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Filed Pursuant to Rule 424(b)(3)
Registration File No.: 333-51563
SF HOLDINGS GROUP, INC.
OFFER TO EXCHANGE 3,000 SHARES OF
13 3/4% SERIES B EXCHANGEABLE PREFERRED STOCK DUE 2009
WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT FOR
ANY AND ALL OF ITS OUTSTANDING
13 3/4% SERIES A EXCHANGEABLE PREFERRED STOCK DUE 2009
THE EXCHANGE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 5:00 P.M., NEW
YORK CITY TIME, ON AUGUST 7, 1998 (AS SUCH DATE MAY BE EXTENDED, THE
"EXPIRATION DATE").
SF Holdings Group, Inc. ("SF Holdings") 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 3,000 Shares of 13 3/4%
Series B Exchangeable Preferred Stock due 2009 (the "New Shares") for an
identical number of the outstanding 13-3/4% Series A Exchangeable Preferred
Stock due 2009 (the "Old Shares" and, with the New Shares, the "Shares" or
the "Preferred Shares"). The terms of the New Shares are identical in all
material respects to the terms of the Old Shares except that the registration
and other rights relating to the exchange of Old Shares for New Shares and
the restrictions on transfer set forth on the Old Shares will not appear on
the New Shares. See "The Exchange Offer." The New Shares are being offered
hereunder in order to satisfy certain obligations of SF Holdings under a
Registration Rights Agreement dated as of March 20, 1998 (the "Registration
Rights Agreement") among SF Holdings, American Industrial Partners Management
Company, Inc. ("AIPM") and Bear, Stearns & Co. Inc. (the "Initial
Purchaser"). Based on an interpretation by the staff of the Securities and
Exchange Commission (the "Commission") set forth in no-action letters issued
to third parties unrelated to SF Holdings, New Shares issued pursuant to the
Exchange Offer in exchange for Old Shares may be offered for resale, resold,
and otherwise transferred by a holder thereof (other than a holder which is
an "affiliate" of SF Holdings 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 Shares 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 Shares.
Each New Share has a liquidation preference of $10,000 per share (the
"Liquidation Amount"), plus an amount of cash equal to the dividends, whether
or not earned or declared, accrued and unpaid thereon to the date of final
distribution. Dividends on the New Shares will be payable quarterly in
arrears on March 15, June 15, September 15 and December 15 of each year
(each, a "Dividend Payment Date"), commencing June 15, 1998, at an annual
rate equal to 13-3/4% and will be cumulative.
Until March 15, 2003, dividends on the New Shares may be paid, at SF
Holdings' option, on any Dividend Payment Date, either in cash or by the
issuance of additional shares of Old Shares with an aggregate Liquidation
Amount equal to the amount of such dividends. Thereafter, dividends will be
payable in cash, except to the extent that covenants applicable to
indebtedness of SF Holdings prohibit such cash payments or the covenants
applicable to securities and/or indebtedness of SF Holdings' subsidiaries
prohibit such subsidiaries from distributing the necessary cash to SF
Holdings. See "Risk Factors--Holding Company Structure and Related
Considerations."
On March 15, 2009, to the extent that SF Holdings shall have funds legally
available for such payment, SF Holdings will be required to redeem any shares
of New Shares outstanding at a redemption price per share, in cash, equal to
the Liquidation Amount, plus an amount of cash equal to the dividends,
whether or not earned or declared, accrued and unpaid thereon to the date of
redemption. The New Shares will be redeemable, at the option of SF Holdings,
in whole or in part, at any time on or after March 15, 2003, at the
redemption prices set forth herein plus an amount of cash equal to the
dividends, whether or not earned or declared, accrued and unpaid thereon to
the date of redemption. In addition, prior to March 15, 2001, SF Holdings
may, at its option, redeem up to one-half of the aggregate Liquidation Amount
of New Shares at a redemption price equal to 113-3/4% of the Liquidation
Amount, plus an amount of cash equal to the dividends, whether or not earned
or declared, accrued and unpaid thereon to the date of redemption, with the
net cash proceeds of an underwritten public offering of common stock of SF
Holdings (other than stock which is redeemable on or prior to the date which
is 91 days after the date on which the New Shares mature) registered under
the Securities Act, other than a public offering registered on Form S-8 under
the Securities Act. ("Equity Offering"); provided, that at least one-half of
the aggregate Liquidation Amount of New Shares remains outstanding
immediately after the occurrence of such redemption (excluding New Shares
held by SF Holdings and its subsidiaries); and provided, further, that any
such redemption occurs within 60 days of the date of the closing of such
Equity Offering. Upon the occurrence of a Change of Control (as such term is
defined in "Description of New Shares--Definitions"), SF Holdings will be
required to make an offer to each holder of New Shares to repurchase such
holder's New Shares (a "Repurchase Offer") at a purchase price equal to 101%
of the Liquidation Amount, plus the cash value of any accrued and unpaid
dividends payable in kind and the amount of any accrued and unpaid cash
dividends. In the event of a Change of Control, there can be no assurance
that SF Holdings will have, or will have access to, sufficient funds to
repurchase the Preferred Stock. See "Risk Factors--Holding Company Structure
and Related Considerations" and "--Change of Control Provisions."
(Continued on the following page)
SEE "RISK FACTORS" BEGINNING ON PAGE 22 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 JULY 13, 1998.
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(Continued from the previous page)
SF Holdings may, at its option, on any Dividend Payment Date, redeem all,
but not less than all, of the then outstanding shares of New Shares in
exchange for SF Holdings' 13-3/4% Subordinated Notes due March 15, 2009 (the
"Subordinated Notes"), provided, that on such date no condition exists that
would constitute an event of default under the indenture governing the
Subordinated Notes (the "Indenture"). The Subordinated Notes will accrue
interest at the rate of 13-3/4% per annum, payable semi-annually in arrears
on March 15 and September 15 of each year (each an "Interest Payment Date"),
commencing on the first such date to occur after the date of exchange and
will be cumulative. Interest on the Subordinated Notes payable on or prior to
March 15, 2003, may be paid in the form of additional Subordinated Notes.
THE NEW SHARES AND THE SUBORDINATED NOTES WILL BE SUBORDINATE TO ALL
INDEBTEDNESS AND OTHER LIABILITIES AND COMMITMENTS OF SF HOLDINGS'
SUBSIDIARIES. The New Shares will rank senior to all classes of Common Stock
of the Company and to each other class or series of capital stock issued by
the Company now or hereafter created (collectively, "Junior Stock");
provided, however, that the Board of Directors may authorize a class or
series of preferred stock on a parity in powers, preferences and rights to
the New Shares (collectively "Parity Stock") or senior in powers, preferences
and rights to the New Shares (collectively, "Senior Stock") if approved by
the holders of a majority of the shares of New Shares. The New Shares will
rank junior to right of payment to all of the indebtedness of SF Holdings.
The Subordinated Notes will be unsecured, subordinated obligations of SF
Holdings that will be subordinated to all existing and future indebtedness of
SF Holdings. As of April 26, 1998, all of the indebtedness and other
liabilities and commitments of the Company and its Subsidiaries would have
totaled $802.2 million, after giving pro forma effect to the following: (i)
the Fiscal 1997 acquisitions by Fonda, (ii) the issuance of senior
subordinated notes by Fonda, (iii) the acquisition by Fonda of Leisureway,
Inc. (iv) the disposition by Fonda of its Natural Dam tissue mill, (v) the
disposition by Sweetheart of its bakery operations, (vi) the closure by
Sweetheart of its Riverside facility and the cessation of paper operations at
its Springfield facility, (vii) the merger of a subsidiary of SF Holdings
into Fonda, (viii) the issuance of Units of SF Holdings, (ix) the investment
by SF Holdings in Sweetheart and (x) the payment of certain financial
advisory and legal fees and severance expenses in connection with the
investment by SF Holdings in Sweetheart (collectively, the "Transactions").
See "Risk Factors--Holding Company Structure and Related Considerations." In
addition, after giving pro forma effect to the Transactions, earnings for the
Company and its subsidiaries were not sufficient to cover combined fixed
charges and New Share dividends for Fiscal 1997, the nine months ended April
26, 1998 and the twelve months ended April 26, 1998 by $74.8 million, $72.5
million and $66.5 million, respectively. See "Description of New
Shares--Ranking."
SF Holdings will accept for exchange from an Eligible Holder any and all
Old Shares 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 Shares that remain Transfer
Restricted Securities, as reflected on the records of The Bank of New York,
as registrar for the Old Shares (in such capacity, the "Registrar"), or any
person whose Old Shares are held of record by the depository of the Old
Shares. Tenders of Old Shares 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 Share until
the earliest to occur of (i) the date on which such Old Share 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 Share 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 Share 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."
SF Holdings will not receive any proceeds from the Exchange Offer and will
pay all the expenses incident to the Exchange Offer. If SF Holdings
terminates the Exchange Offer and does not accept for exchange any Old
Shares, it will promptly return the Old Shares to the holders thereof. See
"The Exchange Offer."
Each broker-dealer that receives New Shares 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 Shares. 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
Shares were acquired by such broker-dealer as a result of market-making
activities or other trading activities. Any broker-dealer that acquired Old
Shares directly from SF Holdings 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 Shares
received in exchange for such Old Shares. SF Holdings 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
Shares. To the extent that Old Shares are tendered and accepted in the
Exchange Offer, a holder's ability to sell untendered Old Shares could be
adversely affected. If a market for the New Shares should develop, the New
Shares could trade at a discount from their principal amount. SF Holdings
does not currently intend to list the New Shares 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 Shares
will develop.
The Exchange Agent for the Exchange Offer is The Bank of New York.
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AVAILABLE INFORMATION
SF Holdings 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 SF Holdings' 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, SF Holdings will be subject to the
informational requirements of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), and in accordance therewith SF Holdings 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 SF Holdings 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. SF Holdings 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 Shares remain outstanding it will
furnish to the holders of the Shares, and if required by the Exchange Act,
file with the Commission all annual, quarterly and current reports that SF
Holdings 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 Shares remain outstanding, SF Holdings has agreed to make
available to any prospective purchaser of the Old Shares or beneficial owner
of the Old Shares in connection with any sale thereof the information
required by Rule 144A(d)(4) under the Securities Act.
Sweetheart and Fonda are subject to the periodic reporting and other
informational requirements of the Exchange Act and the rules and regulations
thereunder, and in accordance therewith file periodic reports, proxy and
information statements, and other information with the Commission. All
reports, proxy and information statements, and other information filed by
Sweetheart and Fonda with the Commission may be inspected at the public
reference facilities maintained by the Commission at the address set forth
above, and at the regional offices of the Commission located at the addresses
set forth above. Copies of such materials may also be obtained from The
Public Reference Section of the Commission at the address set forth above, at
prescribed rates. The Commission also maintains a web site
(http://www.sec.gov) that contains reports, proxy and information statements
regarding registrants, such as SF Holdings subsidiaries that file
electronically with the Commission. SF Holdings' subsidiaries furnish to the
respective holders of the Fonda Notes (as defined herein) and the Sweetheart
Notes (as defined herein) all such filings with the Commission. In addition,
for so long as any of such securities remain outstanding, each company has
agreed to make available to any prospective purchaser of such securities or
respective beneficial owner of such securities in connection with any sale
thereof the information required by Rule 144(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 SF
HOLDINGS, INCLUDING EXHIBITS TO SUCH DOCUMENTS, ARE AVAILABLE TO ANY
REGISTERED HOLDER OR BENEFICIAL OWNER OF THE OLD SHARES UPON WRITTEN OR ORAL
REQUEST AND
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WITHOUT CHARGE FROM SF HOLDINGS GROUP, INC., 115 STEVENS AVENUE, VALHALLA,
NEW YORK 10595-1252, ATTENTION: CHIEF FINANCIAL OFFICER. TELEPHONE REQUESTS
MAY BE DIRECTED TO SF HOLDINGS AT (914) 749-3274. IN ORDER TO ENSURE TIMELY
DELIVERY OF THE DOCUMENTS, ANY SUCH REQUEST SHOULD BE MADE BY , 1998.
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 SF HOLDINGS. 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 SF HOLDINGS 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. References to a fiscal year of SF Holdings or
Fonda are to the year ended on the last Sunday in July of such year.
References to a fiscal year of Sweetheart are to the year ended on September
30 of such year. Unless otherwise stated or the context otherwise requires,
(a) references to the "Company" are to SF Holdings and its subsidiaries,
including Fonda and Sweetheart and their respective subsidiaries, after
giving effect to the Transactions and (b) references to "SF Holdings" are to
SF Holdings Group, Inc., excluding its subsidiaries. See "The Sweetheart
Investment." Unless otherwise indicated, all information in this Prospectus
assumes the Transactions have been consummated. Certain information in the
Prospectus with respect to Sweetheart and Fonda is derived from their
respective reports on Forms 10-K and 10-Q as filed with the Commission. See
"Available Information." Portions of this Prospectus may constitute
forward-looking statements for purposes of the Securities Act and the
Exchange Act. See "Risk Factors--Forward-Looking Statements."
THE COMPANY
The Company is one of the three largest converters and marketers of
disposable food service and food packaging products in North America. The
Company sells a broad line of disposable paper, plastic and foam food service
and food packaging products under both branded and private labels to the
consumer and institutional markets, including large national accounts, and
participates at all major price points. The Company conducts its business
through two principal operating subsidiaries, Sweetheart and Fonda, and has
marketed its products under its well recognized Lily(Registered Trademark),
Sweetheart(Registered Trademark) and Trophy(Registered Trademark) brands for
over 85, 45 and 15 years, respectively. In addition, the Company's Sensations
and Hoffmaster(Registered Trademark) brands are well recognized in the
industry. After giving pro forma effect to the Transactions, the Company
would have had net sales, net loss and Adjusted EBITDA of $1.1 billion, $35.7
million and $68.7 million, respectively, for the twelve months ended April
26, 1998. See "Summary Unaudited Combined Condensed Financial Data of the
Company."
The Company's product offerings are among the broadest in the industry,
enabling it to offer its customers "one-stop" shopping for their disposable
food service and food packaging product needs. The Company's principal
products include (i) paperboard, plastic and foam food service products,
primarily cups, lids, plates, bowls, plastic cutlery and food containers;
(ii) tissue and specialty food service products, primarily napkins and
placemats; and (iii) food packaging products, primarily containers for the
dairy and food processing industries.
The Company sells its products to more than 5,000 customers and serves the
institutional and consumer markets, including large national accounts,
located throughout the United States and Canada. In addition, the Company has
developed and maintained long-term relationships with many of its customers.
The Company's institutional customers, which are served by Sweetheart and
Fonda, include (i) major food service distributors, (ii) national accounts,
including fast-food chains and catering services, and (iii) schools,
hospitals and other major institutions. The Company's consumer customers,
which are served by Fonda, include supermarkets, mass merchandisers,
warehouse clubs and other retailers. The Company's food packaging customers,
which are served by Sweetheart, include national and regional dairy and food
companies.
The Company conducts its business through two principal operating
subsidiaries, Sweetheart and Fonda:
SWEETHEART HOLDINGS INC.
Sweetheart believes that it is one of the largest producers of paper,
plastic and foam disposable food service and food packaging products,
including hot and cold drink cups, lids, food containers, plates and bowls,
and cutlery. Sweetheart sells its food service products primarily to (i)
major food service distributors who serve national and regional institutional
food service customers such as Sysco
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Corporation and Alliant Foodservice Inc. and (ii) national accounts,
including fast-food chains, such as McDonald's Corporation ("McDonald's") and
Wendy's International, Inc., and catering services, such as ARAMARK
Corporation.
Sweetheart's food packaging operations sell paper and plastic containers
and lids for products such as ice cream, frozen novelty products and cultured
foods, and also lease filling and lidding equipment to customers.
Sweetheart's food packaging customers include national and regional dairy and
food companies, such as Ben and Jerry's Homemade, Inc., Blue Bell Creameries,
L.P., Borden, Inc. and Prairie Farms Dairy, Inc.
After giving pro forma effect to the Transactions, Sweetheart would have
had net sales, net loss and Adjusted Sweetheart EBITDA of $857.4 million,
$37.2 million and $46.2 million, respectively, for the twelve months ended
March 31, 1998.
THE FONDA GROUP, INC.
Fonda believes that it is a leading producer of (i) private label paper
plates, bowls and cups for the consumer market and (ii) premium tissue
products including white, colored and custom-printed napkins, placemats,
tablecovers and food trays for the institutional and consumer markets.
Fonda's consumer market customers include (i) supermarkets, such as The Great
Atlantic & Pacific Tea Company, Inc., The Kroger Co. and The Stop & Shop
Companies, Inc., (ii) mass merchandisers, such as Target Stores (a division
of Dayton Hudson Corp.), Wal-Mart Stores, Inc. and Kmart Corporation and
(iii) warehouse clubs, such as Price-Costco, Inc., and other retailers.
Fonda's institutional customers include Sysco Corporation, Rykoff-Sexton,
Inc./U.S. Foodservice Inc., Bunzl USA, Inc. and Alliant Foodservice Inc.
After giving pro forma effect to the Transactions, Fonda would have had
net sales, net income and Adjusted Fonda EBITDA of $261.9 million, $8.8
million and $21.5 million, respectively, for the twelve months ended April
26, 1998.
RECENT DEVELOPMENTS
On March 12, 1998, Fonda entered into a five-year licensing agreement with
its affiliate, Creative Expressions Group, Inc. ("CEG"), subject to
extension, whereby CEG will manufacture and distribute certain party goods
products currently manufactured by Fonda. In connection therewith, Fonda will
receive an annual royalty equal to 5% of CEG's cash flow, as determined in
accordance with a formula specified in such agreement. Pursuant to such
agreement, during a transition period, Fonda is manufacturing such party
goods products for CEG on a contract basis. In Fiscal 1997, Fonda's net sales
of such party goods products were approximately $30 million.The Company
expects Fonda's fixed and variable costs to decrease and it expects to reduce
Fonda's accounts receivable and inventory by approximately $9 million as a
result of such licensing agreement. The Company believes that such
transaction will have a favorable impact on Fonda's results of operations.
On March 24, 1998, Fonda consummated an agreement with Cellu Tissue
Holdings, Inc. ("Cellu"), whereby Cellu acquired substantially all of the
fixed assets and certain related working capital of the Natural Dam mill in
Gouverneur, New York (the "Natural Dam Mill Disposition") Fonda realized net
proceeds of $24.6 million, including a note receivable of $3.7 million, and
recorded a pre-tax gain of $9.3 million. The Natural Dam mill produced tissue
mill products, primarily specialty "jumbo" rolls of tissue.
In connection with the consummation of the Sweetheart Investment,
Sweetheart incurred $4.4 million of financial advisory and legal expenses and
$3.7 million of severance expenses as a result of the termination of certain
officers of Sweetheart pursuant to executive separation agreements and
retention plans for certain key executives (such expenses are collectively
defined herein as the "Sweetheart Reduction"). See "Unaudited Pro Forma
Financial Information." In the three month period ended March 31, 1998,
Sweetheart reduced its salaried workforce by approximately 15% and hourly
workforce by less
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than 5% and decided to rationalize certain product lines, and in connection
therewith, disposed of associated property and equipment. In connection with
such plans, Sweetheart recognized $10.5 million of charges for severance and
asset disposition costs. As a result of the applications of purchase
accounting by SF Holdings for the Sweetheart Investment, the expenses
described above will have no effect on SF Holdings' results of operations.
On May 27, 1998, Fonda decided to close its administrative offices in St.
Albans, Vermont and to relocate such offices, including its principal
executive offices, to Fonda's Oshkosh, Wisconsin facility. The costs
associated with such relocation will be recorded in Fonda's fourth quarter.
On July 1, 1998, Fonda consummated an agreement with Kamine Besicorp
Natural Dam L.P. ("Kamine"), the owner of the co-generation facility at the
Natural Dam mill, whereby Kamine terminated its obligations to supply steam
to Natural Dam and to make certain land lease payments in return for a lump
sum cash payment and the delivery of certain equipment. As a result, Fonda
will record a gain in its fourth fiscal quarter.
THE SWEETHEART INVESTMENT
In connection with the Sweetheart Investment, on March 12, 1998, SF
Holdings acquired all of the outstanding capital stock of Fonda in a merger
of a subsidiary of SF Holdings into Fonda, and the stockholders of Fonda
became the stockholders of SF Holdings (the "Fonda Stockholders Exchange").
The Fonda Stockholders Exchange has been accounted for under an accounting
method similar to a pooling of interests and the consolidated financial
statements of the Company will include the historical accounts of Fonda for
all periods presented.
On March 12, 1998, the stockholders of Sweetheart as of December 29, 1997
(the "Sweetheart Stockholders") consummated an Investment Agreement dated
December 29, 1997 with SF Holdings and CEG (the "Investment Agreement"),
pursuant to which SF Holdings acquired 48% of the total outstanding voting
common stock, par value $.01 per share, of Sweetheart (the "Sweetheart Class
A Common Stock") and 100% of the total outstanding non-voting common stock,
par value $.01 per share, of Sweetheart (the "Sweetheart Class B Common
Stock" and together with the Sweetheart Class A Common Stock the "Sweetheart
Common Stock"), representing 90% of the total outstanding common stock of
Sweetheart (the "Sweetheart Investment"). The aggregate purchase price
consisted of $88.0 million in cash, a demand promissory note (the "Demand
Note") of SF Holdings in the amount of $7.0 million (which was satisfied
immediately following the consummation of the Sweetheart Investment) and an
aggregate of $30.0 million of a series of exchangeable preferred stock, par
value $.001 per share, of SF Holdings (the "Exchangeable Preferred Stock").
See "--Issuance of the Old Shares" and "Description of Capital Stock."
Pursuant to the Investment Agreement, immediately prior to the
consummation of the Sweetheart Investment, Sweetheart amended its by-laws,
including its subsidiaries' by-laws, to provide for certain matters, and to
appoint certain executive officers of Fonda as executive officers of
Sweetheart. Upon consummation of the Sweetheart Investment, Fonda purchased
the right to manage the day-to-day operations of Sweetheart. In addition, SF
Holdings entered into certain agreements with the Sweetheart Stockholders
concerning their respective interests in Sweetheart and in SF Holdings. See
"The Sweetheart Investment."
SF Holdings, which was formed in December 1997 to facilitate the
Sweetheart Investment, is incorporated under the laws of Delaware. The
principal executive office of SF Holdings is located at 115 Stevens Avenue,
Valhalla, New York 10595-1252 and its telephone number is (914) 749-3274.
ISSUANCE OF THE OLD SHARES
Share Units (the "Share Units") consisting of the Old Shares and 111,000
shares of Class C Common Stock of SF Holdings (the "Common Shares") were sold
by the Sweetheart Stockholders to Bear, Stearns
7
<PAGE>
& Co. Inc. on March 20, 1998 (the "Closing Date") pursuant to a Purchase
Agreement, dated as of March 11, 1998 (the "Purchase Agreement"), among SF
Holdings, the Sweetheart Stockholders and the Initial Purchaser. The Initial
Purchaser subsequently resold the Share Units in reliance on Rule 144A under
the Securities Act and other available exemptions under the Securities Act on
or about March 20, 1998. SF Holdings, the Sweetheart Stockholders and the
Initial Purchaser also entered into the Registration Rights Agreement,
pursuant to which SF Holdings granted certain registration rights for the
benefit of the holders of the Old Shares. The Exchange Offer is intended to
satisfy certain of SF Holdings' obligations under the Registration Rights
Agreement with respect to the Old Shares. See "The Exchange Offer--Purpose
and Effects."
The form and terms of the New Shares will be identical in all material
respects to the form and terms of the Old Shares except that (i) the New
Shares have been registered under the Securities Act and, therefore, will not
bear legends restricting the transfer thereof, (ii) holders of New Shares
will not be entitled to the liquidated damages otherwise payable under the
terms of the Registration Rights Agreement in respect of Old Shares
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 Shares will not be, and upon
the consummation of the Exchange Offer, Eligible Holders of Old Shares 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 SF Holdings to the
Exchange Agent of the same number of New Shares as the number of Old Shares
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 Shares--Registration Rights; Liquidated
Damages."
SF Holdings did not receive any of the proceeds from the issuance and sale
of the Share Units. There will be no proceeds to SF Holdings from any
exchange pursuant to the Exchange Offer.
8
<PAGE>
THE EXCHANGE OFFER
THE EXCHANGE OFFER ............ SF Holdings 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 13-3/4% Series B
Exchangeable Preferred Stock due 2009 (the
"New Shares," and with the Old Shares, the
"Shares" or "Preferred Shares") for an
identical number of outstanding Old Shares
(the "Exchange Offer"). As of the date of
this Prospectus, 3,000 Old Shares are
outstanding. As of August 1, 1998, there was
one registered holder of the Old Shares,
Cede & Co. ("Cede"), which held 3,000 of the
Old Shares. See "The Exchange Offer--Terms
of the Exchange Offer."
EXPIRATION DATE ............... 5:00 p.m., New York City time, on August 7,
1998, 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 Shares
being tendered for exchange. However, the
Exchange Offer is subject to certain
customary conditions, which may be waived by
SF Holdings. See "The Exchange
Offer--Conditions of the Exchange Offer."
DIVIDENDS ON THE OLD SHARES ... Cumulative dividends at an annual rate equal
to 13-3/4% are payable quarterly in arrears
on March 15, June 15, September 15 and
December 15 of each year (each, a "Dividend
Payment Date"), commencing on June 15, 1998.
Until March 15, 2003, dividends on the Old
Shares may be paid, at SF Holdings' option,
on any Dividend Payment Date, either in cash
or by the issuance of additional shares of
Old Shares with an aggregate Liquidation
Amount equal to the amount of such
dividends. Thereafter, dividends will be
payable in cash, except to the extent that
covenants applicable to indebtedness of SF
Holdings prohibit such cash payments or the
covenants applicable to securities and/or
indebtedness of SF Holdings' subsidiaries
prohibit such subsidiaries from distributing
the necessary cash to SF Holdings. See "Risk
Factors--Holding Company Structure and
Related Considerations." Dividends accrue
and are cumulative from the date of original
issue of the Old Shares, whether or not
declared for any reason (including if such
declaration is prohibited under any
outstanding indebtedness or borrowing or
other contractual provision binding on SF
Holdings or any of its subsidiaries) and
whether or not there will be funds of SF
Holdings legally available for the payment
thereof. All accrued and unpaid dividends
will be compounded on a quarterly basis.
PROCEDURES FOR TENDERING
OLD SHARES ................... Each holder of Old Shares wishing to accept
the Exchange Offer must complete, sign and
date the Letter of Transmittal, or a
facsimile thereof, in accordance with the
instructions con-
9
<PAGE>
tained herein and therein, and mail or
otherwise deliver such Letter of
Transmittal, or such facsimile, together
with the Old Shares and any other required
documentation to the exchange agent (the
"Exchange Agent") at the address set forth
herein. Certificates representing the Old
Shares may be physically delivered, but
physical delivery is not required if a
confirmation of a book-entry of such Old
Shares 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
SF Holdings that, among other things, the
New Shares acquired pursuant to the Exchange
Offer are being obtained in the ordinary
course of business of the person receiving
such New Shares, 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
Shares and that neither the holder nor any
such other person is an "affiliate," as
defined under Rule 405 of the Securities
Act, of SF Holdings. Each broker or dealer
that receives New Shares for its own account
in exchange for Old Shares, where such Old
Shares 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 Shares. See "The Exchange
Offer--Procedures for Tendering" and "Plan
of Distribution."
GUARANTEED DELIVERY PROCEDURES
............................... Eligible Holders of Old Shares who wish to
tender their Old Shares and (i) whose Old
Shares are not immediately available or (ii)
who cannot deliver their Old Shares 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 Shares
according to the guaranteed delivery
procedures set forth in the Letter of
Transmittal. See "The Exchange
Offer--Guaranteed Delivery Procedures."
ACCEPTANCE OF OLD SHARES AND
DELIVERY OF NEW SHARES ....... Upon satisfaction or waiver of all
conditions of the Exchange Offer, SF
Holdings will accept any and all Old Shares
that are properly tendered in the Exchange
Offer prior to 5:00 p.m., New York City
time, on the Expiration Date. The New Shares
issued pursuant to the Exchange Offer will
be delivered promptly after acceptance of
the Old Shares. See "The Exchange
Offer--Procedures for Tendering."
WITHDRAWAL RIGHTS ............. Tenders of Old Shares 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."
10
<PAGE>
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--The Exchange Agent."
FEES AND EXPENSES ............. All expenses incident to SF Holdings'
consummation of the Exchange Offer and
compliance with the Registration Rights
Agreement will be borne by SF Holdings. SF
Holdings will also pay certain transfer
taxes applicable to the Exchange Offer. See
"The Exchange Offer--Fees and Expenses."
RESALES OF THE NEW SHARES ..... Based on interpretations by the staff of the
Commission set forth in no-action letters
issued to third parties, SF Holdings
believes that New Shares issued pursuant to
the Exchange Offer to an Eligible Holder in
exchange for Old Shares may be offered for
resale, resold and otherwise transferred by
such Eligible Holder (other than (i) a
broker-dealer who purchased the Old Shares
directly from SF Holdings 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 SF Holdings 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 Shares 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 Shares. Each broker-dealer that
receives New Shares for its own account in
exchange for Old Shares, where such Old
Shares 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 Shares. See "The Exchange
Offer--Purposes and Effects" and "Plan of
Distribution."
11
<PAGE>
DESCRIPTION OF NEW SHARES
The Exchange Offer applies to 3,000 shares of 13 3/4% Series A
Exchangeable Preferred Stock due 2009. The terms of the New Shares are
identical in all material respects to the Old Shares, except for certain
transfer restrictions and registration and other rights relating to the
exchange of the Old Shares for New Shares. See "Description of New Shares."
SECURITIES OFFERED ............ 3,000 shares of 13 3/4% Series B
Exchangeable Preferred Stock due 2009.
DIVIDENDS ..................... Cumulative dividends at an annual rate equal
to 13-3/4% are payable quarterly in arrears
on March 15, June 15, September 15 and
December 15 of each year (each, a "Dividend
Payment Date"), commencing on June 15, 1998.
Until March 15, 2003, dividends on the New
Shares may be paid, at SF Holdings' option,
on any Dividend Payment Date, either in cash
or by the issuance of additional shares of
Old Shares with an aggregate Liquidation
Amount equal to the amount of such
dividends. Thereafter, dividends will be
payable in cash, except to the extent that
covenants applicable to indebtedness of SF
Holdings prohibit such cash payments or the
covenants applicable to securities and/or
indebtedness of SF Holdings' subsidiaries
prohibit such subsidiaries from distributing
the necessary cash to SF Holdings. See "Risk
Factors--Holding Company Structure and
Related Considerations." Dividends accrue
and are cumulative from the date of original
issue of the New Shares, whether or not
declared for any reason (including if such
declaration is prohibited under any
outstanding indebtedness or borrowing or
other contractual provision binding on SF
Holdings or any of its subsidiaries) and
whether or not there will be funds of SF
Holdings legally available for the payment
thereof. All accrued and unpaid dividends
will be compounded on a quarterly basis.
RANKING ....................... The New Shares will be effectively
subordinated to all indebtedness and other
liabilities and commitments of SF Holdings'
subsidiaries. As of April 26, 1998, after
giving pro forma effect to the Transactions,
SF Holdings and its subsidiaries would have
had $802.2 million of indebtedness and other
liabilities and commitments. The New Shares
will rank senior to all classes of Common
Stock of SF Holdings and, except as provided
in the following proviso, to each other
class or series of capital stock issued by
SF Holdings now or hereafter created
(collectively, the "Junior Stock");
provided, however, that the Board of
Directors of SF Holdings may authorize a
class or series of preferred stock on a
parity in powers, preferences and rights to
the New Shares (collectively, the "Parity
Stock") or senior in powers, preferences and
rights to the New Shares (collectively, the
"Senior Stock") if approved by the holders
of a majority of the shares of New Shares.
The New Shares will rank junior to right of
payment to all of the indebtedness of SF
Holdings.
12
<PAGE>
MANDATORY REDEMPTION .......... Subject to the legal availability of funds,
the New Shares will be mandatorily
redeemable on March 15, 2009, at a
redemption price per share, in cash , equal
to the Liquidation Amount, plus an amount of
cash equal to the dividends, whether or not
earned or declared, accrued and unpaid
thereon to the date of redemption.
