratio of earnings to fixed
charges (l)............... 1.7x
OTHER NON-GAAP FINANCIAL
DATA:
EBITDA(j) ................. $ 17,314
Ratio of EBITDA to cash
interest expense, net .... 2.6x
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
YEAR ENDED JULY 28, 1996
-----------------------------------
PRO FORMA PRO FORMA
ADJUSTMENTS INTERCOMPANY PRO FORMA
JAMES RIVER ELIMINATIONS HISTORICAL
----------- ------------ ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Net sales.................. $(4,111) $262,459
Cost of goods sold......... $ (429)(e) (4,111) 208,055
----------- ------------ ----------
Gross profit............... 429 54,404
Selling, general and
administrative expenses .. 34,576
----------- ------------ ----------
Income from operations .... 429 19,828
Interest expense, net ..... 1,121(g) 10,606
----------- ------------ ----------
Income (loss) before
taxes..................... (692) 9,222
Income taxes (benefit)(i) . (291) 3,883
----------- ------------ ----------
Net income (loss).......... $ (401) $ 0 $ 5,339
=========== ============ ==========
</TABLE>
See Notes to Unaudited Pro Forma Condensed Statements of Operations.
34
<PAGE>
UNAUDITED PRO FORMA CONDENSED STATEMENTS OF OPERATIONS (A)
<TABLE>
<CAPTION>
YEAR ENDED JULY 28, 1996
-----------------------------------------
ADJUSTMENTS
PRO FORMA FOR ISSUANCE OF
HISTORICAL OLD NOTES PRO-FORMA(B)
------------ --------------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales ..................................... $262,459 $ -- $262,459
Cost of goods sold ............................ 208,055 -- 208,055
------------ --------------- ------------
Gross profit .................................. 54,404 -- 54,404
Selling, general and administrative expenses . 34,576 -- 34,576
------------ --------------- ------------
Income from operations ........................ 19,828 -- 19,828
Interest expense, net ......................... 10,606 1,858(h) 12,464
------------ --------------- ------------
Income before taxes and extraordinary expense 9,222 (1,858) 7,364
Income taxes (benefit)(i) ..................... 3,883 (780) 3,103
------------ --------------- ------------
Income before extraordinary expense ........... $ 5,339 $(1,078) $ 4,261
OTHER GAAP FINANCIAL DATA:
Cash interest expense, net .................... $ 12,034
Capital expenditures........................... 2,435
Depreciation and amortization (k).............. 4,386
Ratio of earnings to fixed charges (l) ........ 1.6x
OTHER NON-GAAP FINANCIAL DATA:
EBITDA (j)..................................... $ 24,214
Ratio of EBITDA to cash interest
expense, net ................................. 2.0x
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
NINE MONTHS ENDED APRIL 27, 1997
---------------------------------------
HISTORICAL ADJUSTMENTS PRO FORMA(K)
------------ ------------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales ..................................... $189,227 $ -- $189,227
Cost of goods sold ............................ 149,165 (212)(e) 148,953
------------ ------------- ------------
Gross profit .................................. 40,062 212 40,274
Selling, general and administrative expenses . 28,466 -- 28,466
------------ ------------- ------------
Income from operations ........................ 11,596 212 11,808
Interest expense, net ......................... 6,798 2,385(h) 9,183
------------ ------------- ------------
Income before taxes and extraordinary expense 4,798 (2,173) 2,625
Income taxes (benefit)(i) ..................... 2,015 (913) 1,102
------------ ------------- ------------
Income before extraordinary expense ........... $ 2,783 $(1,260) $ 1,523
OTHER GAAP FINANCIAL DATA:
Cash interest expense, net .................... $ 5,924 $ 9,066
Capital expenditures........................... 3,469 3,469
Depreciation and amortization (k).............. 3,475 3,263
Ratio of earnings to fixed charges (l) ........ 1.7x 1.3x
OTHER NON-GAAP FINANCIAL DATA:
EBITDA (j)..................................... $ 15,071 $ 15,071
Ratio of EBITDA to cash interest
expense, net ................................. 2.5x 1.7x
</TABLE>
See Notes to Unaudited Pro Forma Condensed Statements of Operations.
35
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONDENSED STATEMENTS OF OPERATIONS
(a) Reflects those adjustments to record the Fiscal 1996 Acquisitions and
the issuance of the Old Notes and the transactions contemplated thereby
as if they had occurred on July 31, 1995.
(b) The unaudited pro forma condensed statements of operations do not
include the charge of $2.2 million which resulted from the write-off of
unamortized debt issuance costs, elimination of $2.1 million
unamortized discount that resulted from the repayment of the Old
Subordinated Notes, and $1.6 million which resulted from prepayment
penalties incurred from early retirement of existing debt. These items
were accounted for as extraordinary items in the fiscal quarter ended
April 27, 1997, the fiscal quarter in which such debt was repaid.
(c) Reflects the historical results of operations of the Fiscal 1996
Acquisitions as if they had occurred on July 31, 1995 until their
respective dates of acquisition.
(d) Reflects the net decrease in amortization expense relating to
Chesapeake goodwill ($4.6 million) as follows:
<TABLE>
<CAPTION>
<S> <C>
Amortization expense resulting from goodwill created by the excess of the
purchase price over the fair market value of net assets acquired amortized over
a twenty-year period............................................................. $ 96
Removal of goodwill amortization expense previously recorded on historical
financial statements............................................................. (139)
-------
Net decrease in amortization expense.............................................. $ (43)
=======
</TABLE>
(e) Reflects a decrease in depreciation expense of long-term assets created
by the excess of the fair market value of the net assets acquired over
the purchase price. For Maspeth, the excess of the fair market value of
the net assets acquired over the purchase price of $122,000 was
allocated to property, plant and equipment which are being amortized
over a three to 12 year period. For James River, the excess of the fair
market value of the net assets acquired over the purchase price of $7.4
million (including the final purchase price adjustment of $3.4 million
and the gain on the retirement of the note payable to James River of
$5.3 million) was allocated to property, plant and equipment and other
assets which are being amortized over a three to 40 year period and a
42 year period, respectively.
(f) Reflects a decrease in depreciation expense primarily as a result of
the change in the valuation of property, plant and equipment based upon
appraised values as compared to their historical carrying value. Such
property, plant and equipment is being depreciated over a three to 40
year period.
(g) Reflects additional interest expense related to the Fiscal 1996
Acquisitions as if they had occurred on July 31, 1995 until their
respective dates of acquisition. In connection with the Maspeth
acquisition, the Company incurred $10 million of debt under the Old
Credit Facility, the Old Subordinated Notes and a promissory note to
the seller at interest rates ranging from 8.5% to 14%. In connection
with the Chesapeake acquisition, the Company incurred $29 million of
debt under the Old Credit Facility, the Term Loans and the Old
Subordinated Notes at interest rates ranging from 8.5% to 14%. In
connection with the James River acquisition, the Company incurred $15
million of debt under the Old Credit Facility, the Term Loans and a
promissory note to the seller at interest rates ranging from 8.5% to
10.75%. The historical debt of Maspeth and Chesapeake was not assumed
by the Company.
(h) The pro forma adjustments to interest exense, net consist of the
following:
<TABLE>
<CAPTION>
INCREASE (DECREASE)
---------------------------------
YEAR ENDED NINE MONTHS ENDED
JULY 28, 1996 APRIL 27, 1997
--------------- -----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Historical interest expense............................ $ 7,934 $ 6,798
=============== =================
Elimination of interest expense related to:
Old Credit Facility, Term Loans and Old Subordinated
Notes................................................. $(6,346) $(5,816)
Amortization of deferred debt issuance costs on
retired debt ......................................... (1,021) (672)
--------------- -----------------
Decrease in interest expense........................... (7,367) (6,488)
--------------- -----------------
Interest expense on new indebtedness:
9 1/2% Senior Subordinated Notes due 2007 ............. 11,400 8,550
Acquisition debt(1) ................................... 67 --
Amortization of costs on new debt(2) .................. 430 323
--------------- -----------------
Increase in interest expense........................... 11,897 8,873
--------------- -----------------
Net increase in interest expense ...................... 4,530 2,385
Less: Fiscal 1996 Acquisitions interest expense(3) (2,672) --
--------------- -----------------
Adjustment to interest expense related to the
issuance of the Old Notes............................. $ 1,858 $ 2,385
=============== =================
</TABLE>
36
<PAGE>
- ------------
(1) Represents additional interest expense on indebtedness incurred to
fund the Maspeth acquisition as if such acquisition occurred on
July 31, 1995.
(2) Debt issuance costs related to the Notes will be amortized over
their 10-year life.
(3) Represents the increase in historical interest expense reflected
in Notes (c) and (g) hereto as if the Fiscal 1996 Acquisitions had
occurred on July 31, 1995 until their respective dates of
acquisition.
(i) For pro forma purposes, the income tax provision was calculated at 42%
based on enacted statutory tax rates applied to pro forma pre-tax
income and the provisions of SFAS No. 109.
(j) EBITDA represents income from operations before interest expense,
provision for income taxes, and depreciation and amortization. EBITDA
is generally accepted as providing information regarding a company's
ability to service debt. EBITDA should not be considered in isolation
or as a substitute for net income, cash flows from operations, or other
income or cash flow data prepared in accordance with generally accepted
accounting principles or as a measure of a company's profitability or
liquidity. In addition, although the EBITDA measure of performance is
not recognized under generally accepted accounting principles, it is
widely used by companies as a measure of operating performance because
it assists in comparing performance on a relatively consistent basis
across companies without regard to depreciation and amortization, which
can vary significantly depending on accounting methods (particularly
where acquisitions are involved) or non-operating factors such as
historical cost bases. Because EBITDA is not calculated identically by
all companies, the presentation herein may not be comparable to other
similarly titled measures of other companies.
(k) Depreciation and amortization excludes amortization of debt issuance
costs which is classified as interest expense in the Statements of
Operations.
(l) For purposes of calculating the ratio of earnings to fixed charges,
earnings consist of earnings before provision for income taxes plus
fixed charges. Fixed charges consist of interest expense plus that
portion of rental payments on operating leases deemed representative of
the interest factor.
37
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
The following discussion of results of operations for Fiscal 1994, 1995
and 1996 and for the nine month periods ended April 27, 1997 and April 28,
1996 is based on the historical results of operations of the Company. Since
the Acquisitions were consummated from time to time during such fiscal years,
the financial information contained herein with respect to periods prior to
the Acquisitions does not reflect the results of operations of the businesses
acquired; thus, this financial information is not necessarily indicative of
the results of operations that would have been achieved had the Acquisitions
been consummated by the Company at the beginning of the periods presented
herein or which may be achieved in the future, nor does it reflect the
operations of such acquired businesses under the Company's management for a
significant period of time.
Prior to March 1995, the Company's business was highly seasonal with over
30% of its net sales and 50% of its cash flow realized in the fourth quarter
of its fiscal year. As a result of the Acquisitions, its business has become
less seasonal and the Company anticipates a continued reduction in the
seasonality of its business. Nevertheless, collections of receivables will be
greatest during the first and second quarters of the fiscal year.
Additionally, the Company will continue its practice of building inventory at
the Fonda division throughout the second and third quarters of each fiscal
year to satisfy the high seasonal demands of the summer months when outdoor
and away-from-home consumption increases. In the event the Company's cash
flow from operations during the second and third quarters of a fiscal year
are insufficient to provide working capital necessary to fund production
requirements during these quarters, the Company will need to resort to
borrowings under the New Credit Facility or other sources of capital.
Although the Company believes that funds available under the New Credit
Facility together with cash generated from operations will be adequate to
provide for the Company's cash requirements, there can be no assurance that
such capital resources will be sufficient in the future.
GENERAL
The Company is a converter and marketer of paperboard and tissue products,
the selling prices of which typically follow the general movement in the cost
of such principal raw materials. This is particularly true with respect to
commodity products, such as coated and uncoated white paper plates. When raw
materials and selling prices increase, operating margins tend to improve.
Conversely, when raw materials prices decrease, selling prices generally also
decline. Operating margins may also decline as the Company's fixed selling,
general and administrative costs remain relatively constant. The actual
impact on the Company of raw materials price changes is affected by a number
of factors including the level of inventories at the time of a price change,
the specific timing and frequency of price changes, and the lead and lag time
that generally accompanies the implementation of both raw materials and
subsequent selling price changes. However, over time the Company believes it
is able to maintain relatively stable margins between its selling prices and
raw material costs. The Company's business and growth strategy is intended,
in part, to enable the Company to maintain a lower cost structure as a result
of improved purchasing power, improved fixed overhead costs absorption and
consolidation and elimination of costs as it integrates its strategic
acquisitions. Furthermore, the Company believes it has been able to mitigate
the effect of changing raw materials prices by diversifying into higher
margin, value-added products, such as those produced by the Hoffmaster
division. See "Business--Raw Materials and Suppliers."
38
<PAGE>
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JULY
-----------------------------------------------------------------
1994 1995 1996
--------------------- --------------------- ---------------------
PERCENT OF PERCENT OF PERCENT OF
AMOUNT NET SALES AMOUNT NET SALES AMOUNT NET SALES
-------- ------------ -------- ------------ -------- ------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Net sales ................. $61.8 100.0% $97.1 100.0% $204.9 100.0%
Cost of goods sold ........ 51.6 83.5 76.3 78.6 161.3 78.7
-------- ------------ -------- ------------ -------- ------------
Gross profit .............. 10.2 16.5 20.8 21.4 43.6 21.3
Selling, general and
administrative expenses .. 8.4 13.7 14.1 14.5 29.7 14.5
-------- ------------ -------- ------------ -------- ------------
Income from operations ... 1.8 2.8 6.7 6.9 13.9 6.8
Interest expense .......... 1.3 2.1 2.9 3.0 8.0 3.9
-------- ------------ -------- ------------ -------- ------------
Income before taxes and
extraordinary expense ... 0.5 0.7 3.8 3.9 5.9 2.9
Taxes on income ........... 0.2 0.3 1.6 1.6 2.5 1.2
-------- ------------ -------- ------------ -------- ------------
Income before
extraordinary expense ... 0.3 0.4 2.2 2.2 3.4 1.7
Extraordinary expense,
net....................... -- -- -- -- -- --
Net income ................ $ 0.3 0.4% $ 2.2 2.2% $ 3.4 1.7%
======== ============ ======== ============ ======== ============
Other Non-GAAP Financial
Data:
EBITDA .................... $ 3.0 4.9% $ 8.4 8.6% $ 17.3 8.4%
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
NINE MONTHS ENDED APRIL
-------------------------------------------
1996 1997
--------------------- ---------------------
PERCENT OF PERCENT OF
AMOUNT NET SALES AMOUNT NET SALES
-------- ------------ -------- ------------
<S> <C> <C> <C> <C>
Net sales ................. $138.5 100.0% $189.2 100.0%
Cost of goods sold ........ 110.2 79.5 149.2 78.8
-------- ------------ -------- ------------
Gross profit .............. 28.3 20.5 40.0 21.2
Selling, general and
administrative expenses .. 21.3 15.4 28.4 15.1
-------- ------------ -------- ------------
Income from operations ... 7.0 5.1 11.6 6.1
Interest expense .......... 4.5 3.3 6.8 3.6
-------- ------------ -------- ------------
Income before taxes and
extraordinary expense ... 2.5 1.8 4.8 2.5
Taxes on income ........... 1.0 0.7 2.0 1.1
-------- ------------ -------- ------------
Income before
extraordinary expense ... 1.5 1.1 2.8 1.4
Extraordinary expense,
net....................... -- -- 3.5 1.8
Net income ................ $ 1.5 1.1 $ (0.7) (0.4)%
======== ============ ======== ============
Other Non-GAAP Financial
Data:
EBITDA .................... $ 10.1 7.3% $ 15.1 8.0%
</TABLE>
NINE MONTHS ENDED APRIL 27, 1997 COMPARED TO NINE MONTHS ENDED APRIL 28, 1996
The Company's net sales increased $50.7 million, or 36.6%, to $189.2
million in the nine months ended April 27, 1997 compared to $138.5 million in
the nine months ended April 28, 1996. Approximately 90% of the increase
reflects nine months of results of operations for the Chesapeake and James
River acquisitions during the 1997 period versus four months of results of
operations of Chesapeake during the 1996 period. The Company did not own the
James River acquisition during the 1996 period. During the nine months ended
April 27, 1997, average selling prices declined approximately 10% and 18% in
the consumer and institutional markets, respectively, reflecting competitive
market conditions and lower average raw materials costs.
Cost of goods sold increased $39.0 million, or 35.4%, to $149.2 million in
the nine months ended April 27, 1997 compared to $110.2 million in the nine
months ended April 28, 1996. Approximately 90% of the increase reflects nine
months of results of operations for the Chesapeake and James River
acquisitions during the 1997 period versus four months of results of
operations of Chesapeake during the 1996 period. The Company did not own the
James River acquisition during the 1996 period. Cost of goods sold as a
percentage of net sales decreased slightly from 79.5% in the nine months
ended April 28, 1996 to 78.8% in the nine months ended April 27, 1997. This
decrease was due to improved fixed overhead costs absorption, particularly at
the Fonda division, and lower average raw materials costs which declined
about 10% during the period. The higher sales levels and lower cost of goods
sold as a percentage of net sales contributed to the increase in gross profit
of $11.7 million, or 41.3%, to $40.1 million in the nine months ended April
27, 1997 compared to $28.3 million in the nine months ended April 28, 1996.
As a percentage of net sales, gross profit improved from 20.5% in the nine
months ended April 28, 1996 to 21.2% in the nine months ended April 27, 1997.
Selling, general and administrative expenses increased $7.2 million, or
33.7%, to $28.5 million in the nine months ended April 27, 1997 compared to
$21.3 million in the nine months ended April 28, 1996. This increase was due
primarily to the incurrence of additional expenses and corporate overhead
assumed in connection with the acquisitions completed during Fiscal 1996. As
a percentage of net sales, selling, general and administrative expenses
decreased from 15.4% in the nine months ended April 28, 1996 to 15.0% during
the nine months ended April 27, 1997.
39
<PAGE>
Operating income increased $4.5 million, or 64.4%, to $11.6 million in the
nine months ended April 27, 1997 compared to $7.0 million in the nine months
ended April 28, 1996. As a percentage of net sales, operating income
increased from 5.1% in the nine months ended April 28, 1996 to 6.1% during
the nine months ended January 27, 1997. This increase reflects the decrease
in cost of goods sold and selling, general and administrative expenses as a
percentage of net sales.
Interest expense increased $2.3 million, or 49.8%, to $6.8 million in the
nine months ended April 27, 1997 compared to $4.5 million in the nine months
ended April 28, 1996. This increase was due primarily to higher borrowings
related to the acquisitions made during Fiscal 1996 and the issuance of the
Old Notes.
Income before income taxes and extraordinary expenses increased to $4.8
million in the nine months ended April 27, 1997 from $2.5 million in the nine
months ended April 28, 1996. This increase was due principally to increased
operating income arising from the acquisitions made during Fiscal 1996. The
Company's provision for income taxes remained unchanged at 42% of income
before income taxes.
The Company incurred extraordinary expenses in connection with the
repayment of debt consisting of the write-off of unamortized debt issuance
costs related to the debt being repaid, elimination of unamortized discount
on debt being repaid, and prepayment penalties on early retirement of debt
totaling approximately $6.0 million. The after tax effect of this
extraordinary item was $3.5 million. The extraordinary item resulted in a net
loss of $0.7 million during the nine months ended April 27, 1997 compared to
net income of $1.5 million during the nine months period ended April 28,
1996.
FISCAL 1996 COMPARED TO FISCAL 1995
The Company's net sales increased $107.8 million, or 111.1%, to $204.9
million in Fiscal 1996 compared to $97.1 million in Fiscal 1995.
Approximately 70% of this increase reflects a full year's results of
operations for the Hoffmaster division, which also includes seven months of
results of operations for the Chesapeake acquisition. Approximately 7% of
this increase is attributable to about three months of results of operations
of the James River California and Natural Dam businesses, which were acquired
by the Company in May 1996. Sales growth was also driven by a 13% increase in
shipments by the Fonda division, which is primarily due to improved
integration and marketing efforts, and a 5% increase in selling prices.
Cost of goods sold increased by $85.0 million, or 111.5%, to $161.3
million in Fiscal 1996 from $76.3 million in Fiscal 1995. Approximately 70%
of this increase reflects a full year's results of operations for the
Hoffmaster division, which also includes seven months of results of
operations for the Chesapeake acquisition. Cost of goods sold as a percentage
of net sales remained constant from Fiscal 1995 to Fiscal 1996 at
approximately 78.6%. The inclusion of the Hoffmaster division results offset
an increase in cost of goods sold as a percentage of sales at the Fonda
division. In the first half of Fiscal 1996, the Company experienced increased
raw material costs as a result of continuous price increases during 1995,
which affected the Fonda division. Raw material costs stabilized and began to
decline in the latter part of Fiscal 1996 but nevertheless increased
approximately 15% during the year. The Company's gross profit increased $22.8
million, or 109.4%, to $43.6 million in Fiscal 1996 from $20.8 million in
Fiscal 1995. Gross profit as a percentage of net sales during Fiscal 1996
remained relatively constant at approximately 21.4% as compared with Fiscal
1995.