OPTIONAL REDEMPTION ........... The New Shares will be redeemable at any
time on or after March 15, 2003, at the
option of SF Holdings, in whole or in part,
at the redemption prices set forth herein,
plus an amount of cash equal to the
dividends, whether or not earned or
declared, accrued and unpaid thereon to the
date of redemption.
In addition, prior to March 15, 2001, SF
Holdings may, at its option, redeem up to
one-half of the aggregate Liquidation Amount
of New Shares at a redemption price equal to
113-3/4% of the Liquidation Amount, plus an
amount of cash equal to the dividends,
whether or not earned or declared, accrued
and unpaid thereon to the date of
redemption, with the net cash proceeds of an
Equity Offering; provided, that at least
one-half of the aggregate Liquidation Amount
of New Shares remains outstanding
immediately after the occurrence of such
redemption (excluding New Shares held by SF
Holdings and its subsidiaries); and
provided, further, that any such redemption
occurs within 60 days of the date of the
closing of such Equity Offering.
CHANGE OF CONTROL ............. Upon the occurrence of a Change of Control,
SF Holdings will be required to make an
offer to each holder of New Shares to
repurchase such holder's New Shares (a
"Repurchase Offer") at a purchase price
equal to 101% of the Liquidation Amount,
plus the cash value of any accrued and
unpaid dividends payable in kind and the
amount of any accrued and unpaid cash
dividends. SF Holdings will not be required
to make a Repurchase Offer upon a Change of
Control if such Repurchase Offer would cause
an event of default under any of the
agreements governing indebtedness of SF
Holdings, or if a third party makes a
Repurchase Offer in the manner, at the times
and otherwise in compliance with the
requirements set forth in the Restated
Certificate of Incorporation, as filed on
March 11, 1998, of SF Holdings (the
"Restated Certificate of Incorporation") and
purchases all shares of New Shares validly
tendered and not withdrawn under such
Repurchase Offer. In particular, the terms
of the Company's 12-3/4% Senior Secured
Discount Notes due 2008 (the "Discount
Notes") may prohibit SF Holdings from
repurchasing the New Shares upon a Change of
Control. As a result of the foregoing, there
can be no assurance that SF Holdings will
have the financial resources to repurchase
the New Shares upon a Change of Control. See
"Risk Factors--Holding Company Structure and
Related Considerations" and "--Change of
Control Provisions."
13
<PAGE>
VOTING RIGHTS ................. Holders of the New Shares have no voting
rights, except as described below or as
otherwise required by applicable law. In the
event that SF Holdings fails to (i) pay
dividends for six or more quarters (whether
or not consecutive), (ii) satisfy any
mandatory redemption obligation with respect
to the New Shares (regardless of whether the
reason for such failure is lack of legally
available funds), (iii) make a Repurchase
Offer within 30 days following a Change of
Control or make an Asset Sale Offer (as
defined herein) (regardless of whether such
offer is prohibited by the terms of any
indebtedness of SF Holdings) or (iv) comply
with certain informational obligations
contained in the Restated Certificate of
Incorporation or with the covenants
contained in "--Covenants" below for a
period of 30 days after the receipt of
notice of such failure from the registered
holders of not less than 25% of the shares
of New Shares then outstanding, then the
Board of Directors of SF Holdings shall be
increased by two members and the holders of
a majority of the outstanding shares of New
Shares, voting as a separate class, will be
entitled to elect two members to the Board
of Directors of SF Holdings.
In addition, the approval of the holders of
a majority of the outstanding shares of New
Shares, voting as a separate class, will
also be required for (i) the authorization
by SF Holdings of any series of preferred
stock ranked senior or on a parity in
powers, preferences and rights to the New
Shares (including any additional shares of
New Shares), (ii) the amendment or
modification of any provisions of the
Restated Certificate of Incorporation in any
manner that would adversely affect the
voting powers, designations, preferences and
rights of the New Shares and (iii) any
merger or consolidation or sale of all or
substantially all of the assets of SF
Holdings if the terms of such transaction do
not provide for the repurchase or redemption
of all of the shares of New Shares upon
consummation of such merger, consolidation
or sale. Notwithstanding the foregoing, upon
a refinancing of the Discount Notes, the
Restated Certificate of Incorporation may be
amended or modified without any approval of
the holders of the New Shares to reflect
covenants in the new notes which are more
favorable to SF Holdings than those
contained in the Discount Notes.
EXCHANGE ...................... SF Holdings may, at its option, on any
Dividend Payment Date, exchange all, but not
less than all, of the shares of New Shares
then outstanding for SF Holdings' 13-3/4%
Subordinated Notes due March 15, 2009 (the
"Subordinated Notes"), provided, that on
such date no condition exists that would
constitute an event of default under the
Indenture.
COVENANTS ..................... The Restated Certificate of Incorporation
contains certain covenants that, among other
things, limit the ability of SF Holdings and
its Restricted Subsidiaries to incur
additional indebtedness, pay dividends or
make other distributions, repur-
14
<PAGE>
chase certain equity interests, repay
certain subordinated indebtedness or make
certain other restricted payments, create
certain liens, enter into certain
transactions with affiliates, sell assets or
enter into certain mergers and
consolidations. In addition, the ability of
the Restricted Subsidiaries to issue
additional Exchangeable Preferred Stock is
also limited. The only consequences of a
violation of these covenants will be those
set forth in the first paragraph under
"--Voting Rights" above. See "Description of
New Shares--Certain Covenants."
USE OF PROCEEDS ............... There will be no proceeds to SF Holdings
from any exchange pursuant to the Exchange
Offer. SF Holdings did not receive any net
proceeds from the issuance of the Shares
Units. See "Use of Proceeds."
ABSENCE OF A PUBLIC MARKET
FOR THE NEW SHARES ........... The New Shares are a new issue of securities
with no established market, and SF Holdings
does not expect that an active trading
market in the Shares will develop.
Accordingly, there can be no assurance as to
the development or liquidity of any market
for the New Shares. The Initial Purchaser
has advised SF Holdings that it currently
makes a market in the Old Shares. SF
Holdings does not currently intend to apply
for listing of the New Shares 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.
15
<PAGE>
SUMMARY UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL DATA OF THE COMPANY
(DOLLARS IN THOUSANDS)
The following table sets forth summary unaudited pro forma combined
condensed financial data of the Company as of April 26, 1998 and for the
fiscal year ended July 27, 1997 and the nine and twelve months ended April
26, 1998. The summary unaudited pro forma combined condensed statement of
income data give effect to (i) the Fonda Stockholders Exchange, (ii) the
issuance of the units (the "Units") consisting of the Company's Discount
Notes and 288,000 shares of Class C Common Stock (the "Discount Note Shares")
and (iii) the Sweetheart Investment, as if each had occurred on the first day
of the Company's fiscal year ended July 27, 1997. The summary unaudited pro
forma combined condensed balance sheet data as of April 26, 1998 give effect
to (i) the Fonda Stockholders Exchange, (ii) the issuance of the Units and
(iii) the Sweetheart Investment, as if each had occurred on April 26, 1998.
The information contained in the following table should also be read in
conjunction with "Capitalization," "Unaudited Pro Forma Combined Condensed
Financial Data," "Management's Discussion and Analysis of Financial Condition
and Results of Operations," "Unaudited Pro Forma Financial Data of
Sweetheart," "Unaudited Pro Forma Financial Data of Fonda" and the historical
financial statements, including the notes thereto, contained elsewhere
herein.
<TABLE>
<CAPTION>
NINE MONTHS TWELVE MONTHS
YEAR ENDED ENDED ENDED
JULY 27, 1997 APRIL 26, 1998 APRIL 26, 1998
--------------- -------------- --------------
<S> <C> <C> <C>
STATEMENT OF INCOME DATA:
Net sales ........................................ $1,117,215 $811,696 $1,119,354
Cost of goods sold ............................... 992,757 735,452 992,192
--------------- -------------- --------------
Gross profit ..................................... 124,458 76,244 127,162
Selling, general and administrative expenses .... 105,451 81,130 110,404
Loss on asset disposal and impairment ............ 24,550 24,550 24,550
Other income, net ................................ (1,681) (11,871) (13,816)
--------------- -------------- --------------
Income (loss) from operations .................... (3,862) (17,565) 6,024
Interest expense, net ............................ 62,928 49,219 64,557
--------------- -------------- --------------
Loss before taxes and minority interest ......... (66,790) (66,784) (58,533)
Income tax benefit ............................... (26,800) (26,681) (23,339)
Minority interest in loss of subsidiary ......... (3,757) (4,094) (3,723)
--------------- -------------- --------------
Loss before cumulative effect of an accounting
change and extraordinary loss ................... (36,233) (36,009) (31,471)
Dividends on preferred stock ..................... 4,219 3,165 4,219
--------------- -------------- --------------
Loss available to common stockholders before
cumulative effect of an accounting change
and extraordinary loss .......................... $ (40,452) $ (39,174) $ (35,690)
=============== ============== ==============
OTHER GAAP FINANCIAL DATA:
Cash interest expense (a) ........................ $ 49,761 $ 39,413 $ 51,722
Capital expenditures ............................. 47,951 34,115 46,795
Depreciation and amortization (b) ................ 50,580 38,253 51,183
OTHER NON-GAAP FINANCIAL DATA:
Adjusted EBITDA (c) .............................. $ 71,207 $ 33,092 $ 68,671
Ratio of Adjusted EBITDA to cash interest expense
(c)(a) .......................................... 1.4x 0.8x 1.3x
</TABLE>
<TABLE>
<CAPTION>
AS OF
APRIL 26, 1998
--------------
<S> <C>
BALANCE SHEET DATA:
Cash and cash equivalents .......... $ 6,914
Cash in escrow ..................... 10,286
Working capital .................... 150,168
Property, plant and equipment, net 436,269
Total assets ....................... 952,056
Total indebtedness (d) ............. 621,007
Total stockholders' equity.......... 29,622
</TABLE>
(Footnotes on next page)
16
<PAGE>
- ------------
(a) Cash interest expense consists of interest expense, excluding interest
on the Discount Notes and amortization of deferred financing costs of
$4,135, $2,749 and $3,804 for Fiscal 1997 and the nine and twelve
months ended April 26, 1998, respectively.
(b) Depreciation and amortization excludes amortization of deferred
financing costs, which are included in interest expense.
(c) Adjusted EBITDA represents income (loss) from operations before
interest expense, provision for income taxes, Fonda other income,
depreciation and amortization, Sweetheart loss on asset disposal and
impairment, Sweetheart restructuring expenses, the Sweetheart
Reduction, which represents one-time charges of $8,147 associated with
the Sweetheart Investment and the gain on the sale by Sweetheart of its
bakery operations in November 1997 (the "Sweetheart Bakery
Disposition") of $3,459 in the nine and twelve months ended March 31,
1998. Adjusted EBITDA is generally accepted as providing information
regarding a company's ability to service debt. Adjusted 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.
Adjusted EBITDA does not reflect the elimination of $2.8 million and
$0.8 million of fixed costs in Fiscal 1997 and the twelve months ended
April 26, 1998, respectively, that would not have been incurred had the
Three Rivers and Long Beach facilities been closed at the beginning of
Fiscal 1997.
(d) Total indebtedness includes short-term and long-term borrowings and
current maturities, of long-term debt.
17
<PAGE>
SUMMARY HISTORICAL FINANCIAL DATA OF THE FONDA GROUP, INC. (1)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS
FISCAL YEAR ENDED JULY (2) ENDED APRIL (2)
------------------------------------------------------- ----------------------
1993 1994 1995 1996 1997 1997 1998
--------- --------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Net sales ..................... $61,079 $61,839 $ 97,074 $204,903 $252,513 $184,544 $203,597
Cost of goods sold ............ 49,776 51,643 76,252 161,304 196,333 148,820 167,520
--------- --------- ---------- ---------- ---------- ---------- ----------
Gross profit .................. 11,303 10,196 20,822 43,599 56,180 35,724 36,077
Selling, general and
administrative expenses ..... 8,686 8,438 14,112 29,735 37,168 24,128 26,003
Other income, net ............. -- -- -- -- (1,608) -- (9,566)
--------- --------- ---------- ---------- ---------- ---------- ----------
Income from operations ........ 2,617 1,758 6,710 13,864 20,620 11,596 19,640
Interest expense, net ......... 1,201 1,268 2,943 7,934 9,017 6,798 9,151
--------- --------- ---------- ---------- ---------- ---------- ----------
Income before taxes and
extraordinary loss ........... 1,416 490 3,767 5,930 11,603 4,798 10,489
Income taxes .................. 478 239 1,585 2,500 4,872 2,015 4,406
--------- --------- ---------- ---------- ---------- ---------- ----------
Income before extraordinary
loss ......................... 938 251 2,182 3,430 6,731 2,783 6,083
Extraordinary loss, net (3) .. -- -- -- -- 3,495 3,495 --
--------- --------- ---------- ---------- ---------- ---------- ----------
Net income (loss).............. $ 938 $ 251 $ 2,182 $ 3,430 $ 3,236 $ (712) $ 6,083
========= ========= ========== ========== ========== ========== ==========
OTHER GAAP FINANCIAL DATA:
Net cash provided by (used in)
operating activities(4) ..... $ 2,797 $ 140 $ (4,774) $ 17,673 $ 8,273 $ 679 $ 6,342
Net cash provided by (used in)
investment activities ........ (1,027) (1,272) (29,593) (46,532) (36,006) (9,485) 1,271
Net cash provided by (used in)
financing activities ......... (1,742) 992 34,262 30,206 32,174 31,473 (9,866)
Cash interest expense (5) .... 1,201 1,268 2,383 6,748 8,309 5,924 9,071
Capital expenditures (6) ..... 1,027 1,272 1,608 1,314 10,363 3,469 6,245
Depreciation and amortization . 1,248 1,246 1,669 3,450 4,440 3,475 4,153
Ratio of earnings to fixed
charges (7) .................. 1.9x 1.3x 2.1x 1.7x 2.1x 1.7x 2.0x
OTHER NON-GAAP FINANCIAL DATA:
Adjusted Fonda EBITDA(8) ..... $ 3,865 $ 3,004 $ 8,379 $ 17,314 $ 23,942 $ 15,071 $ 14,560
Ratio of Adjusted Fonda EBITDA
to cash interest expense
(8)(5) ....................... 3.2x 2.4x 3.5x 2.6x 2.9x 2.5x 1.6x
</TABLE>
<TABLE>
<CAPTION>
AS OF
APRIL 26, 1998
--------------
<S> <C>
BALANCE SHEET DATA:
Cash ............................... $ 3,655
Working capital .................... 49,037
Property, plant and equipment, net 48,907
Total assets ....................... 178,674
Total indebtedness (9) ............. 122,909
Redeemable common stock (10) ....... --
Total stockholders' equity.......... 13,381
</TABLE>
(Footnotes on next page)
18
<PAGE>
- ------------
(1) The summary statement of income and other financial data include the
results of operations of Fonda and each of the following acquisitions
(the "Fonda Acquisitions") since their respective dates of
acquisition as follows: (i) the net assets of the Scott Foodservice
Division ("Hoffmaster") from Scott Paper Company as of March 31,
1995; (ii) the net assets of Alfred Bleyer & Co., Inc. ("Maspeth") as
of November 30, 1995; (iii) all of the outstanding capital stock of
the Chesapeake Consumer Products Company ("Chesapeake") from
Chesapeake Corporation as of December 29, 1995; (iv) the net assets
of two divisions of the Specialties Operations Division of James
River Paper Corporation ("James River California/Natural Dam") as of
May 5, 1996; (v) all of the outstanding capital stock of Heartland
Mfg. Corp. ("Heartland") as of June 2, 1997; (vi) the net assets of
the former printed products division of Astro Valcour, Inc. ("Astro
Valcour") from Tenneco Inc. as of June 10, 1997; and (vii) the net
assets of Leisureway as of January 5, 1998. The acquisitions of
Heartland and Astro Valcour are hereinafter referred to as the "1997
Fonda Acquisitions." See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Introduction,"
"Business" and Note 3 of the Notes to the Financial Statements of
Fonda.
(2) All fiscal years are 52 weeks, except for Fiscal 1994 which is 53
weeks. The six month periods are 26 weeks.
(3) Fonda incurred a $3.5 million extraordinary loss (net of a $2.5
million income tax benefit) in connection with the early retirement
of debt consisting of the write-off of unamortized debt issuance
costs, elimination of unamortized discount and prepayment penalties.
(4) Material differences between Adjusted Fonda 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 Adjusted Fonda EBITDA
and (b) interest expense and provision for income taxes which are
included when presenting cash provided by or used in operating
activities but are not included in the calculation of Adjusted Fonda
EBITDA.
(5) Cash interest expense excludes (i) the amortization of debt issuance
costs of $560, $1,021, $514, $466 and $413 for Fiscal 1995, 1996 and
1997, the nine months ended April 1997 and 1998, respectively, (ii)
pay-in-kind interest expense of $165, $684 and $408 for Fiscal 1996
and 1997 and the nine months ended April 1997, respectively, and
(iii) interest income of $490 and $333 for Fiscal 1997 and the nine
months ended April 1998, respectively.
(6) Excludes the costs of the Fonda Acquisitions.
(7) 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.
(8) Adjusted Fonda EBITDA represents income from operations before
interest expense, provision for income taxes, other income and
depreciation and amortization. EBITDA is generally accepted as
providing information regarding a company's ability to service debt.
The Adjusted Fonda 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 invloved)
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.
(9) Total indebtedness includes short-term and long-term borrowings and
current maturities of long-term debt.
(10) See Note 10 of the Notes to the Financial Statements of Fonda.
19
<PAGE>
SUMMARY HISTORICAL FINANCIAL DATA OF SWEETHEART HOLDINGS INC.
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM SIX MONTHS
JANUARY 1 TO AUGUST 30 TO FISCAL YEAR ENDED SEPTEMBER 30, ENDED MARCH 31,
AUGUST 29, SEPTEMBER 30, ------------------------------------------- --------------------
1993 1993 1994 1995 1996 1997 1997 1997
-------------- --------------- ---------- ---------- --------- -------- ----------- --------
(PREDECESSOR) (SUCCESSOR)
-------------- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales .................... $591,258 $81,571 $898,528 $986,618 $959,818 $886,017 $398,107 $393,168
Cost of sales ................ 522,615 71,963 778,163 874,593 846,719 821,021 385,530 373,965
-------------- --------------- ---------- ---------- ---------- ----------- ----------- -----------
Gross profit ................. 68,643 9,608 120,365 112,025 113,099 64,996 12,577 19,203
Selling, general and
administrative .............. 45,494 5,787 67,712 66,089 61,788 66,792 32,915 38,124
Loss on asset disposal and
impairment .................. -- -- -- -- -- 24,550 -- --
Restructuring charges ........ -- -- -- -- -- 9,680 -- 10,527
Other (income) expense, net . (48) 177 (411) (1,197) 4,271 (73) 582 6,160
-------------- --------------- ---------- ---------- ---------- ----------- ----------- -----------
Operating income (loss) ..... 23,197 3,644 53,064 47,133 47,040 (35,953) (20,920) (35,608)
Interest expense, net ........ 43,947 3,311 37,248 37,410 37,517 40,265 19,501 21,498
-------------- --------------- ---------- ---------- ---------- ----------- ----------- -----------
Income (loss) before income
taxes, cumulative effect of
an accounting change and
extraordinary loss .......... (20,750) 333 15,816 9,723 9,523 (76,218) (40,421) (57,106)
Income tax (expense) benefit 6,641 (161) (6,462) (3,903) (3,809) 30,487 16,168 22,840
-------------- --------------- ---------- ---------- ---------- ----------- ----------- -----------
Income (loss) before
cumulative effect
of an accounting change and
extraordinary loss .......... (14,109) 172 9,354 5,820 5,714 (45,731) (24,253) (34,266)
Cumulative effect of a change
in accounting principle,
net.......................... -- -- -- -- -- -- -- (1,511)
Extraordinary loss, net ..... -- -- -- -- -- (940) -- --
-------------- --------------- ---------- ---------- ---------- ----------- ----------- -----------
Net income (loss) ............ $(14,109) $ 172 $ 9,354 $ 5,820 5,714 $(46,671) $(24,253) $(35,777)
============== =============== ========== ========== ========== =========== =========== ===========
OTHER GAAP FINANCIAL DATA:
Net cash provided by (used
in) operating activities (1) $ 23,735 $ 5,901 $ 41,532 $ 50,899 $ 43,508 $ (3,242) $(18,060) $(18,542)
Net cash (used in) investing
activities .................. (14,154) (1,942) (32,581) (51,514) (50,236) (29,914) (24,889) (4,710)
Net cash provided by (used
in) financing activities ... (9,625) (3,982) 3,240 (3,615) 3,098 31,435 42,271 23,861
Cash interest expense (2) ... 14,038 3,063 34,140 35,121 35,272 38,241 18,276 20,605
Capital expenditures ......... 14,557 1,956 39,428 51,625 50,236 47,757 24,889 20,342
Depreciation and amortization
(3) ......................... 28,507 2,050 25,783 34,207 39,813 44,152 21,605 21,540
Ratio of earnings to fixed
charges (4) ................. N/A 1.1x 1.4x 1.2x 1.2x N/A N/A N/A
OTHER NON-GAAP FINANCIAL
DATA:
Adjusted Sweetheart EBITDA
(5) ......................... $ 51,738 $ 5,710 $ 79,059 $ 82,585 $ 88,168 $ 43,976 $ 1,239 $ 1,702
Ratio of Adjusted Sweetheart
EBITDA to cash interest
expense (5)(2)............... 3.7x 1.9x 2.3x 2.4x 2.5x 1.1x 0.1x 0.1x
</TABLE>
<TABLE>
<CAPTION>
AS OF MARCH
31, 1998
--------------
<S> <C>
BALANCE SHEET DATA:
Cash and cash equivalents .......... $ 3,259
Working capital .................... 97,248
Property, plant and equipment, net 375,362
Total assets ....................... 688,813
Total indebtedness (6) ............. 422,988
Total shareholders' equity ......... 38,873
</TABLE>
(Footnotes on next page)
20
<PAGE>
- ------------
(1) Material differences between Adjusted Sweetheart 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 Adjusted Sweetheart 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 Adjusted Sweetheart EBITDA.
(2) Cash interest expense excludes (i) the amortization of debt issuance
cost of $1,241, $264, $3,320, $3,534, $3,560, $3,571, $1,779, and
$1,448 for the eight months ended August 1993, the one month ended
September 1993, Fiscal 1994, 1995, 1996, 1997, the six month March 1997
period and the six month March 1998 period, respectively, (ii) $28,702
of payment-in-kind interest in the eight months ended August 1993, and
(iii) interest income of $34, $16, $212, $1,245, $1,315, $1,547, $555
and $555 for the eight months ended August 1993, the one month ended
September 1993, Fiscal 1994, 1995, 1996, 1997, the six month March 1997
period and the six month March 1998 period, respectively.
(3) Depreciation and amortization excludes amortization of deferred
financing costs which are included in interest expense.
(4) 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. Earnings were not sufficient to cover fixed charges in the
eight months ended August 1993, Fiscal 1997 and the six months ended
March 1997, 1996 and 1998 periods in the amount of $20,750, $76,803,
$40,958 and $57,129, respectively.
(5) Adjusted Sweetheart EBITDA represents income (loss) from operations
before interest expense, provision for income taxes, depreciation and
amortization, loss on asset disposal and impairment, restructuring
expense, the Sweetheart Reduction, which represents one-time charges of
$8,147 associated with the Sweetheart Investment in the six month
period ended March 31, 1998 and gain on the Sweetheart Bakery
Disposition recognized in the six month period ending March 31, 1998
period in the amount of $3,459. EBITDA is generally accepted as
providing information regarding a company's ability to service debt.
Adjusted Sweetheart 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 invloved) 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.
(6) Total indebtedness includes short-term and long-term borrowings and
current maturities of long-term debt.
21
<PAGE>
RISK FACTORS
Holders of the Old Shares should carefully consider the following matters,
as well as the other information contained in this Prospectus, before
deciding to tender their Old Shares in the Exchange Offer.
HOLDING COMPANY STRUCTURE AND RELATED CONSIDERATIONS
SF Holdings is a holding company that conducts all of its operations
through Sweetheart and Fonda, and therefore does not have any material cash
flows independent of Sweetheart and Fonda. The instruments governing the
indebtedness of Sweetheart and Fonda (the "Subsidiary Debt Instruments")
contain numerous restrictive covenants which restrict Sweetheart and Fonda's
ability to pay dividends or make other distributions to SF Holdings. In
addition, the payment of dividends and other distributions by Sweetheart or
Fonda may be restricted by applicable law. Moreover, the indenture governing
the Discount Notes and the Restated Certificate of Incorporation impose, and
the Indenture will impose, restrictions on the ability of the Company to
incur additional indebtedness or pay dividends on or redeem or repurchase the
New Shares. These covenants could also limit SF Holdings' ability to meet its
obligations with respect to the New Shares, the Discount Notes and the
Subordinated Notes. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources; --
Fonda Liquidity and Capital Resources; and --Sweetheart Liquidity and Capital
Resources."
Any right of the Company and its stockholders, including holders of the
Shares, to participate in the assets of Sweetheart, Fonda or any other
subsidiary of the Company upon any liquidation or reorganization of any such
subsidiary will be subject to the prior claims of that subsidiary's
creditors, including the trade creditors. Accordingly, the New Shares and the
Subordinated Notes will be effectively subordinated to all liabilities,
including trade payables, of the subsidiaries of the Company.
Under Delaware law, the Company is permitted to pay dividends on its
capital stock including the Shares, only out of its surplus or, in the event
that it has no surplus, out of its net profits for the year in which a
dividend is declared or for the immediately preceding fiscal year. In order
to pay dividends in cash, the Company must have surplus or net profits equal
to the full amount of the cash dividend at the time such dividend is
declared. In determining the Company's ability to pay dividends, Delaware law
permits the board of directors of the Company to revalue the Company's assets
and liabilities from time to time to their fair market values in order to
create surplus. The Company cannot predict what the value of its assets or
the amount of its liabilities will be in the future and, accordingly, there
can be no assurance that the Company will be able to pay dividends on the New
Shares.
SUBORDINATION; SUBSTANTIAL LEVERAGE; ABILITY TO SERVICE INDEBTEDNESS;
LIQUIDITY
Although the New Shares will rank senior to all Junior Stock, they will be
subordinate to all indebtedness and other liabilities of SF Holdings and its
subsidiaries, which, as of April 26, 1988, would have totaled $802.2 million,
after giving pro forma effect to the Transactions.
Each of SF Holdings, Sweetheart and Fonda is highly leveraged. As of April
26, 1998, after giving pro forma effect to the Transactions, the Company
would have had total consolidated indebtedness of $621.0 million consisting
of the Discount Notes, $122.9 million of indebtedness at Fonda and $423.0
million of indebtedness at Sweetheart. In addition, as of April 26, 1998,
Sweetheart and Fonda would have had $9.0 million and $36.1 million,
respectively, of additional borrowings available under their respective
credit facilities. Moreover, the Company's indebtedness will increase as a
result of the accretion of original issue discount on the Discount Notes. See
"Capitalization." For the twelve months ended April 26, 1998, after giving
pro forma effect to the Transactions, the Company's ratio of Adjusted EBITDA
to total interest expense would have been 1.0x.
The significant indebtedness outstanding of SF Holdings, Sweetheart and
Fonda may have several important consequences to the holders of the New
Shares, including, but not limited to, the following: (i) the Company's
ability to obtain additional financing in the future for working capital,
capital expenditures, acquisitions or for other purposes may be impaired;
(ii) the Company's flexibility to expand, make capital expenditures and
respond to changes in the industry and economic conditions generally may be
limited; (iii) the Subsidiary Debt Instruments, the Restated Certificates of
Incorporation and the indenture governing the Discount Notes contain numerous
financial and other restrictive covenants, including,
22
<PAGE>
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, to
reinvest asset sale proceeds, if any, 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 (iv) the ability of the Company to satisfy its obligations
pursuant to its indebtedness, including pursuant to the indenture governing
the Discount Notes, may be impaired. See "Management's Discussion and
Analysis of Results of Operations and Financial Condition." In addition, SF
Holdings has no credit facility to draw upon in order to obtain additional
financing, if necessary.
Due in part to seasonally low cash flows from operations in the first and
second fiscal quarters and reduced profitability in the prior fiscal year,
Sweetheart's available borrowings under its credit facilities as of March 31,
1998 were substantially limited pursuant to the borrowing base formulas set
forth therein. The inability of Sweetheart to increase available borrowings
through the production of inventory and accounts receivable or otherwise
could have a material adverse effect on the Company. In addition, due to the
Company's high leverage, there can be no assurance that the Company would
have access to alternative sources of liquidity.
RANKING OF NEW SHARES AND SUBORDINATED NOTES
The New Shares will, with respect to dividend rights and rights on
liquidation, winding-up and dissolution, rank senior to all Junior Stock of
SF Holdings and junior to right of payment to all of the indebtedness of SF
Holdings. The Subordinated Notes will be unsecured, subordinated obligations
of SF Holdings that will be subordinated to all existing and future
indebtedness of SF Holdings. The New Shares and the Subordinated Notes will
be effectively subordinated to all indebtedness and other liabilities and
commitments of SF Holdings' subsidiaries. In the event of the insolvency,
liquidation, reorganization, dissolution or other winding-up of SF Holdings,
holders of the New Shares and the Subordinated Notes will rank junior to the
claims of the holders of any indebtedness of SF Holdings and all other
creditors of SF Holdings and to all indebtedness and other liabilities and
commitments of SF Holdings' subsidiaries. Future agreements of SF Holdings
may restrict or prohibit SF Holdings from redeeming the New Shares or the
Subordinated Notes.
INDENTURE AND CREDIT FACILITY RESTRICTIONS
The Subsidiary Debt Instruments and the indenture governing the Discount
Notes contain numerous restrictive covenants including, among other things,
limitations on the ability of Sweetheart, Fonda and SF Holdings, as the case
may be, 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
respective credit facilities of Fonda and Sweetheart also require each entity
to meet certain financial tests. Fonda, Sweetheart or SF Holdings' failure to
comply with their respective obligations under the Subsidiary Debt
Instruments or the indenture governing the Discount Notes, as the case may
be, or under agreements relating to indebtedness incurred in the future,
could result in an event of default under such agreements, which could permit
acceleration of the related indebtedness and acceleration of indebtedness
under other financing arrangements that may contain cross-acceleration or
cross-default provisions. In addition, because the Subsidiary Debt
Instruments and the indenture governing the Discount Notes limit the ability
of Fonda, Sweetheart and SF Holdings, as the case may be, to engage in
certain transactions except under certain circumstances, Fonda, Sweetheart
and SF Holdings may be prohibited from entering into transactions that could
be beneficial to the Company. Furthermore, the Subsidiary Debt Instruments
permit certain transactions with affiliates so long as such transactions are
negotiated on an arm's length basis and are on terms at least as favorable as
those which could otherwise have been obtained from unrelated third parties.
See "--Realization of Benefits from Sweetheart Investment," "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources; -- Fonda Liquidity and Capital
Resources; and -- Sweetheart Liquidity and Capital Resources" and
"Description of New Shares."