Selling, general and administrative expenses increased $15.6 million, or
110.7%, to $29.7 million in Fiscal 1996 compared to $14.1 million in Fiscal
1995 primarily as a result of the incurrence of additional expenses assumed
in connection with the acquisitions of Chesapeake and Maspeth, as well as a
full year's results for the Hoffmaster division. As a percentage of net
sales, however, selling, general and administrative expenses remained
relatively constant at approximately 14.5%.
Operating income increased $7.2 million, or 106.6%, to $13.9 million in
Fiscal 1996 from $6.7 million in Fiscal 1995. As a percentage of net sales,
operating income remained unchanged at 6.9%. Costs of integrating the
Chesapeake and Maspeth acquisitions and slightly lower selling prices were
offset by cost savings achieved in overhead reduction, improved fixed cost
absorption and lower procurement costs.
40
<PAGE>
EBITDA increased $8.9 million, or 106.6%, to $17.3 million in Fiscal 1996
from $8.4 million in Fiscal 1995 for the reasons stated above. Depreciation
and amortization increased from $1.7 million in Fiscal 1995 to $3.5 million
in Fiscal 1996 primarily as a result of the Acquisitions.
FISCAL 1995 COMPARED TO FISCAL 1994
The Company's net sales increased $35.3 million, or 57.0%, to $97.1
million in Fiscal 1995 from $61.8 million in Fiscal 1994. Approximately 70%
of the increase was due to the acquisition of Hoffmaster on March 31, 1995
and the inclusion of four months of results of operations in Fiscal 1995. At
the Fonda division, a 30% increase in average selling prices was offset by a
9% volume decline. The decline in volume reflects the Company's goal of
eliminating lower margin business.
Cost of goods sold increased $24.7 million, or 47.7%, to $76.3 million in
Fiscal 1995 from $51.6 million in Fiscal 1994. The Hoffmaster acquisition
represented about 72% of such increase. Average raw material costs at the
Fonda division, which increased approximately 32% during the year, also
contributed to the increase in cost of goods sold. Selling prices at the
Fonda division rose about 30% in response to higher raw material costs. Cost
of goods sold as a percentage of net sales decreased from 83.5% in Fiscal
1994 to 78.6% in Fiscal 1995. The primary reason for the decline was the
higher margin business contributed by Hoffmaster during the fiscal year.
Gross profit increased $10.6 million, or 104.2%, to $20.8 million in Fiscal
1995 compared to $10.2 million in Fiscal 1994. Gross profit as a percentage
of net sales increased to 21.4% in Fiscal 1995 from 16.5% in Fiscal 1994.
This improvement was primarily due to the Hoffmaster acquisition and was
positively affected by improved operating margins at the Fonda division.
Selling, general and administrative expenses increased $5.7 million, or
67.2%, to $14.1 million in Fiscal 1995 from $8.4 million in Fiscal 1994.
Selling, general and administrative expenses as a percentage of net sales
increased to 14.5% in Fiscal 1995 from 13.7% in Fiscal 1994. This increase
was primarily due to the inclusion of Hoffmaster selling expenses. In
addition, Hoffmaster sells higher value-added products which require
increased selling efforts.
Operating income increased $4.9 million, or 281.7%, to $6.7 million in
Fiscal 1995 compared to $1.8 million in Fiscal 1994. As a percentage of net
sales, operating income increased to 6.9% in Fiscal 1995 from 2.8% in Fiscal
1994. This improvement was primarily due to a combination of higher volumes
and margins at the Fonda division and the inclusion of four months of
Hoffmaster results.
EBITDA increased $5.4 million, or 178.9%, to $8.4 million in Fiscal 1995
from $3.0 million in Fiscal 1994 for the reasons stated above. Depreciation
and amortization increased from $1.2 million in Fiscal 1994 to $1.7 million
in Fiscal 1995.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company has relied on cash flows from operations and
borrowings to finance its working capital requirements, capital expenditures
and acquisitions.
Net cash provided by operating activities for the nine months ended April
27, 1997 was $0.4 million compared to net cash provided by operating
activities of $14.8 million for the nine months ended April 28, 1996. The
higher level of net cash provided by operating activities during the nine
months ended April 28, 1996 reflects the consolidation of the working capital
assets acquired prior to such period. Net cash provided by operating
activities for Fiscal 1996 was $17.7 million compared to $4.8 million net
cash used in operating activities for Fiscal 1995. This increase was
primarily due to an increase in net income and a reduction in the level of
accounts receivable and an increase in accounts payable and accrued expenses.
Net cash used in investing activities for the nine months ended April 27,
1997 was $9.5 million compared to net cash used in investing activities of
$38.4 million for the nine months ended April 28, 1996. The higher level of
net cash used in investing activities during the nine months ended April 28,
1996 was due primarily to payments made by the Company in connection with the
Fiscal 1996 Acquisitions. Net cash used in investing activities for Fiscal
1996 was $46.5 million compared to $29.6 million for Fiscal 1995. This
increase is primarily a result of the payment for the Fiscal 1996
Acquisitions.
41
<PAGE>
Capital expenditures for the nine months ended April 27, 1997 were $3.5
million as compared to $1.0 million for the nine months ended April 28, 1996.
The capital expenditures made in such periods were used primarily for routine
capital improvements. Capital expenditures for Fiscal 1996 were $1.3 million
compared to $1.6 million for Fiscal 1995. Estimated capital expenditures for
Fiscal 1997 will be approximately $14.3 million, approximately $10.0 million
of which is expected to be used to complete the installation of an existing
paper machine at Natural Dam. The paper machine was partially installed by
James River prior to the Company's acquisition of Natural Dam. When such
machine is operational the Natural Dam mill's production capacity is expected
to double, providing the Company flexibility to vertically integrate its
tissue-based products and the opportunity to participate in a number of
specialty markets that historically have been served by Natural Dam.
Estimated capital expenditures for Fiscal 1997 will be financed by a portion
of the net proceeds of the offering of the Old Notes.
Net cash provided by financing activities for the nine months ended April
27, 1997 was $31.7 million compared to net cash provided by financing
activities of $23.9 million for the nine months ended April 28, 1996. The net
cash provided by financing activities during the nine months ended April 27,
1997 was primarily the result of the proceeds from the issuance of the Old
Notes exceeding the amount of debt repaid, while the net cash provided
financing activities during the nine months ended April 28, 1996 primarily
reflected borrowings to fund two of the acquisitions that the Company
consummated in fiscal 1996. Net cash provided by financing activities for
Fiscal 1996 was $30.2 million compared to $34.3 million for Fiscal 1995. This
increase primarily reflected borrowings to fund the Acquisitions and related
working capital needs.
In connection with the consummation of the Company's issuance and sale of
the Old Notes, on February 27, 1997, the Company repaid the Term Loans and
the Old Credit Facility and entered into the New Credit Facility which
provides a total borrowing capacity of up to $50.0 million through a
revolving credit facility, subject to borrowing base limitations, to finance
the Company's working capital needs and acquisitions. The New Credit Facility
will mature in March 2000. Pursuant to the New Credit Facility, the Company
is subject to certain affirmative and negative covenants customarily
contained 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) granting or incurrence of liens to secure other
indebtedness, (vii) prepayment or modification of the terms of subordinated
indebtedness and (viii) engaging in transactions with affiliates. In
addition, the New Credit Facility requires that the Company satisfy certain
financial covenants similar to those in the Indenture and maintain an
interest coverage ratio of not less than 1.75 to 1.0 for the first fiscal
year following the issuance of the Old Notes and 2.0 to 1.0 for each year
thereafter. The New Credit Facility also provides for customary events of
default. See "Description of Certain Indebtedness." The New Credit Facility
is expected to be undrawn as of the consummation of the Exchange Offer.
On February 27, 1997, the Company issued $120 million aggregate principal
amount of Old Notes. The Old Notes bear interest at a rate of 9 1/2% per
annum, payable semi-annually in arrears on March 1 and September 1 of each
year beginning September 1, 1997. The Old Notes will mature on March 1, 2007.
See "Prospectus Summary--Issuance of the Old Notes."
During Fiscal 1996, the Company did not incur material costs for
compliance with environmental laws and regulations.
Following the issuance of the Old Notes, the Company believes that cash
generated by operations, combined with amounts available under the New Credit
Facility, will be sufficient to meet its capital expenditure needs, debt
service requirements and working capital needs for the foreseeable future.
The Company may need to obtain additional financing to pursue additional
acquisitions; however, there can be no assurance that the Company will be
able to obtain such financing or on terms favorable to the Company.
42
<PAGE>
BUSINESS
GENERAL
The Company believes it is a leading converter and marketer of a broad
line of disposable paper food service products. The Company sells its
products under both branded and private labels to the consumer and
institutional markets and participates at all major price points. The Company
believes it is a market leader in the sale of premium white, colored and
custom-printed napkins, placemats, tablecovers and food trays and in the sale
of private label consumer paper plates, bowls and cups. The Company's
Sensations, Splash(Registered Trademark) and Party Creations(Registered
Trademark) brands are well recognized in the consumer markets and its
Hoffmaster(Registered Trademark) brand is well recognized in the
institutional markets.
During the past two years, the Company has grown rapidly, principally
through the completion of the Acquisitions. As the Company completes the
integration of the Acquisitions, it expects to continue to improve
manufacturing efficiencies, achieve further cost savings and increase
profitability. As evidence of the Company's rapid growth, its net sales, net
income and EBITDA increased from $61.8 million, $0.3 million and $3.0
million, respectively, in Fiscal 1994 to $204.9 million, $3.4 million and
$17.3 million, respectively, in Fiscal 1996. For Fiscal 1996, after giving
pro forma effect to the Fiscal 1996 Acquisitions, the Company would have had
net sales of $262.5 million, net income of $4.3 million and EBITDA of $24.2
million.
The Company offers a broad range of products, enabling it to offer its
customers "one-stop" shopping for their disposable food service product
needs. The Company's principal products include (i) paperboard products, such
as white, colored and printed paper plates and bowls (approximately 31% of
gross sales), paper cups for both hot and cold drinks (approximately 10%),
handled food pails for take-out food and food trays (approximately 6%); (ii)
tissue products, such as printed and solid napkins (approximately 21%) and
printed and solid paper tablecovers and crepe paper (approximately 9%); (iii)
specialty products, such as placemats (approximately 9%), doilies, tray
covers and fluted products including baking cups (approximately 8%); and (iv)
products for resale, such as plastic cutlery, coasters, plastic cups and
plastic toothpicks (approximately 6%). See "--Products." The Company is
principally a converter and marketer of paperboard and tissue products, the
prices of which typically follow the general movement in the costs of such
principal raw materials. The Company believes it is generally able to
maintain relatively stable margins between its selling prices and its raw
materials costs.
According to the Pulp & Paper Fact Book published by Miller Freeman
(1996), growth in unit production of disposable paper food service products
has been relatively stable during the past decade and tracks the growth of
end-users of these products. The Company believes recent growth in the
disposable paper food service products industry has been and will continue to
be influenced principally by increased away-from-home dining, take-out
convenience and sanitary considerations. In addition, management believes
that the industry has experienced consolidation in recent years and will
further consolidate over the next several years as smaller local and regional
competitors experience greater difficulty competing with larger national
competitors. The Company believes that it is well positioned to take
advantage of and benefit from this consolidation.
The Company sells its products to more than 2,500 consumer and
institutional customers located throughout the United States and has
developed and maintained long-term relationships with many of these
customers. The Company's consumer customers include (i) supermarkets, (ii)
mass merchandisers, and (iii) warehouse clubs and other retailers. The
Company's institutional customers include major food service distributors, as
well as restaurants, schools, hospitals and other major institutions with
dining facilities.
COMPETITIVE STRENGTHS
Management believes the Company has a leading competitive position in the
disposable paper food service products industry for the following reasons:
o Broad Product Offering. The Company believes that its product
offering is one of the broadest
43
<PAGE>
in the industry, competing across all major price points of the
markets it serves and that it is the only company that offers a
full selection of premium products as well as a full line of
private label products. The Company offers its products in a wide
range of colors, designs and graphics which are often printed to
the customer's specifications. The Company owns and operates one of
only three mills in the United States currently producing specialty
and deep-tone colored tissue.
The Company's diverse and expansive product offering allows it to
better serve its customers with "one-stop" shopping and enables
both the Company and its customers to differentiate themselves from
their respective competitors. As the industry continues to
experience greater customer concentration resulting from a
consolidation of distributors and retail outlets, as well as an
increase in sales to the mass merchandiser and discount retailer
distribution channels, the Company believes that its broad product
offering and the benefits it provides are a competitive advantage.
In addition, the Company believes that its broad product offering
enables it to increase shelf space with its customers.
o Extensive Distribution Network and Strong Focus on Customer
Service. The Company has an extensive network of distributors,
brokers and direct sales accounts in both the institutional and
consumer markets. Because of the Company's multiple distribution
channels, it can adapt its distribution capabilities to meet each
customer's individual needs and preferences. The Company also has
established long-term relationships, some as long as 25 years, with
some of the food service industry's leading companies as a result
of consistently providing high quality products and services. As a
result of the Company's recent Acquisitions, the Company has
increased its manufacturing, distribution and warehouse facilities
from four locations primarily in the eastern United States to nine
locations throughout the United States. This provides the Company
with the ability to be more responsive and otherwise provide better
service to its customers, particularly national and regional
accounts.
o Experienced Management Team. The Company's top four senior
operating managers average over 15 years of experience in the food
service industry. The Company's management has developed long-term
relationships with its customers and suppliers and has a proven
track record in identifying, completing and integrating strategic
acquisitions.
BUSINESS AND GROWTH STRATEGY
The Company believes that it can maintain and improve its position in the
disposable paper food service products industry by (i) selectively pursuing
and successfully integrating strategic acquisitions, (ii) continuing to
provide value-added products and services, (iii) continuing to be responsive
to customer demands and (iv) increasing its production of specialty and
deep-tone colored tissue. The Company will pursue its growth strategy
through:
o Strategic Acquisitions. The Company targets acquisitions for their
ability to complement and broaden existing product lines, penetrate
additional end-use markets, strengthen existing market positions,
expand the Company's geographic scope and provide manufacturing,
sales and marketing economies. When integrating acquisitions, the
Company seeks to (i) reduce manufacturing and production costs
through the elimination of redundant facilities, the consolidation
of overhead and the more efficient use of its manufacturing
equipment; (ii) achieve sales and marketing economies of scale
through consolidation; (iii) reduce procurement costs by leveraging
its purchasing power; (iv) improve customer service through
geographic diversification; and (v) increase net sales by
cross-marketing the Company's products to an expanded customer
base.
o Value-Added Products and Services. The Company has focused and
expects to continue to focus on higher margin, value-added products
where it has a competitive advantage while continuing to produce
high volume commodity-oriented product lines. These niche
value-added products include print-to-the-edge napkins and premium
table top products, which are not the principal focus of the
Company's larger competitors. In addition, the Company believes its
processing of custom orders differentiates it from its competitors.
The Company also intends to continue to provide value-added
services, such as EDI capabilities, automatic shipment notification
to
44
<PAGE>
customers, sales training for distributors, promotional support,
brochures and catalogs, state-of-the-art graphics services,
merchandising programs, prompt delivery of products and information
systems that provide detailed sales data to customers.
In order to better serve its customers, the Company is focusing on
the development of new product designs, increasing brand awareness
and channel marketing. Management believes that new product designs
provide customers recognized value by offering alternatives in
color and style. In addition, the Company believes that its brand
names are associated with high quality products. The Company
supports its brand identity and private label program through
enhanced packaging and promotion. Products and programs will be
developed for specific distribution channels. Additionally, the
Company seeks, through its direct sales force, to create
"pull-through" demand by marketing directly to end-users in order
to create additional demand from institutional distributors for the
Company's products.
o Natural Dam Expansion. The Company expects to complete the
installation of an existing second paper machine at the Company's
Natural Dam mill by the end of 1997 which will produce specialty
and deep-tone colored tissue paper, the primary raw material used
in the conversion of colored napkins and tablecovers. This
expansion is expected to (i) double the mill's production capacity;
(ii) significantly lower its unit cost of production; and (iii)
provide the Company with greater operating flexibility to source
tissue paper for its own converting operations as well as sell
specialty tissue to third parties.
PRODUCTS
General. The Company classifies its products into four categories: (i)
paperboard products, such as white, colored and printed paper plates and
bowls, paper cups for both hot and cold drinks, handled food pails for
take-out food and food trays; (ii) tissue products, such as printed and solid
napkins, printed and solid paper tablecovers and crepe paper; (iii) specialty
products, such as placemats, doilies, tray covers and fluted products
including baking cups; and (iv) products for resale, such as plastic cutlery,
coasters, plastic cups and plastic toothpicks. The Company's premium products
include colored and custom printed napkins and placemats. The Company
currently has over 8,000 SKUs. The Company believes it holds one of the top
three market positions in white paper plates, decorated plates, bowls and
cups in the consumer market, as well as in food pails, trays and premium
napkins in the institutional market. These products are sold nationwide to
supermarkets, restaurants franchises, discount store chains and major food
distributors.
45
<PAGE>
The following table illustrates the Company's growth and diversification
of product lines from Fiscal 1994, prior to the Acquisitions, to Fiscal 1996:
<TABLE>
<CAPTION>
FISCAL 1994 FISCAL 1996(1)
-------------------------- --------------------------
(DOLLARS IN MILLIONS)
PRODUCT CATEGORY GROSS SALES % OF TOTAL GROSS SALES % OF TOTAL
- -------------------- ------------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
PAPERBOARD
Plates and bowls .. $37.6 58.2% $ 68.9 31.6%
Paper cups ........ 15.3 23.7 20.9 9.6
Trays ............. 4.9 7.6 7.3 3.3
Pails ............. 6.1 9.4 5.1 2.3
Cans .............. 0.7 1.1 0.6 0.3
TISSUE
Napkins ........... -- -- 45.2 20.7
Tablecovers ....... -- -- 12.6 5.8
Crepe Rolls ....... -- -- 1.1 0.5
Tissue Parent Rolls -- -- 4.7 2.2
Crepe Parent Rolls -- -- 1.0 0.4
SPECIALTY
Placemats ......... -- -- 19.4 8.9
Doilies ........... -- -- 4.5 2.1
Portion cups/fluted -- -- 13.4 6.2
RESALE AND OTHER
Cutlery ........... -- -- 1.3 0.6
Other ............. -- -- 11.9 5.5
------------- ------------ ------------- ------------
TOTAL............. $64.6 100.0% $217.9 100.0%
============= ============ ============= ============
<FN>
- ------------
(1) Does not give pro forma effect to the Fiscal 1996 Acquisitions prior to
their respective acquisition dates.
</TABLE>
PAPERBOARD PRODUCTS
Paper Plates and Bowls. Paper plates and bowls, which represent the
largest portion of the Company's sales, are sold primarily to the consumer
market. These products include coated and uncoated white plates, decorated
plates and bowls. The plates range in size from a four inch square to a 10
1/4 inch diameter round. The bowls include seven ounce and 12 ounce sizes.
Uncoated and coated paper plates are considered commodity items and are
generally purchased by cost-conscious consumers for everyday use. Printed and
decorated plates and bowls, which are typically in lower count packages, are
sold for everyday use as well as for parties and seasonal celebrations, such
as Halloween and Christmas.
Paper Cups. Paper cups, which range in size from three ounces to 46
ounces, are sold to both the consumer and institutional markets. The Company
offers a number of attractive cup and lid combinations for both hot and cold
beverages. Cups for the consumption of cold beverages are generally wax
coated for superior rigidity, while cups for the consumption of hot beverages
are made from paper which is poly-coated on one side to provide a barrier to
heat transfer. Printed cups are often used as promotional items by the
Company's customers.
Take-Out Containers. Trays, which range in size from four ounces to 10
pounds, are sold to the institutional markets customers and are used
primarily for the take-out of fast foods. Food pails, which range in size
from eight ounces to 64 ounces, are sold exclusively to the institutional
market and are used primarily by restaurants for take-out meals.
TISSUE PRODUCTS
Napkins. Napkins represent the second largest portion of the Company's
sales. Napkins are sold under the Company's Hoffmaster(Registered Trademark),
Fonda, Sensations, Splash(Registered Trademark) and Party
Creations(Registered Trademark) brand names, as well
46
<PAGE>
as under national distributor brand names. The Company believes its brand
names are well established and are widely considered to be among the leading
brands in the consumer and institutional food service markets. Napkin
products range from decorated-colored, multi-ply napkins and simple custom
printed napkins featuring an end-user's name or logo to fully printed,
graphic-intensive napkins for the premium paper goods sector. Hoffmaster is a
line of premium quality one-, two-, three-, and four-ply napkins that
coordinate with printed and solid paper placemats, paper plates, paper cups,
paper and plastic tablecovers, plastic cutlery and crepe paper.