CHANGE OF CONTROL PROVISIONS
Upon the occurrence of a Change of Control, SF Holdings will be required
to offer to repurchase each holder's New Shares at a price equal to 101% of
the Liquidation Amount, plus the cash value of any
23
<PAGE>
accrued and unpaid dividends payable in kind and the amount of any accrued
and unpaid cash dividends or each holder's Subordinated Notes at a purchase
price equal to 101% of the aggregate principal amount thereof, plus accrued
and unpaid interest to the date of repurchase, as applicable. The indenture
governing the Discount Notes and the Subsidiary Debt Instruments contain
similar change of control provisions. SF Holdings does not have, and may not
in the future have, any assets other than the Capital Stock of Sweetheart and
Fonda. The Subsidiary Debt Instruments limit Sweetheart and Fonda's
respective ability to make payments to SF Holdings. As a result, the ability
of SF Holdings to repurchase the New Shares, the Subordinated Notes, if
issued, or the Discount Notes upon a Change of Control will be dependent on
SF Holdings' ability to issue additional equity or refinance the indebtedness
under the Subordinated Notes, if issued, the Discount Notes or the Subsidiary
Debt Instruments. If SF Holdings is unable to issue additional equity or
refinance the indebtedness under the Subordinated Notes, if issued, the
Discount Notes or the Subsidiary Debt Instruments, SF Holdings will likely
not have the financial resources to repurchase the New Shares upon the
occurrence of a Change of Control. In addition, the requirement to repurchase
the New Shares, the Subordinated Notes, if issued, and the Discount Notes
upon a Change of Control may discourage persons from making a tender offer
for or a bid to acquire SF Holdings. In addition, the Subsidiary Debt
Instruments contain similar change of control provisions. As a result,
following a Change of Control, Sweetheart and Fonda, as the case may be, may
be required to offer to repurchase all indebtedness under their respective
indentures. See "The Sweetheart Investment;" "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources; -- Fonda Liquidity and Capital Resources; and --Sweetheart
Liquidity and Capital Resources" and "Description of New Shares--Repurchase
at the Option of Holders--Change of Control."
Furthermore, pursuant to the Restated Certificate of Incorporation or the
Indenture, as applicable, SF Holdings will not be required to make a
Repurchase Offer upon a Change of Control if such Repurchase Offer would
cause an event of default under any agreements governing indebtedness of SF
Holdings.
DEPENDENCE ON CERTAIN CUSTOMERS
The Company has a number of large national accounts which account for a
significant portion of its revenue. In Fiscal 1997, each of Sweetheart and
Fonda's five largest customers represented approximately 35% and 17%,
respectively, of its net sales. No single customer of Fonda accounted for
more than 10.0% of net sales in Fiscal 1997. One customer of Sweetheart,
McDonald's, accounted for 13.7% of net sales of Sweetheart in Fiscal 1997. In
the fourth quarter of Fiscal 1997, Sweetheart completed negotiations of a
three-year contract renewal with its largest customer, McDonald's. This
agreement results in a lower selling price and less total volume, thereby
resulting in lower margins. The loss of one or more large national customers
could adversely affect the Company's operating results. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Sweetheart Liquidity and Capital Resources" and
"Business--Marketing and Sales."
SUPPLY AND PRICING OF RAW MATERIALS
The Company purchases solid bleached sulfate ("SBS") paperboard, plastic
resin 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
24
<PAGE>
accompanies the implementation of both raw materials and subsequent selling
price changes. In the event raw materials prices decrease over a period of
several months, the Company's profit margins may be adversely affected. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
REALIZATION OF BENEFITS FROM SWEETHEART INVESTMENT
There can be no assurance that the Company will be able to realize the
benefits it expects to achieve as a result of the Sweetheart Investment.
Management has not previously had responsibility for day-to-day operations of
a company as large as Sweetheart. The realization of potential benefits from
the Sweetheart Investment could be adversely affected by a number of factors,
some of which are not in the Company's control, including the ability of the
Company to achieve cost savings and other synergies as a result of, among
other things, the limitations under the indenture governing the Discount
Notes and the Subsidiary Debt Instruments, the ability of the Company's
existing management and systems infrastructure to absorb the increased
operations, the response of competition and general economic conditions. In
addition, the implementation of the Company's strategy has resulted in
one-time operating charge and could result in additional operating charges,
which could impair the Company's liquidity. See "--Subordination; Substantial
Leverage; Ability to Service Indebtedness; Liquidity" and "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Recent Developments." In addition, pursuant to the indenture
governing the Discount Notes and the Subsidiary Debt Instruments,
transactions with affiliates, including transactions between and among SF
Holdings, Sweetheart and/or Fonda, must be negotiated on terms at least as
favorable as those which could otherwise have been obtained from unrelated
third parties, which may limit the Company's ability to fully realize the
cost savings and synergies expected to be achieved as a result of the
Sweetheart Investment. See "Business--General."
MANAGEMENT INFORMATION SYSTEMS
Sweetheart is in the process of implementing new management information
systems that affect broad aspects of its operations. There can be no
assurance that such systems will be implemented successfully or that
implementation of such systems will not result in a disruption of
Sweetheart's operations. The failure to successfully implement such systems
could have a material adverse effect on the Company.
SEASONALITY
The Company's business is highly seasonal with a majority of its net cash
flow from operations realized in the second and third quarters of the
calendar year. The Company builds its inventory throughout the year to
satisfy the high seasonal demands of the summer months when outdoor and
away-from-home consumption increases. In the event cash flow from operations
is insufficient to provide working capital necessary to fund production
requirements during these quarters, Fonda and Sweetheart will need to borrow
under their respective credit facilities or seek other sources of capital.
Although the Company believes that funds available under the Fonda Credit
Facility and Sweetheart Credit Facilities, together with cash generated from
operations, will be adequate to provide for each company's respective 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; -- Fonda
Liquidity and Capital Resources and -- Sweetheart 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 those who compete across the full line of the
Company's products, as well as companies that compete against a limited
number of the Company's products. Some of the Company's competitors have
greater financial and other resources than the Company. See
"Business--Competition."
25
<PAGE>
VOTING OWNERSHIP OF SWEETHEART
The Sweetheart Stockholders own 52% of the total outstanding Sweetheart
Class A Common Stock and thereby control the vote on matters submitted to the
stockholders of Sweetheart. In addition, the Sweetheart Stockholders have the
right to nominate and elect three of the five members of Sweetheart's Board
of Directors. See "The Sweetheart Investment."
CONTROL BY PRINCIPAL STOCKHOLDER
Dennis Mehiel, the Chairman of the Board of Directors and Chief Executive
Officer of SF Holdings, beneficially owns approximately 80.0% of the
outstanding shares of SF Holdings' Common Stock on a fully diluted basis
(approximately 90.0% of the outstanding shares of SF Holdings' Class A Common
Stock on a fully diluted basis). See "Principal Stockholders." As a result,
Mr. Mehiel controls SF Holdings and has the power to elect the entire board
of directors, appoint new management and approve any other action requiring
the approval of the holders of SF Holdings' stock, including adopting certain
amendments to SF Holdings' certificate of incorporation and approving mergers
or sales of all of SF Holdings' assets. See "Principal Stockholders" and
"Description of Capital Stock."
DEPENDENCE ON KEY PERSONNEL
SF Holdings is dependent on the retention of, and continued performance
by, its senior management, including Dennis Mehiel, Chairman and Chief
Executive Officer of SF Holdings, and Thomas Uleau, President and Chief
Operating Officer of SF Holdings. The Company believes that the loss of the
services of any of the senior management of SF Holdings could have a material
adverse effect on SF Holdings. SF Holdings 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 Dennis Mehiel and Thomas Uleau are executive officers of other
affiliates of SF Holdings. See "Management."
LABOR MATTERS
As of April 16, 1998, approximately 22% and 87% of Sweetheart and Fonda's
hourly employees, respectively, were covered by collective bargaining
agreements. Sweetheart currently has collective bargaining agreements
("CBAs") in effect at its facilities in Springfield, Missouri, Augusta,
Georgia and Toronto, Canada (collectively, the "Sweetheart CBAs"). Fonda has
collective bargaining agreements in effect at its facilities in Appleton,
Wisconsin; Oshkosh, Wisconsin; St. Albans, Vermont; Williamsburg,
Pennsylvania and Maspeth, New York (collectively, the Fonda "CBAs"). The
Sweetheart and Fonda CBAs cover all production, maintenance and distribution
hourly-paid employees at each respective facility and contain standard
provisions relating to, among other things, management rights, grievance
procedures, strikes and lockouts, seniority, and union rights. The current
expiration dates of the CBAs at the Springfield, Augusta and Toronto
facilities are March 4, 2001, October 31, 1998 and November 30, 2000,
respectively. The Company anticipates that renewal negotiations regarding the
Augusta CBA will result in another three-year contract term. The current
expiration dates of the CBAs at the Appleton, Oshkosh, St. Albans,
Williamsburg and Maspeth facilities are March 31, 1999, May 31, 2002, January
31, 2001, June 7, 2000, October 31, 1999 and May 31, 2003, respectively.
Fonda experienced a one-month work stoppage at its former 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
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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.
YEAR 2000 COMPLIANCE
Each of Sweetheart and Fonda has implemented Year 2000 compliance programs
designed to ensure that each respective company's computer systems and
applications will function properly beyond 1999. The Company expects
Sweetheart and Fonda's Year 2000 date conversion programs to be substantially
completed by the end of 1999. The Company believes that adequate resources,
both internal and external, have been allocated for this purpose. Spending
for these Year 2000 compliance programs, including Fiscal 1998 spending, is
estimated to be $2.7 million and $1.8 million at Sweetheart and Fonda,
respectively, and will be funded from each of the respective company's cash
from operations or borrowings under each company's respective credit
facility. However, there can be no assurance that the Company will identify
all Year 2000 date conversion problems in its computer systems in advance of
their occurrence or that the Company will be able to successfully remedy all
problems that are discovered. Failure by Sweetheart or Fonda and/or their
significant vendors and customers to complete Year 2000 compliance programs
in a timely manner could have a material adverse effect on the Company's
business, financial condition and results of operations. In addition, the
revenue stream and financial stability of existing customers may be adversely
impacted by Year 2000 problems which could cause fluctuations in the
Company's revenues and operating profitability.
ABSENCE OF PUBLIC MARKET
Prior to this Prospectus, there has been no public market for the New
Shares, and there can be no assurance that such a market will develop. In
addition, the New Shares will not be listed on any national securities
exchange. Although the New Shares are eligible for trading in the Private
Offerings, Resales and Trading through Automatic Linkages ("PORTAL") market,
the New Shares may trade at a discount from their initial offering price,
depending upon prevailing interest rates, the market for similar securities,
SF Holdings' performance and other factors. The Initial Purchaser has made a
market in the Old Shares as permitted by applicable law and regulation;
however, the Initial Purchaser is not obligated to do so and any such
market-making activities may be discontinued at any time without notice. In
addition, such market-making activities may be limited during the Exchange
Offer and, if necessary, the pendency of a Shelf Registration Statement.
Therefore, there can be no assurance that an active market for any of the New
Shares will develop after SF Holdings' performance of its obligations under
the Registration Rights Agreement.
FRAUDULENT TRANSFER STATUTES
Under Federal or state fraudulent transfer laws, the Shares may be
subordinated to existing or future indebtedness of SF Holdings 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 Shares were issued SF Holdings was
insolvent, or was rendered insolvent by the issuance of the Shares and the
substantially concurrent use of the proceeds therefrom, was engaged in a
business or transaction for which the assets remaining with SF Holdings
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
SF Holdings' obligations under the Shares or subordinate the Shares to all
other indebtedness of SF Holdings. In such event, there can be no assurance
that any repayment of the Shares could ever be recovered by holders of the
Shares.
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For purposes of the foregoing, the measure of insolvency varies depending
upon the law of the jurisdiction which is being applied. Generally, however,
SF Holdings would be considered to have been insolvent at the time the Shares
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 SF Holdings was insolvent as of the date
the Shares were issued, or that, regardless of the method of valuation, a
court would not determine that SF Holdings was insolvent on that date, or
that, regardless of whether SF Holdings was insolvent on the date the Shares
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 Shares who do not exchange their Old Shares for New Shares
pursuant to the Exchange Offer will continue to be subject to the
restrictions on transfer of such Old Shares as set forth in the legend
thereon as a consequence of the issuance of the Old Shares 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 Shares 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. SF
Holdings does not currently anticipate that it will register the Old Shares
under the Securities Act. New Shares issued pursuant to the Exchange Offer in
exchange for Old Shares may be offered for resale, resold or otherwise
transferred by holders thereof (other than any such holder which is an
"affiliate" of SF Holdings 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 Shares 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 Shares. Each broker-dealer that receives New Shares 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 Shares. 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 Shares received in exchange for Old Shares
where such Old Shares were acquired by such broker-dealer as a result of
market-making activities or other trading activities. SF Holdings has agreed
that, for a period 270 days after the effective date of the registration
statement relating to the Exchange Offer, 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 Shares 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 Shares are tendered and accepted
in the Exchange Offer, the trading market for untendered and tendered but
unaccepted Old Shares will be adversely affected.
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THE SWEETHEART INVESTMENT
In connection with the Sweetheart Investment, on March 12, 1998, SF
Holdings acquired all of the outstanding capital stock of Fonda in a merger
of a subsidiary of SF Holdings into Fonda, and the stockholders of Fonda
became the stockholders of SF Holdings. The Fonda Stockholders Exchange has
been accounted for under an accounting method similar to a pooling of
interests and the consolidated financial statements of the Company will
include the historical accounts of Fonda for all periods presented.
On March 12, 1998, the Investment Agreement was consummated and SF
Holdings acquired 48% of the Sweetheart Class A Common Stock and 100% of the
Sweetheart Class B Common Stock, representing 90% of the total outstanding
common stock of Sweetheart. The aggregate purchase price consisted of $88.0
million in cash, a $7.0 million Demand Note and $30.0 million of Exchangeable
Preferred Stock. See "Description of Capital Stock--Preferred Stock." The
Demand Note was satisfied in full immediately following the consummation of
the Sweetheart Investment.
Pursuant to the Investment Agreement, Sweetheart has agreed to indemnify
the Sweetheart Stockholders and their respective affiliates and, if
applicable, their respective directors, officers, shareholders, partners,
attorneys, accountants, agents and employees for claims relating to or
arising out of the ownership by the Sweetheart Stockholders of the capital
stock of Sweetheart or the operation by Sweetheart and its subsidiaries of
the respective businesses, regardless of when they arose and regardless of by
whom or when asserted. The foregoing indemnification obligation has no dollar
limitation with respect to such obligation.
Upon consummation of the Sweetheart Investment, SF Holdings entered into
certain agreements with the Sweetheart Stockholders concerning their
respective interests in Sweetheart (the "Sweetheart Stockholders' Agreement")
and their respective interests in SF Holdings (the "SF Holdings Registration
Rights Agreement").
Pursuant to the Sweetheart Stockholders' Agreement, the Sweetheart
Stockholders are entitled to nominate three members to the board of directors
of Sweetheart and SF Holdings is entitled to nominate two members. The
Sweetheart Stockholders and SF Holdings have agreed to vote all their shares
of Sweetheart Common Stock in favor of such nominees. In addition, the
Sweetheart Stockholders, following the fifth anniversary of the consummation
of the Sweetheart Investment, have the right to exchange their shares of
Sweetheart Class A Common Stock for warrants (the "Exchange Warrants") to
purchase, for nominal consideration, shares of Class C Common Stock of SF
Holdings representing 10% of the total outstanding shares of common stock of
SF Holdings at the consummation of the Sweetheart Investment on a fully
diluted basis. SF Holdings has the right to cause such exchange and has the
right to thereafter repurchase the Exchange Warrants, in whole or in part,
for an aggregate call price of $50.0 million, subject to increase at 12.5%
per annum until the fifth anniversary of the consummation of the Sweetheart
Investment. Upon the occurrence of a merger (as defined in the Sweetheart
Stockholders' Agreement), the Sweetheart Stockholders will be required to
exchange their shares of Sweetheart Class A Common Stock for the Exchange
Warrants. In addition, in the event SF Holdings proposes to sell shares of
Sweetheart Class A Common Stock or Sweetheart Class B Common Stock in an
amount greater than 30% of the outstanding shares of Sweetheart Common Stock,
the Sweetheart Stockholders will have the right to participate in such sale.
In the event SF Holdings proposes to sell shares of Sweetheart Common Stock
in an amount greater than 30% of the outstanding shares of Sweetheart Common
Stock, then SF Holdings will have the right to require the Sweetheart
Stockholders to sell all, but not less than all, of their shares of
Sweetheart Common Stock. The Sweetheart Stockholders have also agreed not to
transfer or pledge their shares of Sweetheart Class A Common Stock, subject
to certain exceptions as described above.
Pursuant to the SF Holdings Registration Rights Agreement, SF Holdings has
agreed to file a registration statement registering the securities of SF
Holdings received by the Sweetheart Stockholders upon consummation of the
Sweetheart Investment no later than the 90th day thereafter. The Sweetheart
Stockholders have agreed not to sell any such securities for a specified
period of time prior to and after
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a public offering of SF Holdings' Common Stock. In addition, after the
issuance of the Exchange Warrants, upon the request of the Sweetheart
Stockholders, SF Holdings will file a registration statement registering the
Exchange Warrants and the shares of Class C Common Stock underlying such
warrants.
Pursuant to the Investment Agreement, the by-laws of Sweetheart and its
subsidiaries were amended immediately prior to the consummation of the
Sweetheart Investment (i) to fix its board of directors at five members, (ii)
to provide for the presence of four directors to constitute a quorum and
(iii) to require approval of four directors for the following matters, among
others (a) a merger, consolidation or other combination of Sweetheart with or
into another entity, (b) the sale of all or a material portion of the assets
of Sweetheart, (c) the entering into of any new line of business by
Sweetheart, (d) the issuance or repurchase by Sweetheart of any equity
securities, (e) the incurrence by Sweetheart of any indebtedness for money
borrowed or the refinancing of any existing indebtedness of Sweetheart, (f)
approval of the annual business plans and operating budgets of Sweetheart,
(g) the termination or modification of any of the terms of the Management
Services Agreement, (h) the amendment or modification of any provisions of
the certificate of incorporation of Sweetheart, (i) the selection of
Sweetheart's chief executive officer, chief operating officer and chief
financial officer, (j) any change of accountants and (k) the removal of
officers of Sweetheart.
In addition, immediately prior to the consummation of the Sweetheart
Investment, Dennis Mehiel, Thomas Uleau and Hans Heinsen were appointed Chief
Executive Officer, Chief Operating Officer and Chief Financial Officer,
respectively, of Sweetheart. Pursuant to the Investment Management Agreement,
in the event of the disability of Dennis Mehiel, the Chief Operating Officer
shall automatically replace him as Chief Executive Officer.
The Sweetheart Stockholders also received the same number of shares of
Class C Common Stock, on a pro rata basis, as were offered pursuant to the
issuance of the Units.
Upon consummation of the Sweetheart Investment, AIPM, an affiliate of
American Industrial Partners, L.P. ("AIP"), assigned to SF Holdings certain
of its rights under the restated management services agreement, dated August
31, 1993 (the "1993 Management Services Agreement"), pursuant to which AIPM
provided management services to Sweetheart and received fees of $1.85 million
per annum. Following the assignment of the 1993 Management Services
Agreement, such Agreement (the "Management Services Agreement") was amended
and its term was extended through March 12, 2008. Following the consummation
of the Sweetheart Investment, SF Holdings assigned substantially all of its
rights under the Management Services Agreement to Fonda in consideration for
the payment of $7.0 million. During the term of the Management Services
Agreement, Fonda has the right, subject to the direction of the board of
directors of Sweetheart, to manage Sweetheart's day-to-day operations for and
on behalf of Sweetheart, including but not limited to, the right to cause
Sweetheart to (i) acquire and dispose of assets; (ii) employ, determine
compensation of and terminate employees of Sweetheart other than the Chief
Executive Officer, Chief Operating Officer and Chief Financial Officer; and
(iii) take all other actions associated with the management of the day-to-day
operations of the business of Sweetheart. For the first three years after the
consummation of the Sweetheart Investment, AIPM will continue to provide
certain financial advisory services to Sweetheart for which it will receive
fees of $925,000, $740,000 and $555,000 in respect of the first, second and
third years, respectively. In consideration of SF Holdings' performance of
certain administrative services, it will receive fees of $200,000 per annum
throughout the term of the Management Services Agreement. In consideration of
Fonda's performance of services, it will receive fees of $725,000, $910,000
and $1,095,000 in the first, second and third years, respectively, following
the consummation of the Sweetheart Investment, and $1,650,000 per annum
throughout the remaining term of the Management Services Agreement.
USE OF PROCEEDS
There will be no proceeds to SF Holdings from the exchange pursuant to the
Exchange Offer. SF Holdings did not receive any of the proceeds from the sale
and issuance of the Share Units.
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THE EXCHANGE OFFER
PURPOSE AND EFFECTS
The Share Units, comprised of the Old Shares and the Common Shares, were
sold by the Sweetheart Stockholders on March 20, 1998 to the Initial
Purchaser, who resold the Units 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 Shares, SF Holdings, AIPM and the
Initial Purchaser entered into a Registration Rights Agreement dated as of
March 20, 1998 (the "Registration Rights Agreement") pursuant to which SF
Holdings agreed to file with the Commission a registration statement (the
"Exchange Offer Registration Statement") with respect to an offer to exchange
the Old Shares for New Shares within 45 days following the closing date of
the issuance of the Old Shares. In addition, SF Holdings 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 Shares 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 SF Holdings' obligations thereunder. For purposes of the
Exchange Offer, the term "Eligible Holder" shall mean the registered owner of
any Old Shares that remain Transfer Restricted Securities, as reflected on
the records of The Bank of New York as registrar for the Old Shares (in such
capacity, the "Registrar"), or any person whose Old Shares are held of record
by the depository of the Old Shares. SF Holdings is not required to include
any securities other than the New Shares in the Exchange Offer Registration
Statement. Holders of Old Shares who do not tender their Old Shares or whose
Old Shares 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 Shares.
Based on interpretations by the staff of the Commission set forth in
no-action letters issued to third parties unrelated to SF Holdings, SF
Holdings believes that the New Shares issued pursuant to the Exchange Offer
in exchange for Old Shares may be offered for resale, resold and otherwise
transferred by any holder of such New Shares (other than a person that is an
"affiliate" of SF Holdings 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 Shares 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 Shares.
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 Shares for its own
account in exchange for Old Shares, where such Old Shares 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 Shares. See "Plan of Distribution."
The Exchange Offer is not being made to, nor will SF Holdings accept
surrenders for exchange from, holders of Old Shares 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, SF Holdings will use its best efforts to register or
qualify the New Shares 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 Shares.
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, SF Holdings will accept any
and all Old Shares validly tendered prior to 5:00 p.m.,
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New York City time, on the Expiration Date (as defined below). SF Holdings
will issue up to 3,000 New Shares in exchange for a like amount of
outstanding Old Shares which are validly tendered and accepted in the
Exchange Offer. Subject to the conditions of the Exchange Offer described
below, SF Holdings will accept any and all Old Shares which are so tendered.
Holders may tender some or all of their Old Shares pursuant to the Exchange
Offer. See "Description of New Shares."
The form and terms of the New Shares will be the same in all material
respects as the form and terms of the Old Shares, except that (i) the New
Shares will be registered under the Securities Act and hence will not bear
legends restricting the transfer thereof, (ii) because the New Shares will be
registered, holders of the New Shares will not be entitled to Liquidated
Damages which would have been payable under the terms of the Registration
Rights Agreement in respect of Old Shares constituting Transfer Restricted
Securities held by such holders during any period in which a Registration
Default was continuing and (iii) because the New Shares will be registered,
holders of New Shares will not be, and upon the consummation of the Exchange
Offer, Eligible Holders of Old Shares will no longer be, entitled to certain
rights under the Registration Rights Agreement intended for the holders of
unregistered securities.
Holders of Old Shares do not have any appraisal or dissenters' rights
under the General Corporation Law of the State of Delaware or the Restated
Certificate of Incorporation in connection with the Exchange Offer. SF
Holdings intends to conduct the Exchange Offer in accordance with the
provisions of the Registration Rights Agreement. Old Shares 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 Restated
Certificate of Incorporation, but will not be entitled to any registration
rights under the Registration Rights Agreement.
SF Holdings shall be deemed to have accepted validly tendered Old Shares
when, as and if SF Holdings 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 Shares from
SF Holdings.
If any tendered Old Shares 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 Shares will be returned,
without expense, to the tendering holder thereof as promptly as practicable
after the Expiration Date.
Eligible Holders who tender Old Shares 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 Shares pursuant to the Exchange Offer. SF Holdings 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 August
7, 1998, subject to extension by SF Holdings by notice to the Exchange Agent
as herein provided. SF Holdings 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. SF
Holdings 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.
SF Holdings reserves the right (i) to delay accepting for exchange any Old
Shares for any New Shares or to extend or terminate the Exchange Offer and
not accept for exchange any Old Shares for any New Shares 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 SF Holdings 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
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determined by SF Holdings to constitute a material change, SF Holdings will
promptly disclose such amendment in a manner reasonably calculated to inform
the holders of Old Shares of such amendment, and SF Holdings 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 Shares, if the Exchange Offer would otherwise expire during such five
business-day period. The rights reserved by SF Holdings in this paragraph are
in addition to SF Holdings' 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
Shares are entitled to receive Liquidated Damages in an amount equal to 50
basis points per annum of the Liquidation Amount (as defined herein) of Old
Shares, or the aggregate outstanding principal amount of Subordinated Notes,
as applicable, 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 Liquidation Amount of the New Shares, or
the aggregate outstanding principal amount of Subordinated Notes, as
applicable. For purposes of the Exchange Offer, a "Registration Default"
shall occur if (i) SF Holdings 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) SF Holdings fails
to consummate the Exchange Offer within 30 business 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 Shares 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 Shares will not be and, upon consummation of the Exchange
Offer, Eligible Holders of Old Shares 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 SF Holdings to the Registrar of the same number
of New Shares as the number of Old Shares that are tendered by holders
thereof pursuant to the Exchange Offer.
PROCEDURES FOR TENDERING
Only an Eligible Holder of Old Shares may tender such Old Shares 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 Shares (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
Shares by causing the Depositary to transfer such Old Shares into the
Exchange Agent's account in accordance with the Depositary's procedure for
such transfer. Although delivery of Old Shares 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.
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The tender by an Eligible Holder of Old Shares will constitute an
agreement between such holder and SF Holdings in accordance with the terms
and subject to the conditions set forth herein and in the Letter of
Transmittal.
The method of delivery of Old Shares 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 Shares should
be sent to SF Holdings. 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 a member of a signature guarantee program
within the meaning of Rule 17Ad-15 under the Exchange Act (an "Eligible
Institution") unless the Old Shares 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 an
Eligible Institution.
If the Letter of Transmittal or any Old Shares 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
SF Holdings, evidence satisfactory to SF Holdings 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 Shares will be
determined by SF Holdings in its sole discretion, which determination will be
final and binding. SF Holdings reserves the absolute right to reject any and
all Old Shares not properly tendered or any Old Shares SF Holdings'
acceptance of which might, in the judgment of SF Holdings or its counsel, be
unlawful. SF Holdings also reserves the right to waive any defects,
irregularities or conditions of tender as to particular Old Shares. SF
Holdings' 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 Shares must be cured within such times as SF
Holdings in its sole discretion shall determine. Although SF Holdings intends
to request the Exchange Agent to notify holders of defects or irregularities
with respect to tenders of Old Shares, neither SF Holdings, the Exchange
Agent nor any other person shall incur any liability for failure to give such
notification. Tenders of Old Shares will not be deemed to have been made
until such defects or irregularities have been cured or waived. Any Old
Shares 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, SF Holdings reserves the right in its sole discretion
(subject to limitations contained in the Indenture) (i) to purchase or make
offers for any Old Shares that remain outstanding subsequent to the
Expiration Date and (ii) to the extent permitted by applicable law, to
purchase Old Shares 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 SF Holdings that,
among other things, the New Shares acquired pursuant to the Exchange Offer
are being obtained in the ordinary course of business by the person receiving
such New Shares, 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
Shares and that neither the Eligible Holder nor any such other person is an
"affiliate," as defined in Rule 405 under the Securities Act, of SF Holdings.
If the holder is a broker-dealer that will receive New Shares for its own
account in exchange for Old Shares 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 Shares.
34
<PAGE>
GUARANTEED DELIVERY PROCEDURES
Eligible Holders who wish to tender their Old Shares and (i) whose Old
Shares are not immediately available, or (ii) who cannot deliver their Old
Shares 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 and the
certificate number(s) of such Old Shares (if available) 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 Shares 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 Shares 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 Shares in proper
form for transfer (or confirmation of a book-entry transfer into the
Exchange Agent's account at the Depositary of Old Shares 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 Shares according to
the guaranteed delivery procedures set forth above.
WITHDRAWAL OF TENDERS
Except as otherwise provided herein, tenders of Old Shares 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 Shares 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 SF
Holdings. Any such notice of withdrawal must (i) specify the name of the
person having deposited the Old Shares to be withdrawn (the "Depositor"),
(ii) identify the Old Shares to be withdrawn (including the certificate
number or numbers), (iii) be signed by the Depositor in the same manner as
the original signature on the Letter of Transmittal by which such Old Shares
were tendered (including any required signature guarantees) or be accompanied
by documents of transfer sufficient to have the Transfer Agent with respect
to the Old Shares register the transfer of such Old Shares into the name of
the person withdrawing the tender, and (iv) specify the name in which any
such Old Shares 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 SF Holdings
in its sole discretion, whose determination shall be final and binding on all
parties. Any Old Shares so withdrawn will be deemed not to have been validly
tendered for purposes of the Exchange Offer, and no New Shares will be issued
with respect thereto unless the Old Shares so withdrawn are validly
re-tendered. Any Old Shares 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 Shares 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, SF
Holdings will not be required to accept for exchange any Old Shares tendered
for any New Shares and may terminate or amend the Exchange Offer as provided
herein before the acceptance of such Old Shares, if any of the following
conditions exist:
35
<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 SF Holdings, might
materially impair the ability of SF Holdings to proceed with the Exchange
Offer or have a material adverse effect on the contemplated benefits of
the Exchange Offer to SF Holdings; or
(b) There shall have occurred any change, or any development involving a
prospective change, in the business or financial affairs of SF Holdings,
which in the sole judgment of SF Holdings, might materially impair the
ability of SF Holdings to proceed with the Exchange Offer or materially
impair the contemplated benefits of the Exchange Offer to SF Holdings; or
(c) There shall have been proposed, adopted or enacted any law, statute,
rule or regulation which, in the sole judgment of SF Holdings, might
materially impair the ability of SF Holdings to proceed with the Exchange
Offer or have a material adverse effect on the contemplated benefits of
the Exchange Offer to SF Holdings; 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 SF Holdings and may
be asserted by SF Holdings regardless of the circumstances giving rise to
such conditions or may be waived by SF Holdings in whole or in part at any
time and from time to time in its sole discretion. If SF Holdings waives or
amends the foregoing conditions, SF Holdings will, if required by applicable
law, extend the Exchange Offer for a minimum of five business days from the
date that SF Holdings 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 SF Holdings
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 SF Holdings. 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
SF Holdings and its affiliates.
SF Holdings 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. SF Holdings, 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. SF Holdings 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 Shares and in handling
or forwarding tenders for exchange. SF Holdings 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.
SF Holdings will pay all transfer taxes, if any, applicable to the
exchange of Old Shares pursuant to the Exchange Offer. If, however,
certificates representing New Shares or Old Shares 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 Shares
tendered, or if tendered Old Shares 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 Shares pursuant to
the Exchange
36
<PAGE>
Offer, then the amount of any such transfer taxes (whether imposed on the
registered holder or any other persons) will be payable by the tendering
holder. If satisfactory evidence of payment of such taxes or exemption
therefrom is not submitted with the Letter of Transmittal, the amount of such
transfer taxes will be billed directly to such tendering holder.
FEDERAL INCOME TAX CONSIDERATIONS
The following discussion is based on the advice of Kramer, Levin, Naftalis
& Frankel, counsel to the Company. Such counsel has advised the Company that
the exchange of the Old Shares for the New Shares 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
Share; (ii) the holding period of the New Share should include the holding
period of the Old Share exchanged therefor and (iii) the adjusted tax basis
of the New Share should be the same as the adjusted tax basis of the Old
Share exchanged therefor immediately before the exchange. Even if the
exchange of an Old Share for a New Share were treated as an exchange,
however, such an exchange should constitute a tax-free recapitalization for
federal income tax purposes. Accordingly, a New Share should have the same
issue price as an Old Share and a U.S. Holder should have the same adjusted
basis and holding period in the New Share as it had in an Old Share
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 SHARES
Generally, Eligible Holders (other than any holder who is an "affiliate"
of SF Holdings within the meaning of Rule 405 under the Securities Act) who
exchange their Old Shares for New Shares pursuant to the Exchange Offer may
offer such New Shares for resale, resell such New Shares, and otherwise
transfer such New Shares without compliance with the registration and
prospectus delivery provisions of the Securities Act, provided such New
Shares 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 Shares. Each broker-dealer that receives New Shares for its own
account in exchange for Old Shares, where such Old Shares 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 Shares. 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 Shares prior to offering or selling such
New Shares. Upon request by Eligible Holders prior to the Exchange Offer, SF
Holdings will register or qualify the New Shares in certain jurisdictions
subject to the conditions in the Registration Rights Agreement. If an
Eligible Holder does not exchange such Old Shares for New Shares pursuant to
the Exchange Offer, such Old Shares 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 Shares 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 Shares are tendered and accepted in
the Exchange Offer, a holder's ability to sell untendered Old Shares 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
Shares. Holders of Old Shares are urged to consult their financial and tax
advisors in making their own decisions on what action to take.
ACCOUNTING TREATMENT
The New Shares will be recorded at the same carrying value as the Old
Shares, as reflected in SF Holdings' accounting records on the date of the
exchange. Accordingly, no gain or loss for accounting purposes will be
recognized by SF Holdings upon the consummation of the Exchange Offer. The
expenses of the Exchange Offer will be amortized by SF Holdings over the term
of the New Shares.
37
<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:
By Hand or Overnight Courier: By Mail:
(registered or certified
recommended)
The Bank of New York The Bank of New York
Tender and Exchange Department Tender and Exchange Department
101 Barclay Street P.O. Box 11248
Receive and Deliver Window Church Street Station
New York, New York 10286 New York, New York 10286-1248
Facsimile Number (for Eligible Institutions Only and Withdrawal Notices Only):
(212) 815-6213
Confirm Receipt of Notice of Guaranteed Delivery by Telephone:
(800) 507-9357
For Information Call:
(800) 507-9357
Requests for additional copies of this Prospectus or the Letter of
Transmittal should be directed to the Exchange Agent.
38
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of (i) Fonda as of April
26, 1998 on an historical basis, (ii) Sweetheart as of March 31, 1998 on an
historical basis and (iii) the Company on a pro forma combined basis to give
effect to the Transactions. The following table should be read in conjunction
with the "Unaudited Pro Forma Combined Condensed Financial Data" and the other
financial information appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
APRIL 26, 1998 MARCH 31, 1998
---------------- ---------------
FONDA SWEETHEART PRO FORMA
HISTORICAL HISTORICAL ADJUSTMENTS COMBINED
---------------- --------------- -------------------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Cash and cash equivalents ........... $ 3,655 $ 13,545(1) $ 17,200
======== =========== ========
Long-term debt, including current
portion:
Credit facilities .................. $ 390 $ 114,929 $115,319
Sweetheart Secured Notes ........... -- 190,000 190,000
Sweetheart Subordinated Notes ...... -- 110,000 110,000
Fonda Notes ........................ 120,000 -- 120,000
The Discount Notes ................. $ 75,110(2) 75,110
Other .............................. 2,519 8,059 10,578
-------- ----------- --------
Total long-term debt ............... 122,909 422,988 75,110 621,007
Exchangeable Preferred Stock ........ -- -- 29,064 (3) 29,064
Minority interest in Sweetheart ..... -- -- 13,890 (4) 13,890
Redeemable common stock ............. -- -- 2,123 (5) 2,123
Stockholders' equity ................ 13,381 38,873 15,000 (6) 29,622
(38,873)(7)
2,428 (2)
936 (3)
(2,123)(5)
-------------
Total capitalization ................ $136,290 $ 461,861 $ 97,555 $695,706
======== =========== ============= ========
</TABLE>
- ----------
(1) Includes $10.3 million cash in escrow, which is restricted to qualified
capital expenditures.
(2) Reflects the proceeds of the issuance of the Units, after giving effect
to the $2.4 million fair value of the Discount Note Shares.
(3) Reflects the Exchangeable Preferred Stock, after giving effect to the
$0.9 million fair value of the Class C Common Stock issued by SF Holdings
to the Sweetheart Stockholders as partial consideration for the
Sweetheart Investment.
(4) Reflects the common equity investment in Sweetheart being retained by the
Sweetheart Stockholders.
(5) Reflects the present value of the liquidation value of such stock.
(6) Reflects a cash contribution of equity from an affiliate of Dennis Mehiel
to SF Holdings. See "Use of Proceeds."
(7) Reflects elimination of the historical Sweetheart stockholders' equity.
39
<PAGE>
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma combined condensed financial statements
of the Company set forth the unaudited pro forma combined condensed balance
sheet of the Company as of April 26, 1998 (the "Pro Forma Balance Sheet") and
the unaudited pro forma combined condensed statements of income of the Company
for the fiscal year ended July 27, 1997 and the nine and twelve months ended
April 26, 1998 (the "Pro Forma Statements of Income" and, together with the Pro
Forma Balance Sheet, the "Company Pro Forma Financial Statements"). The Pro
Forma Balance Sheet has been derived from Fonda's historical balance sheet as
of April 26, 1998 and Sweetheart's historical balance sheet as of March 31,
1998, and gives effect to (i) the Fonda Stockholders Exchange, (ii) the
issuance of the Units, (iii) the Sweetheart Investment and (iv) the Sweetheart
Reduction, as if each such transaction had occurred on April 26, 1998. The Pro
Forma Statements of Income have been derived from Fonda's pro forma condensed
statements of income for the fiscal year ended July 27, 1997 and the nine and
twelve months ended April 26, 1998 (collectively, the "Fonda Pro Forma
Statements of Income"), included elsewhere herein, and Sweetheart's pro forma
condensed statements of operations for the fiscal year ended September 30, 1997
and the six and twelve months ended March 31, 1998 (collectively, the
"Sweetheart Pro Forma Statements of Operations"), included elsewhere herein,
and give additional effect to (i) the Fonda Stockholders Exchange, (ii) the
issuance of the Units and (iii) the Sweetheart Investment, as if each such
transaction had occurred on the first day of the Company's fiscal year ended
July 27, 1997.
The Fonda Pro Forma Statements of Income have been derived from Fonda's
historical statements of income for the fiscal year ended July 27, 1997 and the
nine and twelve months ended April 26, 1998, and give effect to (i) the 1997
Fonda Acquisitions, (ii) the issuance of the Fonda Notes, (iii) the Leisureway
Acquisition and (iv) the Natural Dam Mill Disposition, as if each such
transaction had occurred on the first day of Fonda's fiscal year ended July 27,
1997. The Sweetheart Pro Forma Statements of Operations have been derived from
Sweetheart's historical statements of operations for the fiscal year ended
September 30, 1997 and the six and twelve months ended March 31, 1998, and give
effect to (i) the Sweetheart Bakery Disposition and (ii) the closing of
Sweetheart's Riverside facility and the cessation of paper operations at
Sweetheart's Springfield facility during Fiscal 1997 (the "Sweetheart
Closures"), as if each such transaction had occurred on the first day of
Sweetheart's fiscal year ended September 30, 1997. The Sweetheart Pro Forma
Statement of Operations for the six months ended March 31, 1998 combines the
first half of Fiscal 1998 and the fourth quarter of Fiscal 1997.
The 1997 Fonda Acquisitions, the issuance of the Fonda Notes, the
Leisureway Acquisition, the Natural Dam Mill Disposition, the Sweetheart Bakery
Disposition, the Sweetheart Closures, the Fonda Stockholders Exchange, the
issuance of the Units, the Sweetheart Investment and the Sweetheart Reduction
are collectively referred to herein as the "Transactions."
The 1997 Fonda Acquisitions, the Leisureway Acquisition and the Sweetheart
Investment have been accounted for under the purchase method of accounting,
pursuant to which the total purchase price of such acquisitions is allocated to
the assets and liabilities acquired based upon their relative fair values as of
the closing date, with the excess of the purchase price over the fair value of
the assets acquired, net of the liabilities assumed, allocated to goodwill. The
Company believes that the preliminary allocations set forth herein are
reasonable; however, in some cases the final allocations will be based upon
valuations and other studies that are not yet complete. As a result, the
allocations set forth herein are subject to revision when additional
information becomes available, and such revised allocations could differ
substantially from those set forth herein. In addition, the Pro Forma Financial
Statements exclude the potential effect of rationalization of facilities and
other cost savings initiatives that the Company intends to undertake following
the consummation of the Sweetheart Investment.
40
<PAGE>
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FONDA SWEETHEART
APRIL 26, MARCH 31,
1998 1998 PRO FORMA
HISTORICAL HISTORICAL ADJUSTMENTS COMBINED
------------ ------------ -------------------- ----------
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ................. $ 3,655 $ 3,259 $ 6,914
Cash in escrow ............................ -- 10,286 10,286
Accounts receivable ....................... 26,751 79,484 106,235
Inventories ............................... 38,450 147,708 $ 3,883 (a) 190,041
Other current assets ...................... 13,987 21,084 35,071
-------- -------- ----------- --------
TOTAL CURRENT ASSETS .................... 82,843 261,821 (3,883) 348,547
Property, plant and equipment, net ......... 48,907 375,362 12,000 (a) 436,269
Goodwill, net .............................. 22,047 -- 68,922 (a) 83,969
(7,000)(b)
Other assets, net .......................... 24,877 51,630 2,226 (a) 83,271
4,538 (b)
-------- -------- ----------- --------
TOTAL ASSETS ............................... $178,674 $688,813 $ 84,569 $952,056
======== ======== =========== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable .......................... $ 11,634 $ 70,116 $ 81,750
Accrued expenses .......................... 21,706 88,898 110,604
Current portion of long-term debt ......... 466 5,559 6,025
-------- -------- ----------- --------
TOTAL CURRENT LIABILITIES ............... 33,806 164,573 $ 0 198,379
Credit facilities .......................... 390 114,929 115,319
Other long-term debt ....................... 122,053 302,500 75,110 (b) 499,663
Other long-term liabilities ................ 9,044 67,938 (12,986)(a) 63,996
-------- -------- ----------- --------
TOTAL LIABILITIES ....................... 165,293 649,940 62,124 877,357
Exchangeable Preferred Stock ............... -- -- 29,064 (b) 29,064
Minority interest in Sweetheart ............ -- -- 13,890 (a) 13,890
Redeemable common stock .................... -- -- 2,123 (c) 2,123
Stockholders' equity ....................... 13,381 38,873 (38,873)(a) 29,622
18,364 (b)
(2,123)(c)
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY ..................................... $178,674 $688,813 $ 84,569 $952,056
======== ======== =========== ========
</TABLE>
See Notes to Unaudited Pro Forma Combined Condensed Balance Sheet.
41
<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
(a) The total purchase price for the Sweetheart Investment was $125.0 million.
The adjustments reflect the preliminary allocation of the purchase price
in accordance with purchase accounting, as follows:
<TABLE>
<S> <C> <C>
Purchase price ........................................................ $ 125,000
---------
Fair value of net assets acquired:
Net book value of assets as of March 31, 1998 ....................... 38,873
Adjustments to fair value of assets acquired and liabilities assumed:
Inventories:
Write-off existing LIFO reserve .................................... $ 125
Write-up finished goods inventory .................................. 3,758 3,883
------
Property, plant and equipment ....................................... 12,000
Other assets:
Eliminate intangible pension asset ................................. (774)
Fair value of intangible assets .................................... 3,000 2,226
------
Other long-term liabilities--eliminate unrecognized prior service
costs and unrecognized net gains from pension and
post-retirement benefit plans ...................................... 12,986
Minority interest in Sweetheart ..................................... (13,890)
---------
Fair value of net assets acquired .................................. 56,078
---------
Goodwill--excess of purchase price over fair value of net assets
acquired ............................................................. $ 68,922
=========
</TABLE>
(b) Reflects the financing, including related financing costs, of the
Sweetheart Investment, as follows:
<TABLE>
<S> <C>
Purchase of Management Services Agreement ........................... $ 7,000
Long-term debt--the Discount Notes, net of fair value of the Discount
Note Shares ....................................................... 75,110
Fair value of the Discount Note Shares issued in connection with the
Discount Notes .................................................... 2,428
Deferred financing costs ............................................ (4,538)
Exchangeable Preferred Stock, net of fair value of the Class C Common
Stock issued in connection with the Exchangeable Preferred Stock .. 29,064
Fair value of the Common Shares issued in connection with the
Exchangeable Preferred Stock ...................................... 936
Capital contribution ................................................ 15,000
--------
$125,000
========
</TABLE>
(c) As a result of the Fonda Stockholders Exchange, the redeemable common
stock, which had been reported on Fonda's balance sheet, was converted
into Class A Common Stock of SF Holdings. See Note 10 of Fonda's Notes to
Financial Statements.
42
<PAGE>
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED JULY 27, 1997
-----------------------------------------------------------
PRO FORMA
-----------------------
PRO FORMA
FONDA SWEETHEART ADJUSTMENTS COMBINED
----------- ------------ ------------------- -------------
<S> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Net sales .................................................. $262,850 $ 854,365 $1,117,215
Cost of goods sold ......................................... 204,904 786,603 $ 1,250(a) 992,757
-------- --------- ---------- ----------
Gross profit ............................................... 57,946 67,762 (1,250) 124,458
Selling, general and administrative expenses ............... 39,390 65,628 1,447 (b) 105,451
(1,014) (c)
Loss on asset disposal and impairment ...................... -- 24,550 24,550
Other income, net .......................................... (1,608) (73) (1,681)
-------- --------- ----------
Income (loss) from operations .............................. 20,164 (22,343) (1,683) (3,862)
Interest expense, net ...................................... 12,084 40,265 10,579 (d) 62,928
-------- --------- ---------- ----------
Income (loss) before taxes and minority interest ........... 8,080 (62,608) (12,262) (66,790)
Income tax (benefit) expense ............................... 3,393 (25,043) (5,150) (e) (26,800)
Minority interest in loss of subsidiary .................... -- -- (3,757) (f) (3,757)
-------- --------- ---------- ----------
Income (loss) before cumulative effect of an
accounting change and extraordinary loss .................. 4,687 (37,565) (3,355) (36,233)
Dividends on preferred stock ............................... -- -- 4,219 (g) 4,219
-------- --------- ---------- ----------
Income (loss) available to common stockholders
before cumulative effect of an accounting change
and extraordinary loss .................................... $ 4,687 $ (37,565) $ (7,574) $ (40,452)
======== ========= ========== ==========
OTHER GAAP FINANCIAL DATA:
Cash interest expense (h) .................................. $ 11,520 $ 38,241 $ 49,761
Capital expenditures ....................................... 1,762 46,189 47,951
Depreciation and amortization (i) .......................... 5,406 43,176 $ 1,998 50,580
Ratio of earnings to fixed charges (j) ..................... 1.6x N/A N/A
OTHER NON-GAAP FINANCIAL DATA:
Adjusted EBITDA (k) ........................................ $ 23,962 $ 46,930 $ 315 $ 71,207
Ratio of Adjusted EBITDA to cash interest expense
(k)(h) .................................................... 2.1x 1.2x 1.4x
Ratio of Adjusted EBITDA to total interest expense (k). 1.1x
</TABLE>
See Notes to Unaudited Pro Forma Combined Condensed Statements of Income.
43
<PAGE>
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED APRIL 26, 1998
---------------------------------------------------------------
PRO FORMA
--------------------------
PRO FORMA
FONDA SWEETHEART ADJUSTMENTS COMBINED
----------- ------------ ------------------- ------------
<S> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Net sales ................................................ $194,737 $ 616,959 $ 811,696
Cost of goods sold ....................................... 159,344 575,600 $ 508(a) 735,452
-------- --------- ---------- ---------
Gross profit ............................................. 35,393 41,359 (508) 76,244
Selling, general and administrative expenses ............. 26,028 55,207 590 (b) 81,130
(695) (c)
Loss on asset disposal and impairment .................... -- 24,550 -- 24,550
Other income, net ........................................ (9,566) (2,305) (11,871)
-------- --------- ---------- ---------
Income (loss) from operations ............................ 18,931 (36,093) (403) (17,565)
Interest expense, net .................................... 9,151 32,133 7,935 (d) 49,219
-------- --------- ---------- ---------
Income (loss) before taxes and minority interest ......... 9,780 (68,226) (8,338) (66,784)
Income tax (benefit) expense ............................. 4,109 (27,288) (3,502) (e) (26,681)
Minority interest in loss of subsidiary .................. -- -- (4,094) (f) (4,094)
-------- --------- ---------- ---------
Income (loss) before cumulative effect of an
accounting change and extraordinary loss ................ 5,671 (40,938) (742) (36,009)
Dividends on preferred stock ............................. -- -- 3,165 (g) 3,165
-------- --------- ---------- ---------
Income (loss) available to common stockholders
before cumulative effect of an accounting change
and extraordinary loss .................................. $ 5,671 $ (40,938) $ (3,907) $ (39,174)
======== ========= ========== =========
OTHER GAAP FINANCIAL DATA:
Cash interest expense (h) ................................ $ 8,738 $ 30,675 $ 39,413
Capital expenditures ..................................... 3,860 30,255 34,115
Depreciation and amortization (i) ........................ 4,213 32,541 $ 1,499 38,253
Ratio of earnings to fixed charges (j) ................... 2.0x N/A N/A
OTHER NON-GAAP FINANCIAL DATA:
Adjusted EBITDA (k) ...................................... $ 13,578 $ 18,418 $ 1,097 $ 33,092
Ratio of Adjusted EBITDA to cash interest expense
(k)(h) .................................................. 1.6x 0.6x 0.8x
Ratio of Adjusted EBITDA to total interest expense (k). 0.6x
</TABLE>
See Notes to Unaudited Pro Forma Combined Condensed Statements of Income.
44
<PAGE>
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED APRIL 26, 1998
--------------------------------------------------------------
PRO FORMA
------------------------
PRO FORMA
FONDA SWEETHEART ADJUSTMENTS COMBINED
----------- ------------ ------------------- -------------
<S> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Net sales ................................................ $ 261,919 $ 857,435 $1,119,354
Cost of goods sold ....................................... 206,881 784,161 $ 1,150(a) 992,192
--------- --------- ---------- ----------
Gross profit ............................................. 55,038 73,274 (1,150) 127,162
Selling, general and administrative expenses ............. 39,317 71,156 881 (b) 110,404
(950) (c)
Loss on asset disposal and impairment .................... -- 24,550 -- 24,550
Other income, net ........................................ (11,174) (2,642) -- (13,816)
--------- --------- ---------- ----------
Income (loss) from operations ............................ 26,895 (19,790) (1,081) 6,024
Interest expense, net .................................... 11,716 42,262 10,579 (d) 64,557
--------- --------- ---------- ----------
Income (loss) before taxes and minority interest ......... 15,179 (62,052) (11,660) (58,533)
Income tax (benefit) expense ............................. 6,376 (24,818) (4,897) (e) (23,339)
Minority interest in loss of subsidiary .................. -- -- (3,723) (f) (3,723)
--------- --------- ---------- ----------
Income (loss) before cumulative effect of an
accounting change and extraordinary loss ................ 8,803 (37,234) (3,040) (31,471)
Dividends on preferred stock ............................. -- -- 4,219 (g) 4,219
--------- --------- ---------- ----------
Income (loss) available to common stockholders
before cumulative effect of an accounting change
and extraordinary loss .................................. $ 8,803 $ (37,234) $ (7,259) $ (35,690)
========= ========= ========== ==========
OTHER GAAP FINANCIAL DATA:
Cash interest expense (h) ................................ $ 11,152 $ 40,570 $ 51,722
Capital expenditures ..................................... 4,240 42,555 46,795
Depreciation and amortization (i) ........................ 5,810 43,375 $ 1,998 51,183
Ratio of earnings to fixed charges (j) ................... 2.2x N/A N/A
OTHER NON-GAAP FINANCIAL DATA:
Adjusted EBITDA (k) ...................................... $ 21,531 $ 46,223 $ 917 $ 68,671
Ratio of Adjusted EBITDA to cash interest
expense (k)(h) .......................................... 1.9x 1.1x 1.3x
Ratio of Adjusted EBITDA to total interest
expense (k) ............................................. 1.0x
</TABLE>
See Notes to Unaudited Pro Forma Combined Condensed Statements of Income.
45
<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENTS OF INCOME
(a) Reflects an increase in cost of goods sold resulting from the Sweetheart
Investment, as follows:
<TABLE>
<CAPTION>
NINE MONTHS TWELVE MONTHS
YEAR ENDED ENDED ENDED
JULY 27, 1997 APRIL 26, 1998 APRIL 26, 1998
--------------- ---------------- ---------------
<S> <C> <C> <C>
Increase in depreciation expense resulting from the
preliminary purchase price allocation to
long-term assets acquired ......................... $ 250 $188 $ 250
Increase in pension and post-retirement benefits
resulting from elimination of unrecognized gains 1,000 320 900
------ ---- ------
$1,250 $508 $1,150
====== ==== ======
</TABLE>
(b) Reflects adjustments to general and administrative expenses resulting from
the Sweetheart Investment, as follows:
<TABLE>
<CAPTION>
SIX MONTHS TWELVE MONTHS
YEAR ENDED ENDED ENDED
JULY 27, 1997 APRIL 26, 1998 APRIL 26, 1998
--------------- ---------------- ---------------
<S> <C> <C> <C>
Goodwill amortization over forty years .............. $1,548 $1,161 $1,548
Other intangible assets amortization over fifteen
years ............................................. 200 150 200
Reduction in officer compensation ................... (301) (721) (867)
------ ------ ------
$1,447 $ 590 $ 881
====== ====== ======
</TABLE>
(c) Reflects the elimination of a portion of the fees paid by Sweetheart to AIP
pursuant to the Management Services Agreement that, upon consummation of
the Sweetheart Investment, were paid to Fonda. See "The Sweetheart
Investment."
(d) Reflects additional interest expense of SF Holdings resulting from the
issuance of the Units, as follows:
<TABLE>
<CAPTION>
NINE MONTHS TWELVE MONTHS
YEAR ENDED ENDED ENDED
JULY 27, 1997 APRIL 26, 1998 APRIL 26, 1998
--------------- ---------------- ---------------
<S> <C> <C> <C>
Amortization of original issue discount on the
Discount Notes at 12.75% ........................ $ 9,886 $7,415 $ 9,886
Amortization of deferred financing costs over ten
years ........................................... 450 338 450
Amortization of additional discount resulting from
the fair value of the Discount Note Shares ...... 243 182 243
------- ------ -------
$10,579 $7,935 $10,579
======= ====== =======
</TABLE>
(e) For pro forma purposes, the income tax provision was calculated at 42%
based on enacted statutory rates applied to pro forma pre-tax income
(loss) and the provisions of SFAS No. 109.
(f) Reflects the minority interest allocable to the common equity investment in
Sweetheart retained by the Sweetheart Stockholders.
(g) Reflects pay-in-kind dividends on the Exchangeable Preferred Stock
originally issued to the Sweetheart Stockholders and amortization of
discount resulting from an allocation of fair value to the Common Shares.
<TABLE>
<CAPTION>
NINE MONTHS TWELVE MONTHS
YEAR ENDED ENDED ENDED
JULY 27, 1997 APRIL 26, 1998 APRIL 26, 1998
--------------- ---------------- ---------------
<S> <C> <C> <C>
Dividends at 13.75% ...................... $4,125 $3,094 $4,125
Amortization of discount of Common Shares 94 71 94
------ ------ ------
$4,219 $3,165 $4,219
====== ====== ======
</TABLE>
46
<PAGE>
(h) Cash interest expense consists of interest expense, excluding interest on
the Discount Notes and amortization of deferred financing costs of $4,135,
$2,749 and $3,804 for Fiscal 1997 and the nine and twelve months ended
April 26, 1998, respectively.
(i) Depreciation and amortization excludes amortization of deferred financing
costs, which are included in interest expense.
(j) For purposes of calculating the ratio of earnings to fixed charges and the
earnings to fixed charges coverage deficiency, earnings consist of
earnings before provision for income taxes plus fixed charges less
capitalized interest. Fixed charges consist of interest expense plus that
portion of rental payments on operating leases deemed representative of
the interest factor and capitalized interest. Dividends on the
Exchangeable Preferred Stock are not included. Earnings were not
sufficient to cover fixed charges for Sweetheart and for the combined
Company by $63,193 and $67,538, respectively, for Fiscal 1997, by $68,331
and $67,081, respectively, for nine months ended April 26, 1998, and by
$62,123 and $59,235, respectively, for the twelve months ended April 26,
1998.
(k) Adjusted EBITDA represents income (loss) from operations before interest
expense, provision for income taxes, Fonda other income, depreciation and
amortization, Sweetheart loss on asset disposal and impairment, Sweetheart
restructuring expenses, the Sweetheart Reduction, which represents
one-time charges of $8,147 associated with the Sweetheart Investment and
gain on the Sweetheart Bakery Disposition of $3,459 in the nine and twelve
months ended March 31, 1998. Adjusted EBITDA is generally accepted as
providing information regarding a company's ability to service debt.
Adjusted 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.
Adjusted EBITDA does not reflect the elimination of $2.8 million and $0.8
million of fixed costs in Fiscal 1997 and the twelve months ended April 26,
1998, respectively, that would not have been incurred had the Three Rivers
and Long Beach facilities been closed at the beginning of the year ended
July 27, 1997.
47
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA OF FONDA (1)
The following selected historical financial data have been derived from
the financial statements of Fonda. The data as of July 28, 1996 and July 27,
1997 and for the years ended July 30, 1995, July 28, 1996 and July 27, 1997 are
derived from the financial statements of Fonda audited by Deloitte & Touche
LLP, independent auditors, whose report with respect thereto is included
elsewhere in this Prospectus. The data as of April 26, 1998 and for the nine
months ended April 27, 1997 and April 26, 1998 are derived from Fonda'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 26, 1998 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 Fonda'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>
NINE MONTHS
FISCAL YEAR ENDED JULY (2) ENDED APRIL (2)
---------------------------------------------------------- -----------------------
1993 1994 1995 1996 1997 1997 1998
---------- ---------- ------------ ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Net sales ............................ $ 61,079 $ 61,839 $ 97,074 $ 204,903 $ 252,513 $184,544 $203,597
Cost of goods sold ................... 49,776 51,643 76,252 161,304 196,333 148,820 167,520
-------- -------- --------- --------- --------- -------- --------
Gross profit ......................... 11,303 10,196 20,822 43,599 56,180 35,724 36,077
Selling, general and administrative
expenses ............................ 8,686 8,438 14,112 29,735 37,168 24,128 26,003
Other income, net .................... -- -- -- -- (1,608) -- (9,566)
-------- -------- --------- --------- --------- -------- --------
Income from operations ............... 2,617 1,758 6,710 13,864 20,620 11,596 19,640
Interest expense, net ................ 1,201 1,268 2,943 7,934 9,017 6,798 9,151
-------- -------- --------- --------- --------- -------- --------
Income before taxes and
extraordinary loss .................. 1,416 490 3,767 5,930 11,603 4,798 10,489
Income taxes ......................... 478 239 1,585 2,500 4,872 2,015 4,406
-------- -------- --------- --------- --------- -------- --------
Income before extraordinary loss ..... 938 251 2,182 3,430 6,731 2,783 6,083
Extraordinary loss, net (3) .......... -- -- -- -- 3,495 3,495 --
-------- -------- --------- --------- --------- -------- --------
Net income (loss) .................... $ 938 $ 251 $ 2,182 $ 3,430 $ 3,236 $ (712) $ 6,083
======== ======== ========= ========= ========= ======== ========
OTHER GAAP FINANCIAL DATA:
Net cash provided by (used in)
operating activities (4) ............ $ 2,797 $ 140 $ (4,774) $ 17,673 $ 8,273 $ 679 $ 6,342
Net cash provided by (used in)
investment activities ............... (1,027) (1,272) (29,593) (46,532) (36,006) (9,485) 1,271
Net cash provided by (used in)
financing activities ................ (1,742) 992 34,262 30,206 32,174 31,473 (9,866)
Capital expenditures (5) ............. 1,027 1,272 1,608 1,314 10,363 3,469 6,245
Depreciation and amortization ........ 1,248 1,246 1,669 3,450 4,440 3,475 4,153
Ratio of earnings to fixed
charges (6) ......................... 1.9x 1.3x 2.1x 1.7x 2.1x 1.7x 2.0x
OTHER NON-GAAP FINANCIAL DATA:
Adjusted Fonda EBITDA (7) ............ $ 3,865 $ 3,004 $ 8,379 $ 17,314 $ 23,942 $ 15,071 $ 14,560
Ratio of Adjusted Fonda
EBITDA to cash interest
expense (7)(8) ...................... 3.2x 2.4x 3.5x 2.6x 2.9x 2.5x 1.6x
</TABLE>
(Footnotes on next page)
48
<PAGE>
<TABLE>
<CAPTION>
AS OF JULY
----------------------------------------------------------- AS OF
1993 1994 1995 1996 1997 APRIL 26, 1998
--------- --------- --------- ---------- ---------- ---------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash ................................. $ 365 $ 225 $ 120 $ 1,467 $ 5,908 $ 3,655
Working capital ...................... 1,738 2,731 28,079 38,931 58,003 49,037
Property, plant and equipment, net 7,428 7,454 26,933 46,350 59,261 48,907
Total assets ......................... 24,676 24,668 79,725 136,168 179,604 178,674
Total indebtedness (9) ............... 11,589 12,581 48,165 87,763 122,987 122,909
Redeemable common stock (10) ......... -- -- 2,115 2,179 2,076 --
Stockholders' equity ................. 5,726 5,977 7,205 11,873 15,010 13,381
</TABLE>
- ----------
(1) The selected historical statement of income and other financial data
include the results of operations of Fonda and each of the Fonda
Acquisitions since their respective dates of acquisition. See
"Management's Discussion and Analysis of Financial Condition and Results
of Operations--Introduction," "Business" and Note 3 of the Notes to the
Financial Statements of Fonda.
(2) All fiscal years are 52 weeks, except for Fiscal 1994 which is 53 weeks.
Nine month periods are 39 weeks.
(3) Fonda incurred a $3.5 million extraordinary expense (net of a $2.5 million
income tax benefit) in connection with the early retirement of debt
consisting of the write-off of unamortized debt issuance costs,
elimination of unamortized discount and prepayment penalties.
(4) Material differences between Adjusted Fonda 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 Adjusted Fonda 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
Adjusted Fonda EBITDA.
(5) Excludes the costs of the Fonda 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) Adjusted Fonda EBITDA represents income from operations before interest
expense, provision for income taxes, other income and depreciation and
amortization. EBITDA is generally accepted as providing information
regarding a company's ability to service debt. Adjusted Fonda 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 invloved) 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.
(8) Cash interest expense excludes (i) the amortization of debt issuance costs
of $560, $1,021, $514, $466 and $413 for Fiscal 1995, 1996 and 1997, the
nine months ended April 1997 and 1998, respectively, (ii) pay-in-kind
interest expense of $165, $684 and $408 for Fiscal 1996 and 1997 and the
nine months ended April 1997, respectively and (iii) interest income of
$490 and $333 for Fiscal 1997 and the nine months ended April 1998,
respectively.
(9) Total indebtedness includes short-term and long-term borrowings and
current maturities of long-term debt.
(10) See Note 10 of the Notes to the Financial Statements of Fonda.