Tablecovers. Tablecovers represent one of the Company's fastest growing
product segments, ranging from economy to premium product lines. Tablecovers
are sold under the Hoffmaster(Registered Trademark), Linen-Like,
Windsor(Registered Trademark), Sensations, Splash(Registered Trademark) and
Party Creations(Registered Trademark) brand names. The Company has a broad
selection of tablecovers in one-, two-, and three-ply configurations.
Tablecovers, in rolled and folded package formats, are produced in white,
solid color and one-to-four-colored printed products. These tablecovers are
matched in color and design with the Company's napkins, placements, cups,
plates, plastic cutlery and crepe paper. Linen-Like is a premium line of
tablecovers, currently sold to institutional customers as a linen
replacement.
Crepe. Rolled crepe paper complements the Company's offering of disposable
tableware products. Originally sold only in the consumer market, the Company
has expanded crepe products to the Company's institutional seasonal product
lines. The Company is vertically integrated in crepe products and uses the
beater-dyed process, at its Natural Dam mill, which makes colored crepe
products bleed-resistant to moisture. Crepe products are sold under the
Hoffmaster(Registered Trademark), Splash(Registered Trademark) and Party
Creations(Registered Trademark) brand names. In addition to solid color crepe
paper products, the Company produces printed crepe paper in seasonal and
themed product offerings. The Company believes it can produce higher quality
crepe products than its competitors because it controls all parts of the
crepe production process, from paper making to converting and packaging.
SPECIALTY PRODUCTS
Placemats. Placemats and traycovers are available in a variety of shapes
and sizes. The Company owns 30 different die shapes which create unique
decorated placemats in shapes such as flags, pumpkins, fish, seashells and
farm animals. These unusual shapes attract interest because they allow
customers to individualize their placemats by focusing on a particular theme,
season or holiday. In addition to placemats, the Company uses a proprietary
technology to produce non-skid traycovers that serve the particular needs of
the airline and healthcare industries. These traycovers, made from both
recycled and virgin paper, can be printed with up to four colors and
coordinated with printed or solid napkins.
Specialty Tissue. Natural Dam manufactures unconverted deep-tone,
multi-ply tissue, a primary raw material used in the conversion of napkins
and tablecovers by the Hoffmaster division. Approximately 55% of the
production from Natural Dam is sold to converters of specialty tabletop
products, of which approximately 20% is sold to Hoffmaster and Chesapeake.
Prior to their acquisition by the Company, Hoffmaster and Chesapeake were and
continue to be Natural Dam's largest customers. The remaining 45% of
production is customized specialty products sold to converters of disposable
products used in the medical, hygienic, industrial and other markets.
Products such as electrical insulating tissue, filter media, waxing tissue
base, surgical face mask and blood wadding, as well as other products, are
also manufactured at Natural Dam.
Doilies. Paper doilies are used as decorative items by the food service
industry. The Company offers numerous different styles of paper lace doilies
that are used primarily to enhance the visual appeal of foods, fine china and
glassware in upscale restaurants and hotels.
Portion Cups and Fluted Products. Portion cups and fluted products are
offered in a variety of sizes and shapes. Portion cups range in size from 0.5
to 5.5 ounces and are pleated and wax-coated for extra strength. Portion cups
are typically used for dispensing condiments, medicines, liquids and other
items where portion control is important. Fluted products also come in a
variety of sizes and are used as baking cups for muffins and as trays for
fast-foods.
47
<PAGE>
PRODUCTS FOR RESALE
In an effort to offer its customers the convenience of "one-stop"
shopping, the Company purchases products which it does not manufacture, and
offers such products for resale. These products round out the Company's
complete product line and include plastic cutlery, coasters, plastic cups,
plastic plates, wooden and plastic sandwich picks, special occasion
invitations and paravors. The Company believes that it has lowered the costs
of these purchased items by leveraging its buying power as a result of the
Acquisitions.
MARKETING AND SALES
Marketing. The Company's marketing efforts are principally focused on (i)
providing value-added services, including EDI capabilities, automatic
shipment notification to customers, sales training for distributors,
promotional support, brochures and catalogs, state-of-the-art graphics
services, merchandising programs, prompt delivery of products and information
systems that provide detailed sales data to customers; (ii) category
expansion by cross marketing products between the consumer and institutional
markets; (iii) development of new graphic designs which the Company believes
will offer consumers recognized value; and (iv) increasing brand awareness
through enhanced packaging and promotion. The marketing group, together with
its customers, conducts product trial tests to gather consumer feedback and
improve product salability. The seasonal product marketing programs promote
the Company's sophisticated graphic art capabilities and encourage customers
to supplement their regular purchases with premium-quality seasonal items.
The marketing group coordinates the projects of 14 artists and designers
in the Company's art department. The art department has state-of-the-art
graphic capabilities, including computer-aided design systems and lithograph
plate making capabilities, which allow the Company to compete effectively in
the custom printed napkin market. The Company also benefits from its
extensive design library.
The Company sells its products through a 50-person sales organization and
independent brokers. The Company believes that its experienced sales team and
its ability to provide high levels of customer service enhances the Company's
long-term relationships with its customers. The Company sells to more than
2,500 institutional and consumer customers located throughout the United
States.
Institutional Market. Restaurants, schools, hospitals and other major
institutions comprise the institutional market. This market represented
approximately 55% of the Company's net sales in Fiscal 1996. The
institutional market is serviced by dedicated field service representatives
located throughout the United States under the direction of five dedicated
sales managers. The field sales force works directly with these national and
regional distributors to service the needs of the various segments of the
food service industry. The field sales force serves four primary functions:
(i) to work with distributors' own sales representatives to increase demand
for the Company's products; (ii) to make direct sales calls with
distributors; (iii) to keep distributors' sales representatives knowledgeable
about the Company's new products; and (iv) to demonstrate to end-users the
value added by the Company's customized color printing capabilities for table
top products. These functions also help to create "pull-through" demand for
the Company's products.
Consumer Market. Supermarkets, discount chains and other retail stores
comprise the consumer market. This market represented approximately 45% of
the Company's net sales in Fiscal 1996. The Company's consumer market is
classified into four distribution channels: (i) the grocery channel, which is
serviced through a national and regional network of brokers, (ii) the retail
mass merchant channel, which is serviced directly by field service
representatives, (iii) the specialty (party) channel, a new channel of
distribution, which is serviced through both national and regional networks
of brokers and directly by field service representatives and (iv) the
warehouse club channel, also a new channel of distribution, which is serviced
through both national and regional networks of brokers and directly by field
service representatives. Each channel is managed by a Sales Director who is
responsible for all product sales in that channel. The Company's broker
relationships are managed by eight regional managers who have an average of
20 years of experience selling service products.
As a result of the Acquisitions, the Company has experienced an increase
in sales to existing customers and additional product opportunities in
markets in which it historically had limited penetration.
48
<PAGE>
For example, the Maspeth acquisition provided the Company with access to the
mass merchandising market. In addition, the Company's consumer customer base
has extended into additional channels as a result of product line
enhancements. In this regard, the James River California acquisition afforded
the Company three customers in the warehouse club channel. In order to
eliminate duplicate sales representation with certain customers in connection
with the Acquisitions, the Company has also reorganized its consumer sales
and marketing efforts to be more responsive to the marketplace.
In Fiscal 1996, the Company's five largest customers represented
approximately 21.0% of net sales. During Fiscal 1996, the Company had net
sales to one customer, Sysco Corporation, which accounted for 11.0% of net
sales and less than 10.0% of net sales after giving pro forma effect to the
Fiscal 1996 Acquisitions. The Company sells its products to approximately 60
separate entities owned by Sysco Corporation. Management believes that each
of these entities independently contracts with its suppliers.
DISTRIBUTION
The Company believes that as a result of the Acquisitions, it will be able
to distribute its products more efficiently and cost effectively given the
broader geographic scope of its operations. Each of the Company's
manufacturing facilities includes sufficient warehouse space to store such
facility's raw materials and finished goods. In addition, the Company's
approximately 951,900 total square feet of warehouse space allows for each
warehouse to store products from all of the Company's other manufacturing
facilities. Shipments of finished goods are made from each facility via
common carrier. Raw materials are received (i) by rail or truck in Vermont
and Michigan and (ii) by truck in Florida, Pennsylvania, Wisconsin, New York
and California.
COMPETITION
The disposable food service products industry is highly competitive. The
Company believes that competition is principally based on product quality,
customer service, price and graphics capability. Competitors include large
multinational companies as well as regional and local manufacturers. The
marketplace for these products is fragmented and includes participants that
compete across the full line of products, as well as those that compete with
a limited number of products. Some of the Company's major competitors are
significantly larger than the Company, are vertically integrated and have
greater access to financial and other resources. Consequently, such
competitors may be able to more effectively compete by offering a broader
range of products to customers.
The Company's primary competitors in the paper plate and cup categories
include Imperial Bondware (a division of International Paper Co.), James
River, AJM Packaging Corp., Temple-Inland Inc., Fold-Pak Corp., Solo Cup Co.
and Sweetheart Cup Co., Inc. Major competitors in the napkin, tablecover,
tray and doily categories include Brooklyn Lace Paper Works, Inc., Duni
Corp., Erving Paper Products Inc., Fort Howard Corp., James River and
Wisconsin Tissue Mills Inc. (a subsidiary of Chesapeake Corporation). The
Company's competitors also include manufacturers of products made from
plastics and foam.
RAW MATERIALS AND SUPPLIERS
Raw materials are a significant component of the Company's cost structure.
Principal raw materials for the Company's paperboard and tissue operations
include solid bleached sulfate paperboard, napkin tissue, bond paper and
waxed bond obtained from major domestic manufacturers. Pulp is the principal
raw material for the Natural Dam facility and is obtained from a number of
suppliers. Other material components include corrugated boxes, poly bags, wax
adhesives, coating and inks. Paperboard, napkin tissue, bond paper and waxed
bond paper is purchased in "jumbo" rolls which may either be slit for in-line
printing and processing, printed and processed or printed and blanked for
processing into final products. The primary supplier of tissue to the
Company, in addition to the Company's Natural Dam mill, is Lincoln Pulp and
Paper Co., Inc. Pursuant to a contract with Lincoln Pulp and Paper Co., Inc.,
as amended, the Company is required to purchase color and white tissue at the
lower of a formula-based price or market price through December 31, 1999.
Primary suppliers of paperboard stock are Georgia-Pacific Corp.,
49
<PAGE>
Temple-Inland Inc., and Gilman Paper Co. The Company has a number of
suppliers for substantially all of its raw materials and believes that
current sources of supply for its raw materials are adequate to meet its
requirements. The Company has reduced raw materials costs by leveraging its
purchasing power as a result of the Acquisitions. The Company purchases the
bulk of its solid bleached sulfate paperboard under long-term contracts.
FACILITIES
The Company has nine converting facilities, which are located in St.
Albans, Vermont; Three Rivers, Michigan; Williamsburg, Pennsylvania;
Jacksonville, Florida; Maspeth, New York; Oshkosh, Wisconsin; Appleton,
Wisconsin; Rancho Dominguez, California; and Gouverneur, New York. During
Fiscal 1996, the converting facilities operated at approximately 70% of total
production capacity. The Company also operates a specialty and deep-tone
colored tissue mill in Gouverneur, New York.
The table below provides summary information regarding the principal
properties owned or leased by the Company.
<TABLE>
<CAPTION>
SIZE
TYPE OF (APPROXIMATE OWNED/
LOCATION FACILITY SQUARE FEET) LEASED PRODUCTS
- ---------------------------- --------------- ------------- -------- --------------
<S> <C> <C> <C> <C>
St. Albans, Vermont ........ Manufacturing 112,500 O Plates,
Warehouse 182,000 L pails,
Office 7,000 O bowls,
trays
Three Rivers, Michigan .... Manufacturing 70,500 O Plates
Warehouse 39,900 O
Office 10,000 O
Williamsburg, Pennsylvania.. Manufacturing 66,000 O(1) Plates,
Warehouse 71,000 O(1) cups
Office 9,000 O(1)
Jacksonville, Florida(2) ... Manufacturing 57,500 L Plates,
Warehouse 10,100 L pails
Office 2,400 L
Maspeth, New York .......... Manufacturing 55,000 L Plates,
Warehouse 70,000 L cups,
Office 5,000 L
Oshkosh, Wisconsin.......... Manufacturing 234,000 O Napkins,
Warehouse 218,000 O placemats,
Office 32,000 O tablecovers,
doilies,
portion cups/
fluted
Appleton, Wisconsin......... Manufacturing 90,300 O Napkins,
Warehouse 168,900 O crepe,
Office 8,500 O tablecovers
Rancho Dominguez,
California................. Manufacturing 47,400 L Napkins,
Warehouse 49,000 L placemats
Office 7,300 L
Gouverneur, New York........ Manufacturing 88,000 O Tissue,
Warehouse 143,000 O crepe
Office 3,800 O
</TABLE>
- ------------
(1) Subject to capital lease.
(2) Owned by Dennis Mehiel. See "Certain Relationships and Related
Transactions."
50
<PAGE>
The Company hosts a co-generation facility on its property in Gouverneur,
New York which produces steam for internal use at the Natural Dam mill and
which is expected to provide significant cost savings to the Company. The
Company will receive all of its steam energy requirements at 50% of
historical cost in 1997 and at no cost for the next 40 years thereafter, and
the Company will receive land lease payments from the operator of the land
occupied by the co-generation facility.
ENVIRONMENTAL MATTERS
The Company and its operations are subject to comprehensive and frequently
changing Federal, state, local and foreign environmental and occupational
health and safety laws and regulations, including laws and regulations
governing emissions of air pollutants, discharges of waste and storm water,
and the disposal of hazardous wastes. The Company is subject to liability for
the investigation and remediation of environmental contamination (including
contamination caused by other parties) at properties that it owns or operates
and at other properties where the Company or its predecessors have arranged
for the disposal of hazardous substances. As a result, the Company is
involved from time to time in administrative and judicial proceedings and
inquiries relating to environmental matters. The Company believes that there
are currently no pending investigations at the Company's plants and sites
relating to environmental matters. However, there can be no assurance that
the Company will not be involved in any such proceeding in the future and
that any amount of future clean up costs and other environmental liabilities
will not be material.
The Company cannot predict what environmental legislation or regulations
will be enacted in the future, how existing or future laws or regulations
will be administered or interpreted or what environmental conditions may be
found to exist. Enactment of more stringent laws or regulations or more
strict interpretation of existing laws and regulations may require additional
expenditures by the Company some of which could be material.
LEGAL PROCEEDINGS
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.
In connection with the Company's acquisition of Hoffmaster, the Company
brought a civil action in the United States District Court for the Eastern
District of Pennsylvania against the Foodservice Division of Scott Paper
Company ("Scott") alleging, among other things, breach of warranty, fraud and
negligent misrepresentation for Scott's alleged failure to disclose certain
raw material pricing information. In September 1996, a jury awarded the
Company compensatory damages of $3.3 million, punitive damages of $750,000
and pre-judgment interest of $436,123. Scott has appealed the award. The
appeal is currently pending in the United States Court of Appeals for the
Third Circuit. There can be no assurance that such award will be upheld or
that the Company will receive all or any portion of such judgment.
EMPLOYEES
As of January 26, 1997, the Company employed 1,550 persons consisting of
1,209 hourly and 341 salaried workers. Approximately 98% of the Company's
hourly employees are represented by the United Paperworkers International
Union. The current labor agreements expire on January 31, 1998 at St. Albans;
August 31, 1997 at Three Rivers; March 31, 1999 at Appleton; November 30,
1997 at Maspeth; October 31, 1997 at Rancho Dominguez; and November 28, 1998
at Gouverneur. The labor agreements at Williamsburg and Oshkosh expired on
June 7, 1997 and May 31, 1997, respectively. At both locations, the employees
are continuing to work under the terms of the expired agreements and are
expected to do so until new agreements are executed or specifically
terminated. There can be no assurance that the Company will be successful in
renegotiating such agreements. The facility in Jacksonville, Florida is not
covered by a labor agreement. Since 1989, the Company has not experienced any
work stoppages or
51
<PAGE>
curtailment of operations due to a labor dispute, other than a one-month work
stoppage at the Three Rivers facility in August 1996. Operations were
maintained during the time of the walkout, and the Company negotiated a
one-year extension until August 31, 1997 that gives the Company the
flexibility to close this facility. The Company has not finally decided
whether to close its Three Rivers facility. The Company believes, however,
that such a closing or any further work stoppages at this facility would not
have a material adverse effect on the financial condition or results of
operations of the Company. The Company considers its relationship with its
employees to be good.
52
<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 ......... 55 Chairman and Chief Executive Officer
Thomas Uleau .......... 52 President, Chief Operating Officer and Director
Hans Heinsen .......... 44 Senior Vice President, Chief Financial Officer
and Treasurer
Michael Hastings ...... 50 Senior Vice President and President, Fonda Division
Robert Korzenski ...... 42 Senior Vice President and President, Hoffmaster
Division
Harvey L. Friedman ... 55 Secretary and General Counsel
Alfred B. DelBello ... 62 Vice Chairman
Gail Blanke ........... 49 Director
John A. Catsimitidis . 48 Director
Chris Mehiel .......... 57 Director
Jerome T. Muldowney .. 51 Director
G. William Seawright .. 55 Director
Lowell P. Weicker, Jr.. 65 Director
</TABLE>
DENNIS MEHIEL has been the Chairman and Chief Executive Officer of the
Company since it was purchased in 1988. Since 1966 he has been the Chairman
of Four M, a converter and seller of interior packaging, corrugated sheets
and corrugated containers which he co-founded, and since 1977 (except during
a leave of absence from April 1994 through July 1995) he has been the Chief
Executive Officer of Four M. Mr. Mehiel is also the Chairman of MannKraft
Corporation ("MannKraft"), a manufacturer of corrugated containers, and Chief
Executive Officer and Chairman of CEG.
THOMAS ULEAU has been the President of the Company since January 9, 1997,
the Chief Operating Officer of the Company since 1994 and a Director of the
Company since 1988. Mr. Uleau was Executive Vice President of the Company
from 1994 to 1996 and from 1988 to 1989. He has been Executive Vice President
of CEG since 1996. He served as Executive Vice President and Chief Financial
Officer of Four M from 1989 through 1993 and Chief Operating Officer in 1994.
He is also currently a director of Four M, CEG and MannKraft. Mr. Uleau was
President of Cardinal Container Corporation (which was acquired by Four M in
1985) from 1983 to 1987. He started his career as an accountant at Haskins
and Sells from 1969 to 1971, after which he spent several years in various
capacities at IU International Corp., a transportation and paper products
conglomerate.
HANS HEINSEN has been Senior Vice President and Treasurer since January 9,
1997 and Vice President Finance and Chief Financial Officer of the Company
since May 1996. Prior to joining the Company, Mr. Heinsen spent 21 years in a
variety of corporate finance positions with The Chase Manhattan Bank, N.A.
His experience includes private placements, mergers and acquisitions,
syndications, project finance and leveraged finance.
MICHAEL HASTINGS has been Senior Vice President since January 9, 1997 and
President of the Fonda division since joining the Company in May 1995. From
December 1990 to April 1995, Mr. Hastings served as Vice President of Sales
and Marketing and as a member of the Board of Directors of Anchor Packaging
Company, a manufacturer of institutional films and thermoformed plastic
packaging. Mr. Hastings had previously worked in a variety of positions,
including sales, marketing and plant operations management, at Scott Paper
Company and Thomson Industries CSF S.A.
ROBERT KORZENSKI has been Senior Vice President since January 9, 1997 and
President of the Hoffmaster division since its acquisition by the Company on
March 30, 1995. From October 1988 to March 30, 1995, he served as Vice
President of Operations and Vice President of Sales of Scott Institutional, a
division of Scott Paper Company. Prior to that, he was Director of National
Sales at Thompson Industries.
53
<PAGE>
HARVEY L. FRIEDMAN has been Secretary and General Counsel since May 1996.
He was a Director of the Company from 1985 to January 9, 1997. Mr. Friedman
is also the Secretary and General Counsel of CEG, Four M and MannKraft and is
a Director of CEG. He was formerly a partner in Kramer, Levin, Naftalis &
Frankel, a New York City law firm.
ALFRED B. DELBELLO has served as a Vice Chairman of the Company since
January 9, 1997 and Director of the Company since 1990. Since July 1995, Mr.
DelBello has been a partner at the law firm of DelBello, Donnellan &
Weingarten & Tartaglia, LLP. From September 1992 to July 1995 he was a
partner at the law firm of Worby DelBello Donnellan & Weingarten. Prior
thereto, he had been the President of DelBello Associates, a consulting firm,
since 1985. Mr. DelBello served as Lieutenant Governor of New York State from
1983 to 1985.
GAIL BLANKE has served as a Director of the Company since January 9, 1997.
She has been President of Avon Lifedesigns, a division of Avon Products, Inc.
("Avon"), since March 1995. She also has been Corporate Senior Vice President
of Avon since August 1991. Prior thereto, she held a number of management
positions at CBS, Inc. and served as Manager of Player Promotion for the New
York Yankees. Ms. Blanke is President of the New York Women's Forum and
Chairman of the Board of the Fashion Group International. She is also a
director of the Trickle Up Program and the New York Women's Agenda.
JOHN A. CATSIMITIDIS has served as a Director of the Company since January
9, 1997. He has been Chairman and Chief Executive Officer of the Red Apple
Group, Inc., a company with diversified holdings that include oil refining,
supermarkets, real estate, aviation and newspapers, since 1969. Mr.
Catsimitidis serves as a director of Sloan's Supermarket, Inc. and New's
Communications, Inc. He also serves on the board of trustees of New York
Hospital, St. Vincent Home for Children, New York University Business School,
Athens College, Independent Refiners Coalition and New York State Food
Merchant's Association.
CHRIS MEHIEL, the brother of Dennis Mehiel, has been a Director of the
Company since January 9, 1997. Mr. Mehiel is a co-founder of Four M and has
been Executive Vice President, Chief Operating Officer and a Director of Four
M 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. 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.
JEROME T. MULDOWNEY has served as a Director of the Company since 1990.
Since January 1996, Mr. Muldowney has been a Managing Director of AIG Global
Investment Corp. and since March 1995 he has been a Senior Vice President of
AIG Domestic Life Companies ("AIG Life"). Prior thereto, he had been a Vice
President of AIG Life since 1982. In addition, from 1986 to 1996, he served
as President of AIG Investment Advisors, Inc. He is currently a director of
AIG Life and AIG Equity Sales Corp.
G. WILLIAM SEAWRIGHT has served as a Director of the Company since January
9, 1997. He has been President and Chief Executive Officer of Stanhome Inc.,
a manufacturer and distributor of giftwares and collectibles, since 1993.
Prior thereto, he was President and Chief Executive Officer of Paddington,
Inc., an importer of distilled spirits, since 1990. From 1986 to 1990, he was
President of Heublein International, Inc., where he was primarily responsible
for marketing Smirnoff vodka worldwide. He is also a director of Stanhome
Inc.
LOWELL P. WEICKER, JR. has served as a Director of the Company since
January 9, 1997. Mr. Weicker served as Governor of Connecticut from January
1991 through January 1995. From 1962 to 1989, Mr. Weicker served in the U.S.
Congress. Mr. Weicker presently teaches at the University of Virginia. In
1992, Mr. Weicker earned the Profiles in Courage Award from the John F.
Kennedy Library Foundation.
EXECUTIVE COMPENSATION
The following table sets forth the compensation earned, whether paid or
deferred, to the Company's Chief Executive Officer and its other four most
highly compensated executive officers during Fiscal 1996 (collectively, the
"Named Officers") for services rendered in all capacities to the Company
during such fiscal year.
54
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
--------------------- --------------
OTHER ANNUAL SECURITIES
NAME AND PRINCIPAL COMPENSATION UNDERLYING ALL OTHER COMPENSATION
POSITION SALARY($) BONUS($) ($)(1) SARS(#) ($)(2)
- ----------------------------- ----------- --------- -------------- ------------ ----------------------
<S> <C> <C> <C> <C> <C>
Dennis Mehiel................. $150,000 $60,000 $-- -- $ --
Chairman and Chief
Executive Officer
Thomas Uleau.................. 185,000 60,000 -- 1,950 5,108
President and Chief
Operating Officer
Hans Heinsen.................. 26,153(3) -- -- 1,950 285
Senior Vice President, Chief
Financial Officer and
Treasurer
Michael Hastings.............. 150,000 38,250 -- 1,950 3,849
Senior Vice President and
President, Fonda division
Robert Korzenski.............. 150,000 47,250 -- 1,950 5,453
Senior Vice President and
President, Hoffmaster
division
</TABLE>
- ------------
(1) The Company has concluded that the aggregate amount of perquisites and
other personal benefits paid to each of the Named Officers did not
exceed the lesser of (i) 10% of such officer's total annual salary and
bonus for Fiscal 1996 and (ii) $50,000. Thus, such amounts are not
reflected in the table.
(2) Reflects matching contributions by the Company under the Company's
401(k) Plan and life insurance premiums paid by the Company.
(3) Consists of salary for employment commencing June 1996.
DIRECTOR COMPENSATION
Directors who are not employees of the Company receive annual compensation
of (i) $12,000, (ii) $1,000 for each Board meeting attended, (iii) $1,000 for
each committee meeting attended which is not held on the date of a Board
meeting and (iv) 30 SARs. Directors who are employees of the Company do not
receive any compensation or fees for service on the Board of Directors or any
committee thereof.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During Fiscal 1996, both Messrs. Mehiel and Uleau participated in
deliberations of the Company's Board of Directors concerning executive
officer compensation. In addition, Messrs. Mehiel and Uleau are both members
of the Board of Directors of Four M and CEG and Dennis Mehiel is the Chairman
and Chief Executive Officer of Four M and CEG and Mr. Uleau is Executive Vice
President of CEG.
STOCK APPRECIATION RIGHTS
The following table provides information on grants of stock appreciation
rights ("SARs") made during Fiscal 1996 to the Named Officers.
55
<PAGE>
SAR GRANTS IN FISCAL 1996
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
------------------------------------------------------------------
% OF TOTAL
NUMBER OF SECURITIES SARS GRANTED TO EXERCISE OR BASE
UNDERLYING SARS EMPLOYEES IN PRICE PER EXPIRATION
NAME GRANTED FISCAL YEAR SHARE DATE(1)
- ---------------- -------------------- --------------- ---------------- ------------
<S> <C> <C> <C> <C>
Thomas Uleau ... 1,950 21.6% $30.06 --
Hans Heinsen ... 1,950 21.6 45.33 --
Michael
Hastings........ 1,950 21.6 30.06 --
Robert
Korzenski....... 1,950 21.6 30.06 --
</TABLE>
- ------------
(1) Unless otherwise determined by the non-employee directors of the
Company and the Chief Executive Officer of the Company, 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 will be subject to 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.
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information as of April 27, 1997,
with respect to the shares of common stock of the Company beneficially owned
by each person or group that is known by the Company to be a beneficial owner
of more than 5% of the outstanding common stock and all directors and
officers as a group.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP
---------------------------
NAME AND ADDRESS OF NUMBER OF PERCENTAGE OF
BENEFICIAL OWNER SHARES OWNERSHIP(1)(2)
- ------------------------------------ ----------- ---------------
<S> <C> <C>
Dennis Mehiel
The Fonda Group, Inc.
115 Stevens Avenue
Valhalla, New York 10595............ 180,000 88.3%
All executive officers and directors
as a group (12 persons) ............ 184,000 90.1%
</TABLE>
- ------------
(1) Includes warrants to purchase 9,176 shares of Class B Common Stock
which are currently exercisable. See "Description of Capital
Stock--Warrants."
(2) A maximum of $10.0 million of the proceeds of the issuance of the Old
Notes are being used for the Stock Repurchase. The Stock Repurchase is
expected to be consummated no later than 180 days following the
issuance of the Old Notes. Mr. Mehiel will continue to own
approximately 81.6% of the outstanding shares of the Company's common
stock on a fully diluted basis, after giving effect to the Stock
Repurchase and assuming that Mr. Mehiel sells to the Company the
maximum number of shares being offered for repurchase by the Company.
Pursuant to a proposed separation agreement currently being negotiated
between Mr. Mehiel and his spouse, Mr. Mehiel intends to transfer 50% of his
common stock interest (90,000 shares) to his spouse, who would thereafter
sell to the Company up to 69,000 shares as part of the Stock Repurchase, but
in no event less than 61,865 shares. In addition, Mr. Mehiel would sell up to
3,625 shares and other stockholders of the Company would have the right to
sell to the Company a pro rata number of shares. The foregoing transactions
are collectively referred to herein as the "Spousal Repurchase." If the
Spousal Repurchase is consummated, Mr. Mehiel would continue to own
approximately 66.5% of the outstanding shares of the Company's Common Stock
on a fully diluted basis, after giving effect to the Spousal Repurchase and
assuming the maximum number of shares are repurchased pursuant thereto.
56
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company leases its Jacksonville facility from Dennis Mehiel on terms
that the Company believes are no less favorable than could be negotiated with
an independent third party on an arm's-length basis. Pursuant to the lease,
which has a term expiring December 31, 2014, the Company currently pays base
rent of approximately $167,000 per year, subject to escalations indexed to
the Consumer Price Index ("CPI"). In addition, from and after January 1, 1998
until July 31, 2006, Mr. Mehiel may require the Company to purchase the
facility for $1.5 million, subject to a CPI-based escalation. The purchase
price would be paid $350,000 in cash and the balance in a seven-year note
secured by a lien covering the facility and under which the regular monthly
payments would be no greater than the monthly lease payments payable to Mr.
Mehiel immediately prior to the sale date, with interest payable at a rate of
prime plus 2% and the remaining principal amount payable at maturity.
In Fiscal 1996, the Company had net sales to CEG in the amount of $1.9
million. CEG manufactures party goods such as decorated plates, cups,
napkins, tablecovers, tableware and other related products. Mr. Mehiel, the
97% owner of CEG, acquired this company as part of the acquisition of certain
operations of The Specialty Operations of James River. The Company believes
that the terms upon which it sold products to CEG are at least as favorable
as those which it could otherwise have obtained from unrelated third parties
and that such terms were negotiated on an arm's-length basis. The Company
believes that it will sell a greater amount of its products to CEG in the
future given the potential benefits to both of these companies.
On February 27, 1997, upon the issuance of the Old Notes, the Company lent
CEG $2.6 million for five years at an interest rate of 10% per annum to
facilitate CEG's satisfaction of certain of its obligations to James River.
The Company believes that the terms of such loan are no more favorable to CEG
than those that CEG could otherwise have obtained from unrelated third
parties and such terms were negotiated on an arm's-length basis.
From August 1, 1996 to April 27, 1997, the Company purchased $585,664 of
corrugated containers from Four M. Management believes that the terms on
which it purchased such containers were at least as favorable as those which
it could otherwise have obtained from unrelated third parties and such terms
were negotiated on an arm's-length basis.
The Company was formed in 1915. In early 1988 under prior ownership, the
Company filed for protection under Chapter 11 of the U.S. Bankruptcy Code. In
April 1988, Four M took over management of the Company, and in October 1988,
Four M acquired the Company. In March 1995, Four M transferred all of the
capital stock of the Company to Dennis Mehiel, the sole shareholder of Four
M, and a creditor of Four M.
DESCRIPTION OF NEW NOTES
GENERAL
The New Notes will be issued pursuant to the Indenture between the Company
and The Bank of New York, as trustee (the "Trustee"). 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, as amended (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. A copy of the proposed form of Indenture and
Registration Rights Agreement is available as set forth under "Available
Information." The definitions of certain terms used in the following summary
are set forth below under "--Certain Definitions."
Although the Company currently has no Subsidiaries, any future
Subsidiaries created or acquired by the Company may be designated by the
Company as Unrestricted Subsidiaries. Unrestricted Subsidiaries will not be
subject to the restrictive covenants set forth in the Indenture. See
"--Certain Covenants."
57
<PAGE>
PRINCIPAL, MATURITY AND INTEREST
The New Notes will be limited in aggregate principal amount to $120.0
million and will mature on March 1, 2007. Interest on the New Notes will
accrue at the rate of 9 1/2% per annum and will be payable semi-annually in
arrears on March 1 and September 1 of each year, commencing on September 1,
1997 to holders of record (the "Holders") on the immediately preceding
February 15 and August 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 issuance. Interest will be computed on the basis of a
360-day year comprised of twelve 30-day months. Principal of, premium and
interest, if any, 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.
SUBORDINATION
The payment of principal of and premium and interest, if any, on the New
Notes will be subordinated in right of payment, as set forth in the
Indenture, to the prior payment in full of all Senior Debt of the Company,
whether outstanding on the date of the Indenture or thereafter incurred.
Upon any distribution to creditors of the Company in a liquidation or
dissolution of the Company or in a bankruptcy, reorganization, insolvency,
receivership or similar proceeding relating to the Company or its property,
an assignment for the benefit of creditors or any marshalling of the
Company's assets and liabilities, the holders of Senior Debt of the Company
will be entitled to receive payment in full in cash of all Obligations due in
respect of such Senior Debt (including interest after the commencement of any
such proceeding at the rate specified in the applicable Senior Debt) before
the Holders of New Notes will be entitled to receive any payment with respect
to the New Notes, and until all Obligations with respect to Senior Debt of
the Company are paid in full in cash, any distribution to which the Holders
of New Notes would be entitled shall be made to the holders of such Senior
Debt (except that Holders of New Notes may receive securities that are
subordinated at least to the same extent as the New Notes to Senior Debt and
any securities issued in exchange for Senior Debt and payments made from the
trust described under "--Legal Defeasance and Covenant Defeasance").
The Company also may not make any payment upon or in respect of the New
Notes (except in such subordinated securities or from the trust described
under "--Legal Defeasance and Covenant Defeasance") if (i) a default in the
payment of the principal of or premium or interest on Designated Senior Debt
of the Company occurs and is continuing beyond any applicable period of grace
or (ii) any other default occurs and is continuing with respect to Designated
Senior Debt of the Company that permits holders of the Designated Senior Debt
as to which such default relates to accelerate its maturity and the Trustee
receives a notice of such default (a "Payment Blockage Notice") from the
holders of any Designated Senior Debt. Payments on the New Notes may and
shall be resumed (a) in the case of a payment default, upon the date on which
such default is cured or waived and (b) in case of a nonpayment default, the
earlier of the date on which such nonpayment default is cured or waived or
179 days after the date on which the applicable Payment Blockage Notice is
received, unless the maturity of any Designated Senior Debt of the Company
has been accelerated. No new period of payment blockage may be commenced
unless and until (i) 360 days have elapsed since the first day of the
effectiveness of the immediately prior Payment Blockage Notice and (ii) all
scheduled payments of principal of and premium and interest, if any, on the
New Notes that have come due have been paid in full in cash. No nonpayment
default that existed or was continuing on the date of delivery of any Payment
Blockage Notice to the Trustee shall be, or be made, the basis for a
subsequent Payment Blockage Notice.
The Indenture will further require that the Company promptly notify
holders of Senior Debt of the Company if payment of the New Notes is
accelerated because of an Event of Default.
58
<PAGE>
As a result of the subordination provisions described above, in the event
of a liquidation or insolvency, Holders of New Notes may recover less ratably
than creditors of the Company who are holders of Senior Debt. As of January
26, 1997, after giving pro forma effect to the issuance of the Old Notes and
the use of proceeds therefrom, $2.6 million of Senior Debt would have been
outstanding. The Indenture will limit the amount of additional Indebtedness,
including Senior Debt, that the Company and its Restricted Subsidiaries can
incur. See "--Certain Covenants--Limitations on Incurrence of Indebtedness."
OPTIONAL REDEMPTION
The New Notes will not be redeemable at the Company's option prior to
March 1, 2002. 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 percentages of
principal amount) set forth below, plus accrued and unpaid interest, if any,
thereon to the applicable redemption date, if redeemed during the
twelve-month period beginning on March 1 of the years indicated below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
- -------------------- ------------
<S> <C>
2002 ................ 104.750%
2003 ................ 103.166%
2004 ................ 101.583%
2005 and thereafter 100.000%
</TABLE>
Notwithstanding the foregoing, at any time prior to March 1, 2000, the
Company may redeem up to one-third in aggregate principal amount of the New
Notes at a redemption price of 109.5% 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 Public Offering.
In addition, upon the occurrence of a Change of Control prior to March 1,
2002, 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 nor 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 portions thereof called for
redemption.
MANDATORY REDEMPTION
Except as set forth below under "--Repurchase at the Option of Holders, --
Change of Control" and "--Asset Sales," the Company is not required to make
mandatory redemption or sinking fund payments with respect to the New Notes.
59
<PAGE>
REPURCHASE AT THE OPTION OF HOLDERS
CHANGE OF CONTROL
Upon the occurrence of a Change of Control, the Company will be required
to make an offer (a "Change of Control Offer") to repurchase all or any part
(equal to $1,000 or an integral multiple thereof) of each Holder's New Notes
at an offer price in cash equal to 101% of the aggregate principal amount
thereof, plus accrued and unpaid interest, if any, thereon to the date of
repurchase (the "Change of Control Payment"). Within ten days following any
Change of Control, the Company will mail a notice to each Holder describing
the transaction that constitutes the Change of Control and offering to
repurchase New Notes pursuant to the procedures required by the Indenture and
described in such notice; provided that, prior to complying with the
provisions of this covenant, but in any event within 90 days following a
Change of Control, the Company will either repay all outstanding Senior Debt
or obtain the requisite consents, if any, under all agreements governing
outstanding Senior Debt to permit the repurchase of New Notes required by
this covenant. 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, (i) accept for payment all New Notes or portions thereof properly
tendered pursuant to the Change of Control Offer, (ii) deposit with the
Paying Agent an amount equal to the Change of Control Payment in respect of
all New Notes or portions thereof so tendered and (iii) 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 occurrence of a Change of Control could result in a default under the
Senior Debt of the Company. In addition, the Senior Debt could restrict the
Company's ability to repurchase New Notes upon a Change of Control. In the
event a Change of Control occurs at a time when the Company is prohibited
from repurchasing New Notes, the Company could seek the consent of its
lenders to the repurchase of New Notes or could attempt to refinance the
borrowings that contain such prohibition. If the Company does not obtain such
a consent or repay such borrowings, the Company will remain prohibited from
repurchasing New Notes. In such case, the Company's failure to make a Change
of Control Offer or to repurchase the New Notes tendered in a Change of
Control Offer would constitute an Event of Default under the Indenture, which
could, in turn, constitute a default under the Senior Debt. In such
circumstances, the subordination provisions in the Indenture would likely
restrict payments to the Holders of New Notes. See "--Subordination."
Finally, the Company's ability to repurchase the New Notes upon a Change of
Control may be limited by the Company's then existing financial resources.
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.
ASSET SALES
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 such Restricted Subsidiary, as the case
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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 (a) any
liabilities (as shown on the Company's or such 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) 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 and (b) any notes or other
obligations received by the Company or 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) 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,
the Company or such Restricted Subsidiary may apply such Net Proceeds (i) to
permanently reduce Senior Debt of the Company or such Restricted Subsidiary
(and to correspondingly reduce commitments with respect thereto) or (ii) to
make capital expenditures or acquire long-term assets in the same line of
business as the Company was engaged immediately prior to such Asset Sale or,
in the case of a sale of accounts receivable in connection with any accounts
receivable financing, for working capital purposes. Pending the final
application of any such Net Proceeds, the Company may temporarily reduce
Senior Debt or otherwise invest such Net Proceeds in any manner that is not
prohibited by the Indenture. Any Net Proceeds from Asset Sales 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 "Asset Sale 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 100% of the
principal amount thereof, plus accrued and unpaid interest, if any, thereon
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 Asset Sale Offer is less than the Excess Proceeds, the Company
may use any remaining Excess Proceeds for general corporate purposes (subject
to the restrictions of the Indenture). 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.
CERTAIN COVENANTS
LIMITATIONS ON 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 Equity Interests (including, without limitation, any payment in
connection with any merger or consolidation involving the Company) or to any
direct or indirect holder of the Company's Equity Interests in its capacity
as such, other than dividends or distributions payable in Equity Interests
(other than Disqualified Stock) of the Company or 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 Subsidiary 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, prior to a scheduled mandatory sinking fund payment date or final
maturity date, any Indebtedness that is subordinated to the New Notes; 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;
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(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 by virtue of the Company's pro forma Fixed Charge Coverage
Ratio, immediately after giving effect to such Restricted Payment, 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 "--Limitations on 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 on
or after the date of the Indenture, is less than the sum of (1) 50% of the
Consolidated Net Income of the Company for the period (taken as one
accounting period) from February 1, 1997 to the end of the Company's most
recently ended fiscal quarter for which 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 (2)
100% of the aggregate net cash proceeds received by the Company as capital
contributions or 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 (3) to the extent that any
Restricted Investment is sold for cash or otherwise liquidated or repaid
for cash, 100% of the net cash proceeds thereof (less the cost of
disposition) (but only to the extent not included in subclause (1) of this
clause (c)).
The foregoing provisions will not apply to (i) the payments and
applications of the proceeds received by the Company from the issuance of the
Old Notes under the Indenture; (ii) the repurchase, redemption or other
acquisition or retirement for value of any Equity Interests held by any
member of the Company's (or any of its Restricted Subsidiaries') management
pursuant to any management equity subscription agreement, stock option or
similar employee incentive arrangement; provided that the aggregate price
paid for all such repurchased, redeemed, acquired or retired Equity Interests
shall not exceed $1.0 million in any twelve-month period plus the aggregate
cash proceeds received by the Company (or any of its Restricted Subsidiaries)
during any such twelve-month period from any issuance of Equity Interests by
the Company (or any of its Restricted Subsidiaries) to members of management
of the Company (or any of its Restricted Subsidiaries) (provided that such
proceeds are excluded from clause (c) of the preceding paragraph; and
provided, further, that such repurchase, redemption or other acquisition or
retirement may not include any Equity Interests owned, directly or
indirectly, by the Principals; (iii) the payment of any dividend or other
distribution 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; (iv) 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) of the preceding
paragraph; and (v) the defeasance, redemption or repurchase of subordinated
Indebtedness with the net cash proceeds from an incurrence of Permitted
Refinancing Debt 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) of the preceding paragraph.