49
<PAGE>
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA OF SWEETHEART
The following selected historical consolidated financial data have been
derived from the financial statements of Sweetheart. The data as of September
30, 1996 and 1997 and for the years ended September 30, 1995, 1996 and 1997 are
derived from the consolidated financial statements of Sweetheart audited by
Arthur Andersen LLP, independent auditors, whose report with respect thereto is
included elsewhere in this Prospectus. The data as of September 30, 1993 and
1994 and August 29, 1993 and for the year ended September 30, 1994, the period
from August 30, 1993 to September 30, 1993 and the period from January 1, 1993
to August 29, 1993 are derived from the audited consolidated financial
statements of Sweetheart and are not included herein. The data as of March 31,
1998 and for the six months ended March 31, 1997 and 1998 are derived from
Sweetheart's unaudited consolidated financial statements included elsewhere in
this Prospectus. In the opinion of management, the unaudited consolidated
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 six months ended March 31,
1998 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 Sweetheart'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>
PERIOD FROM PERIOD FROM
JANUARY 1 TO AUGUST 30 TO FISCAL YEAR ENDED SEPTEMBER 30,
AUGUST 29, SEPTEMBER 30, -------------------------------------------------
1993 1993 1994 1995 1996 1997
--------------- -------------- ----------- ----------- ----------- -------------
(PREDECESSOR) (SUCCESSOR)
--------------- ----------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Net Sales ........................... $ 591,258 $81,571 $898,528 $986,618 $959,818 $ 886,017
Cost of sales ....................... 522,615 71,963 778,163 874,593 846,719 821,021
--------- ------- -------- -------- -------- ---------
Gross profit ........................ 68,643 9,608 120,365 112,025 113,099 64,996
Selling, general and
administrative ..................... 45,494 5,787 67,712 66,089 61,788 66,792
Loss on asset disposal and
impairment ......................... --- --- --- --- --- 24,550
Restructuring charges ............... -- -- -- -- -- 9,680
Other (income) expense, net ......... (48) 177 (411) (1,197) 4,271 (73)
--------- ------- -------- -------- -------- ---------
Operating income (loss) ............. 23,197 3,644 53,064 47,133 47,040 (35,953)
Interest expense, net ............... 43,947 3,311 37,248 37,410 32,517 40,265
--------- ------- -------- -------- -------- ---------
Income (loss) before income
taxes, cumulative effect of
an accounting change and
extraordinary loss ................. (20,750) 333 15,816 9,723 9,523 (76,218)
Income tax (expense) benefit ........ 6,641 (161) (6,462) (3,903) (3,809) 30,487
--------- ------- -------- -------- -------- ---------
Income (loss) before
cumulative effect of an
accounting change and
extraordinary loss ................. (14,109) 172 9,354 5,820 5,714 (45,731)
Cumulative effect of a change
in accounting principle, net . --- --- --- --- --- ---
Extraordinary loss, net ............. -- -- -- -- -- (940)
--------- ------- -------- -------- -------- ---------
Net income (loss) ................... (14,109) 172 9,354 5,820 5,714 (46,671)
Accrued dividends on Class B
Common Stock ....................... 4,200 -- -- -- -- --
--------- ------- -------- -------- -------- ---------
Net income (loss) applicable
to common shareholders ............. $ (18,309) $ 172 $ 9,354 $ 5,820 $ 5,714 $ (46,671)
========= ======= ======== ======== ======== =========
<CAPTION>
SIX MONTHS
ENDED MARCH 31,
---------------------------
1997 1998
------------- -------------
(SUCCESSOR)
---------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Net Sales ........................... $ 398,107 $ 393,168
Cost of sales ....................... 385,530 373,965
--------- ---------
Gross profit ........................ 12,577 19,203
Selling, general and
administrative ..................... 32,915 38,124
Loss on asset disposal and
impairment ......................... -- --
Restructuring charges ............... -- 10,527
Other (income) expense, net ......... 582 6,160
--------- ---------
Operating income (loss) ............. (20,920) (35,608)
Interest expense, net ............... 19,501 21,498
--------- ---------
Income (loss) before income
taxes, cumulative effect of
an accounting change and
extraordinary loss ................. (40,421) (57,106)
Income tax (expense) benefit ........ 16,168 22,840
--------- ---------
Income (loss) before
cumulative effect of an
accounting change and
extraordinary loss ................. (24,253) (34,266)
Cumulative effect of a change
in accounting principle, net . -- (1,511)
Extraordinary loss, net ............. -- --
--------- ---------
Net income (loss) ................... (24,253) (35,777)
Accrued dividends on Class B
Common Stock ....................... -- --
--------- ---------
Net income (loss) applicable
to common shareholders ............. $ (24,253) $ (35,777)
========= =========
</TABLE>
50
<PAGE>
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM
JANUARY 1 TO AUGUST 30 TO FISCAL YEAR ENDED SEPTEMBER 30,
AUGUST 29, SEPTEMBER 30, ---------------------------------------------------
1993 1993 1994 1995 1996 1997
--------------- -------------- ------------ ------------ ------------ ------------
(PREDECESSOR) (SUCCESSOR)
--------------- ------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
OTHER GAAP FINANCIAL DATA:
Net cash provided by (used
in) operating activities(1) ..... $ 23,735 $ 5,901 $ 41,532 $ 50,899 $ 43,508 $ (3,242)
Net cash (used in) investing
activities ...................... (14,154) (1,942) (32,581) (51,514) (50,236) (29,914)
Net cash provided by (used
in) financing activities ........ (9,625) (3,982) 3,240 (3,615) 3,098 31,435
Capital Expenditures ............. 14,557 1,956 39,428 51,625 50,236 47,757
Depreciation and
amortization .................... 28,507 2,050 25,783 34,207 39,813 44,152
Ratio of earnings to fixed
charges (2) ..................... N/A 1.1x 1.4x 1.2x 1.2x N/A
OTHER NON-GAAP FINANCIAL
DATA:
Adjusted Sweetheart
EBITDA (3) ...................... $ 51,738 $ 5,710 $ 79,059 $ 82,585 $ 88,168 $ 43,976
Ratio of Adjusted Sweetheart
EBITDA to cash interest
expense (3)(4) .................. 3.7x 1.9x 2.3x 2.4x 2.5x 1.1x
BALANCE SHEET DATA
(AT END OF PERIOD): .............
Cash and cash equivalents ........ $ 63 $ 40 $ 12,231 $ 8,001 $ 4,371 $ 2,650
Working capital .................. 112,817 146,821 163,391 153,951 162,379 166,768
Property, plant and
equipment, net .................. 450,362 393,918 400,176 417,563 427,833 382,491
Total assets ..................... 753,531 692,772 728,442 741,906 762,610 719,530
Total indebtedness (5) ........... 621,190 354,132 371,257 371,690 387,114 431,868
Total shareholders' equity
(deficit) ....................... (121,883) 100,548 109,955 115,805 121,415 74,611
<CAPTION>
SIX MONTHS
ENDED MARCH 31,
---------------------------
1997 1998
------------- -------------
(SUCCESSOR)
---------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
OTHER GAAP FINANCIAL DATA:
Net cash provided by (used
in) operating activities(1) ..... $ (18,060) $ (18,524)
Net cash (used in) investing
activities ...................... (24,889) (4,710)
Net cash provided by (used
in) financing activities ........ 42,271 23,861
Capital Expenditures ............. 24,889 20,342
Depreciation and
amortization .................... 21,605 21,540
Ratio of earnings to fixed
charges (2) ..................... N/A N/A
OTHER NON-GAAP FINANCIAL
DATA:
Adjusted Sweetheart
EBITDA (3) ...................... $ 1,239 $ 1,702
Ratio of Adjusted Sweetheart
EBITDA to cash interest
expense (3)(4) .................. 0.1x 0.1x
BALANCE SHEET DATA
(AT END OF PERIOD): .............
Cash and cash equivalents ........ $ 3,693 $ 3,259
Working capital .................. 148,648 97,248
Property, plant and
equipment, net .................. 431,301 375,362
Total assets ..................... 746,614 688,813
Total indebtedness (5) ........... 430,454 422,988
Total shareholders' equity
(deficit) ....................... 96,997 38,873
</TABLE>
- ----------
(1) Material differences between Adjusted Sweetheart 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 Adjusted Sweetheart 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 Adjusted Sweetheart EBITDA.
(2) 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.
Earnings were not sufficient to cover fixed charges in the eight months
ended August 1993, Fiscal 1997 and the six months ended March 1997 and
1998 periods in the amount of $20,750, $76,803, $40,958 and $57,129,
respectively.
(3) Adjusted Sweetheart EBITDA represents income from operations before
interest expense, provision for income taxes, depreciation and
amortization, loss on asset disposal and impairment, restructuring
expenses and gain on the Sweetheart Bakery Disposition incurred in the
six month March 1998 period in the amount of $3,459. EBITDA is generally
accepted as providing information regarding a company's ability to
service debt. Adjusted Sweetheart 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 invloved) 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) Cash interest expense excludes (i) the amortization of debt issuance cost
of $1,241, $264, $3,320, $3,534, $3,560, $3,571, $1,779, and $1,448 for
the eight months ended August 1993, the one month ended September 1993,
Fiscal 1994, 1995, 1996, 1997, the six month March 1997 and 1998 periods,
respectively, (ii) $28,702 of payment-in-kind interest in the eight
months ended August 1993 and (iii) interest income of $34, $16, $212,
$1,245, $1,315, $1,547, $555 and $555 for eight months ended August 1993,
the one month ended September 1993, Fiscal 1994, 1995, 1996, 1997, the
six month March 1997 period and the six month March 1998 period,
respectively.
(5) Total indebtedness includes short-term and long-term borrowings and
current maturities of long-term debt.
51
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
The following discussion contains forward-looking statements which involve
risks and uncertainties. The Company's actual results or future events could
differ materially from those anticipated in these forward-looking statements as
a result of certain factors, including, but not limited to, raw material costs,
labor market conditions, the highly competitive nature of the industry and
developments with respect to contingencies.
The following discussion of results of operations for Fiscal 1995, 1996
and 1997 and the interim periods is based on the historical results of
operations of Sweetheart and Fonda. Since the Fonda Acquisitions were
consummated from time to time during such fiscal years, the financial
information contained herein with respect to periods prior to such 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 Fonda at the beginning of the periods presented herein or which may be
achieved in the future.
Sweetheart has reclassified certain amounts for current year presentation
from prior year presentation. Within the statements of operations,
"transportation costs," previously reported as a separate line item, are now a
component of "cost of sales." Additionally, interest income has been
reclassified from "other expense" to "interest expense, net" and the remainder
of "other expense" is now reflected as a component of "operating loss." Certain
other reclassifications of balance sheet amounts have been made to conform to
the current year's presentation. All prior years have been restated to conform
to the current year presentation.
The Company's business is highly seasonal with a majority of its net cash
flow from operations realized in the second and third quarters of the calendar
year. The Company builds its inventory throughout the year to satisfy the high
seasonal demands of the summer months when outdoor and away-from-home
consumption increases. In the event cash flow from operations is insufficient
to provide working capital necessary to fund production requirements during
these quarters, Fonda and Sweetheart will need to borrow under their respective
credit facilities or seek other sources of capital. Although the Company
believes that funds available under the Fonda Credit Facility and Sweetheart
Credit Facilities, together with cash generated from operations, will be
adequate to provide for each company's respective cash requirements, there can
be no assurance that such capital resources will be sufficient in the future.
GENERAL
SF Holdings is a holding company that conducts all of its operations
through Sweetheart and Fonda. As a holding company, SF Holdings expects to
incur minimal operating expenses. See "Certain Relationships and Related
Transactions." Sweetheart and Fonda, SF Holdings' principal operating
subsidiaries, are converters and marketers of disposable paper, plastic and
foam food service and food packaging products. The prices for each subsidiary's
raw materials fluctuate. When raw material prices decrease, selling prices have
historically decreased. The actual impact on each company from 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. In
the event raw materials prices decrease over a period of several months, such
company may suffer margin erosion on the sale of such inventory.
In addition to the pro forma adjustments set forth under "Unaudited Pro
Forma Financial Information," the Company believes that it can realize
additional cost savings by (i) eliminating the outsourcing of products which
will be manufactured within the Company; (ii) capitalizing on the Company's
combined purchasing leverage with respect to raw materials and other procured
items, such as packaging materials; (iii) eliminating duplicative
administrative, sales and marketing expenses; (iv) making selective capital
expenditures intending to realize manufacturing and distribution savings; and
(v) rationalizing its facilities.
52
<PAGE>
YEAR 2000
Each of Sweetheart and Fonda have implemented Year 2000 compliance
programs designed to ensure that each respective company's computer systems and
applications will function properly beyond 1999. The Company expects Sweetheart
and Fonda's Year 2000 date conversion programs to be substantially completed by
the end of 1999. The Company believes that adequate resources, both internal
and external, have been allocated for this purpose. Spending for these Year
2000 compliance programs, including Fiscal 1998 spending, is estimated to be
$2.7 million and $1.8 million at Sweetheart and Fonda, respectively, and will
be funded from each of the respective company's cash from operations or
borrowings under each company's respective credit facility. However, there can
be no assurance that the Company will identify all Year 2000 date conversion
problems in its computer systems in advance of their occurrence or that the
Company will be able to successfully remedy all problems that are discovered.
Failure by Sweetheart or Fonda and/or their significant vendors and customers
to complete Year 2000 compliance programs in a timely manner could have a
material adverse effect on the Company's business, financial condition and
results of operations. In addition, the revenue stream and financial stability
of existing customers may be adversely impacted by Year 2000 problems which
could cause fluctuations in the Company's revenues and operating profitability.
LIQUIDITY AND CAPITAL RESOURCES
On March 12, 1998, SF Holdings issued Units consisting of Discount Notes
and Discount Note Shares. Until March 15, 2003, no interest will accrue on the
Discount Notes, but the Accreted Value (as defined herein) will increase
between the date of original issuance and March 15, 2003. Beginning on March
15, 2003, interest on the Discount Notes will accrue at the rate of 12 3/4% per
annum and will be payable in cash semi-annually in arrears on March 15 and
September 15 of each year, commencing on September 15, 2003. The Discount Notes
will mature on March 15, 2008. As used herein, "Accreted Value" means, as of
any date of determination prior to March 15, 2003, with respect to any Discount
Note, the sum of (a) the initial offering price to investors of such Discount
Note and (b) the portion of the excess of the principal amount of such Discount
Note over such initial offering price which shall have been accreted thereon
through such date, such amount to be so accreted on a daily basis at a rate of
1234% per annum of the initial offering price of such Discount Note, compounded
semi-annually on each March 15 and September 15 from the date of issuance of
the Discount Notes through the date of determination, computed on the basis of
a 360-day year of twelve 30-day months.
On March 12 1998, SF Holdings issued 3,000 Share Units consisting of 3,000
shares of 13 3/4% Exchangeable Preferred Stock due 2009 and 111,000 shares of
Class C Common Stock of SF Holdings. Each share of Exchangeable Preferred Stock
has a liquidation preference of $10,000 per share, plus an amount of cash equal
to the dividends, whether or not earned or declared, accrued and unpaid thereon
to the date of final distribution. Dividends on the Exchangeable Preferred
Shares will be payable quarterly in arrears at an annual rate equal to 13 3/4%
and will be cumulative. Until March 12, 2003, dividends on the Exchangeable
Preferred Shares may be paid, at SF Holdings' option, either in cash or by the
issuance of additional shares of Preferred Stock with an aggregate liquidation
amount equal to the amount of such dividends. Thereafter, dividends will be
payable in cash, subject to certain exceptions.
None of SF Holdings, Fonda or Sweetheart anticipate any material capital
expenditures in the next twelve months. SF Holdings is a holding company and
does not anticipate any material cash needs until 2003. See "--Fonda Liquidity
and Capital Resources" and "--Sweetheart Liquidity and Capital Resources" for a
discussion of each company's respective outstanding indebtedness.
RECENT DEVELOPMENTS
On March 12, 1998, Fonda entered into a five-year licensing agreement with
its affiliate, CEG, subject to extension, whereby CEG will manufacture and
distribute certain party goods products currently manufactured by Fonda. In
connection therewith, Fonda will receive an annual royalty equal to 5% of CEG's
cash flow, as determined in accordance with a formula specified in such
agreement. Pursuant to such agreement, during a transition period, Fonda is
manufacturing such party goods products for CEG on a contract basis. In Fiscal
1997, Fonda's net sales of such party goods products were approximately $30
million. The Company expects Fonda's fixed and variable costs to decrease and
it expects to reduce
53
<PAGE>
Fonda's accounts receivable and inventory by approximately $9 million as a
result of such licensing agreement. The Company believes that such transaction
will have a favorable impact on Fonda's results of operations.
On March 24, 1998, Fonda consummated the agreement with Cellu, whereby
Cellu acquired substantially all of the fixed assets and certain related
working capital of the Natural Dam mill in Gouverneur, New York, pursuant to
which Fonda realized net proceeds of $24.6 million, including a note receivable
of $3.7 million, and recorded a pre-tax gain of $9.3 million.
In connection with the consummation of the Sweetheart Investment,
Sweetheart incurred $4.4 million of financial advisory and legal expenses and
$3.7 million of severance expenses as a result of the termination of certain
officers of Sweetheart pursuant to executive separation agreements and
retention plans for certain key executives. See "Unaudited Pro Forma Financial
Information." For the three month period ended March 31, 1998, Sweetheart
reduced its salaried workforce by approximately 15% and hourly workforce by
less than 5% and decided to rationalize certain product lines, and in
connection therewith, disposed of associated property and equipment. In
connection with such plans, Sweetheart recognized $10.5 million of charges for
severance and asset disposition costs. As a result of the applications of
purchase accounting by SF Holdings for the Sweetheart Investment, the expenses
described above will have no effect on SF Holdings' results of operations.
On July 1, 1998, Fonda consummated an agreement with Kamine, the owner of
the co-generation facility at the Natural Dam mill, whereby Kamine terminated
its obligations to supply steam to Natural Dam and to make certain land lease
payments in return for a lump sum cash payment and the delivery of certain
equipment. As a result, Fonda will record a gain in its fourth fiscal quarter.
FONDA RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JULY
-------------------------------------------------------------------------
1995 1996 1997
----------------------- ------------------------ ------------------------
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 .................. $ 97.1 100.0% $ 204.9 100.0% $ 252.5 100.0%
Cost of goods sold ......... 76.3 78.6 161.3 78.7 196.3 77.7
------- ----- -------- ----- -------- -----
Gross profit ............... 20.8 21.4 43.6 21.3 56.2 22.3
Selling, general and
admin. expenses ........... 14.1 14.5 29.7 14.5 37.2 14.7
Other income, net .......... -- -- -- -- ( 1.6) 6.0
------- ----- -------- ----- -------- -----
Income from operations ..... $ 6.7 6.9% $ 13.9 6.8% $ 20.6 8.2%
======= ===== ======== ===== ======== =====
<CAPTION>
NINE MONTHS ENDED APRIL
------------------------------------------------
1997 1998
------------------------ -----------------------
PERCENT OF PERCENT OF
AMOUNT NET SALES AMOUNT NET SALES
----------- ------------ ----------- -----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Net sales .................. $ 184.5 100.0% $ 203.6 100.0%
Cost of goods sold ......... 148.8 80.6 167.5 82.3
-------- ----- -------- -----
Gross profit ............... 35.7 19.4 36.1 17.7
Selling, general and
admin. expenses ........... 24.1 13.1 26.0 12.8
Other income, net .......... -- -- ( 9.6) ( 4.7)
-------- ----- -------- -----
Income from operations ..... $ 11.6 6.3% $ 19.6 9.6%
======== ===== ======== =====
</TABLE>
FONDA--NINE MONTHS ENDED APRIL 26, 1998 COMPARED TO NINE MONTHS ENDED APRIL 27,
1997
Net sales increased $19.1 million, or 10.3%, to $203.6 million, in the
nine months ended April 26, 1998 compared to $184.5 million in the nine months
ended April 27, 1997. The increase was primarily due to increased sales volume
in converting operations from businesses acquired subsequent to the third
quarter of Fiscal 1997, and to a lesser extent increased sales volume in
converted tissue products. Sales volume in the converting operations increased
12% in the consumer markets and 7% in the institutional markets, Average
selling prices increased 5% in the institutional markets and decreased less
than 1% in the consumer markets. Net sales of tissue mill products declined
$1.1 million resulting from a shift in mix due to competitive market
conditions, a nine day outage due to a severe ice storm which interrupted the
availability of electricity and steam and the sale of the Natural Dam mill on
March 24, 1998. Increased sales of commodity white paper from the new paper
machine were offset by reduced sales of deep tone paper due to competitive
market conditions.
Gross profit increased $0.4 million, or 1.0%, to $36.1 million in the nine
months ended April 26, 1998 compared to $35.7 million in the nine months ended
April 27, 1997. This increase is primarily the result
54
<PAGE>
of a $3.3 million increase in gross profit in the converting operations,
partially offset by a $2.9 million decrease in gross profit in tissue mill
products. In the converting operations, gross profits from businesses acquired
subsequent to the third quarter of Fiscal 1997 and higher margins in converted
tissue products were partially offset by increased costs of paperboard, which
were not recovered through price adjustments. The decrease in gross profits of
tissue mill products was due to the increased sales of lower margin white paper
and reduced sales of higher margin deep tone paper, as well as increased
manufacturing costs resulting from the start-up of the second paper machine. As
a result of the ice storm, the Natural Dam mill sustained property damage and
experienced a temporary shut down. Fonda maintains insurance policies that
cover losses of this type, and expects to recover a portion of these costs. The
Company believes that any additional costs would not have a significant effect
on its results of operations. As a percentage of nets sales, gross profit
decreased from 19.4% in the nine months ended April 27, 1997 to 17.7% in the
nine months ended April 26, 1998 for the reasons set forth above.
Selling, general and administrative expenses increased $1.9 million, or
7.8%, to $26.0 million in the nine months ended April 26, 1998 compared to
$24.1 million in the nine months ended April 27, 1997 primarily due to
increased selling expenses resulting from the increase in net sales. As a
percentage of net sales, selling, general and administrative expenses decreased
from 13.1% in the nine months ended April 27, 1997 to 12.8% in the nine months
ended April 26, 1998.
Other income, net includes a $9.3 million pre-tax gain on the sale of the
Natural Dam mill and a $0.4 million gain on the sale of other non-core assets.
These gains were partially offset by closure cost accruals relating to the
decision to close the Jacksonville converting facility.
Income from operations increased $8.0 million, or 69.4% to $19.6 million
in the nine months ended April 26, 1998 compared to $11.6 million in the nine
months ended April 27, 1997 due to the reasons discussed above. Excluding other
income, net, as a percentage of net sales, income from operations decreased
from 6.3% in the nine months ended April 27, 1997 to 4.9% in the nine months
ended April 26, 1998.
Interest expense, net of interest income, increased $2.4 million, or 34.6%
to $9.2 million in the nine months ended April 26, 1998 compared to $6.8
million in the nine months ended April 27, 1997. The increase was due to higher
borrowing levels resulting from the issuance in the third quarter of Fiscal
1997 of $120.0 million of 9 1/2% Senior Subordinated Notes due 2007 (the "Fonda
Notes"), which replaced higher interest rate debt.
As a result of the above and a 42% effective tax rate in both periods,
income before extraordinary items was $6.1 million in the nine months ended
April 26, 1998 compared to $2.8 million in the nine months ended April 27,
1997.
In the nine months ended April 27, 1997, Fonda incurred a $3.5 million
extraordinary loss (net of a $2.5 million income tax benefit) in connection
with the early retirement of debt consisting of the write-off of unamortized
debt issuance costs, elimination of unamortized debt discount, and prepayment
penalties. As a result of the above, net income was $6.1 million in the nine
months ended April 26, 1998 compared to a net loss of $0.7 million in the nine
months ended April 27, 1997.
FONDA--FISCAL 1997 COMPARED TO FISCAL 1996
Net sales increased $47.6 million, or 23.2%, to $252.5 million in Fiscal
1997 compared to $204.9 million in Fiscal 1996. This increase was a result of a
full year's results of operations for the acquisitions consummated in Fiscal
1996 and two month's results of operations for the 1997 Fonda Acquisitions,
which was partially offset by a $5.8 million decline in net sales due to lower
average selling prices. The lower selling prices arose from competitive market
conditions and lower raw material costs. During Fiscal 1997, prices declined
about 13% in the institutional market and 5% in the consumer market. These
lower selling prices were partially offset by higher sales volumes of 8% and 4%
in the institutional and consumer markets, respectively.
Gross profit increased $12.6 million, or 28.9%, to $56.2 million in Fiscal
1997 compared to $43.6 million in Fiscal 1996, primarily due to the
acquisitions consummated in Fiscal 1996. As a percentage
55
<PAGE>
of net sales, gross profit improved slightly from 21.3% in Fiscal 1996 to 22.2%
in Fiscal 1997. Gross profits increased in the consumer market, primarily due
to a 14% decline in SBS paperboard costs, but were offset by lower gross
profits in the institutional market. Margins for the institutional market were
reduced primarily as a result of competitive market conditions which lowered
selling prices.
Selling, general and administrative expenses increased $7.4 million, or
25.0%, to $37.2 million in Fiscal 1997 compared to $29.7 million in Fiscal
1996. This increase was primarily due to the incurrence of additional expenses
and corporate overhead assumed in connection with the acquisitions consummated
in Fiscal 1996. As a percentage of net sales, selling, general and
administrative expenses increased slightly from 14.5% in 1996 to 14.7% in 1997.
Other income, net includes a gain of a net $2.9 million in Fiscal 1997
from the settlement of a lawsuit. Partially offsetting this gain was a $1.3
million charge for costs of the closure of Fonda's Three Rivers, Michigan
facility. The charge covers the costs for the termination of employees as well
as ongoing costs to maintain the facility until its disposition.
Income from operations increased $6.8 million, or 48.7%, to $20.6 million
in Fiscal 1997 compared to $13.9 million in Fiscal 1996, due to the reasons
discussed above. Excluding the $1.6 million net gain included in other income,
income from operations increased, as a percentage of net sales, from 6.8% in
Fiscal 1996 to 7.5% in Fiscal 1997.
Interest expense, net of interest income, increased $1.1 million, or
13.7%, to $9.0 million in Fiscal 1997 compared to $7.9 million in Fiscal 1996
due to higher borrowing levels primarily resulting from the acquisitions
consummated in Fiscal 1996 and the issuance of the Fonda Notes. See "--Fonda
Liquidity and Capital Resources." Partially offsetting the higher borrowing
levels were the lower interest rates on such notes.
Income before income taxes and extraordinary loss increased to $11.6
million in Fiscal 1997 from $5.9 million in Fiscal 1996. Fonda's effective
income tax rate was 42% in both years.
Fonda incurred a $3.5 million extraordinary loss (net of a $2.5 million
income tax benefit) in connection with the early retirement of debt consisting
of the write-off of unamortized debt issuance costs, elimination of unamortized
debt discount, and prepayment penalties. As a result of the above, net income
was $3.2 million in Fiscal 1997 compared to $3.4 million in Fiscal 1996.
FISCAL 1996 COMPARED TO FISCAL 1995
Fonda'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 for the Hoffmaster division which
also included seven months of results of operations for the Chesapeake
acquisition. Approximately 7% of this increase is attributable to three months
of results of operations of the James River acquisition which was acquired by
Fonda 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.
Gross profit increased by $22.8 million, or 109.4%, to $43.6 million in
Fiscal 1996 compared to $20.8 million in Fiscal 1995. Approximately 70% of this
increase is due to the acquisition of Hoffmaster, for the reasons stated above.
Gross profits as a percentage of net sales was approximately 21.4% in both
periods. The inclusion of the Hoffmaster division results was offset in part by
an increase in cost of goods sold as a percentage of sales at the Fonda
division. In the first half of Fiscal 1996, Fonda experienced increased raw
material costs as a result of continuous price increases during Fiscal 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.
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 Fonda's increased presence in consumer markets
as a result of the Chesapeake and Maspeth acquisitions, 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%.
56
<PAGE>
Income from operations increased $7.2 million, or 106.6%, to $13.9 million
in Fiscal 1996 compared to $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.
Interest expense increased $5.0 million as a result of the debt incurred
in connection with the Hoffmaster acquisition and the acquisitions consummated
in Fiscal 1996. Fonda's effective income tax rate was 42% in both periods.
FONDA LIQUIDITY AND CAPITAL RESOURCES
Historically, Fonda 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
26, 1998 was $6.3 million compared to $0.7 million for the nine months ended
April 27, 1997. The nine month period ended April 26, 1998 includes the receipt
of $2.9 million resulting from the settlement of a lawsuit. Net cash provided
by operating activities for Fiscal 1997 was $8.3 million compared to $17.7
million for Fiscal 1996. The higher level of net cash provided by operating
activities in Fiscal 1996 reflects the consolidation of the working capital
assets acquired in the Hoffmaster acquisition. This increase was primarily due
to a reduction in the level of accounts receivable and an increase in accounts
payable and accrued expenses.
Fonda's investing activities are primarily capital expenditures and
business acquisitions. Capital expenditures in the nine months ended April 26,
1998 were $6.2 million, including $1.8 million related to the installation of a
second paper machine at the Natural Dam mill. The remaining $4.4 million in
such period and the capital expenditures in the nine months ended April 27,
1997 were for routine capital improvements. Capital expenditures in Fiscal 1997
were $10.4 million, including $8.2 million related to the installation of the
second paper machine at the Natural Dam mill. The remaining $2.2 million in
Fiscal 1997 and most of the capital expenditures in prior years were for
routine capital improvements. Fonda spent $23.0 million in Fiscal 1997, $45.2
million in Fiscal 1996 and $28.0 million in Fiscal 1995 for the Fonda
Acquisitions.
Fonda is a party to a credit facility with IBJ Schroder Bank & Trust
Company, as agent, providing for available borrowings of up to $50.0 million
(the "Fonda Credit Facility"). Borrowings under the Fonda Credit Facility have
a final maturity date of March 31, 2000. As of April 26, 1998, $0.4 million was
outstanding under the Fonda Credit Facility. Borrowings under the Fonda Credit
Facility bear interest, at Fonda'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%. Pursuant to the terms of the Fonda Credit
Facility, the obligation to advance funds is subject to certain conditions
customary for facilities of similar size and nature. In addition, Fonda 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 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 Fonda Credit Facility requires Fonda to satisfy
certain financial covenants, including the maintenance of an interest coverage
ratio of not less than 2.0 to 1.0. The Fonda Credit Facility also provides for
customary events of default. The Fonda Credit Facility is secured by accounts
receivable, inventory, certain general intangibles and the proceeds on the sale
of accounts receivable and inventory.
In 1997, Fonda issued $120.0 million of its 9 1/2% Senior Subordinated
Notes due 2007 (the "Fonda Notes"). Payment of the principal of, and interest
on, the Fonda Notes is subordinate in right of payment to the prior payment of
Senior Debt (as defined therein), which includes the Fonda Credit Facility.
Interest is payable semi-annually in arrears on the Fonda Notes at a rate of 9
1/2% per annum.
57
<PAGE>
The principal amount of the Fonda Notes is payable on February 28, 2007.
Fonda may, at its election, redeem the Fonda Notes at any time after March 1,
2002 at a redemption price equal to a percentage (104.750% after March 1, 2002
and declining to 103.166% after March 1, 2003, 101.583% after March 1, 2004 and
to 100% after March 1, 2005) of the principal amount thereof plus accrued
interest. The Fonda Notes provide that upon the occurrence of a Change of
Control (as defined therein), the holders thereof will have the option to
require the redemption of the Fonda Notes at a redemption price equal to 101%
of the principal amount thereof plus accrued interest.
The indenture relating to the Fonda Notes (the "Fonda Indenture") contains
certain affirmative and negative covenants customarily contained in agreements
of this type, including, without limitation, covenants that restrict, subject
to specified exceptions (i) purchase or redemption of Fonda's capital stock or
declaration or payment of dividends or distributions on such capital stock,
(ii) incurrence of additional indebtedness, (iii) investment activities, (iv)
mergers, consolidations, asset sales or changes in capital structure, (v)
creation or acquisition of subsidiaries, (vi) granting or incurrence of liens
to secure other indebtedness, and (vii) engaging in transactions with
affiliates. The Fonda Indenture also provides for customary events of default.
In April 1997, Fonda offered to repurchase up to 74,000 (pre-Fonda
Stockholder Exchange) shares of Class A common stock of Fonda (the "Fonda Class
A Common Stock") at $135 per share from its stockholders on a pro rata basis
(the "Fonda Stock Repurchase"). Pursuant to the Fonda Stock Repurchase, during
Fiscal 1997 Fonda redeemed 500 (pre-Fonda Stockholder Exchange) shares of Fonda
Class A Common Stock and 1,000 (pre-Fonda Stockholder Exchange) shares of Class
B common stock of Fonda for $0.2 million; during the nine months ended April
26, 1998, Fonda redeemed 72,500 (pre-Fonda Stockholder Exchange) shares of
Fonda Class A Common Stock for $9.8 million. Fonda has completed such stock
repurchase.
During the nine months ended April 26, 1998 and Fiscal 1997, Fonda did not
incur material costs for compliance with environmental laws and regulations.
The Company believes that cash generated by Fonda's operations, combined
with amounts available under the Fonda Credit Facility, will be sufficient to
meet Fonda's capital expenditure needs, debt service requirements and working
capital needs for the foreseeable future.