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 (i) the net book value of such Investments at the
time of such designation, (ii) the fair market value
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of such Investments at the time of such designation and (iii) 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 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 "Restricted Payments" were computed, which
calculations may be based upon the Company's latest available financial
statements.
LIMITATIONS ON 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); provided, however, that, so long as no Default or
Event of Default has occurred and is continuing, the Company and its
Restricted Subsidiaries may incur Indebtedness (including Acquired Debt) if
the Fixed Charge Coverage Ratio for the Company's most recently ended four
full fiscal quarters for which financial statements are available immediately
preceding the date on which such additional Indebtedness is incurred would
have been at least 2.0 to 1, determined on a pro forma basis (including a pro
forma application of the net proceeds therefrom), as if the additional
Indebtedness had been incurred at the beginning of such four-quarter period.
The foregoing provisions will not apply to:
(i) the incurrence by the Company and its Restricted Subsidiaries of
Indebtedness pursuant to the Bank Credit Facility in an aggregate
principal amount not to exceed $50 million at any one time outstanding
less any Net Proceeds of Asset Sales applied to permanently reduce the
Bank Credit Facility pursuant to the provisions of the Indenture described
under "Repurchase at the Option of Holders--Asset Sales;"
(ii) the incurrence by the Company and its Restricted Subsidiaries of
Existing Indebtedness;
(iii) the incurrence by the Company and its Restricted Subsidiaries of
Indebtedness represented by the New Notes, the Guarantees thereof by any
Restricted Subsidiary as described under "--Subsidiary Guarantees" and the
Indenture;
(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 $5.0 million at any one 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 its 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;
(vi) the incurrence of intercompany Indebtedness between or among the
Company and any of its Wholly Owned Restricted Subsidiaries; provided that
any subsequent issuance or transfer of
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Equity Interests that results in any such Indebtedness being held by a
Person other than the Company or a Wholly Owned Restricted Subsidiary of
the Company, or any sale or other transfer of any such Indebtedness to a
Person that is neither the Company nor a Wholly Owned Restricted
Subsidiary of the Company, shall be deemed to constitute an incurrence of
such Indebtedness by the Company or such Restricted Subsidiary, as the
case may be;
(vii) 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;
(viii) the incurrence by the Company's Unrestricted Subsidiaries of
Non-Recourse Debt; provided that if, and to the extent that, 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;
(ix) 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; and
(x) the incurrence by the Company and its Restricted Subsidiaries of
additional Indebtedness in an aggregate amount not to exceed $7.5 million
at any one time outstanding.
LIMITATIONS ON LIENS
The Indenture provides that the Company will not, and will not permit any
of its Restricted 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.
LIMITATIONS ON 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 on its (1) 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 Bank Credit Facility as in
effect as of the date of the Indenture, and any amendments, modifications,
restatements, renewals, increase, supplements, refundings, replacements or
refinancings thereof, provided that such amendments, modifications,
restatements, renewals, increase, supplements, refundings, replacements or
refinancings are no more restrictive with respect to such dividend and other
payment restrictions than those contained in the Bank Credit Facility 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, (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 and (h) restrictions relating to a Restricted Subsidiary formed for
the sole purpose of engaging in accounts receivable financing.
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LIMITATIONS ON 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 entity), 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 entity 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 "--Limitations on Incurrence of Indebtedness."
LIMITATIONS ON TRANSACTIONS WITH AFFILIATES
The Indenture provides that the Company will not, and will not permit any
of its Restricted Subsidiaries to, directly or indirectly, 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 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, except with respect to transactions
in the ordinary course of business and consistent with past practice between
the Company or any of its Restricted Subsidiaries and Four M, CEG or any of
their respective subsidiaries; provided that (1) the Indenture of Lease dated
as of January 1, 1995, between Dennis Mehiel and the Company relating to the
Jacksonville Facility except for any purchases of property by the Company
that may arise thereunder; (2) any employment agreement entered into between
any Person and 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 in an amount not to exceed $500,000 per
annum; (3) transactions between or among the Company and its Restricted
Subsidiaries and (4) Restricted Payments and Permitted Investments that are
permitted by the provisions of the Indenture described under the caption
"Restricted Payments," in each case shall not be deemed Affiliate
Transactions.
LIMITATION ON ISSUANCES AND SALES OF CAPITAL STOCK OF SUBSIDIARIES
The Indenture provides that the Company (i) will not, and will not permit
any of its Restricted Subsidiaries to, transfer, convey, sell or otherwise
dispose of any Capital Stock of any Restricted
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Subsidiary of the Company to any Person (other than the Company or a Wholly
Owned Restricted Subsidiary of the Company), unless (a) such transfer,
conveyance, sale or other disposition is of all of the Capital Stock of such
Restricted Subsidiary owned by the Company and its Restricted Subsidiaries
and (b) such transaction is conducted in accordance with the covenant
described above under the caption "--Asset Sales" and (ii) will not permit
any Restricted Subsidiary of the Company to issue any of its Equity Interests
(other than, if required by law, shares of its Capital Stock constituting
directors' qualifying shares) to any Person other than to the Company or a
Wholly Owned Restricted Subsidiary of the Company.
LIMITATION ON OTHER SENIOR SUBORDINATED DEBT
The Indenture provides that neither the Company nor any of its Restricted
Subsidiaries will incur, create, issue, assume, guarantee or otherwise become
liable for any Indebtedness that is subordinate or junior in right of payment
to any Senior Debt of the Company or such Restricted Subsidiary, as the case
may be, and senior in any respect in right of payment to the New Notes or
such Restricted Subsidiary's Guarantee.
SUBSIDIARY GUARANTEES
The Indenture provides that if the Company or any of its Restricted
Subsidiaries shall acquire or create a Subsidiary after the date of the
Indenture, then such newly acquired or created Subsidiary shall execute a
Guarantee (a "Subsidiary Guarantee") and deliver an opinion of counsel in
accordance with the terms of the Indenture; provided that this covenant shall
not apply to (i) a Restricted Subsidiary formed for the sole purpose of
engaging in accounts receivable financings; and (ii) any Subsidiary that has
been properly designated as an Unrestricted Subsidiary in accordance with the
Indenture for so long as it continues to constitute an Unrestricted
Subsidiary.
The Obligations of each Guarantor of the New Notes under its Subsidiary
Guarantee will be subordinated in right of payment to all Senior Debt of such
Guarantor pursuant to subordination provisions substantially similar to those
described above under "--Subordination".
PAYMENTS FOR CONSENT
The Indenture provides that the Company will not, and will not permit any
of its Subsidiaries or Affiliates to, 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 an amendment 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 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
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Company has agreed that, for so long as any New Notes remain outstanding, it
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 (whether or not prohibited by the subordination provisions of the
Indenture); (ii) default in payment when due of the principal of or premium,
if any, on the New Notes (whether or not prohibited by the subordination
provisions of the Indenture); (iii) failure by the Company to comply with the
provisions described under the captions "--Repurchase at the Option of
Holders--Change of Control," "--Repurchase at the Option of Holders--Asset
Sales," "--Certain Covenants--Limitations on Restricted Payments" or
"--Certain Covenants--Limitations on 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 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 respect of such Indebtedness (a "Payment
Default") or (b) results in the acceleration of such Indebtedness prior to
its express maturity and, in each case, the principal amount of any such
Indebtedness, together with the 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 and either (a) any creditor commences
enforcement proceedings upon any such judgment or (b) such judgments are not
paid, discharged or stayed for a period of 45 days; and (vii) 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 of the Company or any group of Restricted
Subsidiaries of the Company that, taken together, would constitute a
Significant Subsidiary of the Company, 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 March 1, 2002 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 such date, 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 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 the principal of or premium or interest, if any, on
the New Notes.
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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 or the Indenture 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 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 payments in respect of the principal of and premium and interest, if
any, on the 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 obligations
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 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
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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 shall 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 shall have delivered to the Trustee an Officers'
Certificate stating that the deposit was not made by the Company with the
intent of preferring the Holders of 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 shall have
delivered 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.
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 or
the New Notes 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 or the New
Notes may be waived with the consent of the Holders of a majority in
principal amount of the then outstanding New Notes (including, without
limitation, consents obtained in connection with a purchase of, or 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 and interest, if any, 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 payments of
principal of or premium or interest, if any, 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") or (viii) make any change in the
foregoing amendment and waiver provisions. In addition, any amendment to the
provisions of Article 10 of the Indenture (which relate to subordination)
will require the consent of the Holders of at least 75% in aggregate
principal amount of the New Notes then outstanding if such amendment would
adversely affect the rights of Holders of the New Notes.
Notwithstanding the foregoing, without the consent of any Holder of New
Notes, the Company and the Trustee may amend or supplement the Indenture or
the New Notes 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
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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, 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 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
Except as set forth in the next paragraph, 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 date of the closing
of the sale of the New Notes offered hereby (the "Closing Date") with, or on
behalf of, The Depository Trust Company (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 "--Certificated
Securities" will be issued in the form of registered definitive certificates
(the "Certificated Securities"). Upon the transfer of Certificated
Securities, such Certificated Securities may, unless the Global Note has
previously been exchanged for Certificated Securities, be exchanged for an
interest in the Global Note representing the principal amount of 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 Purchasers), 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 thorough 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 principal amount of the Global Note and (ii) ownership of the
New 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 Note will be limited to such extent.
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So long as the Global Note Holder is the registered owner of any New
Notes, the Global Note Holder will be considered the sole Holder under the
Indenture of any New Notes evidenced by the Global Note. Beneficial owners of
New Notes evidenced by the Global Note 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 the Trustee
thereunder. Neither the Company nor the Trustee will have any responsibility
or liability for any aspect of the records of the Depositary or for
maintaining, supervising or reviewing any records of the Depositary relating
to the New Notes.
Payments in respect of the principal of and premium and interest, if any,
on any New Notes registered in the name of the Global Note Holder on the
applicable record date will be payable by the Trustee to or at the direction
of the Global Note Holder in its capacity as the registered Holder under the
Indenture. Under the terms of the Indenture, the Company and the Trustee may
treat the persons in whose names New Notes, including the Global Note, are
registered as the owners thereof for the purpose of receiving such payments.
Consequently, neither the Company nor the Trustee has or will have any
responsibility or liability for the payment of such amounts to beneficial
owners of New Notes. 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 New 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 SECURITIES
Subject to certain conditions, any person having a beneficial interest in
the Global Note may, upon request to the Trustee, exchange such beneficial
interest for New Notes in the form of Certificated Securities. Upon any such
issuance, the Trustee is required to register such Certificated Securities 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) the 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
Securities under the Indenture, 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 will require that payments in respect of the New Notes
represented by the Global Note (including principal and 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
Securities, the Company will make all payments of 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. The
New Notes represented by the Global Note 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 expect that secondary trading in the Certificated Securities will
also be settled in immediately available funds.
REGISTRATION RIGHTS; LIQUIDATED DAMAGES
The Company and the Initial Purchasers entered into the Registration
Rights Agreement dated as of February 27, 1997. Pursuant to the Registration
Rights Agreement, the Company agreed to file with the
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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 to each Holder of Old Notes Liquidated
Damages in an amount equal to 50 basis points per annum for each successive
90-day period, or any portion thereof, during which such Registration Default
continues, up to a maximum amount of 200 basis points per annum of the
principal amount of the 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 this Prospectus 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.
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 Restricted 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 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 Holders--Change of Control" and/or the provisions described above
under the caption "--Certain Covenants--Limitations on Merger, Consolidation
or Sale of Assets" and not by the provisions of the Asset Sale covenant), and
(ii) the issue or sale by the Company or any of its Restricted Subsidiaries
of Equity Interests of any of the Company's Restricted Subsidiaries, 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--Limitations on
Restricted Payments" will not be deemed to be Asset Sales. The term "all or
substantially all" as used in this definition has not been interpreted under
New York law (which is the governing law of the Indenture) to represent a
specific quantitative test. As a consequence, in the event the holders of the
Notes elected to exercise their rights under the Indenture and the Company
elected to contest such election, there could be no assurance as to how a
court interpreting New York law would interpret the phrase.
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"Bank Credit Facility" means (i) the New Credit Facility, (ii) each
instrument pursuant to which the Obligations under the agreement described in
clause (i) above are amended, deferred, extended, renewed, replaced, refunded
or refinanced, in whole or in part, and (iii) each instrument now or
hereafter evidencing, governing, guaranteeing or securing any Indebtedness
under any agreements described in clause (i) or (ii) above, in each case, as
modified, amended, restated or supplemented from time to time.
"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.
"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 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 Group and in each case maturing within one year
after the date of acquisition.
"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" or "group" (as such terms are
used in Section 13(d)(3) and Section 14(d)(2) of the Exchange Act) other than
the Principals, (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 or group (as defined above), other than the
Principals, becomes the "beneficial owner" (as defined in Rule 13d-3 and Rule
13d-5 under the Exchange Act), directly or indirectly, of more of the voting
power of the voting stock of the Company than at that time is beneficially
owned by the Principals; or (iv) the first day on which more than 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.
"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, without duplication, to the extent deducted in
computing Consolidated Net Income, (i) an amount equal to any extraordinary
loss plus any net loss realized in connection with an Asset Sale, (ii)
provision for taxes based on income or profits of such Person and its
Restricted Subsidiaries for such period, (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) and (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, in each case, on
a
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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 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 such 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 equity holders 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 (a) 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, (b) all investments as of such date
in unconsolidated Subsidiaries and in Persons that are not Subsidiaries
(except, in each case, Permitted Investments), and (c) all unamortized debt
discount and expense and unamortized deferred charges as of such date, all of
the foregoing determined in accordance with GAAP.
"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 the board of
directors on the date of the Indenture or (ii) was nominated for election to
the board of directors with the approval of at least a majority of the
Continuing Directors who were members of the board of directors at the time
of such nomination or election.
"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.
"Designated Senior Debt" of any Person means such Person's Obligations
under the Bank Credit Facility and any other Senior Debt of such Person
permitted to be incurred by such Person under the terms of the Indenture, the
principal amount of which is $10.0 million or more and that has been
designated by the board of directors of such Person as "Designated Senior
Debt."
"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.
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"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).
"Existing Indebtedness" means Indebtedness of the Company and its
Subsidiaries 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 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 or redeems 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.
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"Guarantors" means any Subsidiary that executes a Subsidiary Guarantee in
accordance with the provisions of the Indenture, and their respective
successors and assigns.
"Hedging Obligations" means, with respect to any Person, the obligations
of such Person under (i) interest and currency 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 or currency exchange rates.
"Indebtedness" means, with respect to any Person, (i) 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 bankers'
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 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, (ii)
all indebtedness of others secured by a Lien on any asset of such Person
(whether or not such indebtedness is assumed by 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, (iii) Disqualified Stock of such Person, (iv)
preferred stock of any Restricted Subsidiary of such Person (other than
Preferred Stock held by such Person or any of its Wholly Owned Restricted
Subsidiaries) and (v) 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 or any of its Restricted Subsidiaries 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) 104.750% 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 New Note were
redeemed on March 1, 2002, 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 for any period, the net
income (loss) of such Person for such period, 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
(including, without limitation, any cash received upon the sale
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or other disposition of any non-cash consideration received in any Asset
Sale), net of the direct costs relating to such Asset Sale (including,
without limitation, legal, accounting and investment banking fees, and sales
commissions), any relocation expenses incurred as a result thereof, any taxes
paid or payable by the Company or any of its Restricted Subsidiaries 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 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, (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 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 (i) any Investment in the Company or in a
Wholly Owned Restricted Subsidiary of the Company; (ii) any Investment in
Cash Equivalents; (iii) any Investment by the Company or any of its
Restricted Subsidiaries in a Person if, as a result of such Investment, (a)
such Person becomes a Wholly Owned Restricted Subsidiary of the Company or
(b) 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;
(iv) 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 (v) a $2.6 million loan to CEG, as in effect on
the date of the Indenture, as such loan may be amended or refinanced in a
manner not adverse to the Company or the Holders of the New Notes.
"Permitted Liens" means (i) Liens securing Senior Debt of the Company and
its Restricted Subsidiaries; (ii) Liens in favor of the Company or any of its
Restricted Subsidiaries; (iii) Liens on property of a Person existing at the
time such Person is merged into or consolidated with the Company or any of
its Restricted Subsidiaries, 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 or any such Restricted Subsidiary; (iv) Liens on property existing at
the time of acquisition thereof by the Company or any of its Restricted
Subsidiaries, provided that such Liens were in existence prior to the
contemplation of such acquisition; (v) 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;
(vi) Liens to secure Indebtedness permitted by clause (iv) (including Capital
Lease Obligations) of the second paragraph of the covenant entitled
"Incurrence of Indebtedness" covering only the assets acquired with such
Indebtedness; (vii) Liens existing on the date of the Indenture excluding
Liens on Indebtedness to be repaid with the proceeds of the issuance of the
Old Notes; (viii) 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; (ix) Liens incurred in
the ordinary course of business of the Company or any of its Restricted
Subsidiaries 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 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 any such
Restricted
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Subsidiary; (x) renewals or refundings of any Liens referred to in clauses
(iii) through (ix) 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 (xi) 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 such Restricted Subsidiary; 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 only by the Company or the
Restricted Subsidiary that is the obligor on the Indebtedness being extended,
refinanced, renewed, replaced, defeased or refunded.
"Principals" mean Dennis Mehiel, his lineal descendants and any trust,
corporation, partnership, association, limited liability company or other
entity in which Dennis Mehiel and/or his lineal descendants hold at least 80%
of the total, combined outstanding voting power or similar controlling
interest.
"Public Offering" means an underwritten public offering of common stock
(other than Disqualified Stock) of the Company registered under Securities
Act (other than a public offering registered on Form S-8 under the Securities
Act) that results in net proceeds of at least $35 million to the Company.
"Restricted Investment" means an Investment other than a Permitted
Investment.
"Restricted Subsidiary" of a Person means any Subsidiary of such Person
that is not an Unrestricted Subsidiary.
"Senior Debt" of any Person means (i) any Indebtedness of such Person
incurred under the Bank Credit Facility, (ii) Indebtedness of a Restricted
Subsidiary formed for the sole purpose of engaging in accounts receivable
financings and (iii) any other Indebtedness permitted to be incurred by such
Person under the terms of the Indenture, unless the instrument under which
such Indebtedness is incurred expressly provides that it is subordinated in
right of payment to any Senior Debt of such Person. Notwithstanding anything
to the contrary in the foregoing, Senior Debt will not include (a) any
liability for federal, state, local or other taxes owed or owing by such
Person, (b) any Indebtedness of such Person to any of its Subsidiaries or
other Affiliates, (c) any trade payables or (d) any Indebtedness that is
incurred in violation of the Indenture.
"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 such
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).
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"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 the 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 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 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 (i) has no
Indebtedness other than Non-Recourse Debt; (ii) is not party to any
agreement, contract, arrangement or understanding with the Company or any of
its Restricted Subsidiaries 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, (iii) is a Person with respect
to which neither the Company nor any of its Restricted Subsidiaries has any
direct or indirect obligation (a) to subscribe for additional Equity
Interests or (b) to maintain or preserve such Person's financial condition or
to cause such Person to achieve any specified levels of operating results,
(iv) has not guaranteed or otherwise directly or indirectly provided credit
support for any Indebtedness of the Company or any of its Restricted
Subsidiaries and (v) has at least one member of its board of directors who is
not a director or executive officer of the Company or any of its Restricted
Subsidiaries and has at least one executive officer who is not a director or
executive officer of the Company or any of its Restricted Subsidiaries. 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 "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 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 under the caption
"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 and one or more Wholly Owned Restricted
Subsidiaries of such Person.
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DESCRIPTION OF CERTAIN INDEBTEDNESS
NEW CREDIT FACILITY
General. On February 27, 1997, the Company repaid the Term Loans and the
Old Credit Facility from the net proceeds of the issuance of the Old Notes
and entered into an amended and restated revolving credit and security
agreement (the "New Credit Facility") with IBJS, as agent, which provided for
a revolving credit facility in the amount of up to $50.0 million, subject to
certain borrowing base limitations. Borrowings under the New Credit Facility
will have a final maturity date of March 31, 2000 (the "Maturity Date"). As
of April 27, 1997, there were no borrowings under the New Credit Facility.
Interest Rate. Borrowings under the New Credit Facility will bear
interest, at the Company's election, at a rate per annum equal to (i) LIBOR
plus 2.25% or (ii) an Alternate Base Rate (being the higher of the (a) Base
Rate publicly announced by the Agent and (b) Federal Funds Rate in effect on
such day plus 0.5%) plus 0.25%.
Prepayments. Prior to March 30, 1998, the Company will have the right,
without penalty or premium, to permanently reduce borrowings under the New
Credit Facility, in minimum amounts of $1.0 million, up to $3.0 million. If
termination of the New Credit Facility occurs from March 31, 1997 to March
30, 1998, the Company will pay 1.0% of the Maximum Loan Amount.
Covenants. The obligation of the Agent 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 contained in agreements of this type, including,
without limitation, covenants that restrict, subject to specified exceptions
(i) mergers, consolidations, assets 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) granting or incurrence of liens
to secure other indebtedness, (vii) prepayment or modification of the terms
of subordinated indebtedness and (viii) engaging in transactions with
affiliates.
In addition, the New Credit Facility requires the Company to satisfy
certain financial covenants similar to those in the Indenture and the
maintenance of an interest coverage ratio of not less than 1.75 to 1.0 for
the first fiscal year following the issuance of the Old Notes and 2.0 to 1.0
for each year thereafter. The New Credit Facility also provides for customary
events of default.
Security. The New Credit Facility is secured by accounts receivable,
inventory, certain general intangibles and the proceeds on the sale of
accounts receivable and inventory.
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DESCRIPTION OF CAPITAL STOCK
COMMON STOCK
The Company is authorized to issue an aggregate of 620,000 shares of
common stock, par value $.01 per share, consisting of 400,000 shares of Class
A Common Stock, 20,000 shares of Class B Common Stock and 200,000 shares of
Class C Common Stock. There are currently 191,000 shares of Class A Common
Stock (7,000 shares of which are redeemable (the "Redeemable Common Stock")),
3,665.98 shares of Class B Common Stock, and no shares of Class C Common
Stock issued and outstanding. The shares of Class A Common Stock are held by
five stockholders of record and the shares of Class B Common Stock are held
by one stockholder of record which also holds a warrant to purchase 9,176.08
shares of Class B Common Stock. Each share of Class B Common Stock is
convertible into a share of Class A Common Stock (i) at the option of any
holder thereof, other than a "Non-Converting Holder" (as defined), or (ii) at
the option of any Non-Converting Holder concurrently with a sale or other
transfer of such shares of Class B Common Stock to any person other than a
Non-Converting Holder.
Each share of Class A Common Stock is entitled to one vote per share on
all matters to be voted upon by stockholders and does not have cumulative
voting rights in the election of directors. The holders of Class B Common
Stock and Class C Common Stock are not entitled to any vote whatsoever,
except to the extent otherwise provided by law.
The holders of Common Stock are entitled, among other things, (i) to share
ratably in dividends if, when and as declared by the Board of Directors out
of funds legally available therefor, and (ii) in the event of liquidation,
distribution or sale of assets, dissolution or winding-up of the Company, to
share ratably in the distribution of assets legally available therefor. The
holders of Common Stock have no preemptive rights to subscribe for additional
shares of the Company. All currently outstanding shares of the Common Stock
are fully paid and nonassessable.
The Company has an agreement with the holder of 7,000 shares of the Class
A Common Stock whereby such stockholder can require the Company to repurchase
such shares at the earlier of March 31, 2007 or the date of a merger or
consolidation of the Company in which the Company is not the surviving
corporation. The repurchase price is $3.0 million at March 31, 2007
discounted back to the repurchase date at a rate of 3% per annum. The Company
may also require the stockholder to redeem such shares after March 31, 2000
at the redemption price stated above.
PREFERRED STOCK
The Company is authorized to issue an aggregate of 101,000 shares of
preferred stock, par value $.01 per share, consisting of 1,000 shares of
Preferred Stock (the "Preferred") and 100,000 shares of Class B Preferred
Stock (the "Class B Preferred"). There are no shares of Preferred or Class B
Preferred issued and outstanding.
Preferred. The holders of Preferred are entitled to one vote per share on
all matters to be voted upon by the stockholders, and the Preferred and the
Common Stock vote together on all such matters as one class. The Preferred is
not entitled to receive any dividends.
Shares of Preferred may be called for redemption, in whole or in part, at
any time and from time to time, upon the order of the Board of Directors at a
price per share equal to the Redemption Price (as defined below). In case
less than all of the Preferred outstanding is to be redeemed, the shares to
be redeemed shall be selected by lot or in such other equitable manner as the
Board of Directors may determine. Written notice of an election by the
Company for redemption of Preferred (the "Notice") will be mailed at least 30
days prior to the redemption date.
The term "Redemption Price" means (i) $1,750 per share if the Notice is
given on or before the fifth anniversary of the date of issuance of the
Preferred (the "Date of Issuance"), (ii) $2,000 per share if the Notice is
given between the fifth and sixth anniversary of the Date of Issuance, (iii)
$2,250 per share if the Notice is given between the sixth and the seventh
anniversary of the Date of Issuance, and (iv) $2,500 per share if the Notice
is given after the seventh anniversary of the Date of Issuance.
81
<PAGE>
If any shares of Preferred remain outstanding 30 days after the seventh
anniversary of the Date of Issuance thereof, such shares of Preferred shall
automatically be converted into shares of Class A Common Stock on the basis
of one share of Class A Common Stock for each outstanding share of Preferred.
In the event of liquidation, dissolution or winding-up of the Company,
holders of Preferred are entitled to be paid the applicable Redemption Price
prior to the distribution of any assets to the holders of Class B Preferred
or Common Stock.
The Company has no present plans to issue any shares of Preferred.
Class B Preferred. The Board of Directors is authorized to issue shares of
Class B Preferred, from time to time, in one or more series, and to
determine, among other things, with respect to each such series, (i) the
dividend rate and conditions and the dividend preferences, if any; (ii)
whether dividends would be cumulative; (iii) whether, and to what extent, the
holders of such series would enjoy voting rights, if any, in addition to
those prescribed by law; (iv) whether, and upon what terms, such series would
be convertible into or exchangeable for shares of any other class of capital
stock; (v) whether, and upon what terms, such series would be redeemable;
(vi) whether or not a sinking fund or redemption or purchase account would be
provided for such series and, if so, the terms and conditions thereof; and
(vii) the preference, if any, to which such series would be entitled in the
event of voluntary or involuntary liquidation, distribution or sale of
assets, dissolution or winding up of the Company.
Issuance of Class B Preferred, while providing desirable flexibility in
connection with possible acquisitions and other corporate purposes, could
make it more difficult for a third party to acquire a majority of the
outstanding voting stock. Accordingly, the issuance of Class B Preferred may
be used as an "anti-takeover" device without further action on the part of
the stockholders of the Company. The Company has no present plans to issue
any shares of Class B Preferred.
WARRANTS
In connection with the issuance of the Old Subordinated Notes, the Company
issued 9,176.08 warrants to purchase Class B Common Stock. The warrants are
exercisable at a price of $.01 per share, expire in May 2003 and are subject
to standard anti-dilution protection.
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 Securities 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 has agreed that it 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 this
Prospectus to facilitate such resales.
82
<PAGE>
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 resales 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 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 broker-dealer or Holder will forthwith
discontinue the disposition of the New Notes until such broker-dealer or
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.
LEGAL MATTERS
The legality of the New Notes 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 financial statements of the Company as of and for the years ended July
30, 1995 and July 28, 1996 included in this Prospectus have been audited by
Deloitte & Touche LLP, independent auditors, as stated in their report
appearing herein, and have been so included in reliance upon the report of
such firm given upon their authority as experts in accounting and auditing.
The financial statements of the Company for the year ended July 31, 1994
included in this Prospectus have been audited by BDO Seidman, LLP,
independent auditors, as stated in their report appearing herein, and have
been so included in reliance upon the report of such firm given upon their
authority as experts in accounting and auditing.
The statements of operations and cash flows of Scott Foodservice Division
of Scott Paper Company for the years ended December 31, 1994 and 1993 and the
three months ended March 30, 1995 included in this Prospectus have been
audited by Deloitte & Touche LLP, independent auditors, as stated in their
report appearing herein, and have been so included in reliance upon the
report of such firm given upon their authority as experts in accounting and
auditing.
The statements of operations and cash flows of Chesapeake Consumer
Products Company for the year ended December 29, 1995 included in this
Prospectus have been audited by Deloitte & Touche LLP, independent auditors,
as stated in their report appearing herein, and have been so included in
reliance upon the report of such firm given upon their authority as experts
in accounting and auditing.
83
<PAGE>
CHANGE IN CERTIFYING ACCOUNTANTS
In 1995, the Company changed its certifying accountants from BDO Seidman,
LLP (the "Former Accountants") to Deloitte & Touche LLP. The Company's Board
of Directors recommended and approved the appointment of Deloitte & Touche
LLP as its certifying accountants.
During the year ended July 31, 1994 and the subsequent interim period
preceding the hiring of Deloitte & Touche 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 year ended July 31, 1994 did not
contain an adverse opinion or disclaimer of opinion, nor was it modified as
to uncertainty, audit scope, or accounting principles.
84
<PAGE>
THE FONDA GROUP, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
<S> <C>
PAGE
THE FONDA GROUP, INC.:
Independent Auditors' Report .......................................................... F-2
Independent Auditors' Report .......................................................... F-3
Balance Sheets as of July 30, 1995 and July 28, 1996 and (unaudited) April 27, 1997 .. F-4
Statements of Operations for the Years Ended July 31, 1994,
July 30, 1995 and July 28, 1996 and (unaudited) the Nine Months Ended
April 28, 1996 and April 27, 1997 .................................................... F-5
Statements of Cash Flows for the Years Ended July 31, 1994,
July 30, 1995 and July 28, 1996 and (unaudited) the Nine Months
April 28, 1996 and April 27, 1997 .................................................... F-6
Notes to Financial Statements ......................................................... F-7
SCOTT FOODSERVICE DIVISION OF SCOTT PAPER COMPANY ("HOFFMASTER"):
Independent Auditors' Report .......................................................... F-18
Statements of Operations for the Years Ended December 31, 1994 and 1993
and the Three Months Ended March 30, 1995 ............................................ F-19
Statements of Cash Flows for the Years Ended December 31, 1994 and 1993
and the Three Months Ended March 30, 1995 ............................................ F-20
Notes to Financial Statements.......................................................... F-21
CHESAPEAKE CONSUMER PRODUCTS COMPANY:
Independent Auditors' Report .......................................................... F-23
Statement of Operations for the Year Ended December 29, 1995 .......................... F-24
Statement of Cash Flows for the Year Ended December 29, 1995 .......................... F-25
Notes to Financial Statements ......................................................... F-26
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
The Fonda Group, Inc.
We have audited the accompanying balance sheets of The Fonda Group, Inc.
as of July 28, 1996 and July 30, 1995 and the related statements of
operations and cash flows for the years then ended. 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, such financial statements present fairly, in all material
respects, the financial position of The Fonda Group, Inc. as of July 28, 1996
and July 30, 1995 and the results of its operations and its cash flows for
the years then ended in conformity with generally accepted accounting
principles.
DELOITTE & TOUCHE LLP
Stamford, Connecticut
October 25, 1996
(June 16, 1997 as to Note 15)
F-2
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
The Fonda Group, Inc.
We have audited the accompanying statements of income and cash flows of
The Fonda Group, Inc. for the year ended July 31, 1994. 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 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 financial statements referred to above present fairly,
in all material respects, the results of operations and cash flows of The
Fonda Group, Inc. for the year ended July 31, 1994 in conformity with
generally accepted accounting principles.
BDO SEIDMAN, LLP
Valhalla, New York
January 19, 1995
F-3
<PAGE>
THE FONDA GROUP, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
JULY 30, JULY 28, APRIL 27,
1995 1996 1997
---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash............................................. $ 120 $ 1,467 $ 24,134
Accounts receivable, less allowance for doubtful
accounts of $401, $549, and $683, respectively . 20,350 27,173 31,047
Due from affiliate............................... -- 994 --
Inventories...................................... 25,483 37,467 40,598
Deferred income taxes............................ 2,255 5,435 7,445
Refundable income taxes.......................... -- 822 2,143
Other current assets............................. 755 1,160 797
---------- ---------- -----------
Total current assets............................ 48,963 74,518 106,164
Property, plant and equipment, net................ 26,933 46,350 46,310
Note receivable from affiliate.................... -- -- 2,600
Other assets, net................................. 3,829 15,300 17,294
---------- ---------- -----------
TOTAL ASSETS...................................... $79,725 $136,168 $172,368
========== ========== ===========
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................... $ 6,038 $ 14,671 $ 14,179
Accrued expenses............................... 10,532 14,893 16,016
Income taxes payable........................... 3,029 -- --
Current maturities of long-term debt........... 1,285 6,023 454
--------- ---------- ---------
Total current liabilities..................... 20,884 35,587 30,649
Long-term debt.................................. 46,880 81,740 122,689
Other liabilities............................... 2,641 2,345 2,145
Deferred income taxes........................... -- 2,444 3,544
--------- ---------- ---------
Total liabilities............................. 70,405 122,116 159,027
Redeemable common stock, $.01 par value, issued
and outstanding 7,000 shares .................. 2,115 2,179 2,229
Stockholders' equity............................ 7,205 11,873 11,112
--------- ---------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ..... $79,725 $136,168 $172,368
========= ========== =========
</TABLE>
See notes to financial statements.
F-4
<PAGE>
THE FONDA GROUP, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED NINE MONTHS ENDED
-------------------------------- -----------------------
JULY 31, JULY 30, JULY 28, APRIL 28, APRIL 27,
1994 1995 1996 1996 1997
---------- ---------- ---------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales.................... $61,839 $97,074 $204,903 $138,546 $189,227
Cost of goods sold........... 51,643 76,252 161,304 110,202 149,165
---------- ---------- ---------- ----------- -----------
Gross profit............... 10,196 20,822 43,599 28,344 40,062
---------- ---------- ---------- ----------- -----------
Operating expenses:
Selling .................... 5,757 8,576 17,181 11,974 14,862
General and administrative 2,239 4,992 12,554 9,317 13,604
Management fee.............. 442 544 -- -- --
---------- ---------- ---------- ----------- -----------
Total operating expenses .. 8,438 14,112 29,735 21,291 28,466
---------- ---------- ---------- ----------- -----------
Income from operations....... 1,758 6,710 13,864 7,053 11,596
Interest expense, net........ 1,268 2,943 7,934 4,538 6,798
---------- ---------- ---------- ----------- -----------
Income before income taxes
and extraordinary expense .. 490 3,767 5,930 2,515 4,798
Provision for income taxes .. 239 1,585 2,500 1,056 2,015
---------- ---------- ---------- ----------- -----------
Income before extraordinary
expense .................... 251 2,182 3,430 1,459 2,783
Extraordinary expense, net .. -- -- -- -- 3,495
---------- ---------- ---------- ----------- -----------
Net income (loss)............ $ 251 $ 2,182 $ 3,430 $ 1,459 $ (712)
========== ========== ========== =========== ===========
</TABLE>
See notes to financial statements.
F-5
<PAGE>
THE FONDA GROUP, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED NINE MONTHS ENDED
-------------------------------- -----------------------
JULY 31, JULY 30, JULY 28, APRIL 28, APRIL 27,
1994 1995 1996 1996 1997
---------- ---------- ---------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Operating activities:
Net income (loss).................... $ 251 $ 2,182 $ 3,430 $ 1,459 $ (712)
Adjustments to reconcile net income
(loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization ..... 1,246 1,669 3,450 3,085 3,475
Amortization and write-off of
debt issuance costs............... -- 560 1,021 336 2,634
Elimination of unamortized debt
discount.......................... -- -- -- -- 2,108
Provision (benefit) for doubtful
accounts.......................... 25 184 148 96 99
Deferred income taxes.............. 162 (1,690) 533 (988) (910)
Interest capitalized on debt ...... -- -- 165 -- 408
Changes in assets and liabilities
(net of business acquisitions):
Accounts receivable............... (970) (6,543) 6,826 6,059 (3,973)
Inventories....................... 1,425 (6,648) (299) (2,049) (3,131)
Due from affiliate................ (1,742) 464 (994) (66) 994
Other current assets.............. 107 (309) (26) 263 160
Other assets...................... (414) (1,200) (1,244) (2,303) 305
Accounts payable and accrued
expenses......................... 50 3,840 8,782 11,826 466
Income taxes payable
(refundable)..................... -- 3,029 (3,644) (2,042) (1,320)
Other liabilities................. -- (312) (475) (909) (200)
---------- ---------- ---------- ----------- -----------
Net cash provided by
(used in) operating activities ... 140 (4,774) 17,673 14,767 403
---------- ---------- ---------- ----------- -----------
Investing activities:
Capital expenditures................. (1,272) (1,608) (1,314) (978) (3,469)
Payments for business acquisitions .. -- (27,985) (45,218) (37,378) (3,416)
Note receivable from affiliate ...... -- -- -- -- (2,600)
---------- ---------- ---------- ----------- -----------
Net cash used in investing
activities........................ (1,272) (29,593) (46,532) (38,356) (9,485)
---------- ---------- ---------- ----------- -----------
Financing activities:
Net increase (decrease) in revolving
credit agreement.................... 13 (7,225) 14,745 11,113 (32,842)
Proceeds from long-term debt......... 2,029 47,520 18,803 14,499 120,000
Repayments of long-term debt......... (1,050) (3,638) (2,499) (1,126) (50,713)
Financing costs...................... -- (2,395) (843) (587) (4,696)
---------- ---------- ---------- ----------- -----------
Net cash provided by financing
activities........................... 992 34,262 30,206 23,899 31,749
---------- ---------- ---------- ----------- -----------
Net increase (decrease) in cash ...... (140) (105) 1,347 310 22,667
Cash, beginning of period............. 365 225 120 120 1,467
---------- ---------- ---------- ----------- -----------
Cash, end of period................... $ 225 $ 120 $ 1,467 $ 430 $ 24,134
========== ========== ========== =========== ===========
Cash paid during the period for:
Interest............................. $ 1,076 $ 2,114 $ 6,029 $ 1,069 $ 4,685
Income taxes......................... 247 -- 5,611 -- 1,630
Businesses acquired:
Fair value of assets acquired ....... $ 37,777 $ 59,090 $ 42,821 $ 3,416
Cash paid............................ 27,985 45,218 37,378 3,416
---------- ---------- ----------- -----------
Liabilities assumed (including notes
payable to sellers of $9,250 during
Fiscal 1996)........................ $ 9,792 $ 13,872 $ 5,443
========== ========== ===========
</TABLE>
See notes to financial statements.
F-6
<PAGE>
THE FONDA GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS DESCRIPTION AND ORGANIZATION
The Fonda Group, Inc. (the "Company") is a leading converter and marketer
of a broad line of disposable paper food service products. Prior to March 30,
1995, the Company was a wholly-owned subsidiary of Four M Corporation ("Four
M"). On March 30, 1995, Four M distributed approximately 96% of the Company's
common stock to Four M's sole stockholder with the remaining 4% distributed
to American International Life Insurance Company of New York ("AIG").
2. SIGNIFICANT ACCOUNTING POLICIES
INVENTORIES -- Inventories are valued at the lower of cost (first-in,
first-out method) or market.
PROPERTY, PLANT AND EQUIPMENT -- Property, plant and equipment are stated
at cost or fair market value for business acquisitions. Depreciation is
computed by use of the straight-line method over the estimated useful lives
of the assets.
INCOME TAXES -- Deferred income taxes are provided on the differences
between the basis of assets and liabilities for financial reporting and
income tax purposes using presently enacted tax rates.
DEBT ISSUANCE COSTS -- Included in other assets are debt issuance costs of
$2,395,000 and $843,000 incurred in connection with the business acquisitions
during the years ended July 30, 1995 and July 28, 1996, respectively, which
have been capitalized and are being amortized over the terms of the
respective borrowing agreements.
REVERSE STOCK SPLIT -- On October 16, 1996, the Company effected a 1 for
50 reverse split of its common stock. All references in the accompanying
financial statements to the number of common shares have been retroactively
restated to reflect the reverse stock split.
FISCAL YEAR -- The Company's fiscal year is the fifty-two or fifty-three
week period which ends on the last Sunday in July. The 1994 fiscal year was
the fifty-three week period ended July 31. The 1995 and 1996 fiscal years
were fifty-two week periods ended July 30 and July 28, respectively.
RECLASSIFICATIONS -- Certain reclassifications were made to the prior
years' financial statements to conform to the current year's presentation.
MANAGEMENT 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 the disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenue and
expenses during the reporting periods. Actual results could differ from those
estimates.
INTERIM FINANCIAL STATEMENTS -- The accompanying balance sheet as of April
27, 1997 and the statements of operations and cash flows for the nine months
ended April 28, 1996 and April 27, 1997 are unaudited but, in the opinion of
management, include all adjustments (consisting of normal, recurring
adjustments) necessary for a fair presentation of results for these interim
periods. Results for interim periods are not necessarily indicative of
results for the entire year.
FAIR VALUE OF FINANCIAL INSTRUMENTS -- The carrying value of financial
instruments including cash, accounts receivable and account 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.
3. BUSINESS ACQUISITIONS
HOFFMASTER
Effective March 31, 1995, the Company acquired the net assets and business
of the Scott Foodservice Division ("Hoffmaster") from Scott Paper Company
("Scott") for $28 million, including acquisition costs.