SWEETHEART RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
FISCAL YEAR ENDED SEPTEMBER
--------------------------------------------------------------------------
1995 1996 1997
------------------------ ------------------------ ------------------------
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 .................... $ 986.6 100.0% $ 959.8 100.0% $ 886.0 100.0%
Cost of goods sold ........... 874.6 88.6 846.7 88.2 821.0 92.7
-------- ----- -------- ----- -------- -----
Gross profit ................. 112.0 11.4 113.1 11.8 65.0 7.3
Selling, general and
admin. expenses ............. 66.1 6.7 61.8 6.4 66.8 7.5
Loss on asset disposal and
impairment .................. -- -- -- -- 24.6 2.8
Restructuring Expense ........ -- -- -- -- 9.7 1.1
Other, net ................... (1.2) (.1) 4.3 .4 (.1) (.01)
-------- ----- -------- ----- -------- ------
Income (loss) from
operations .................. $ 47.1 4.8% $ 47.0 4.9% $ (36.0) (4.1)%
======== ===== ======== ===== ========= ======
<CAPTION>
SIX MONTHS ENDED MARCH
------------------------------------------------
1997 1998
------------------------ -----------------------
PERCENT OF PERCENT OF
AMOUNT NET SALES AMOUNT NET SALES
----------- ------------ ----------- -----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Net sales .................... $ 398.1 100.0% $ 393.2 100.0%
Cost of goods sold ........... 385.5 96.8 374.0 95.1
------- ----- -------- -----
Gross profit ................. 12.6 3.1 19.2 4.9
Selling, general and
admin. expenses ............. 32.9 8.3 38.1 9.7
Loss on asset disposal and
impairment .................. -- -- -- --
Restructuring Expense ........ -- -- 10.5 2.7
Other, net ................... .6 .2 6.2 1.6
------- ----- -------- -----
Income (loss) from
operations .................. $ (20.9) (5.2)% $ (35.6) (9.1)%
======== ===== ========= =====
</TABLE>
58
<PAGE>
SWEETHEART--SIX MONTHS ENDED MARCH 31, 1998 COMPARED TO SIX MONTHS ENDED MARCH
31, 1997
Net sales decreased $4.9 million to $393.2 million for the six months
ended March 31, 1998, compared to $398.1 million for the comparable 1997
period. The Sweetheart Bakery Disposition resulted in a $7.5 million decrease
in sales. Excluding the impact of the Sweetheart Bakery Disposition, net sales
increased by $2.6 million, or 0.7%, reflecting a 3.1% increase in domestic
sales volume which is partially offset by a 2.4% decrease in domestic sales
price. Price has been negatively impacted by declining raw material prices and
competition in the marketplace. The benefit of lower raw material prices is
generally passed on to customers. Food service sales volume increased 3.1%
while food packaging sales volume decreased 1.2%. Food service volume has been
positively impacted by Sweetheart's focus on revenue growth with key customers.
Food packaging sales volume is primarily attributable to decreases in demand by
large accounts in their customer base due to market conditions.
Gross profit increased $6.6 million, or 52.7%, to $19.2 million for the
six months ended March 31, 1998 compared to $12.6 million for the comparable
1997 period. The increase primarily results from cost reduction programs in
Fiscal 1997, including plant consolidation and manufacturing and operational
improvements, which have favorably impacted costs in Fiscal 1998. This
improvement was partially offset by the underabsorption of fixed overhead into
inventory due to decreased production during unscheduled down-time to reduce
inventory levels and increase inventory turnover. Additionally, Sweetheart has
benefited from higher margin product sales to key customers.
Selling, general and administrative expenses increased $5.2, million, or
15.8%, to $38.1 million for the six months ended March 31, 1998 compared to
$32.9 million for the comparable 1997 period. As a percentage of net sales,
selling, general and administrative expenses increased to 9.7% for the six
months ended March 31, 1998 from 8.3% for the same period in 1997. This
increase is primarily attributable to sales and marketing costs associated with
Sweetheart's focus on increasing its sales volume with key customers, increased
wages and benefits, costs associated with the new MIS system, and non-recurring
expenses associated with an executive retention plan and year 2000 compliance
program.
Operating loss increased $14.7 million to $35.6 million for the six months
ended March 31, 1998 compared to $20.9 million for the comparable 1997 period,
due to the reasons described above.
Net interest expense increased $2.0 million, or 10.2%, to $21.5 million
for the six months ended March 31, 1998 compared to $19.5 million for the
comparable 1997 period, due primarily to higher average use of revolving credit
borrowings and incremental interest paid on the portion of the new revolving
bank loan used to refinance the old notes.
Other expense, net increased $5.6 million to $6.2 million for the six
months ended March 31, 1998 compared to $0.6 million for the comparable 1997
period. In the quarter ended March 31, 1998, Sweetheart recognized certain
one-time charges, consisting primarily of $4.4 million of financial advisory
and legal fees associated with the Sweetheart Investment and $3.7 million of
severance expenses as a result of the termination of certain officers of
Sweetheart pursuant to executive separation agreements and retention plans for
certain key executives. These expenses are offset in part by the $3.5 million
gain on the Sweetheart Bakery Disposition recognized in the first fiscal
quarter of 1998.
Restructuring charges of $10.5 million were recognized in the quarter
ended March 31, 1998. In March 1998, Sweetheart reduced its workforce and
decided to rationalize certain product lines and, in connection therewith,
dispose of the associated property and equipment. In connection with such
plans, Sweetheart recognized charges of severance and asset disposition costs.
Sweetheart believes these product line rationalizations will not have a
material adverse effect on Sweetheart's results of operations or financial
condition and anticipates substantial completion of this restructuring within
the next twelve months.
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<PAGE>
Income tax benefit was $22.8 million for the six months ended March 31,
1998 compared to $16.2 million for the same period in 1997, a change of $6.6
million. The effective tax rate for the six months ended March 31, 1998 and
1997 was 40.0%.
Cumulative effect of change in accounting principle was an expense
recorded to write-off previously capitalized costs as explained in Note 2 to
the Notes to Sweetheart's Financial Statements.
Net loss increased $11.5 million to 35.8% million for the six months ended
March 31, 1998 compared to $24.3 million for the comparable 1997 period, due to
the reasons described above.
SWEETHEART--FISCAL 1997 COMPARED TO FISCAL 1996
Sweetheart's net sales decreased $73.8 million, or 7.7%, to $886.0 million
in Fiscal 1997 compared to $959.8 million in Fiscal 1996. The decrease in net
sales reflects a 2.9% decrease in domestic sales volume and a 4.4% decrease in
average domestic sales prices. Food service selling prices decreased 4.5% while
food packaging selling prices decreased 3.5%. Sweetheart's selling prices have
been negatively impacted by falling raw material prices and by competition in
the marketplace. The benefits of lower raw material prices are generally passed
on to customers. Food service sales volume decreased 1.7% while food packaging
sales volume decreased 11.5%. Sales volume measures the dollar value of unit
sales, assuming constant prices between periods. The decrease in food service
sales volume is primarily attributable to decreases in the national and club
store market segments offset by higher food service distributor account volume.
The decrease in food packaging sales volume is primarily attributable to
decreases in demand experienced by key accounts in their customer base in both
the cultured and frozen segments. Canadian net sales decreased 2.1% from the
prior year.
Cost of sales decreased $25.7 million, or 3.0%, to $821.0 million in
Fiscal 1997 compared to $846.7 million in Fiscal 1996. As a percentage of net
sales, cost of sales increased to 92.7% in Fiscal 1997 from 88.2% in Fiscal
1996. Sweetheart has implemented initiatives which have reduced variable
manufacturing costs to offset price conditions in the marketplace described
above. As a result, raw material and labor costs have been held constant as a
percentage of sales despite lower selling prices to customers. Although
overhead spending was contained at 1996 levels, this cost as a percentage of
net sales has increased. In addition, year-to-date results have been impacted
by changes in overhead absorption relating to planned inventory reductions.
Overhead costs are allocated and absorbed into inventory when inventory is
produced and expensed when inventory is sold. As a result, profit comparisons
can be materially affected when a change in inventory levels during a period
differs significantly from the change in the prior year period. In Fiscal 1996,
inventory levels increased, resulting in an absorption of fixed costs into
inventory. In Fiscal 1997, inventory levels declined, and the fixed costs
associated with inventories sold were recognized. This has resulted in a
year-to-year unfavorable impact on cost of sales of $10.5 million.
Gross profit decreased $48.1 million, or 42.5%, to $65.0 million in Fiscal
1997 compared to $113.1 million in Fiscal 1996 due to the reasons described
above.
Selling, general and administrative expenses increased $5.0 million, or
8.1%, to $66.8 million in Fiscal 1997 compared to $61.8 million in Fiscal 1996.
As a percentage of net sales, selling, general and administrative expenses
increased to 7.5% in Fiscal 1997 from 6.4% in Fiscal 1996. Approximately $3
million of the increase relates to expenditures on new management information
systems, while the remainder reflects investment in the food service
distribution selling activity and normal inflation in the wage base. All other
selling, general and administrative expenses were held below prior year levels.
Loss on asset disposal and impairment of $24.6 million was recorded in the
fourth quarter of Fiscal 1997 relating to the review of the carrying value of
Sweetheart's long-lived assets. See Note 14 of Notes to the Financial
Statements of Sweetheart.
Restructuring expense of $9.7 million was recorded in the fourth quarter
of Fiscal 1997 relating to plant closures and other expenses as part of
Sweetheart's strategic planning process. See Note 14 of Notes to the Financial
Statements of Sweetheart.
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<PAGE>
Other income (expense), net increased to $0.1 million of income in Fiscal
1997 from $4.3 million of expense in Fiscal 1996, an increase of $4.4 million.
Fiscal 1996 was unfavorably impacted by one-time expenses incurred by
Sweetheart relating to an investigation of Sweetheart's strategic alternatives.
Operating loss was $36.0 million in Fiscal 1997 compared to operating
income of $47.0 million in Fiscal 1996, a change of $83.0 million or 176.4%,
due to the reasons described above.
Interest expense increased $2.8 million, or 7.3%, to $40.3 million in
Fiscal 1997 compared to $37.5 million in Fiscal 1996, due primarily to higher
average usage of short-term borrowings.
Income tax benefit (expense) was $30.5 million of benefit in Fiscal 1997
compared to $3.8 million of expense in Fiscal 1996, a change of $34.3 million.
The effective tax rate for Fiscal 1997 and Fiscal 1996 was 40.0%.
Extraordinary loss of $0.9 million (net of $0.6 million in income taxes)
was recorded in the fourth quarter of Fiscal 1997 relating to the write-off of
deferred financing fees associated with a portion of Sweetheart's debt, which
was refinanced subsequent to September 30, 1997.
Net loss was $46.7 million in Fiscal 1997 compared to net income of $5.7
million in Fiscal 1996, a change of $52.4 million, due to the reasons described
above.
SWEETHEART--FISCAL 1996 COMPARED TO FISCAL 1995
Net sales decreased $26.8 million, or 2.7%, to $959.8 million in Fiscal
1996 compared to $986.6 million in Fiscal 1995. The decrease in net sales
reflects a 1.7% decrease in domestic sales volume and a 1.0% decrease in
domestic sales price. Food service selling prices decreased 1.2% while food
packaging selling prices decreased 0.5%. Food service sales volume decreased
1.4% while food packaging sales volume decreased 3.9%. Sales volume measures
the dollar value of unit sales, assuming constant prices between periods. The
decrease in food service sales volume is primarily attributable to decreases in
the distributor and club store market segments offset by higher national
account volume. The decrease in food packaging sales volume is primarily due to
the withdrawal of Sweetheart's Contour-Pak line from the food packaging market
and a decrease in the cultured products and frozen novelty market segments.
Canadian sales increased 2.5% from the prior year.
Cost of sales decreased $27.9 million, or 3.2%, to $846.7 million in
Fiscal 1996 compared to $874.6 million in Fiscal 1995. As a percentage of net
sales, cost of sales decreased to 88.2% in Fiscal 1996 from 88.6% in Fiscal
1995. The decrease in cost of sales as a percentage of net sales was due
primarily to significant changes between the periods in overhead costs absorbed
into inventory. Overhead costs are allocated and absorbed into inventory when
inventory is produced and expensed when inventory is sold. As a result, profit
comparisons can be affected when a change in inventory levels during a period
differs from the change in the prior year period. Finished goods inventory
levels increased to $137.7 million at September 30, 1996 from $104.6 million at
September 30, 1995, which resulted in a favorable impact on cost of sales of
$10.6 million relating to the absorption of fixed overhead costs. Additionally,
Sweetheart realized a 10.4% decrease in material costs from the prior year,
offset by an unfavorable shift in product mix.
Gross profit increased $1.1 million, or 1.0%, to $113.1 million in Fiscal
1996 compared to $112.0 million in Fiscal 1995 due to the reasons described
above.
Selling, general and administrative expenses decreased $4.3 million, or
6.5%, to $61.8 million in Fiscal 1996 compared to $66.1 million in Fiscal 1995.
As a percentage of net sales, selling, general and administrative expenses
decreased to 6.4% in Fiscal 1996 from 6.7% in Fiscal 1995.
Other income (expense), net decreased to $4.3 million of expense in Fiscal
1996 compared to $1.2 million of income in Fiscal 1995, a decrease of $5.5
million. This decrease was due primarily to one-time expenses relating to the
investigation of Sweetheart's strategic alternatives.
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<PAGE>
Operating income decreased $0.1 million, or 0.2%, to $47.0 million in
Fiscal 1996 compared to $47.1 million in Fiscal 1995 due to the reasons
described above.
Interest expense increased $0.1 million, or 0.3%, to $37.5 million in
Fiscal 1996 compared to $37.4 million in Fiscal 1995 due primarily to higher
average usage of short-term borrowings.
Income tax expense decreased $0.1 million, or 2.4%, to $3.8 million in
Fiscal 1996 compared to $3.9 million in Fiscal 1995. The effective tax rate in
Fiscal 1996 was 40.0% compared to 40.1% in Fiscal 1995.
Net income decreased $0.1 million, or 1.8%, to $5.7 million in Fiscal 1996
compared to $5.8 million in Fiscal 1995 due to the reasons described above.
SWEETHEART LIQUIDITY AND CAPITAL RESOURCES
In the fourth quarter of Fiscal 1997, Sweetheart completed negotiations of
a three-year contract renewal with its largest customer, McDonald's. Although
this agreement results in a lower selling price and less total volume, thereby
resulting in lower margins, Sweetheart did retain a majority of McDonald's
North American volume for cold cups and lids. In addition, Sweetheart committed
to convert McDonald's cold cup volume to a new raw material substrate (from wax
to double-sided polyethylene ("DSP")) over the life of the contract. This will
cause Sweetheart to incur incremental capital expenditures.
Net cash used in operating activities for the six months ended March 31,
1998 was $18.5 million compared to $18.0 million for the six month period ended
March 31, 1997. The net cash used in operating activities in both periods was
due principally to the net losses recorded in such periods which reflect both
market conditions and the seasonal low cash flow period for Sweetheart.
Sweetheart's investing activities which consist primarily of capital
expenditures historically have been funded through operating cash flow. Capital
expenditures for the six months ended March 31, 1998 were $20.3 million ($4.7
million net of proceeds from the sale of the bakery business and from the sale
of property, plant and equipment) compared to $24.9 million in the six months
period ended March 31, 1997. Capital expenditures were made primarily for
routine maintenance and capital improvements. During the current fiscal year,
Sweetheart will rely principally on proceeds from the sale of property, plant
and equipment to fund capital expenditures.
On October 24, 1997, Sweetheart and Sweetheart Cup, a subsidiary of
Sweetheart, entered into the Sweetheart U.S. Credit Facility (the "Sweetheart
U.S. Credit Facility") with BankAmerica Business Credit, Inc. ("BankAmerica")
as agent, which provides for a revolving credit facility in the amount of up to
$135.0 million, subject to certain borrowing base limitations. Borrowings under
the Sweetheart U.S. Credit Facility have a final maturity date of September 30,
2000. As of March 31, 1998, $ 114.9 million was outstanding under the
Sweetheart U.S. Credit Facility.
Borrowings under the Sweetheart U.S. Credit Facility bear interest, at
Sweetheart's election, at a rate per annum equal to (i) LIBOR plus 2.25% or
(ii) the Base Rate publicly announced by Bank of American National Trust and
Savings Association plus 1.00%. If the Sweetheart U.S. Credit Facility is
terminated during the period from October 24, 1997 to October 24, 1998,
Sweetheart will be obligated to pay BankAmerica $2.7 million. If the Sweetheart
U.S. Credit Facility is terminated during the period from October 24, 1998 to
October 24, 1999, Sweetheart will be obligated to pay BankAmerica $1.35
million.
Sweetheart 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
Sweetheart'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 Sweetheart U.S. Credit Facility requires Sweetheart to satisfy
certain financial
62
<PAGE>
covenants. The Sweetheart U.S. Credit Facility also provides for customary
events of default and change of control provisions. The Sweetheart U.S. Credit
Facility is secured by accounts receivable, inventory, equipment, intellectual
property, general intangibles and the proceeds on the sale of any of the
foregoing.
On June 15, 1998, Lily Cups entered into a term and revolving credit
facilities agreement (the "Sweetheart Canadian Credit Facility") with General
Electric Capital Canada, Inc., as lender, which provides for (i) a term loan
facility in the amount of up to Cdn. $10.0 million and (ii) a revolving credit
facility in the amount of up to Cdn. $10.0 million. Under the terms of the U.S.
Credit Facility, the total amount outstanding under the Canadian Credit
Facility cannot exceed Cdn. $20.0 million. Term loan borrowings under the
Sweetheart Canadian Credit Facility are due and payable in installments on the
first day of January, April, July and October of each year through April 2001.
Revolving credit borrowings under the Sweetheart Canadian Credit Facility have
a final maturity date of June 15, 2001. As of June 25, 1998, Cdn. $3.1 million
was outstanding under the Sweetheart Canadian Credit Facility.
Borrowings under the Sweetheart Canadian Credit Facility bear interest at
a rate per annum equal to (i) with respect to the revolving credit borrowings,
the Index Rate (as defined therein) plus 2.25% or (ii) with respect to term
loan borrowings, the Index Rate (as defined therein) plus 2.50%. In the event
that Lily Cups sells the property located at Danforth Road, Scarborough,
Ontario, Lily Cups is required to use certain net proceeds of such sale to
repay revolving credit borrowings outstanding on the first day following the
second anniversary of the date on which the Danforth Road property is sold. In
the event Lily Cups sells any of its assets, Lily Cups is required to use
certain net proceeds of such sale to repay term loans outstanding.
Pursuant to the terms of the Sweetheart Canadian Credit Facility, Lily
Cups 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 Lily Cups' 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.
The Sweetheart Canadian Credit Facility is secured by all of the existing
and after acquired real and personal, tangible and intangible assets of Lily
Cups and the proceeds on the sale of any of the foregoing.
Sweetheart's liquidity has been enhanced because it has not been subject
to current income taxes (other than the Alternative Minimum Tax) due to the use
of net operating loss carryforwards for income tax purposes. At September 30,
1997, Sweetheart's net operating loss carryforwards for tax purposes are
approximately $170 million. These net operating loss carryforwards will expire,
if not used, beginning in 2004. See "--Sweetheart Net Operating Loss
Carryforwards."
In September 1996, Sweetheart received $1.2 million of loans from the
State of Maryland Department of Business and Economic Development and the
County of Baltimore. The loans bear interest at 6.0% per annum with a ten year
life and require repayment in equal quarterly installments starting January 1,
1998. On January 1, 1998, the loans converted to interest-free grants.
In 1993, Sweetheart Cup issued $190.0 million of 9 5/8% Senior Secured
Notes due 2000 (the "Sweetheart Secured Notes"). Payment of the principal of,
and interest on, the Sweetheart Secured Notes is guaranteed by Sweetheart.
Interest is payable semi-annually in arrears on the Sweetheart Secured Notes at
a rate of 9 5/8% per annum.
The principal amount of the Sweetheart Secured Notes is payable on August
31, 2000. Sweetheart Cup may, at its election, redeem the Sweetheart Secured
Notes at any time at a redemption price equal to a percentage (currently
103.208% and declining to 101.604% after August 31, 1998 and to 100% after
August 31, 1999) of the principal amount thereof, plus accrued interest. The
Sweetheart Secured Notes provide that upon the occurrence of a Change of
Control (as defined therein), the holders thereof will have the option to
require the redemption of the Sweetheart Secured Notes at a redemption price
equal to 101% of the principal amount thereof plus accrued interest.
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<PAGE>
The indenture relating to the Sweetheart Secured Notes (the "Sweetheart
Secured Notes Indenture") contains certain affirmative and negative covenants
customarily contained in agreements of this type, including, without
limitation, covenants that restrict, subject to specified exceptions (i)
purchase or redemption of Sweetheart Cup's capital stock or declaration or
payment of dividends or distributions on such capital stock, (ii) incurrence of
additional indebtedness, (iii) investment activities, (iv) mergers,
consolidations, asset sales or changes in capital structure, (v) creation or
acquisition of subsidiaries, (vi) granting or incurrence of liens to secure
other indebtedness, and (vii) engaging in transactions with affiliates. The
Sweetheart Secured Notes Indenture also provides for customary events of
default.
The Sweetheart Secured Notes are secured by mortgages on the real property
owned by Sweetheart Cup and by a pledge of the capital stock of the
subsidiaries of Sweetheart Cup. Sweetheart's guarantee of the Sweetheart
Secured Notes is secured by mortgages on the real property owned by Sweetheart.
In 1993, Sweetheart Cup issued $110.0 million of 10 1/2% Senior
Subordinated Notes due 2003 (the "Sweetheart Subordinated Notes" and together
with the Sweetheart Secured Notes, the "Sweetheart Notes"). Payment of the
principal of, and interest on, the Sweetheart Subordinated Notes is guaranteed
by Sweetheart. Payment of the principal of, and interest on, the Subordinated
Notes is subordinate in right of payment to the prior payment of Senior
Indebtedness (as defined therein), which includes the Sweetheart U.S. Credit
Facility and the Sweetheart Secured Notes. Interest is payable semi-annually in
arrears on the Sweetheart Subordinated Notes at a rate of 10 1/2% per annum.
The entire principal amount of the Sweetheart Subordinated Notes is
payable on August 31, 2003. Sweetheart Cup may, at its election, redeem the
Sweetheart Subordinated Notes at any time after August 31, 1998 at a redemption
price equal to a percentage (103.938% after August 31, 1998 and declining to
102.625% after August 31, 1999, 101.313% after August 31, 2000 and to 100%
after August 31, 2001) of the principal amount thereof, plus accrued interest.
The Sweetheart Subordinated Notes provide that upon the occurrence of a Change
of Control (as defined therein), the holders thereof will have the option to
require the redemption of the Sweetheart Subordinated Notes at a redemption
price equal to 101% of the principal amount thereof plus accrued interest.
The indenture relating to the Sweetheart Subordinated Notes (the
"Sweetheart Subordinated Notes Indenture") contains certain affirmative and
negative covenants customarily contained in agreements of this type, including,
without limitation, covenants that restrict, subject to specified exceptions
(i) purchase or redemption of Sweetheart Cup's capital stock or declaration or
payment of dividends or distributions on such capital stock, (ii) incurrence of
additional indebtedness, (iii) investment activities, (iv) mergers,
consolidations, asset sales or changes in capital structure, (v) creation or
acquisition of subsidiaries, (vi) granting or incurrence of liens to secure
other indebtedness, and (vii) engaging in transactions with affiliates. The
Sweetheart Subordinated Notes Indenture also provides for customary events of
default.
Sweetheart's principal uses of cash will continue to be for capital
expenditures, working capital requirements, and debt service requirements.
During Fiscal 1997, Sweetheart made capital expenditures of approximately $47.8
million. New product development (including conversion from wax to DSP for cold
cups) and cost reduction accounted for approximately 21% and 37%, respectively,
of the total Fiscal 1997 expenditures. Non-discretionary expenditures
represented the balance of the current year spending. Sweetheart anticipates
capital spending in the future for similar projects, of which approximately $13
million has been committed for Fiscal 1998 as of March 31, 1998. In addition,
Sweetheart may be required to fund various contingent liabilities at any time,
including amounts accrued for litigation, claims and assessments reflected on
the balance sheet as other current liabilities. Although the Company believes
that cash generated by Sweetheart's operations and funds available from working
capital borrowings under the Sweetheart Credit Facilities, as well as funds
generated by asset sales, will be sufficient to meet Sweetheart's expected
operating needs, planned capital expenditures and debt service requirements,
there can be no assurance that such capital resources will be sufficient in the
future.
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SWEETHEART NET OPERATING LOSS CARRYFORWARDS
As of September 30, 1997, Sweetheart had approximately $170 million of net
operating loss ("NOL") carryforwards for federal income tax purposes. The
acquisition of Sweetheart by AIPM in 1993 resulted in a significant limitation
on Sweetheart's ability to utilize its NOL carryforwards, and the consummation
of the Sweetheart Investment will result in further limitations. Although
Sweetheart has taken certain steps to allow utilization of the NOL
carryforwards and anticipates that a portion of its NOL carryforwards will be
available to offset future taxable income, there can be no assurance that its
NOL carryforwards will become available or that Sweetheart will generate future
taxable income. Accordingly, all or a portion of its NOL carryforwards could
expire unutilized, which could adversely affect Sweetheart's ability to satisfy
its obligations as they become due.
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BUSINESS
GENERAL
The Company is one of the three largest converters and marketers of
disposable food service and packaging products in North America. The Company
sells a broad line of disposable paper, plastic and foam food service and food
packaging products under both branded and private labels to the consumer and
institutional markets, including large national accounts, and participates at
all major price points. The Company conducts its business through two principal
operating subsidiaries, Sweetheart and Fonda, and has marketed its products
under its well recognized Lily (Registered Trademark) , Sweetheart (Registered
Trademark) and Trophy (Registered Trademark) brands for over 85, 45 and 15
years, respectively. In addition, the Company's Sensations and Hoffmaster
(Registered Trademark) brands are well recognized in the industry. After
giving pro forma effect to the Transactions, the Company would have had net
sales, net loss and Adjusted EBITDA of $1.1 billion, $35.7 million and $68.7
million, respectively, for the twelve months ended April 26, 1998.
The Company's product offerings are among the broadest in the industry,
enabling it to offer its customers "one-stop" shopping for their disposable
food service and food packaging product needs. The Company's principal products
include (i) paperboard, plastic and foam food service products, primarily cups,
lids, plates, bowls, plastic cutlery and food containers; (ii) tissue and
specialty food service products, primarily napkins and placemats; and (iii)
food packaging products, primarily containers for the dairy and food processing
industries.
The Company sells its products to more than 5,000 customers and serves the
institutional and consumer markets, including large national accounts, located
throughout the United States and Canada. In addition, the Company has developed
and maintained long-term relationships with many of its customers. The
Company's institutional customers, which are served by Sweetheart and Fonda,
include (i) major food service distributors, (ii) national accounts, including
fast-food chains and catering services, and (iii) schools, hospitals and other
major institutions. The Company's consumer customers, which are served by
Fonda, include supermarkets, mass merchandisers, warehouse clubs and other
retailers. The Company's food packaging customers, which are served by
Sweetheart, include national and regional dairy and food companies.
PRODUCTS
General. The Company's principal products include: (i) paperboard, plastic
and foam food service products, such as white, colored and printed paper,
plastic and foam plates and bowls, paper, plastic and foam cups for both hot
and cold drinks and lids, straws, plastic cutlery, paper and plastic handled
food pails, food containers and trays for take-out of fast food; (ii) tissue
and specialty food service products, such as printed and solid napkins, printed
and solid tablecovers, crepe paper, placemats, doilies, tray covers, fluted
products and paper and plastic portion cups; and (iii) food packaging products,
such as paper and plastic containers for the dairy and food processing
industries. 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 plastic, paper and foam cups, plates, bowls, plastic cutlery,
lids, food containers, food pails, trays and premium napkins in the
institutional market. The Company also believes it is the second largest
supplier, in terms of sales, of containers to the frozen dessert and cultured
dairy products segments of the food packaging industry in North America. These
products are sold nationwide to supermarkets, restaurant franchises, discount
store chains and major food distributors.
PAPERBOARD, PLASTIC AND FOAM FOOD SERVICE PRODUCTS
Beverage Service Products. Paper, plastic and foam cups, which represent
the largest portion of Sweetheart's sales, are sold to both the consumer and
institutional markets, including national accounts. Both Sweetheart and Fonda
offer a number of attractive cup and lid combinations for both hot and cold
beverages. Cups for the consumption of cold beverages are generally plastic or
wax coated for superior rigidity or made of DSP, which permits the printing of
better quality graphics, while cups for the consumption of hot beverages are
made from paper which is poly-coated on one side or foam to provide
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a barrier to heat transfer. Printed paper and plastic cups are often used as
promotional items by Sweetheart's customers. Sweetheart sells plastic straws
exclusively to the institutional market. Sweetheart's beverage service products
are sold under the Sweetheart (Registered Trademark) , Lily (Registered
Trademark) , Trophy (Registered Trademark) , Preference (Registered
Trademark) , Jazz (Registered Trademark) , Gallery (Registered Trademark) ,
Clarity (Registered Trademark) and Lumina (Registered Trademark) brand names.
Fonda's hot and cold beverage cups are sold to the consumer market.
Sweetheart operates in Canada through its subsidiary Lily Cups, Inc.
("Lily Cups"), which has been manufacturing and marketing food service
disposables since 1947. Lily Cups is one of the largest providers of food
service disposable products in the Canadian market, primarily as a consequence
of its large portfolio of national account customers. Sales by Lily Cups during
Fiscal 1997 constituted approximately 6% of Sweetheart's gross sales.
Tabletop Service Products. Paper plates and bowls, which represent the
largest portion of Fonda's sales, are sold primarily to the consumer market.
These products include coated and uncoated white paper plates, decorated plates
and bowls. Sweetheart's plastic and foam plates and bowls and plastic cutlery
are sold to the institutional market. White 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 are
value-added products and are sold for everyday use as well as for parties and
seasonal celebrations, such as Halloween and Christmas. Sweetheart's foam
dinnerware, a value-added product, and plastic cutlery are sold to the
institutional market under the Silent Service (Registered Trademark) ,
Centerpiece (Registered Trademark) , Basix (Registered Trademark) , Guildware
(Registered Trademark) and Simple Elegance (Registered Trademark) brand
names.
Take-Out Containers. Sweetheart sells paper and plastic food containers
and lids and Fonda sells paper trays and food pails, all of which are used
primarily for the take-out of fast foods and are sold to the institutional
market.
TISSUE AND SPECIALTY FOOD SERVICE PRODUCTS
Tissue Converted Products. Napkins represent the second largest portion of
Fonda's sales and are sold under Fonda's Hoffmaster (Registered Trademark) ,
Fonda, Sensations, Splash (Registered Trademark) and Party Creations
(Registered Trademark) brand names, as well as under national distributor
private label names. 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.
Tablecovers represent one of Fonda's fastest growing product segments, ranging
from economy to premium product lines, and are sold under the Hoffmaster
(Registered Trademark) , Linen-Like (Registered Trademark) , 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 and
produces tablecovers in white, solid color and one-to four-colored printed
products. Fonda also sells crepe products under the Hoffmaster (Registered
Trademark) , Splash (Registered Trademark) and Party Creations (Registered
Trademark) brand names.
Specialty Products. The Company sells placemats, traycovers, paper
doilies, plastic and paper portion cups and fluted products in a variety of
shapes and sizes. Fonda produces unique decorated placemats in a variety of
shapes. In addition, Fonda uses a proprietary technology to produce non-skid
traycovers that serve the particular needs of the airline and healthcare
industries.
FOOD PACKAGING PRODUCTS
Sweetheart's food packaging operations sell paper and plastic containers
and lids for ice cream, frozen novelty products and cultured foods (including
sour cream, yogurt, cottage cheese and snack dip), and plastic containers for
single-serving chilled juice products. Other products include Sweetheart's
Flex-E-Form straight-wall paper manufacturing technology and Flex-Guard, a
spiral wound tamper-evident lid.
To enhance product sales, Sweetheart designs, manufactures and leases
container filling and lidding equipment to dairies and other food processors to
package food items in Sweetheart containers at their plants. Sweetheart's
filling and lidding equipment is leased to customers under the Auto-Pak,
Flex-E-Fill and Flex-E-Form trade names. This equipment is manufactured in
Sweetheart's machine shop and assembly plant located in Owings Mills, Maryland.
Types of products packaged in Sweetheart's machines include ice cream,
factory-filled jacketed ice cream cones, cottage cheese, yogurt, squeeze-up
desserts and ice cream sandwiches.
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MARKETING AND SALES
The following is a discussion of Sweetheart and Fonda's existing marketing
and sales operations. Sweetheart and Fonda intend to enter into joint marketing
and sales agreements following the Sweetheart Investment which will be designed
to eliminate duplicative marketing and sales expenses.
Sweetheart's marketing efforts are directed at maintaining firsthand
knowledge of its customer needs and structuring Sweetheart's manufacturing and
sales efforts to provide superior products and services tailored to those
needs. Sweetheart's sales force allows it to service a large distributor and
broker network that permits even small accounts to receive appropriate
coverage. Sweetheart sells its products through a sales organization of
approximately 145 salespersons and it sells to more than 4,000 institutional
customers and national accounts throughout the United States and Canada.
Fonda's marketing efforts are principally focused on (i) providing
value-added services; (ii) category expansion by cross marketing products
between the consumer and institutional markets; (iii) developing new graphic
designs which Fonda believes will offer consumers recognized value; and (iv)
increasing brand awareness through enhanced packaging and promotion. Fonda
sells its products through a sales organization of approximately 50
salespersons, as well as independent brokers. Fonda believes that its
experienced sales team and its ability to provide high levels of customer
service enhance its long-term relationships with its customers. Fonda sells to
more than 2,500 institutional and consumer customers located throughout the
United States.
In Fiscal 1997, Sweetheart and Fonda's five largest customers represented
approximately 35% and 17%, respectively, of net sales. One customer of
Sweetheart, McDonald's, accounted for 13.7% of net sales; no one single
customer of Fonda accounted for more than 10% of net sales. The loss of one or
more large national customers could adversely affect the Company's operating
results.
In the fourth quarter of Fiscal 1997, Sweetheart completed negotiations of
a three-year contract renewal with McDonald's. Although this agreement results
in a lower selling price and less total volume, thereby resulting in lower
margins, Sweetheart retained a majority of McDonald's North American volume for
cold cups and lids. In addition, Sweetheart committed to convert McDonald's
cold cup volume to a new raw material substrate (from wax to DSP) over the life
of the contract. This will cause Sweetheart to incur incremental capital
expenditures.
SWEETHEART SALES
Food Service Institutional Market. Sweetheart's food service products are
sold directly to large national accounts, such as fast-food chains and catering
services. Food service products are also sold through distributors to other
end-users, such as independent restaurants, school systems and hospitals.
Sweetheart's national accounts include ARAMARK Corporation, McDonald's and
Wendy's International, Inc., and its major distributor accounts include Alliant
Foodservice Inc., ComSource, Inc., Network, Inc. and Sysco Corporation. This
market represented approximately 89% of Sweetheart's net sales in Fiscal 1997.
Food Packaging Institutional Market. Food packaging containers and filling
machines are marketed directly to national and regional dairies and food
companies. Major customers of Sweetheart's food packaging products include Ben
& Jerry's Homemade, Inc., Blue Bell Creameries, L.P., Borden, Inc. and Prairie
Farms Dairy, Inc. This market represented approximately 11% of Sweetheart's net
sales in Fiscal 1997.
FONDA SALES
Institutional Market. Restaurants, schools, hospitals and other major
institutions comprise Fonda's institutional market. This market represented
approximately 48% of Fonda's net sales in Fiscal 1997. Fonda's predominant
institutional customers of private label products include Sysco Corporation,
Rykoff-Sexton, Inc./U.S. Foodservice Inc. and Alliant Foodservice Inc.
Institutional customers of Fonda's branded products include Sweet Paper Sales
Corp., Smart Food Distributors Incorporated, Bunzl USA, Inc. and Lisanti Food
Incorporated. The institutional market is serviced by dedicated field service
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representatives located throughout the United States. 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.
Consumer Market. Supermarkets, mass merchants, warehouse clubs, discount
chains and other retail stores comprise the Fonda consumer market. This market
represented approximately 52% of Fonda's net sales in Fiscal 1997. Fonda'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, which is serviced
through both national and regional networks of brokers and directly by field
service representatives and (iv) the warehouse club channel, which is serviced
both through national and regional networks of brokers and directly by field
service representatives. Customers of Fonda's branded consumer products include
Target Stores (a division of Dayton Hudson Corp.), Wal-Mart Stores, Inc., Kmart
Corporation and The Great Atlantic & Pacific Tea Company, Inc. Fonda's primary
private label customers in the consumer market include The Kroger Co., The
Great Atlantic & Pacific Tea Company, Inc. and The Stop & Shop Companies, Inc.
DISTRIBUTION
Each of the Company's manufacturing facilities includes sufficient
warehouse space to store such facility's raw materials and finished goods as
well as products from the Company's other manufacturing facilities. See
"--Facilities." Shipments of finished goods are made from each facility via
common carrier. Sweetheart is in the process of consolidating its warehouse and
distribution facilities in order to reduce costs and improve its customer
service levels. As part of this consolidation, Sweetheart closed its Clackamas,
Oregon and Sparks, Nevada distribution centers. It is further anticipated that
the Ontario and Riverside distribution centers will be combined in a new west
coast distribution center before fiscal year end. Sweetheart is also evaluating
the establishment of a mid-Atlantic distribution center which will replace
distribution centers located at three east coast locations.
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.
Fonda's primary competitors in the paperboard, plastic and foam food
service converted product categories include Imperial Bondware (a division of
International Paper Co.), Fort James Corp. (successor by merger of James River
and Fort Howard Corp.), AJM Packaging Corp., Temple-Inland Inc., Fold-Pak Corp.
and Solo Cup Co. Major competitors in the tissue and specialty food service
converted product categories include Duni Corp., Erving Paper Products Inc.,
Fort James Corp. and Wisconsin Tissue Mills Inc. (a subsidiary of Chesapeake
Corporation). Fonda's competitors also include manufacturers of products made
from plastics and foam. Fonda's competitors in tissue mill products include
Lincoln Pulp and Paper Co., Inc. ("Lincoln"), Little Rapids Corporation and
Cellu Tissue Corporation. Sweetheart's primary competitors in the food service
categories include Dart Group Corporation, Fort James Corp., Solo Cup Co. and
Tenneco Inc. Major competitors in the food packaging categories include
Cardinal Plastics, Inc., Landis Plastics, Inc., Norse Dairy Systems, Inc.,
Polytainer, Ltd. and Sealright Co., Inc.
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 SBS paperboard, napkin tissue, bond paper and waxed bond obtained from
major domestic manufacturers. Other material components include
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corrugated boxes, poly bags, wax adhesives, coating and inks. Paperboard,
napkin tissue, bond paper and waxed bond paper are 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. Primary
suppliers of paperboard stock are Georgia-Pacific Corp., Temple-Inland Inc.,
Fort James Corp. and Gilman Paper Co. Lincoln is the primary supplier of tissue
to the Company. Pursuant to a contract, as amended, with Lincoln, 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. The principal raw material for
the Company's plastic operations is plastic resin (polystyrene, polypropylene,
high density polyethylene and polyethylene terphalate glycol modified)
purchased directly from major petrochemical companies and other resin
suppliers. Resin is processed and formed into cups, lids, cutlery, meal service
products, straws and containers. The Company manufactures foam products by
extruding sheets of plastic foam material that are converted into cups and
plates. 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. Fonda purchases the bulk of its SBS
paperboard and napkin tissue under long-term contracts. Sweetheart does not
maintain any written contracts with its suppliers of raw materials.
FACILITIES
The Company has 25 converting facilities located throughout the United
States and two in Canada. All of the Company's facilities are well maintained,
in good operating condition and suitable for the Company's operations.
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The table below provides summary information regarding the principal
properties owned or leased by Fonda and Sweetheart.
<TABLE>
<CAPTION>
SIZE
(APPROXIMATE
MANUFACTURING/ AGGREGATE OWNED/
LOCATION WAREHOUSE SQUARE FEET) LEASED
- ------------------------------------------------ ---------------- -------------- -------
<S> <C> <C> <C>
FONDA CONVERTING FACILITIES
Appleton, Wisconsin ............................ M/W 267,700 O
Glens Falls, New York .......................... M/W 59,100 O
Goshen, Indiana ................................ M/W 63,000 O
Jacksonville, Florida .......................... M/W 70,000 L(1)
Lakeland, Florida .............................. M/W 50,000 L
Maspeth, New York .............................. M/W 130,000 L
Oshkosh, Wisconsin ............................. M/W 484,000 O
St. Albans, Vermont ............................ M 124,900 O
W 182,000 L
Williamsburg, Pennsylvania ..................... M/W 146,000 O(2)
SWEETHEART CONVERTING FACILITIES
Augusta, Georgia ............................... M/W 339,000 O
Conyers, Georgia ............................... M/W 905,000 O
Chicago, Illinois (2 facilities) ............... M/W 902,000 O
W 587,000 L
Dallas, Texas .................................. M/W 1,316,000 O
Manchester, New Hampshire ...................... M/W 160,000 O
North Las Vegas, Nevada (2 facilities) ......... M/W 128,000 L
W 12,000 L
Ontario, California ............................ W 249,000 L(3)
Owings Mills, Maryland (3 facilities) .......... M/W 1,533,000 O
W 267,000 O
W 406,000 O
Scarborough, Ontario (2 facilities) ............ M/W 185,000 O
M/W 207,000 O
Somerville, Massachusetts ...................... M/W 193,000 O
Springfield, Missouri (2 facilities) ........... M/W 925,000 O
W 415,000 L
Wilmington, Massachusetts ...................... W 407,000 L
</TABLE>
- ----------
(1) Leased from Dennis Mehiel. In Fiscal 1998, Fonda decided to close its
Jacksonville, Florida facility. See "Certain Relationships and Related
Transactions."
(2) Subject to capital lease.
(3) Facility has been closed and returned to the lessor. The facility will be
replaced by a new 370,000 square foot warehouse facility which will also
be located in Ontario, California and will be leased.
During Fiscal 1997, Fonda decided to close its Three Rivers, Michigan and
Long Beach, California facilities and during Fiscal 1998, it decided to close
its Jacksonville, Florida facility. Such closures were a result of the
rationalization of Fonda's operations. The production capacity at Three Rivers
and Jacksonville was moved to facilities acquired in the 1997 Acquisitions and
the Leisureway Acquisition and the operations at Long Beach were moved to the
Oshkosh, Wisconsin facility.
One of Sweetheart's warehouses in Augusta, Georgia was closed in the
latter part of Fiscal 1997. Sweetheart is currently subleasing such property to
a third party through March 31, 2001. Sweetheart's
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Riverside, California facility was closed in the latter part of Fiscal 1997 in
order to eliminate anticipated losses resulting from projected lower revenues
in the region supplied by this facility.
On March 24, 1998, Fonda consummated the Natural Dam Disposition and in
connection therewith sold its tissue mill facility in Gouverneur, New York. On
May 27, 1998, Fonda announced its decision to close its administrative offices
in St. Albans, Vermont and relocate such offices, including its principal
executive offices, to Oshkosh, Wisconsin.
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.
The Clean Air Act mandates the phase out of certain refrigerant compounds,
which will require Sweetheart to upgrade or retrofit air conditioning and
chilling systems during the next few years. Sweetheart has decided to replace
units as they become inefficient or unserviceable. The upgrade of existing
systems would cost approximately $4.0 million. Approximately $1.0 million has
been spent by Sweetheart on upgrading systems in the last five years, exclusive
of costs of $2.4 million to convert to a new foam blowing agent in 1993.
Sweetheart anticipates that future levels of expenditures for environmental
matters (exclusive of costs relating to the blowing agent conversion and the
retrofitting of air conditioning and chilling systems described above) will be
comparable; however, there can be no assurance that expenditures will not be
higher.
During Fiscal 1997, Sweetheart received a request for information from the
Environmental Protection Agency ("EPA") pursuant to Section 104 of the
Comprehensive Environmental Response, Compensation, and Liability Act and
Section 3007 of the Resource Conservation and Recovery Act, concerning the
Lily-Tulip Brown Fields site (the "Site") in Old Town, Maine. Sweetheart
received a demand from the City of Old Town for payment of Sweetheart's alleged
share of the clean-up of the Site. Sweetheart settled these claims by paying
$40,000 in the first quarter of Fiscal 1998.
Some of the Company's facilities contain asbestos. Although there is no
current legal requirement to remove such asbestos, the Company has an ongoing
monitoring and maintenance program to maintain and/or remove such asbestos as
appropriate to prevent the release of friable asbestos. The Company does not
believe the costs associated with such program will be material to its business
or financial condition.
TECHNOLOGY AND RESEARCH
Sweetheart maintains facilities for the development of new products and
product line extensions in Owings Mills, Maryland. Sweetheart maintains a staff
of engineers and technicians who are responsible for product quality, process
control, improvement of existing products, development of new products and
processes and technical assistance in adhering to environmental rules and
regulations. Sweetheart is
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continually striving to expand its proprietary manufacturing technology,
further automate its manufacturing operations, and develop improved
manufacturing processes and product designs.
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 of types and in amounts 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.
A lawsuit entitled Aldridge v. Lily-Tulip, Inc. Salary Retirement Plan
Benefits Committee and Fort Howard Cup Corporation, Civil Action No. CV
187-084, was initially filed in state court in Georgia in April 1987, and is
currently pending against Sweetheart in federal court. The remaining issue
involved in the case is a claim that Sweetheart wrongfully terminated the
Lily-Tulip, Inc. Salary Retirement Plan (the "Plan") in violation of the
Employee Retirement Income Security Act of 1974, as amended ("ERISA"). The
relief sought by plaintiffs is to have the plan termination declared
ineffective. In December 1994, the United States Court of Appeals for the
Eleventh Circuit (the "Circuit Court") ruled that the Plan was terminated on
December 31, 1986. Following that decision, the plaintiffs sought a rehearing
which was denied, and subsequently filed a petition for a writ of certiorari
with the United States Supreme Court, which was also denied. Following remand,
in March 1996 the United States District Court for the Southern District of
Georgia entered a judgment in favor of Sweetheart. Following denial of a motion
for reconsideration, the plaintiffs in April 1997 filed an appeal with the
Circuit Court. On May 21, 1998, the Circuit Court affirmed the judgment in
favor of Sweetheart. On June 10, 1998, the plaintiffs sought a rehearing.
Management of Sweetheart believes that Sweetheart will ultimately prevail
on the remaining issues in the Aldridge litigation. Due to the complexity
involved in connection with the claims asserted in this case, Sweetheart cannot
determine at present with any certainty the amount of damages it would be
required to pay should the plaintiffs prevail; accordingly, there can be no
assurance that such amounts would not have a material adverse effect on the
Company's financial position or results of operations. See Note 18 of the Notes
to the Financial Statements of Sweetheart.
A patent infringement action entitled Fort James Corp. v. Sweetheart Cup
Company Inc., Civil Action No. 97-C-1221, was filed in the United States
District Court for the Eastern District of Wisconsin on November 21, 1997.
Sweetheart has filed an answer to the complaint denying liability and asserting
various affirmative defenses and counterclaims. In the opinion of Sweetheart's
management, the ultimate liability, if any, will not materially affect
Sweetheart's financial position or results of operations.
EMPLOYEES
At March 31, 1998, Sweetheart employed approximately 7,000 persons, of
whom approximately 6,000 persons were hourly employees with approximately 94%
of those employees located at facilities in the United States. Sweetheart
currently has collective bargaining agreements in effect at its facilities in
Springfield, Missouri, Augusta, Georgia and Toronto, Canada which cover all
production, maintenance and distribution hourly-paid employees at each
respective facility and contain standard provisions relating to, among other
things, management rights, grievance procedures, strikes and lockouts,
seniority, and union rights. As of March 31, 1998, approximately 22% of such
Sweetheart hourly employees were covered by the Sweetheart CBAs. The current
expiration dates of the Sweetheart CBAs at the Springfield, Augusta and Toronto
facilities are March 4, 2001, October 31, 1998 and November 30, 2000,
respectively. The Company anticipates that renewal negotiations regarding the
Augusta CBA will result in another three-year contract term. Sweetheart
considers its relationship with its employees to be good.
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At March 31, 1998, Fonda employed approximately 1,500 persons, of whom
approximately 1,160 were hourly employees. Fonda has collective bargaining
agreements in effect at its facilities in Appleton, Wisconsin; Oshkosh,
Wisconsin; St. Albans, Vermont; Williamsburg, Pennsylvania and Maspeth, New
York which cover all production, maintenance and distribution hourly-paid
employees at each respective facility and contain standard provisions relating
to, among other things, management rights, grievance procedures, strikes and
lockouts, seniority, and union rights. The current expiration dates of the
Fonda CBAs at the Appleton, Oshkosh, St. Albans, Williamsburg and Maspeth
facilities are March 31, 1999, May 31, 2002, January 31, 2001, June 7, 2000,
October 31, 1999 and May 31, 2003, respectively. Fonda considers its
relationship with its employees to be good.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS OF SF HOLDINGS
The following table sets forth certain information with respect to the
directors and executive officers of SF Holdings:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------- ----- -----------------------------------------------
<S> <C> <C>
Dennis Mehiel .......... 56 Chairman and Chief Executive Officer
Thomas Uleau ........... 53 President, Chief Operating Officer and Director
Hans Heinsen ........... 45 Senior Vice President, Chief Financial Officer
and Treasurer
Harvey L. Friedman .... 56 Secretary and General Counsel
Alfred B. DelBello .... 63 Vice Chairman
James Armenakis......... 54 Director
W. Richard Bingham .... 62 Director
Gail Blanke ............ 50 Director
John A. Catsimatidis .. 49 Director
Chris Mehiel ........... 58 Director
Jerome T. Muldowney ... 52 Director
G. William Seawright .. 56 Director
Lowell P. Weicker, Jr. 66 Director
</TABLE>
DENNIS MEHIEL has been Chairman and Chief Executive Officer of SF Holdings
since December 1997. He has been Chairman and Chief Executive Officer of
Fonda since it was purchased in 1988. In addition, Mr. Mehiel is Chief
Executive Officer of Sweetheart. Since 1966 he has been 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 Box USA of New Jersey,
Inc. ("Box of New Jersey"), a manufacturer of corrugated containers, and
Chairman and Chief Executive Officer of CEG.
THOMAS ULEAU has been President, Chief Operating Officer and a Director of
SF Holdings since February 1998. He has been President of Fonda since January
1997, Chief Operating Officer of Fonda since 1994 and a director of Fonda
since 1988. In addition, Mr. Uleau is President and Chief Operating Officer
of Sweetheart. Mr. Uleau was Executive Vice President of Fonda 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 its Chief Operating Officer in 1994. He is
also currently a director of Four M, CEG, and Box of New Jersey. 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, Chief Financial Officer and
Treasurer of SF Holdings since February 1998. He has been Senior Vice
President and Treasurer of Fonda since January 1997 and Vice President
Finance and Chief Financial Officer of Fonda since June 1996. Mr. Heinsen is
also Chief Financial Officer and Vice President Finance of Sweetheart. Prior
to joining Fonda, Mr. Heinsen spent 21 years in a variety of corporate
finance positions with The Chase Manhattan Bank, N.A.
HARVEY L. FRIEDMAN has been Secretary and General Counsel of SF Holdings
since February 1998. He is also Secretary and General Counsel of Fonda. He
was a director of Fonda from 1985 to January 1997. Mr. Friedman is also the
Secretary and General Counsel of CEG, Four M and Box of New Jersey and is a
director of CEG. He was formerly a partner of Kramer, Levin, Naftalis &
Frankel, a New York City law firm.
75
<PAGE>
ALFRED B. DELBELLO has served as Vice Chairman of SF Holdings since
February 1998. He has served as Vice Chairman of Fonda since January 1997 and
a director of Fonda since 1990. Since July 1995, Mr. DelBello has been a
partner in the law firm of DelBello, Donnellan & Weingarten & Tartaglia, LLP.
From September 1992 to July 1995 he was a partner in the law firm of Worby
DelBello Donnellan & Weingarten. Prior thereto, he had been President of
DelBello Associates, a consulting firm, since 1985. Mr. DelBello served as
Lieutenant Governor of New York State from 1983 to 1985.
JAMES ARMENAKIS has served as a Director of SF Holdings since February
1998 and a director of Fonda since June 1997. He is a senior partner in the
law firm of Armenakis & Armenakis.
W. RICHARD BINGHAM became a Director of SF Holdings upon the consummation
of the Sweetheart Investment. Mr. Bingham co-founded AIPM and has been a
director and officer of the firm since 1989. He is also a general partner of
AIP. Prior to co-founding AIPM, Mr. Bingham was a Managing Director of
Shearson Lehman Brothers from 1984 until 1987. Prior to joining Shearson
Lehman Brothers, Mr. Bingham was Director of the Corporate Finance
Department, a member of the board, and head of Mergers & Acquisitions at
Lehman Brothers Kuhn Loeb Inc. Prior thereto, he directed investment banking
operations at Kuhn Loeb & Company where he was a partner and member of the
board and executive committee. He formerly served on the board of directors
of Avis Inc., ITT Life Insurance Corporation and Valero Energy Corporation.
GAIL BLANKE has served as a Director of SF Holdings since February 1998
and as a director of Fonda since January 1997. She has been President and
Chief Executive Officer of Gail Blanke's Lifedesigns, LLC since March 1995.
Lifedesigns was founded in March 1995 as a division of Avon Products, Inc.
("Avon") and was spun off from Avon in March 1997. Prior thereto, she held
the position of Corporate Senior Vice President of Avon since August 1991.
She also held a number of management positions at CBS, Inc., including the
position of Manager of Player Promotion for the New York Yankees. Ms. Blanke
will be serving her second consecutive term as President of the New York
Women's Forum.
JOHN A. CATSIMATIDIS has served as a Director of SF Holdings since
February 1998 and as a director of Fonda since January 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. Catsimatidis 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 SF
Holdings since February 1998 and a director of Fonda since January 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 and Chief
Financial Officer since August 1997. He is the President of the managing
member of Fibre Marketing Group, LLC, the successor to Fibre Marketing Group,
Inc., a waste paper recovery business which he co-founded, and was President
from 1994 to January 1996. From 1993 to 1994, Mr. Mehiel served as President
and Chief Operating Officer of Box of New Jersey. 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 SF Holdings since February
1998 and as a director of Fonda 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 SF Holdings since
February 1998 and as a director of Fonda since January 1997. He has been
President and Chief Executive Officer of Stanhome Inc., a manufacturer and
distributor of giftware 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.
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<PAGE>
LOWELL P. WEICKER, JR. has served as a Director of SF Holdings since
February 1998 and as a director of Fonda since January 1997. Mr. Weicker
served as Governor of the State 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
No executive officer of SF Holdings was paid any compensation by SF
Holdings during Fiscal 1997. SF Holdings' executive officers also serve as
executive officers of Sweetheart and/or Fonda and such persons are not
separately compensated by SF Holdings. In addition, except as set forth below
under "Stock Options," SF Holdings does not at this time contemplate that any
of its executive officers will be provided with stock options, restricted
stock, stock appreciation rights ("SARs"), phantom stock or similar equity
benefits.
FONDA
The following table sets forth the compensation earned, whether paid or
deferred, to Fonda's Chief Executive Officer and its other four most highly
compensated executive officers (collectively, the "Named Officers") for the
years ended July 27, 1997, July 26, 1996 and July 30, 1995 for services
rendered in all capacities to Fonda during such fiscal years.
In addition to their positions at Fonda, immediately prior to the
consummation of the Sweetheart Investment, Dennis Mehiel, Thomas Uleau and
Hans Heinsen were appointed executive officers of Sweetheart. In addition,
Michael Hastings, an officer of Fonda, became an officer of Sweetheart. In
Fiscal 1998, such persons will receive compensation from both Sweetheart and
Fonda; therefore, the compensation such officers historically received from
Fonda is not indicative of the compensation to be received from Fonda in
Fiscal 1998. Robert Korzenski continues to be employed by Fonda.
FONDA SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
----------------------------------------------------
SECURITIES
UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OTHER(1) SARS (#)
- ------------------------------------- ------ ----------- -------- -------- ------------
<S> <C> <C> <C> <C> <C>
Dennis Mehiel 1997 $168,750 $75,000 $-- --
Chairman and Chief 1996 150,000 60,000 -- --
Executive Officer 1995 37,500 -- -- --
Thomas Uleau 1997 196,250 75,000 -- 1,950
President and Chief 1996 185,000 60,000 -- 1,950
Operating Officer 1995 57,695(4) -- -- 1,950
Hans Heinsen
Senior Vice President, 1997 170,000 56,000 -- 1,950
Chief Financial Officer and 1996 26,153(3) -- -- 1,950
Treasurer 1995 -- -- -- --
Michael Hastings 1997 164,423 60,000 -- 1,950
Senior Vice President and President, 1996 150,000 38,250 -- 1,950
Fonda Division 1995 37,500(5) 7,500 -- 1,950
Robert Korzenski 1997 164,423 50,000 -- 1,950
Senior Vice President and President, 1996 150,000 47,250 -- 1,950
Hoffmaster Division 1995 50,000(6) 15,000 -- 1,950
</TABLE>
- ------------
(1) Fonda 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 and
(ii) $50,000. Thus, such amounts are not reflected in the table.
(2) Reflects matching contributions by Fonda under Fonda's 401(k) Plans, and
medical and life insurance premiums paid by Fonda.
(3) Consists of salary for employment commencing June 1996.
(4) Consists of salary for employment commencing April 1995.
(5) Consists of salary for employment commencing May 1995.
(6) Consists of salary for employmentcommencing March 1995.
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<PAGE>
SWEETHEART
The following table sets forth information concerning the compensation for
the years ended September 30, 1997, 1996 and 1995, of the chief executive
officer and the four most highly compensated officers and key employees of
Sweetheart (collectively, the "named executive officers").
Immediately prior to the consummation of the Sweetheart Investment,
William McLaughlin and William Spengler were terminated. At that time, Dennis
Mehiel was appointed Chief Executive Officer, Thomas Uleau was appointed
President and Chief Operating Officer and Hans Heinsen was appointed Chief
Financial Officer and Vice President Finance of Sweetheart. William Haas,
Daniel Carson and James Mullen retain their positions at Sweetheart.
SWEETHEART SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
- ---------------------------------------------------------- --------------------------------------
# OF ALL OTHER
FISCAL SALARY BONUS OPTIONS COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($) ($)(1) GRANTED (2) ($)
- ------------------------------------- -------- --------- --------- ----------- --------------
<S> <C> <C> <C> <C> <C>
William F. McLaughlin
President and Chief Executive 1997 491,667 -- 10,000 129,800
Officer of Sweetheart Holdings Inc. 1996 400,000 498,000 -- 18,200
and Sweetheart Cup Company Inc. 1995 400,000 684,522 -- 222,800
William H. Haas
Vice President of Foodservice 1997 180,000 -- -- 364,400
Distribution of Sweetheart Cup 1996 178,313 89,640 600 35,200
Company Inc. 1995 171,187 103,357 -- 6,100
William F. Spengler (9)
Vice President and Chief Financial 1997 159,410 108,333 5,000 100,200
Officer of Sweetheart Holdings Inc.
and Sweetheart Cup Company Inc.
Daniel M. Carson
Vice President, General Counsel and 1997 172,500 -- -- 191,100
Corporate Secretary of Sweetheart 1996 170,625 60,133 -- 49,200
Holdings Inc. and Sweetheart Cup 1995 162,500 94,476 -- 5,700
Company Inc.
James R. Mullen
Vice President of Human Resources of 1997 163,500 -- -- 150,600
Sweetheart Holdings Inc. and 1996 162,000 56,996 -- 7,400
Sweetheart Cup Company Inc. 1995 152,500 77,009 1,500 1,500
</TABLE>
- ------------
(1) Amounts shown were paid pursuant to Sweetheart's Management Incentive
Plans.
(2) All such grants were made pursuant to the 1994 Stock Option and
Purchase Plan.
(3) Reflects $125,000 paid under the Special Incentive Agreement, $4,500
contributed under the 401(k) Plan and $305 of term life insurance
premiums paid by the Company.
(4) Reflects $10,989 paid for relocation expenses, $6,000 contributed under
the 401(k) Plan and $1,218 of term life insurance premiums paid by the
401(k) Plan and $1,218 of term life insurance premiums paid by
Sweetheart.
(5) Reflects $113,563 paid for relocation expenses, $101,963 for the
payment of taxes on relocation expense reimbursements, $6,000
contributed under the Sweetheart 401(k) Retirement Plan (the "401(k)
Plan") (to which Sweetheart contributes an amount equal to 50% of the
participant's contributions net in excess of 6% of the participant's
eligible earnings) and $1,312 of term life insurance premiums paid by
Sweetheart.
(6) Reflects $239,664 paid for relocation expenses, $120,000 paid under the
Special Incentive Agreement, $4,500 contributed under the 401(k) Plan
and $279 of term life insurance premiums paid by Sweetheart.
(7) Reflects $30,000 paid for relocation expenses, $4,219 contributed under
the 401(k) Plan and $1,016 of term life insurance premiums paid by
Sweetheart.
(8) Reflects $5,568 contributed under the 401(k) Plan and $543 of term life
insurance premiums paid by Sweetheart.
(9) Mr. Spengler became Vice President, Finance and Chief Financial Officer
on March 14, 1997. Amounts shown here were paid during the remainder of
fiscal year 1997.
(10) Reflects $100,000 paid under an initial employment bonus, and $274 of
term life insurance premiums paid by Sweetheart.
(11) Reflects $128,994 paid for relocation expenses, $57,500 paid under the
Special Incentive Agreement, $4,500 contributed under the 401(k) Plan
and $166 of term life insurance premiums paid by Sweetheart.
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<PAGE>
(12) Reflects $44,176 paid for relocation expenses, $4,376 contributed under
the 401(k) Plan and $662 of term life insurance premiums paid by
Sweetheart.
(13) Reflects $5,123 contributed under the 401(k) Plan and $598 of term life
insurance premiums paid by Sweetheart.
(14) Reflects $96,029 paid for relocation expenses, $54,500 paid under the
Special Incentive Agreement, and $156 of term life insurance premiums
paid by Sweetheart.
(15) Reflects $2,525 paid for relocation expenses, $4,309 contributed under
the 401(k) Plan, and $611 of term life insurance premiums paid by
Sweetheart.
(16) Reflects $938 contributed under the 401(k) Plan and $624 of term life
insurance premiums paid by Sweetheart.
Messrs. Haas, Carson and Mullen each entered into an executive retention
agreement with Sweetheart, dated October 1, 1997, which provides for an
incentive payment to the executive if he remains employed by Sweetheart for a
period of two years. The amount of the incentive is equal to the executive's
base salary for one year.
DIRECTOR COMPENSATION
Directors who are not employees of SF Holdings or directors of Fonda or
Sweetheart 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) 100 SARs. Directors
who are employees of SF Holdings or directors of Fonda or Sweetheart do not
receive any compensation or fees for service on the Board of Directors or any
committee thereof.
STOCK OPTIONS
Pursuant to the Sweetheart Investment, Dennis Mehiel currently holds
609,307 options to purchase Class A Common Stock of SF Holdings at an option
price of $2.83 per share and 105,842 options to purchase Class A Common Stock
of SF Holdings at an option price of $3.11 per share. Of such options,
options to purchase 238,383 shares are currently exercisable and options to
purchase 238,383 shares vest on October 1, 1998 and October 1, 1999 or upon
an initial public offering of SF Holdings' Common Stock, whichever occurs
first; provided, however, that Mr. Mehiel is then employed by SF Holdings and
its subsidiaries.
On March 12, 1998, all outstanding options to purchase stock of Sweetheart
were exercised in full pursuant to the Investment Agreement.
EMPLOYEE BENEFIT PLANS
FONDA
Fonda provides certain union and non-union employees with retirement and
disability income benefits under defined benefit pension plans. Fonda's
policy has been to fund annually the minimum contributions required by
applicable regulations.