F-7
<PAGE>
THE FONDA GROUP, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
3. BUSINESS ACQUISITIONS--(CONTINUED)
Hoffmaster produces colored and custom-printed napkins and placemats. The
excess of the purchase price over the fair value of the net assets as of July
28, 1996 was $800,000, based upon the Company's final evaluation of the fair
value of the net assets acquired and has been recorded as goodwill.
In connection with the Company's acquisition of Hoffmaster, the Company
brought a civil action against Scott alleging, among other things, breach of
warranty, fraud and negligent misrepresentation for Scott's failure to
disclose certain raw material pricing information. In September 1996, a jury
awarded the Company compensatory damages of $3.3 million, punitive damages of
$750,000 and pre-judgment interest of $436,123. Scott has appealed the award.
The appeal is currently pending. There can be no assurance that such award
will be upheld or that the Company will receive all or any portion of such
judgment. No recognition of the jury award has been included in the
accompanying financial statements. In the event that the Company does receive
all or a portion of the jury award, such award will be recognized as current
income. The Company estimates the failure of Scott to properly disclose the
above-mentioned raw material pricing information adversely affected the
post-acquisition results of Hoffmaster in an amount not less than $3.3
million.
MASPETH
Effective November 30, 1995, the Company acquired the net assets and
business of Alfred Bleyer & Co., Inc. ("Maspeth") for $10 million, including
acquisition costs. The purchase price consisted of cash and a promissory note
for $2.25 million to the seller. See Note 8. Maspeth produces paper plates
and cups. The excess of the fair value of the net assets over the purchase
price was $122,000, based upon the Company's evaluation of the fair value of
the net assets acquired and has been allocated to the long-term assets.
CHESAPEAKE
Effective December 29, 1995, the Company acquired the Chesapeake Consumer
Products Company ("Chesapeake") from Chesapeake Corporation for $29 million,
including acquisition costs. Chesapeake produces design-intensive and
solid-colored premium napkins, tablecovers and crepe paper. The excess of the
purchase price over the fair value of the net assets acquired was $4.6
million, based upon the Company's evaluation of the fair value of the net
assets and has been recorded as goodwill.
JAMES RIVER SPECIALTIES OPERATIONS DIVISION
Effective May 5, 1996, the Company acquired certain net assets and
business of two divisions of the Specialties Operations Division (the
"Division") of James River Paper Corporation ("James River") for $15 million
(prior to a final purchase price adjustment, which was consummated on
February 27, 1997, see Note 15), including acquisition costs. The purchase
price consisted of cash and a promissory note for $7 million to the seller.
See Note 8. The James River California facility produces tissue-based
products. The Natural Dam facility produces specialty and deep-toned colored
tissue paper. Natural Dam hosts a co-generation facility on its property
which produces steam for internal use and which is expected to provide
significant cost savings to the Company. The Company will receive all of its
steam energy requirements at 50% of historical cost in 1997 and at no cost
for the next 40 years thereafter, and the Company will receive land lease
payments from the operator of the land occupied by the co-generation
facility. The $10 million in benefits from the co-generation facility is
included in long-term assets acquired and is being amortized based upon the
Company's annual savings over the 42-year remaining life of the contract. The
excess of the fair value of the net assets acquired (including $10 million in
benefits from the co-generation facility) over the purchase price (prior to a
final purchase price adjustment, which was consummated on February 27, 1997,
see Note 15) was $5.5 million, based upon the Company's evaluation of the
fair value of the net assets acquired and has been allocated to the long-term
assets. The remaining net assets and business of the Division were acquired
by Creative Expressions Group, Inc. ("CEG"), a company under common ownership
with the Company, in a separate transaction.
F-8
<PAGE>
THE FONDA GROUP, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
3. BUSINESS ACQUISITIONS--(CONTINUED)
The above acquisitions have been accounted for under the purchase method.
Included in other assets is goodwill of $216,000 and $5,400,000 at July 30,
1995 and July 28, 1996, respectively, from the Hoffmaster and Chesapeake
acquisitions, which is being amortized over 20 years. Amortization expense
was $3,000 and $223,000 during the years ended July 30, 1995 and July 28,
1996, respectively. The Company periodically evaluates the recoverability of
goodwill for each business acquisition by assessing whether the unamortized
intangible asset can be recovered through cash flows. The results of
operations of the business acquisitions have been included in the statements
of income since the respective dates of the acquisitions.
The following summarized, unaudited pro forma results of operations for
the years ended July 30, 1995 and July 28, 1996, assume the business
acquisitions occurred as of the beginning of the respective years (in
thousands).
<TABLE>
<CAPTION>
YEARS ENDED
---------------------
JULY 30, JULY 28,
1995 1996
---------- ----------
<S> <C> <C>
Net sales.... $238,645 $262,459
Net income .. $ 1,764 $ 5,339
</TABLE>
4. INVENTORIES
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
JULY 30, JULY 28, APRIL 27,
1995 1996 1997
---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Raw materials .. $16,124 $17,015 $16,817
Work-in-process 188 339 415
Finished goods . 8,270 19,126 22,087
Other........... 901 987 1,279
---------- ---------- -----------
$25,483 $37,467 $40,598
========== ========== ===========
</TABLE>
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
LIVES IN JULY 30, JULY 28, APRIL 27,
YEARS 1995 1996 1997
---------- ---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Land and buildings............. 20-40 $ 13,735 $ 17,675 $ 19,202
Machinery and equipment........ 3-12 24,553 42,492 39,726
Leasehold improvements......... 5-10 732 950 951
Construction in progress ...... 144 767 4,543
---------- ---------- -----------
39,164 61,884 64,422
Less: accumulated depreciation. (12,231) (15,534) (18,112)
---------- ---------- -----------
$ 26,933 $ 46,350 $ 46,310
========== ========== ===========
</TABLE>
Property, plant and equipment includes property and equipment under
capital lease as follows (in thousands):
<TABLE>
<CAPTION>
JULY 30, JULY 28, APRIL 27,
1995 1996 1997
---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Building ...................... $2,217 $2,217 $2,217
Equipment...................... 350 350 350
Less: accumulated depreciation. (756) (830) (885)
---------- ---------- -----------
$1,811 $1,737 $1,682
========== ========== ===========
</TABLE>
Depreciation expense was $1,246,000, $1,666,000 and $3,187,000 during the
years ended July 31, 1994, July 30, 1995 and July 28, 1996, respectively.
F-9
<PAGE>
THE FONDA GROUP, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
6. CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of trade receivables.
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. During the
year ended July 28, 1996, the Company had sales to one customer representing
approximately 11% of net sales.
7. ACCRUED EXPENSES
Accrued expenses consist of the following (in thousands):
<TABLE>
<CAPTION>
JULY 30, JULY 28, APRIL 27,
1995 1996 1997
---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Accrued compensation. $ 2,240 $ 4,367 $ 4,954
Accrued promotion ... 1,963 2,310 2,359
Other................ 6,329 8,216 8,703
---------- ---------- -----------
$10,532 $14,893 $16,016
========== ========== ===========
</TABLE>
8. LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
JULY 30, JULY 28, APRIL 27,
1995 1996 1997
---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Revolving credit agreement ................................... $18,097 $32,842 $ --
9 1/2% Series A Senior Subordinated Notes due 2007
(see Note 15) ............................................... -- -- 120,000
Subordinated notes payable.................................... 8,827 13,796 --
Subordinated note payable to James River (see Note 3), plus
capitalized interest of $165,000 and $350,000, due May 2007,
bearing interest at 10% (see Note 15) ....................... -- 7,165 --
Term loan payable to a bank, with interest payable monthly at
LIBOR plus 2.5%, principal payable in monthly installments
of $416,000 beginning on March 31, 1996 through March 31,
2000; collateralized by machinery and equipment and certain
real estate.................................................. 15,100 25,236 --
Term loan payable to a bank, due March 31, 2000, with
interest payable monthly at 2.50% above the prime rate,
collaterized by machinery and equipment and certain real
estate....................................................... 3,500 4,500 --
Promissory note payable bearing interest at 11%, payable in
monthly installments of $6,250 plus interest through
December 31, 1996 with the principal balance of $606,250 due
on January 1, 1997........................................... 706 631 --
Promissory note payable bearing interest at 6%, payable in
monthly installments of $7,314 including interest through
January 1999................................................. 296 217 156
Promissory note payable to Alfred Bleyer & Co., Inc. (see
Note 3) bearing interest at 9.75%, payable in quarterly
installments of $89,295 plus interest through November 2000 . -- 1,982 1,714
Promissory note payable bearing interest at 11%, payable in
monthly installments of $6,899 including interest through
September 1996............................................... 90 -- --
Capital lease obligations..................................... 1,549 1,394 1,273
---------- ---------- -----------
48,165 87,763 123,143
Less amounts due within one year.............................. 1,285 6,023 454
---------- ---------- -----------
$46,880 $81,740 $122,689
========== ========== ===========
</TABLE>
F-10
<PAGE>
THE FONDA GROUP, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
8. LONG-TERM DEBT--(CONTINUED)
In connection with the business acquisitions, the Company obtained a
revolving credit agreement with a bank. The revolving credit agreement is
collateralized by the Company's eligible accounts receivable, inventories and
certain real property. The maximum advance available based upon eligible
accounts receivable and inventory at July 30, 1995 was $23,000,000. The
revolving credit agreement was amended during 1996 to increase the maximum
advance available to $27,000,000 as of November 30, 1995 and to $50,000,000
as of December 29, 1995. The term of the agreement is through March 31, 2000
at which time full payment of the amount outstanding is due. A facility fee
is charged at a rate of .375% per annum on the amount by which the maximum
advance amount exceeds such average daily balance. Interest is charged
monthly at selected variable rates. At July 28, 1996, $4,842,000 and
$28,000,000 of the total revolving credit outstanding was at the prime rate
plus .25% and at LIBOR plus 2.25%, respectively. At July 28, 1996, the prime
rate was 8.25% and LIBOR was 5.875%.
On May 24, 1995, the Company issued subordinated notes in the amount of
$10,000,000 to The Equitable Life Assurance Society of the United States (the
"Equitable"). The notes bear interest at 14% and are due May 24, 2002. In
connection with the issuance of the subordinated notes, the Company granted
warrants, which expire in May 2003, to the Equitable to purchase 9,176 shares
of Class B common stock of the Company for $.01 per share. The fair value of
the warrants ($1,200,000) at the date of issuance was recorded as paid-in
capital with a corresponding reduction to the subordinated notes' balance.
The discount on the subordinated notes is being amortized as additional
interest expense over the term of the notes. Such amount was $127,000 and
$163,000 during the years ended July 30, 1995 and July 28, 1996,
respectively. On December 29, 1995, the Company issued additional
subordinated notes in the amount of $6,000,000 to the Equitable. The
subordinated notes bear interest at 14% and are due December 30, 2002. In
connection with the issuance of the subordinated notes, the Company issued
3,666 shares of Class B common stock to the Equitable. The fair value of the
common stock ($1,300,000) at the date of issuance was recorded as common
stock and paid-in capital with a corresponding reduction in the subordinated
notes' balance. The discount on the subordinated notes is being amortized as
additional interest expense over the term of the subordinated notes. Such
amortization was $106,000 during the year ended July 28, 1996.
The revolving credit agreement and subordinated notes contain certain
restrictive covenants with respect to, among others, (i) mergers and
acquisitions, (ii) capital expenditures, (iii) dividends, and (iv) additional
indebtedness.
Aggregate annual principal payments required under terms of the long-term
debt agreements are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDING
JULY,
---------
<S> <C>
1997...... $ 6,023
1998...... 5,213
1999...... 5,175
2000...... 47,743
2001...... 342
Thereafter 23,267
--------
$87,763
========
</TABLE>
F-11
<PAGE>
THE FONDA GROUP, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
9. STOCKHOLDERS' EQUITY
Stockholders' equity consists of the following (in thousands, except share
data):
<TABLE>
<CAPTION>
JULY 30, JULY 28, APRIL 27,
1995 1996 1997
------------ ------------ -------------
(UNAUDITED)
<S> <C> <C> <C>
Preferred Stock, $.01 par value, 1,000 shares
authorized, no shares issued........................... $ -- $ -- $ --
Preferred Stock Class B, $.01 par value,
100,000 shares authorized, no shares issued............ -- -- --
Common Stock Class A, $.01 par value,
400,000 shares authorized, 184,000 shares issued and
outstanding............................................ 2 2 2
Common Stock Class B, $.01 par value, 20,000 shares
authorized, 3,666 shares issued and outstanding ....... -- -- --
Common Stock Class C, $.01 par value, 200,000 shares
authorized, no shares issued........................... -- -- --
Additional paid-in capital.............................. 2,198 3,500 3,500
Retained earnings....................................... 5,005 8,371 7,610
------------ ------------ -------------
$7,205 $11,873 $11,112
============ ============ =============
</TABLE>
On May 8, 1995, the Company adopted an Amended and Restated Certificate of
Incorporation authorizing the issuance of up to 1,000; 100,000; and 620,000
shares of Preferred Stock, Preferred Stock Class B, and Common Stock Classes
A, B, and C, respectively. Existing common stock outstanding at that date was
reissued proportionately to the existing stockholders. During 1995 the
Company redeemed the outstanding Preferred Stock for $39,000. Such repurchase
was charged to additional paid-in capital.
In connection with the March 30, 1995 distribution of the Company's common
stock by Four M, 7,000 shares of the Company's Class A Common Stock were
distributed to AIG (the "AIG Shares") in partial satisfaction of a
subordinated note dated January 8, 1990 made by Four M in favor of AIG in the
original principal amount of $4 million. Concurrent with the distribution,
the Company and AIG entered into the redemption agreement, whereby AIG can
require the Company to repurchase all of the AIG Shares at the earlier of
March 31, 2007 or the date of a merger or consolidation of the Company with
another entity in which the Company is not the surviving corporation. The
repurchase price is $3,000,000 at March 31, 2007 discounted back to the
repurchase date at a rate of 3% per annum. The agreement also contains
redemption rights whereby the Company can require AIG to redeem the AIG
Shares after March 31, 2000 on the same terms specified above.
The AIG shares have been shown at the present value of their $3,000,000
liquidation value on the accompanying balance sheets. The transfer of the
present value of the liquidation value of the redeemable common stock and the
accretion to liquidation value has been charged to retained earnings.
The changes in retained earnings consists of the following (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED NINE
MONTHS
-------------------------------- ENDED
JULY 31, JULY 30, JULY 28, APRIL 27,
1994 1995 1996 1997
---------- ---------- ---------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Balance, beginning of period................ $4,687 $ 4,938 $5,005 $8,371
Net income (loss) ......................... 251 2,182 3,430 (712)
Transfer of liquidation value of
redeemable common stock................... -- (2,094) -- --
Accretion of redeemable common stock ...... -- (21) (64) (49)
---------- ---------- ---------- -----------
Balance, end of period...................... $4,938 $ 5,005 $8,371 $7,610
========== ========== ========== ===========
</TABLE>
F-12
<PAGE>
THE FONDA GROUP, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
9. STOCKHOLDERS' EQUITY--(CONTINUED)
Pursuant to the Asset Purchase Agreement, dated March 22, 1996 (the
"Agreement"), among James River, CEG and the Company (see Note 3), CEG issued
$8 million of preferred stock, subject to adjustment of the purchase price in
accordance with the Agreement, to James River. If prior to the redemption of
the CEG preferred stock, the Company were to effect an initial public
offering, James River would have the option to exchange the CEG preferred
stock for shares of common stock of the Company having an aggregate value
equal to the redemption price of the CEG preferred stock. The price of the
Company's common stock in the exchange would be the initial public offering
price. If James River exercised this option, James River would deliver the
CEG preferred stock to the Company in exchange for such shares of common
stock; the Company would then hold the CEG preferred stock. The Agreement
further provided that after effecting any exchange of CEG preferred stock for
the Company's common stock, such common stock would be restricted from
trading for a period of 24 months following the exchange (see Note 15).
Effective August 1, 1995, the Company adopted The Fonda Group, Inc. Stock
Appreciation Unit Plan (the "Plan"). The Plan provides for the granting of up
to 200,000 units to key executives of the Company. A grantee is entitled to
the appreciation in a unit's value from the date of the grant to the date of
its redemption. Unit value is based upon a formula consisting of net income
and book value criteria. Grants vest over a five year period. Effective for
the years ended July 30, 1995 and July 28, 1996, the Company granted 5,850
and 9,500 stock appreciation rights, respectively, at a value of $176,000 and
$341,000, respectively, on the dates of grant. During the year ended July 28,
1996, the Company recorded compensation expense of $100,000.
10. INCOME TAXES
The provision (benefit) for income taxes consists of the following (in
thousands):
<TABLE>
<CAPTION>
YEARS ENDED
--------------------------------
JULY 31, JULY 30, JULY 28,
1994 1995 1996
---------- ---------- ----------
<S> <C> <C> <C>
Current:
Federal . $ 48 $ 2,577 $1,526
State ... 29 698 441
---------- ---------- ----------
77 3,275 1,967
---------- ---------- ----------
Deferred:
Federal . 128 (1,381) 423
State ... 34 (309) 110
---------- ---------- ----------
162 (1,690) 533
---------- ---------- ----------
$239 $ 1,585 $2,500
========== ========== ==========
</TABLE>
F-13
<PAGE>
THE FONDA GROUP, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
10. INCOME TAXES--(CONTINUED)
Deferred income taxes reflect the tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting and income tax purposes. Deferred tax assets (liabilities) result
from temporary differences as follows (in thousands):
<TABLE>
<CAPTION>
JULY 30, JULY 28,
1995 1996
---------- ----------
<S> <C> <C>
Deferred tax assets:
Capitalized inventory costs ........................... $ 523 $ 881
Allowance for doubtful accounts receivable ............ 164 180
Accruals for health insurance and other employee
benefits .............................................. 583 1,824
Inventory and sales related reserves .................. 748 662
Pension reserve ....................................... 678 1,158
Other ................................................. 819 1,495
---------- ----------
3,515 6,200
Deferred tax liabilities:
Depreciation .......................................... (1,010) (3,209)
---------- ----------
$ 2,505 $ 2,991
========== ==========
</TABLE>
A reconciliation of the income tax provision to the amount computed using
the Federal statutory rate is as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
--------------------------------
JULY 31, JULY 30, JULY 28,
1994 1995 1996
---------- ---------- ----------
<S> <C> <C> <C>
Income tax at statutory rate ................ $167 $1,281 $2,076
State income taxes (net of Federal benefit) 58 232 365
Other ....................................... 14 72 59
---------- ---------- ----------
$239 $1,585 $2,500
========== ========== ==========
</TABLE>
11. LEASES
The Company leases facilities and equipment under operating leases. Future
minimum payments under noncancellable operating leases with remaining terms
of one year or more are (in thousands):
<TABLE>
<CAPTION>
YEAR ENDING
JULY,
---------
<S> <C>
1997...... $ 2,099
1998...... 1,209
1999...... 925
2000...... 861
2001...... 825
Thereafter 4,513
--------
$10,432
========
</TABLE>
Rent expense was $1,114,000, $1,150,000 and $1,775,000 during the years
ended July 31, 1994, July 30, 1995 and July 28, 1996, respectively.
F-14
<PAGE>
THE FONDA GROUP, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
12. RELATED PARTY TRANSACTIONS
The Company subleased a portion of a building in Jacksonville, Florida
from Four M prior to January 1, 1995. Effective January 1, 1995, the Company
leases the entire building from its majority stockholder. Annual payments
under the lease are approximately $167,000 plus annual increases based on
changes in the consumer price index, through December 31, 2014. A portion of
the premises is subleased to Four M. Net rent expense was $167,000, $108,000
and $115,000 during the years ended July 31, 1994, July 30, 1995 and July 28,
1996, respectively.
Included in net sales for the year ended July 28, 1996 is $1,944,000 of
sales to CEG.
During the period that the Company was owned by Four M, the Company was
charged a management fee by Four M for certain general and administrative
services. Management fees were $442,000 and $544,000 during the years ended
July 31, 1994 and July 30, 1995, respectively. These fees were based on the
following: (i) the time allocated by certain Four M corporate personnel to
Company matters and (ii) a pro rata amount for various expenses such as
insurance, directors' fees, and other miscellaneous expenses. At any point in
time there were seven to ten Four M individuals who performed various
functions on behalf of the Company, each allocating between 25% and 75% of
their time to the Company. The Company believes that the allocation methods
used for Four M's charges are reasonable and include all expenses that Four M
incurred on the Company's behalf.
13. EMPLOYEE BENEFIT PLANS
RETIREMENT SAVINGS PLAN -- The Company provides two 401(k) savings and
investment plans for the benefit of certain employees. Employee contributions
are matched at the discretion of the Company. Contributions to these plans
were $0, $41,000 and $380,000 during the years ended July 31, 1994, July 30,
1995 and July 28, 1996, respectively.
PENSION PLANS -- The Company makes contributions, at a defined rate per
hour worked, to pension plans for its union employees. Contributions to these
plans were $326,000, $862,000 and $1,309,000 during the years ended July 31,
1994, July 30, 1995 and July 28, 1996, respectively.
The Company provides its eligible employees with retirement and disability
income benefits under insured defined benefit pension plans. Plans are
maintained for union and non-union employees. Pension costs are based upon
the actuarially determined normal costs plus interest on and amortization of
the unfunded liabilities. The Company's policy is to fund annually the
minimum contributions required by applicable regulations.
The net pension cost is computed as follows for the years ended July 30,
1995 and July 28, 1996 (in thousands):
<TABLE>
<CAPTION>
1995 1996
------------------------------- -------------------------------
ASSETS EXCEED ACCUMULATED ASSETS EXCEED ACCUMULATED
ACCUMULATED BENEFITS EXCEED ACCUMULATED BENEFITS EXCEED
BENEFITS ASSETS BENEFITS ASSETS
<S> <C> <C> <C> <C>
Service cost ......... $188 $ 81 $ 464 $ 267
Interest cost......... 119 85 264 191
Return on Plan
Assets............... (54) (69) (129) (184)
--------------- --------------- --------------- ---------------
Net pension cost...... $253 $ 97 $ 599 $ 274
=============== =============== =============== ===============
</TABLE>
F-15
<PAGE>
THE FONDA GROUP, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
13. EMPLOYEE BENEFIT PLANS--(CONTINUED)
The funded status of the plans at July 30, 1995 and July 28, 1996 is as
follows (in thousands):
<TABLE>
<CAPTION>
1995 1996
------------------------------- -------------------------------
ASSETS EXCEED ACCUMULATED ASSETS EXCEED ACCUMULATED
ACCUMULATED BENEFITS EXCEED ACCUMULATED BENEFITS EXCEED
BENEFITS ASSETS BENEFITS ASSETS
<S> <C> <C> <C> <C>
Accomulated benefit obligation:
Vested...................... $ 935 $2,102 $1,307 $2,964
Non-Vested.................. 24 6 35 33
--------------- --------------- --------------- ---------------
Total........................ $ 959 $2,108 $1,342 $2,997
=============== =============== =============== ===============
Projected benefit
obligation.................. $3,047 $2,108 $4,011 $2,997
Plan assets at fair value,
primarily common stocks and
government obligations...... 1,178 1,468 1,523 1,916
--------------- --------------- --------------- ---------------
Projected benefit obligation
in excess of plan assets ... $1,869 $ 640 $2,488 $1,081
=============== =============== =============== ===============
</TABLE>
The actuarial present values of benefits shown above as accumulated
benefit obligation and projected benefit obligation were determined using a
discount rate of 8% for pre-retirement and post-retirement benefits and an
assumed rate of increase in compensation levels of 6%. The expected rate of
return is assumed to be 8%.
14. COMMITMENTS
In connection with the Hoffmaster business acquisition (see Note 3), the
Company assumed an annual commitment to purchase 15,500, 10,500, and 10,500
tons of tissue paper in 1997, 1998 and 1999, respectively. This commitment is
in excess of the Company's projected requirements. The price per ton will be
based on market rates, less applicable rebates. As such, the Company has
recorded a reserve of $3,890,000 as part of purchase accounting. $313,000 and
$2,077,000 of this reserve was utilized during the years ended July 30, 1995
and July 28, 1996, respectively.
The Company also has commitments to purchase paperboard inventory from
three major vendors. The total annual commitment is for the purchase of
49,200 tons of inventory through April 2001. The price per ton will be based
on market rates, less applicable rebates.
15. SUBSEQUENT EVENTS
The Asset Purchase Agreement, dated March 22, 1996, among James River, CEG
and the Company provided for a purchase price adjustment based upon a closing
date balance sheet. After negotiation, on February 27, 1997, the Company and
James River consummated a settlement which has been accounted for as a
reduction of the purchase price to $13.1 million. As part of this settlement,
the James River note was reduced to $2.2 million. In addition, on February
27, 1997, the Company loaned to its affiliate, CEG, $2.6 million for five
years at an interest rate of 10% to enable it to extinguish its outstanding
debt and preferred stock with James River.
On February 27, 1997, the Company issued $120 million aggregate principal
amount of 9 1/2% Senior Subordinated Notes due 2007 (the "Notes"). Interest
is payable semi-annually in arrears on March 1 and September 1 of each year
beginning September 1, 1997. Proceeds from the issuance of the Notes were
primarily used to retire existing indebtedness of the Company. The Company
incurred extraordinary
F-16
<PAGE>
THE FONDA GROUP, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
expenses in connection with the repayment of debt consisting of the write-off
of unamortized debt issuance costs related to the debt being repaid,
elimination of the unamortized discount on debt being repaid, and prepayment
penalties on early retirement of debt totalling approximately $6.0 million.
The after-tax effect of this extraordinary item was $3.5 million (net income
taxes of $2.5 million).
On June 2, 1997, the Company completed the acquisition of all of the
outstanding capital stock of Heartland Mfg. Corp., a privately owned
manufacturer of paper plates, for a purchase price of $12.7 million.
On June 16, 1997, the Company completed the acquisition of certain assets
of Tenneco, Inc. relating to the manufacture of placements and other
disposable tabletop products for a purchase price of $7.0 million, subject to
working capital adjustment.
F-17
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
The Fonda Group, Inc.
We have audited the accompanying statements of operations and cash flows
of Scott Foodservice Division of Scott Paper Company ("Hoffmaster") (see Note
1) for the years ended December 31, 1994 and 1993 and for the three months
ended March 30, 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, such financial statements present fairly, in all material
respects, the results of operations and cash flows of Hoffmaster for the
years ended December 31, 1994 and 1993 and for the three months ended March
30, 1995 in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Milwaukee, Wisconsin
June 4, 1997
F-18
<PAGE>
HOFFMASTER
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED YEARS ENDED
MARCH 30, 1995 DECEMBER 31,
------------------ ---------------------------
1994 1993
------------- -------------
<S> <C> <C> <C>
Net sales......................................... $13,363,000 $62,896,000 $63,386,000
Cost of goods sold ............................... 10,270,000 44,175,000 46,793,000
------------------ ------------- -------------
Gross profit.................................... 3,093,000 18,721,000 16,593,000
------------------ ------------- -------------
Operating expenses:
Selling.......................................... 2,284,000 10,633,000 10,674,000
General and administrative....................... 1,058,000 5,205,000 5,606,000
------------------ ------------- -------------
Total operating expenses........................ 3,342,000 15,838,000 16,280,000
------------------ ------------- -------------
(Loss) income from operations..................... $ (249,000) $ 2,883,000 $ 313,000
================== ============= =============
Pro Forma Disclosure of Net (Loss) Income:
Loss (income) before income tax (benefit)
expense.......................................... $ (249,000) $ 2,883,000 $ 313,000
Pro forma income tax (benefit) expense............ (100,000) 1,153,000 125,000
------------------ ------------- -------------
Net (loss) income ................................ $ (149,000) $ 1,730,000 $ 188,000
================== ============= =============
</TABLE>
See notes to financial statements.
F-19
<PAGE>
HOFFMASTER
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED YEARS ENDED
MARCH 30, 1995 DECEMBER 31,
------------------ ---------------------------
1994 1993
------------- -------------
<S> <C> <C> <C>
Operating activities:
(Loss) income from operations................ $ (249,000) $ 2,883,000 $ 313,000
Adjustments to reconcile (loss) income from
operations to net cash provided by (used
in) operating activities:
Loss on disposal of assets................. -- 11,000 700,000
Depreciation .............................. 271,000 1,085,000 1,218,000
Changes in assets and liabilities:
Accounts receivable....................... (2,973,000) (104,000) 1,778,000
Inventories............................... (592,000) 1,623,000 (74,000)
Other current assets...................... (1,000) (2,000) 124,000
Accounts payable and accrued expenses .... 871,000 202,000 810,000
Other liabilities......................... (693,000) 195,000 (302,000)
------------------ ------------- -------------
Net cash provided by (used in) operating
activities............................... (3,366,000) 5,893,000 4,567,000
------------------ ------------- -------------
Investing activities:
Capital expenditures......................... -- (45,000) (270,000)
------------------ ------------- -------------
Financing activities:
Net advances (payments) from Parent ......... 3,366,000 (6,166,000) (4,009,000)
------------------ ------------- -------------
Net increase (decrease) in cash............... 0 (268,000) 268,000
Cash, beginning of period..................... 0 268,000 0
------------------ ------------- -------------
Cash, end of period........................... $ 0 $ 0 $ 268,000
================== ============= =============
</TABLE>
See notes to financial statements.
F-20
<PAGE>
HOFFMASTER
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS DESCRIPTION AND ORGANIZATION
Hoffmaster (the "Company") is a manufacturer of a wide range of specialty
tabletop products for the food service market. The Company was a division of
Scott Paper Company (the "Parent") until March 30, 1995 (see Note 6).
The accompanying financial statements have been prepared from the separate
records maintained by the Company and may not necessarily be indicative of
the conditions that would have existed if the Company had been operated as an
unaffiliated entity.
2. SIGNIFICANT ACCOUNTING POLICIES
DEPRECIATION -- Depreciation is computed by use of the straight-line
method over the estimated useful lives of the assets.
PRO FORMA INCOME TAXES -- As a division of the Parent, the Company was not
allocated a portion of the Parent's provision for income taxes. Pro forma
income taxes are provided in accordance with Statement of Financial
Accounting Standards No. 109 "Accounting for Income Taxes" using currently
enacted statutory rates to estimate the tax effects.
MANAGEMENT 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.
2. LEASES
The Company leases equipment under operating leases. Future minimum
payments under noncancellable operating leases with remaining terms of one
year or more are:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER,
- -------------
<S> <C>
1995.......... $385,000
1996.......... 277,000
1997.......... 175,000
----------
$837,000
==========
</TABLE>
Rent expense was $83,000, $251,000 and $347,000 for the three months ended
March 30, 1995 and for the years ended December 31, 1994 and 1993,
respectively.
F-21
<PAGE>
3. RELATED PARTY TRANSACTIONS
The Parent charges the Company fees for certain corporate services. These
charges are recorded within operating expenses as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED YEARS ENDED DECEMBER 31,
MARCH 30, 1995 1994 1993
-------- --------
<S> <C> <C> <C>
Net sales................... $ (1,000) $ (9,000) $ (563,000)
Cost of sales............... -- 64,000 278,000
Selling:
Field Sales payroll........ 757,000 3,254,000 3,837,000
Marketing.................. -- 5,000 187,000
Other...................... 236,000 1,615,000 1,027,000
General and administrative:
Distribution............... 2,000 1,000 5,000
Administration............. 280,000 1,643,000 2,034,000
------------------ ------------ ------------
$1,274,000 $6,573,000 $6,805,000
================== ============ ============
</TABLE>
All charges, with the exception of administration charges, are direct
charges allocated by the Parent based upon a specific identification method.
Administration charges primarily represent information system charges
allocated by the Parent based upon usage time and employee benefits that are
allocated based on salary and headcount. The Company believes that the
allocation methods for Parent charges are reasonable and include all the
expenses that the Parent incurred on the Company's behalf.
In addition, the Company purchased raw materials, at cost, from an
affiliate of $97,000, $458,000 and $969,000 in for the three months ended
March 30, 1995 and for the years ended December 31, 1994 and 1993,
respectively.
4. EMPLOYEE BENEFIT PLANS
RETIREMENT SAVINGS PLAN -- The Company provides a 401(k) savings and
investment plan for the benefit of certain employees. Employee contributions
are matched at the discretion of the Company. Contributions to these plans
were $34,000, $210,000 and $169,000 for the three months ended March 30, 1995
and for the years ended December 31, 1994 and 1993, respectively.
PENSION PLANS -- The Company makes contributions, at a defined rate per
hour worked, to pension plans for its union employees. Contributions to these
plans were $322,000, $1,504,000 and $1,367,000 for the three months ended
March 30, 1995 and for the years ended December 31, 1994 and 1993,
respectively.
5. COMMITMENTS
The Company has a commitment to purchase specified quantities of raw
materials in excess of the Company's projected requirements through 1999.
Such commitment was assumed as part of the acquisition of the Company (see
Note 6).
6. SUBSEQUENT EVENTS
On March 31, 1995, the Company was acquired by The Fonda Group, Inc.
F-22
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
The Fonda Group, Inc.
We have audited the accompanying statements of operations and cash flows
of Chesapeake Consumer Products Company (see Note 1) for the year ended
December 29, 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 audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the results of operations and cash flows of Chesapeake Consumer
Products Company for the year ended December 29, 1995 in conformity with
generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Milwaukee, Wisconsin
January 17, 1997
F-23
<PAGE>
CHESAPEAKE CONSUMER PRODUCTS COMPANY
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 29,
1995
--------------
<S> <C>
Net sales ...................... $48,418,000
Cost of goods sold ............. 38,553,000
--------------
Gross profit .................. 9,865,000
--------------
Operating expenses:
Selling ....................... 7,057,000
General and administrative ... 2,089,000
Management fee ................ 373,000
--------------
Total operating expenses ..... 9,519,000
--------------
Income from operations ......... 346,000
INTEREST--PARENT:
Income ........................ (151,000)
Expense ....................... 1,998,000
--------------
Loss before income tax benefit (1,501,000)
Income tax benefit ............. 515,000
--------------
Net loss ....................... $ (986,000)
==============
</TABLE>
See notes to financial statements.
F-24
<PAGE>
CHESAPEAKE CONSUMER PRODUCTS COMPANY
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 29,
1995
--------------
<S> <C>
Operating activities:
Net loss ...................................................................... $ (986,000)
Adjustments to reconcile net loss to net cash provided by operating
activities:
Depreciation .............................................................. 1,362,000
Gain on disposal of assets ................................................ (4,000)
Provision for doubtful accounts ........................................... 38,000
Deferred income taxes ..................................................... 187,000
Changes in assets and liabilities:
Accounts receivable ..................................................... 599,000
Inventories ............................................................. (669,000)
Due from Parent ......................................................... (632,000)
Other current assets .................................................... 135,000
Accounts payable ........................................................ 309,000
Accrued payroll and related taxes ....................................... (172,000)
Other accrued expenses .................................................. (193,000)
Other liabilities ....................................................... 52,000
--------------
Net cash provided by operating activities .............................. 26,000
--------------
Investing activities:
Capital expenditures .......................................................... (2,053,000)
Proceeds from disposal of assets .............................................. 21,000
--------------
Net cash used in investing activities ................................. (2,032,000)
--------------
Financing activities--
Net advances from Parent ...................................................... 2,000,000
--------------
Net decrease in cash ........................................................... (6,000)
Cash, beginning of year ........................................................ 69,000
--------------
Cash, end of year .............................................................. $ 63,000
==============
</TABLE>
See notes to financial statements.
F-25
<PAGE>
CHESAPEAKE CONSUMER PRODUCTS COMPANY
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS DESCRIPTION AND ORGANIZATION
Chesapeake Consumer Products Company (the "Company") is a manufacturer,
distributor and decorative marketer of specialty disposable table top
products, primarily for the North American institutional and retail markets.
The Company was a wholly-owned subsidiary of Chesapeake Corporation (the
"Parent") until December 30, 1995 (see Note 8).
The accompanying financial statements have been prepared from the separate
records maintained by the Company and are not necessarily indicative of the
conditions that would have existed if the Company had been operated as an
unaffiliated entity.
2. SIGNIFICANT ACCOUNTING POLICIES
DEPRECIATION -- Depreciation is computed by use of the straight-line
method over the estimated useful lives of the assets.
INCOME TAXES -- Deferred income taxes are provided on the differences
between the basis of assets and liabilities for financial reporting and
income tax purposes using presently enacted tax rates. The operating results
of the Company are included in the consolidated federal income tax return of
the Parent. In accordance with a tax sharing arrangement between the Company
and the Parent, the Company's allocated current federal income tax benefit is
determined on a stand alone basis. The Company files separate state income
tax returns.
MANAGEMENT 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.
FISCAL YEAR -The 1995 fiscal year is a fifty-two week period ended
December 29. The 1995 fiscal year ended on December 29 due to the acquisition
of the Company (see Note 8).
3. CONCENTRATION OF CREDIT RISK
Sales to one customer amounted to 11.3% of net sales.
4. INCOME TAXES
The Company's operations are included in the consolidated federal tax
filings of the Parent. Therefore, the Company's provision for income taxes is
based on an allocation from the Parent. The provision (benefit) for income
taxes is as follows:
<TABLE>
<CAPTION>
<S> <C>
Current:
Federal ......... $(697,000)
State ........... (5,000)
------------
(702,000)
Deferred--Federal . 187,000
------------
$(515,000)
============
</TABLE>
F-26
<PAGE>
5. LEASES
The Company leases certain facilities and equipment under operating
leases. Future minimum payments under noncancellable operating leases with
remaining terms of one year or more are:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER,
- -------------
<S> <C>
1996 ....... $215,000
1997 ....... 143,000
1998 ....... 4,000
----------
$362,000
==========
</TABLE>
Rent expense was $280,000.
6. RELATED PARTY TRANSACTIONS
The Parent charges the Company fees for certain corporate services. These
charges are recorded within operating expenses as follows:
<TABLE>
<CAPTION>
<S> <C>
Management fee................................................. $ 373,000
Employee benefits ............................................. 183,000
Employer share of health, dental and other employee insurances 175,000
General and other insurances .................................. 112,000
Workers compensation insurance ................................ 112,000
Legal, audit and bank fees .................................... 76,000
Contributions ................................................. 30,000
Other ......................................................... 23,000
-----------
$1,084,000
===========
</TABLE>
Management fees were charged by the Parent to the Company based on a
percentage of sales of the Company. Employee benefits and related insurance
costs were charged by the Parent based upon premiums and claims experience
and general insurance (primarily business interruption) was allocated based
on a percentage of sales. The Company believes that the allocation methods
used for Parent charges are reasonable and include all the expenses that the
Parent incurred on the Company's behalf.
In addition, the Company purchased inventory, at cost plus 23%, from an
affiliate in the amount of $945,000 in 1995. Inventory purchased consisted
primarily of goods produced by the affiliate for sale by the Company. The
Company also sold inventory to this affiliate, at cost, in the amount of
$118,000 in 1995. This inventory consisted primarily of raw materials used by
the affiliate to produce a portion of those goods that are purchased by the
Company.
The Parent provides all of the Company's cash requirements, and cash
receipts are transferred to the Parent. The Parent paid the Company $151,000
in interest in 1995 on the intercompany balance due from Parent.
7. EMPLOYEE BENEFIT PLANS
RETIREMENT SAVINGS PLAN -- The Parent provides a 401(k) savings and
investment plan for the benefit of certain employees of the Company. Employee
contributions are matched at the discretion of the Parent. Contributions to
these plans were $53,000 in 1995.
PENSION PLANS -- The Parent provides a defined benefit plan for the union
employees of the Company. Benefits are calculated as stipulated in the union
contract and vest after five years of service. Contributions to the plan are
made by the Parent. Hourly pension expense was $102,000 in 1995.
F-27
<PAGE>
In addition, the Parent provides a defined benefit plan for the salaried
employees of the Company. Benefits are determined based on an employee's
average earnings and years of service as stipulated in the Plan.
Contributions to the plan are made by the Parent. Salaried pension expense
was $0 in 1995.
OTHER PLANS -- The Parent provides a stock purchase plan for its employees
and matches employee contributions to the plan at a percentage rate specified
in the plan. Contributions to the stock purchase plan were $6,000 in 1995.
The Parent sponsors a plan which includes Company employees and provides
post-retirement benefits to certain former employees of the Company. The
amount of the accrued post-retirement benefit, as allocated to the Company by
the Parent, was $144,000 in 1995.
For all of the above plans and benefits, contributions were made by the
Parent and allocated to the Company and are included in the amounts disclosed
in Note 6.
The Company provides incentive and gain sharing programs for its
employees. Contributions to these plans was $212,000 in 1995.
8. SUBSEQUENT EVENT
Effective December 29, 1995, all of the common stock of the Company was
purchased by The Fonda Group, Inc.
F-28
<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 ................... 2
Prospectus Summary ...................... 3
Risk Factors ............................ 14
Use of Proceeds ......................... 19
The Exchange Offer ...................... 20
The Company ............................. 28
Capitalization .......................... 30
Selected Historical Financial Data ..... 31
Unaudited Pro Forma Condensed Financial
Data ................................... 33
Management's Discussion and Analysis
of Financial Condition and Results
of Operations .......................... 38
Business ................................ 43
Management .............................. 53
Principal Stockholders .................. 56
Certain Relationships and Related
Transactions ........................... 57
Description of New Notes ................ 57
Description of Certain Indebtedness .... 80
Description of Capital Stock ............ 81
Plan of Distribution .................... 82
Legal Matters ........................... 83
Experts ................................. 83
Change in Certifying Accountants ....... 84
Index to Financial Statements ........... F-1
</TABLE>
THE FONDA GROUP, INC.
OFFER TO EXCHANGE ITS
9 1/2% SERIES B SENIOR
SUBORDINATED NOTES DUE 2007
WHICH HAVE BEEN REGISTERED
UNDER THE SECURITIES ACT
FOR ANY AND ALL OF ITS
OUTSTANDING
9 1/2% SERIES A SENIOR
SUBORDINATED NOTES DUE 2007
PROSPECTUS