Fonda provides 401(k) savings and investment plans for the benefit of
non-union employees. Employee contributions are matched at the discretion of
Fonda. On January 1, 1997, Fonda adopted a defined contribution benefit plan
for all non-union employees for which contributions and costs are based on
participant earnings. Fonda also participates in multi-employer pension plans
for certain of its union employees. See Note 14 of the Notes to the Financial
Statements of Fonda.
None of the executive officers of SF Holdings is covered under any of
Fonda's defined benefit plans. Rather, such persons are covered under defined
contribution plans.
SWEETHEART
A majority of Sweetheart's employees ("participants") are covered under a
401(k) defined contribution plan. Sweetheart's annual contributions to this
defined contribution plan represent a 50% match on participant contributions.
Sweetheart's match is limited to participant contributions up to 6% of
participant salaries. In addition, Sweetheart is allowed to make
discretionary contributions. Certain Sweetheart employees are covered under
defined benefit plans. Benefits under these plans are generally based on
fixed amounts for each year of service.
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<PAGE>
Sweetheart sponsors various defined benefit postretirement health care
plans that cover substantially all full-time employees. The plans, in most
cases, pay stated percentages of most medical expenses incurred by retirees,
after subtracting payments by Medicare or other providers and after a stated
deductible has been met. Participants generally become eligible after
reaching age 60 with one year of participation. The majority of Sweetheart's
plans are contributory, with retiree contributions adjusted annually.
Sweetheart does not fund the plans. See Notes 7 and 8 to the Financial
Statements of Sweetheart.
None of the executive officers of SF Holdings is covered under any of
Sweetheart's defined benefit plans. Rather, such persons are covered under
defined contribution plans only.
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information as of June 1, with
respect to the beneficial ownership of the shares of common stock of SF
Holdings.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP
----------------------------
NAME AND ADDRESS OF NUMBER OF PERCENTAGE OF
BENEFICIAL OWNER SHARES OWNERSHIP(1)(2)
- ------------------------------------ ----------- ---------------
<S> <C> <C>
Dennis Mehiel
115 Stevens Avenue
Valhalla, New York 10595............ 6,431,573 78.8%
Thomas Uleau......................... 95,353 1.2%
All executive officers and directors
as a group (3 persons).............. 6,679,458 81.8%
</TABLE>
- ------------
(1) Includes 564,586 shares of Class B Common Stock.
(2) Includes 238,383 shares underlying options to purchase Class A Common
Stock, which are presently exercisable, and 1,341,381 shares which
Mr. Mehiel has the power to vote pursuant to a voting trust agreement
between his spouse, Edith Mehiel, and himself. See "Management--Stock
Options."
80
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Fonda leases its Jacksonville facility from Dennis Mehiel on terms that
Fonda 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, Fonda currently pays base rent
of approximately $167,000 per year, subject to escalations indexed to the
Consumer Price Index ("CPI"). In addition, from January 1, 1998 through July
31, 2006, Mr. Mehiel may require Fonda 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 1998, Fonda
decided to close its Jacksonville facility. Fonda is currently negotiating
the termination of the lease of its Jacksonville facility and does not expect
such termination to have a material adverse effect on Fonda.
Fonda purchased $0.9 million and $0.2 million in Fiscal 1997 and 1996,
respectively, of corrugated containers from Four M. Four M is owned by Dennis
Mehiel. 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.
Fonda had net sales to Fibre Marketing Group, LLC ("Fibre Marketing"), a
waste paper recovery business of which Four M and a director of Fonda are
members, of $3.6 million in Fiscal 1997, $4.0 million in Fiscal 1996 and $0.2
million in Fiscal 1995. Management believes that the sales terms 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. In May 1998, Fonda purchased a 38.2% ownership interest in Fibre
Marketing from a director of Fonda of $0.2 million. Management believes that
the terms on which it purchased such interest were at least as favorable as
those it could otherwise have obtained from an unrelated third party and were
negotiated on an arm's length basis.
Fonda had net sales to CEG in the amount of $7.8 million and $1.9 million
in Fiscal 1997 and 1996, respectively. CEG manufactures party goods such as
decorated plates, cups, napkins, tablecovers, tableware and other related
products. Dennis Mehiel owns 97% of CEG. The Company believes that the terms
upon which it sold products to CEG were 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.
On February 27, 1997, upon the issuance of the Fonda Notes, Fonda loaned
$2.6 million to CEG for five years at an interest rate of 10% per annum (the
"CEG Note"), the proceeds of which were applied to CEG's prepayment of
certain obligations. On March 12, 1998, certain of the terms of the CEG Note
were amended. Interest on the CEG Note is pay-in-kind, its 2002 maturity was
extended for an additional three years and it was made subordinate to Senior
Debt (as such term is defined therein). In connection with such amendment,
Fonda was issued a warrant to purchase, for nominal consideration, 2.5% of
CEG's common equity. The Company believes that the terms of such loan and the
amendments thereto 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.
On March 12, 1998, Fonda entered into a five-year licensing agreement with
its affiliate, CEG, subject to extension, whereby CEG will manufacture and
distribute certain party goods products currently manufactured by Fonda. In
connection therewith, Fonda will receive an annual royalty equal to 5% of
CEG's cash flow, as determined in accordance with a formula specified in such
agreement. In Fiscal 1997, Fonda's net sales of such party goods products
were approximately $30 million. The Company expects Fonda's fixed and
variable costs to decrease and it expects to reduce Fonda's accounts
receivable and inventory by approximately $9 million as a result of such
licensing agreement. The Company believes that such transaction will have a
favorable impact on Fonda's results of operations.
Upon consummation of the Sweetheart Investment, SF Holdings and Fonda,
which file consolidated Federal income tax returns, entered into a Tax
Sharing Agreement, pursuant to which Fonda will pay SF Holdings its allocable
share of the consolidated group's consolidated Federal income tax liability,
which, in general, will equal the tax liability Fonda would have paid if it
had filed separate tax returns.
Upon consummation of the Sweetheart Investment, SF Holdings assigned
substantially all of its rights under the Management Services Agreement to
Fonda. See "The Sweetheart Investment."
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<PAGE>
DESCRIPTION OF NEW SHARES
GENERAL
The terms of the New Shares are stated in the Restated Certificate of
Incorporation. The New Shares are subject to all such terms, and holders of
New Shares are referred to the Restated Certificate of Incorporation for a
statement thereof. The following summary of the material provisions of the
Restated Certificate of Incorporation with respect to the Shares does not
purport to be complete and is qualified in its entirety by reference to such
document, including the definitions therein of certain terms used below.
Copies of the Restated Certificate of Incorporation are available as set
forth below under "--Additional Information." The definitions of certain
terms used in the following summary are set forth below under "--Certain
Definitions." For purposes of this summary, the term "Company" refers only to
SF Holdings Group, Inc. and not to any of its Subsidiaries.
The operations of the Company are conducted through its Subsidiaries and,
therefore, the Company will not have material cash flows independent of its
Subsidiaries. The New Shares will be effectively subordinated to all
Indebtedness and other liabilities and commitments (including trade payables
and lease obligations) of the Company's Subsidiaries. Any right of the
Company to receive assets of any of its Subsidiaries upon the latter's
liquidation or reorganization (and the consequent right of the holders of the
New Shares to participate in those assets) will be effectively subordinated
to the claims of such Subsidiary's creditors, except to the extent that the
Company is itself recognized as a creditor of such Subsidiary, in which case
the claims of the Company would still be subordinate to any security in the
assets of such Subsidiary and any indebtedness of such Subsidiary senior to
that held by the Company. As of April 26, 1998, after giving pro forma effect
to the Transactions, all Indebtedness and other liabilities and commitments
of the Company's Subsidiaries would have totaled $802.2 million of
outstanding Indebtedness. See "Risk Factors--Holding Company Structure and
Related Considerations."
RANKING
The New Shares will, with respect to dividend distributions and
distributions upon the liquidation, winding up or dissolution of the Company,
rank senior to all classes of Common Stock of the Company and, except as
provided in the following proviso, to each other class or series of capital
stock issued by the Company now or hereafter created (collectively, "Junior
Stock"); provided, however, that the Board of Directors may authorize a class
or series of preferred stock on a parity in powers, preferences and rights to
the New Shares (collectively, "Parity Stock") or senior in powers,
preferences and rights to the New Shares (collectively, "Senior Stock") if
approved by the holders of a majority of the shares of New Shares. The New
Shares will rank junior to right of payment to all indebtedness of the
Company.
DIVIDENDS
The holders of New Shares will be entitled to receive, when, as and if
declared by the Board of Directors out of funds of the Company legally
available therefor, cumulative dividends at an annual rate equal to 13-3/4%.
Until March 15, 2003, dividends on the New Shares will be payable quarterly
in arrears on March 15, June 15, September 15 and December 15 of each year
(each, a "Dividend Payment Date"), commencing June 15, 1998, (i) in cash or,
at the option of the Company, (ii) by issuing Old Shares with an aggregate
Liquidation Amount (as defined below) equal to the amount of such dividends.
From and after such time, dividends on the New Shares will be payable
quarterly in arrears in cash except to the extent that the covenants
applicable to Indebtedness of the Company prohibit such cash payments or the
covenants applicable to securities and/or Indebtedness of the Company's
subsidiaries prohibit such subsidiaries from distributing the necessary cash
to the Company. Dividends in arrears on the New Shares may be paid at any
time, without reference to any regular dividend payment date. Dividends will
accrue and be cumulative from the date of original issue of the New Shares,
whether or not declared for any reason (including if such declaration is
prohibited under any outstanding indebtedness or borrowing or other
contractual provision binding on the Company or any of its subsidiaries) and
whether or not there will be funds of the Company legally available for the
payment thereof. Dividends accruing and not
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<PAGE>
declared until March 15, 2003 will, when declared, be payable in cash or
additional Old Shares as described above. All accrued and unpaid dividends
will be compounded at the dividend rate on a quarterly basis. All dividends
that accrue in accordance with the foregoing will be cumulative from and
after March 15, 2003.
No dividend or other distribution (payable other than in shares of Junior
Stock) will be paid to the holders of Junior Stock, and no shares of Junior
Stock will be purchased, redeemed or otherwise acquired by the Company or any
of its subsidiaries (except by conversion into or in exchange for Junior
Stock), nor will any monies be paid or made available for a purchase,
redemption or sinking fund for the purchase or redemption of any Junior Stock
unless (i) all dividends on the outstanding New Shares that will have accrued
through any prior Dividend Payment Date will have been paid or declared and
funds set apart for payment thereof; (ii) the Company will not be in default
on any of its obligations to purchase or redeem the New Shares pursuant to
the provisions described below under the captions "--Optional Redemption,"
"--Mandatory Redemption," and "--Repurchase at the Option of Holders--Change
of Control;" and (iii) the Company will not be in default on any of the
covenants described below under the caption "--Certain Covenants." When
dividends are not paid in full upon the New Shares and any Parity Stock, all
dividends declared upon the New Shares and all Parity Stock will be declared
pro rata so that the amount of dividends declared per share of New Shares and
all such Parity Stock will in all cases bear to each other the same ratio
that accrued dividends per share on the New Shares and all such Parity Stock
bear to each other.
LIQUIDATION RIGHTS
In the event of any liquidation, dissolution or winding up of the Company,
whether voluntary or involuntary, no payment or distribution of assets will
be made to or set apart for the holders of Junior Stock unless the holders of
New Shares will have received, out of assets legally available therefor, Ten
Thousand Dollars ($10,000.00) per share of New Shares (the "Liquidation
Amount") plus an amount of cash equal to the dividends, whether or not earned
or declared, accrued and unpaid thereon to the date of final distribution to
such holder. If upon any such distribution of assets in liquidation or
dissolution or upon the winding up of the affairs of the Company the amount
which would be distributed to the holders of the outstanding New Shares would
be less than this amount, then such lesser amount will be distributed pro
rata to the holders of then outstanding shares of New Shares and to the
holders of then outstanding shares of Parity Stock, and no distribution will
be made to the holders of Junior Stock. None of the consolidation or the
merger of the Company, or the sale, lease or transfer by the Company of all
or any part of its assets, will be deemed to be a liquidation, dissolution or
winding up of the Company for purposes of this paragraph.
MANDATORY REDEMPTION
The Company will redeem the New Shares on March 15, 2009, out of funds
legally available for such purpose, at a redemption price per share, in cash,
equal to the Liquidation Amount plus an amount of cash equal to the
dividends, whether or not earned or declared, accrued and unpaid thereon to
the date of redemption. New Shares so redeemed will be cancelled and will not
be reissued.
OPTIONAL REDEMPTION
Except as provided in the next paragraph, the New Shares will not be
redeemable at the Company's option prior to March 15, 2003. From and after
March 15, 2003, the Company may, at its option, redeem the New Shares, in
whole or in part, at the redemption prices (expressed as percentages of the
Liquidation Amount) set forth below, plus an amount of cash equal to the
dividends, whether or not earned or declared, accrued and unpaid thereon to
the date of redemption, if redeemed during the twelve-month period beginning
on March 15 of the years indicated below:
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<TABLE>
<CAPTION>
YEAR PERCENTAGE
<S> <C>
2003 ................ 106.875%
2004 ................ 104.583%
2005 ................ 102.293%
2006 and thereafter 100.000%
</TABLE>
Prior to March 15, 2001, the Company may, at its option, redeem up to
one-half of the aggregate Liquidation Amount of New Shares at a redemption
price of 113 3/4% of the Liquidation Amount, plus an amount of cash equal to
the dividends, whether or not earned or declared, accrued and unpaid thereon
to the date of redemption, with the net cash proceeds of an Equity Offering;
provided, however, that at least one-half of the aggregate Liquidation Amount
of New Shares remains outstanding immediately after the occurrence of such
redemption (excluding New Shares held by the Company and its Subsidiaries);
and provided, further, that any such redemption will occur within 60 days of
the date of the closing of such Equity Offering.
SELECTION AND NOTICE
If less than all outstanding New Shares are to be redeemed, the shares to
be redeemed will be selected pro rata (with any fractional shares being
rounded to the nearest whole share) according to the number of whole shares
held by each holder of New Shares. Notice of such redemption will be given by
first class mail, postage prepaid, mailed not less than 30 days nor more than
60 days prior to the redemption date, to each holder of record of the shares
to be redeemed at such holder's address as the same appears on the stock
register of the Company. Each such redemption notice will state: (i) the
redemption date; (ii) the number of New Shares to be redeemed and , if fewer
than all the shares held by such holder are to be redeemed, the number of
shares to be redeemed from such holder; (iii) the redemption price; (iv) the
place or places where certificates for such shares are to be surrendered for
payment of the redemption price; and (v) that dividends on the shares to be
redeemed will cease to accrue on such redemption date. On or after the date
so specified, each holder of then outstanding New Shares so to be redeemed
will surrender the certificate or certificates evidencing the New Shares held
by such holder to the Company at its principal office (or such other office
or agency of the Company as the Company may designate in such notice), in
exchange for payment to its order or that of its nominee, as such holder will
request, in an aggregate amount equal to the aggregate redemption amount of
the shares of New Shares so redeemed. The Company will reissue to each such
holder a certificate for any New Shares surrendered but not redeemed. All New
Shares so redeemed will be cancelled and will not be reissued.
REPURCHASE AT THE OPTION OF HOLDERS
CHANGE OF CONTROL
In the event of a Change of Control, the Company will be required to make
an offer to each holder of New Shares to repurchase such holder's New Shares
(a "Repurchase Offer") at a purchase price equal to 101% of the Liquidation
Amount, plus the cash value of any accrued and unpaid dividends payable in
kind and the amount of any accrued and unpaid cash dividends (the "Change of
Control Payment"). Within ten days following any Change of Control, the
Company will mail a notice to each holder of New Shares describing the
transaction or transactions that constitute the Change of Control. Such
notice will state: (i) the date of repurchase, which date will be no earlier
than 30 days and no later than 60 days from the date such notice is mailed
("the Change of Control Payment Date"); (ii) the place or places where
certificates for such shares are to be surrendered (the "Paying Agent"); and
(iii) that dividends on the shares to be repurchased will cease to accrue on
such Change of Control Payment Date. 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 Shares 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 Shares properly tendered pursuant to
the Repurchase Offer, and (2) deposit with the Paying Agent an amount equal
to the Change of Control Payment in respect of all New Shares so
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tendered. The Paying Agent will promptly mail to each holder of New Shares so
tendered the Change of Control Payment for such New Shares. All New Shares
which are so repurchased will be cancelled and will not be reissued. The
Company will publicly announce the results of the Repurchase Offer on or as
soon as practicable after the Change of Control Payment Date, but in no case
more than five days (excluding legal holidays) after the Change of Control
Payment Date.
There can be no assurances that the Company will have adequate resources
to consummate a Change of Control Offer following a Change of Control. See
"Risk Factors--Substantial Leverage; Ability to Service Indebtedness;
Liquidity" and "Risk Factors--Holding Company Structure and Related
Considerations."
The Change of Control provisions described above will be applicable
whether or not any other provisions of the Restated Certificate of
Incorporation are applicable. Except as described above with respect to a
Change of Control, the Restated Certificate of Incorporation does not contain
provisions that permit the holders of the New Shares to require that the
Company repurchase or redeem the New Shares in the event of a takeover,
recapitalization or similar transaction.
Notwithstanding the foregoing, the Company will not be required to make a
Repurchase Offer upon a Change of Control if such Repurchase Offer would
cause an event of default under any of the agreements governing Indebtedness
of the Company, or if a third party makes the Repurchase Offer in the manner,
at the times and otherwise in compliance with the requirements set forth
herein applicable to a Repurchase Offer made by the Company and purchases all
New Shares validly tendered and not withdrawn under such Repurchase Offer.
ASSET SALES
So long as any New Shares are outstanding, the Company will not, and will
not permit any of its Restricted Subsidiaries to, consummate an Asset Sale
unless (i) the Company (or the Restricted Subsidiary, as the case may be)
receives consideration at the time of such Asset Sale at least equal to the
fair market value (evidenced by a resolution of the Board of Directors) of
the assets or Equity Interests issued or sold or otherwise disposed of and
(ii) at least 75% of the consideration therefor received by the Company or
such Restricted Subsidiary is in the form of cash; provided that the amount
of (x) any liabilities (as shown on the Company's or such Restricted
Subsidiary's most recent balance sheet), of the Company or any Restricted
Subsidiary (other than contingent liabilities) 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
(y) any securities, notes or other obligations received by the Company or any
such Restricted Subsidiary from such transferee that are contemporaneously
(subject to ordinary settlement periods) converted by the Company or such
Restricted Subsidiary into cash (to the extent of the cash received), will be
deemed to be cash for purposes of this provision.
Within 365 days after the Company's or any Restricted Subsidiary's receipt
of any Net Proceeds from an Asset Sale, the Company or such Restricted
Subsidiary may apply such Net Proceeds (a) to permanently repay Indebtedness
of a Restricted Subsidiary of the Company (and, in the case of revolving
borrowings, to correspondingly reduce commitments with respect thereto), or
(b) to the acquisition of a majority of the assets of, or a majority of the
Voting Stock of, another Permitted Business, the making of a capital
expenditure or the acquisition of other long-term assets that are used or
useful in a Permitted Business. Pending the final application of any such Net
Proceeds, the Company may temporarily reduce revolving credit borrowings or
otherwise invest such Net Proceeds in any manner that is not prohibited by
this Certificate of Incorporation. 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 $10.0 million (an "Excess Proceeds Offer Triggering
Event"), the Company will be required to make an offer to each holder of New
Shares (an "Asset Sale Offer") to repurchase the maximum number of such
holder's New Shares that may be purchased out of the Excess Proceeds, at an
offer price in cash in an amount equal to 100% of the Liquidation Amount,
plus an amount of cash equal to the amount of any accrued and unpaid
dividends, in accordance with the procedures set forth above under the
caption "--Change of Control;" provided, however, that such offer will not be
required if the application of such Excess Proceeds to repurchase New Shares
would cause an
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Event of Default under any of the agreements governing Indebtedness of the
Company. If the aggregate purchase price of the New Shares tendered into such
Asset Sale Offer surrendered by the holders thereof is less than the amount
of Excess Proceeds, the Company may use such Excess Proceeds for general
corporate purposes (subject to the provisions of the Restated Certificate of
Incorporation). If the aggregate purchase price of the shares of New Shares
tendered into such Asset Sale Offer surrendered by the holders thereof
exceeds the amount of Excess Proceeds, the Company will select the New Shares
to be purchased on a pro rata basis. Upon completion of such Asset Sale
Offer, the amount of Excess Proceeds will be reset at zero.
EXCHANGE AT OPTION OF COMPANY
The Company may, at its option, on any Dividend Payment Date with respect
to the New Shares, redeem all, but not less than all, of the then outstanding
New Shares in exchange for the Company's 13-3/4% Subordinated Notes due March
15, 2009 (the "Subordinated Notes") to be issued pursuant to an indenture
between the Company and a trustee and having substantially the terms assigned
to the New Shares as set forth in the Restated Certificate of Incorporation
(the "Indenture"), at a rate of one dollar (or fraction thereof) principal
amount of Subordinated Notes for each dollar (or fraction thereof) in
Liquidation Amount plus, subject to the following paragraph, the cash value
of any accrued and unpaid dividends payable in kind and the amount of any
accrued and unpaid cash dividends, whether or not earned or declared, accrued
and unpaid thereon to the date of exchange (provided that no event of default
under the Indenture will have occurred and be continuing).
Cash dividends on any New Shares exchanged for Subordinated Notes which
have accrued but have not been paid as of the date of exchange will be paid,
at the option of the Company, in cash or in additional Subordinated Notes in
an equivalent principal amount of such accrued and unpaid dividends. In no
event will the Company issue Subordinated Notes in denominations other than
$1,000 or in an integral multiple thereof. Cash will be paid in lieu of any
such fraction of Subordinated Notes that would otherwise have been issued
(which will be determined with respect to the aggregate principal amount of
Subordinated Notes to be issued to a holder upon any such exchange). Interest
will accrue on the Subordinated Notes from the date of exchange.
In the event the Company will exchange New Shares, notice of such exchange
will be given by first class mail, postage prepaid, mailed not less than 30
days nor more than 60 days prior to the exchange date, to each holder of
record of the shares of New Shares to be exchanged at such holder's address
as the same appears on the stock register of the Company. Each such exchange
notice will state: (A) the exchange date; (B) the principal amount of
Subordinated Notes to be received by the exchanging holder; (C) the place or
places where the certificate or certificates for such New Shares are to be
exchanged for notes evidencing the Subordinated Notes to be received by the
exchanging holder; and (D) that dividends on the New Shares to be exchanged
will cease to accrue on such exchange date. On the date so specified, each
holder of then outstanding New Shares will surrender the certificate or
certificates evidencing the New Shares held by such holder to the Company at
its principal office (or such other office or agency of the Company as the
Company may designate in such notice), in exchange for the Subordinated Notes
to which such holder is entitled, registered in such holder's name or that of
its nominee or payable to its order or that of its nominee, as such holder
will request, and in such denominations as such holder will request. All New
Shares so exchanged will be cancelled and will not be reissued.
Prior to giving notice of intention to exchange, the Company will execute
and deliver with a bank or trust company selected by the Company the
Indenture. The Company will cause the Subordinated Notes to be authenticated
on the Dividend Payment Date on which the exchange is effective, and will pay
interest on the Subordinated Notes at the rate and on the dates specified in
the Indenture from the exchange date.
The Company will not give notice of its intention to exchange unless it
will file at the place or places (including a place in the Borough of
Manhattan, The City of New York) maintained for such purpose an opinion of
counsel (who may be an employee of the Company) to the effect that (i) the
Indenture has been duly authorized, executed and delivered by the Company,
has been duly qualified under the Trust Indenture Act of 1939 (or that such
qualification is not necessary) and constitutes a valid and binding
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instrument enforceable against the Company in accordance with its terms
(subject, as to enforcement, to bankruptcy, insolvency, reorganization and
other laws of general applicability relating to or affecting creditors'
rights and to general equity principles, and subject to such other
qualifications as are then customarily contained in opinions of counsel
experienced in such matters), (ii) the Subordinated Notes have been duly
authorized and, when executed and authenticated in accordance with the
provisions of the Indenture and delivered in exchange for the New Shares,
will constitute valid and binding obligations of the Company entitled to the
benefits of the Indenture (subject to the aforesaid), (iii) neither the
execution nor delivery of the Indenture or the Subordinated Notes nor
compliance with the terms, conditions or provisions of such instruments will
result in a breach or violation of any of the terms or provisions of, or
constitute a default under, any indenture, mortgage, deed of trust or
agreement or instrument, known to such counsel, to which the Company or any
of its subsidiaries is a party or by which it or any of them is bound, or any
decree, judgment, order, rule or regulation, known to such counsel, of any
court or governmental agency or body having jurisdiction over the Company and
such subsidiaries or any of their properties, and (iv) the Subordinated Notes
have been duly registered for such exchange with the Commission under a
registration statement that has become effective under the Securities Act or
that the exchange of the Subordinated Notes for the shares of New Shares is
exempt from registration under the Securities Act.
The exchange will be deemed to have been effected immediately prior to the
close of business on the relevant Dividend Payment Date on or prior to which
the certificates for New Shares will have been surrendered, and the person in
whose name or names the Subordinated Notes will be issuable upon such
exchange will be deemed to have become the holder of record of the
Subordinated Notes represented thereby at such time on such Dividend Payment
Date.
Prior to the delivery of any securities which the Company will be
obligated to deliver upon exchange of the New Shares, the Company will comply
with all applicable federal and state laws and regulations that require
action to be taken by the Company. The Company will pay any and all
documentary stamp or similar issue or transfer taxes payable in respect of
the issue or delivery of notes evidencing Subordinated Notes on exchange of
the New Shares pursuant hereto; provided that the Company will not be
required to pay any tax which may be payable in respect of any transfer
involved in the issue or delivery of notes evidencing Subordinated Notes in a
name other than that of the holder of the New Shares to be exchanged and no
such issue or delivery will be made unless and until the person requesting
such issue or delivery has paid to the Company the amount of any such tax or
has established, to the satisfaction of the Company, that such tax has been
paid.
VOTING RIGHTS
The holders of New Shares will not be entitled to any voting rights,
except as described below or as otherwise required by applicable law. In the
event the Company fails to (i) pay dividends for six or more quarters
(whether or not consecutive), (ii) satisfy any mandatory redemption
obligation with respect to the New Shares (regardless of whether the reason
for such failure is lack of legally available funds), (iii) make a Repurchase
Offer within 30 days following a Change of Control or make an Asset Sale
Offer (regardless of whether such offer is prohibited by the terms of any
Indebtedness of the Company) or (iv) comply with any of the covenants
described below under the caption "--Certain Covenants" for a period of 30
days after the receipt of notice of such failure from the registered holders
of not less than twenty-five percent (25%) of the New Shares then
outstanding, the Board of Directors of the Company will be increased by two
members and the holders of a majority of the outstanding New Shares, voting
as a separate class, will be entitled to elect two members to the Board of
Directors of the Company. The foregoing voting rights will cease, and the
term of office of any directors elected pursuant to the exercise of the
foregoing voting rights will terminate, if and when the failure by the
Company giving rise to such voting rights is cured, but subject always to the
vesting of such right in the case of a similar future event. The foregoing
voting rights may be exercised initially either by written consent or at a
special meeting of the holders of the New Shares, called as hereinafter
provided, or at any annual meeting of stockholders held for the purpose of
electing directors, and thereafter at each subsequent annual meeting. At any
time when such voting rights will have vested, and if such right will not
already have been exercised by written consent, a proper officer of the
Company may call, and, upon the written request, addressed to the
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Secretary of the Company, of the record holders of shares representing
twenty-five percent (25%) of the voting power of the shares then outstanding
of the New Shares, will call a special meeting of the holders of the New
Shares. Such meeting will be held at the earliest practicable date upon the
notice required for annual meetings of stockholders at the place for holding
annual meetings of stockholders of the Company, or, if none, at a place
designated by the Board of Directors. Notwithstanding the foregoing, no such
special meeting will be called during a period within 60 days immediately
preceding the date fixed for the next annual meeting of stockholders. At any
meeting held for the purpose of electing directors at which the holders of
New Shares will have the right to elect directors as provided herein, the
presence in person or by proxy of the holders of shares representing more
than fifty percent (50%) in voting power of the then outstanding New Shares
having such right will be required and will be sufficient to constitute a
quorum of such class for the election of directors by such class. Any
director elected by holders of New Shares pursuant to such voting rights will
hold office until the next annual meeting of stockholders (unless such term
has previously terminated as described above) and any vacancy in respect of
any such director will be filled only by vote of the remaining director so
elected or, if there be no such remaining director, by the holders of New
Shares by written consent or at a special meeting called in accordance with
the procedures set forth above or, if no special meeting is called or written
consent executed, at the next annual meeting of stockholders.
The approval of the holders of a majority of the outstanding New Shares,
voting as a separate class, will also be required for (i) the authorization
by the Company of any series of preferred stock ranked senior or on a parity
in powers, preferences and rights to the New Shares (including any additional
shares of New Shares), (ii) the amendment or modification of any provisions
of the Certificate of Incorporation of the Company in any manner that would
adversely affect the voting powers, designations, preferences and rights of
the New Shares and (iii) any merger or consolidation or sale of all or
substantially all of the assets of the Company if the terms of such
transaction do not provide for the repurchase or redemption of all of the New
Shares upon consummation of such merger, consolidation or sale.
Notwithstanding the foregoing, upon a refinancing of the Company's Discount
Notes, the Certificate of Incorporation of the Company may be amended or
modified without any approval of the holders of the New Shares to reflect
covenants in the new notes which are more favorable to the Company than those
contained in the Discount Notes.
CERTAIN COVENANTS
REPORTS
Whether or not required by the rules and regulations of the Commission, so
long as any New Shares are outstanding, the Company will furnish to the
holders of record of shares of New Shares (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 consolidated Subsidiaries
(showing in reasonable detail, either on the face of the financial statements
or in the footnotes thereto and in "Management's Discussion and Analysis of
Financial Condition and Results of Operations," the financial condition and
results of operations of the Company and its Restricted Subsidiaries separate
from the financial condition and results of operations of the Unrestricted
Subsidiaries of the Company) 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
each case within the time periods specified in the Commission's rules and
regulations. In addition, following the consummation of the exchange offer
contemplated by the Discount Note Registration Rights Agreement, 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 within the time periods specified in the Commission's
rules and regulations (unless the Commission will not accept such a filing)
and make such information available to securities analysts and prospective
investors upon request. The Company will also furnish to the holders of New
Shares and to securities analysts and prospective investors, upon their
request, the information required to be delivered pursuant to Rule 144A under
the Securities Act.
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RESTRICTED PAYMENTS
So long as any New Shares are outstanding, the Company will not, and will
not permit any of its Restricted Subsidiaries to, directly or indirectly: (i)
declare or pay any dividend or make any other payment or distribution on
account of the Company's or any of its Restricted Subsidiaries' Equity
Interests (including, without limitation, any payment in connection with any
merger or consolidation involving the Company or any of its Restricted
Subsidiaries), other than a dividend on the Shares, or to the direct or
indirect holders of the Company's or any of its Restricted Subsidiaries'
Equity Interests in their capacity as such (other than dividends or
distributions payable in Equity Interests (other than Disqualified Stock) of
the Company or to the Company or any Restricted Subsidiary of the Company);
(ii) purchase, redeem or otherwise acquire or retire for value (including,
without limitation, in connection with any merger or consolidation involving
the Company) any Equity Interests of the Company or any direct or indirect
parent of the Company or other Affiliate of the Company (other than any such
Equity Interests owned by the Company or any Restricted Subsidiary of the
Company); (iii) make any principal payment on or with respect to, or
purchase, redeem, defease or otherwise acquire or retire for value any
Indebtedness that is subordinated to the Discount Notes, except a payment of
principal at Stated Maturity; or (iv) make any Restricted Investment (all
such payments and other actions set forth in clauses (i) through (iv) above
being collectively referred to as "Restricted Payments"), unless, at the time
of and after giving effect to such Restricted Payment:
(a) no Default or Event of Default will have occurred and be continuing or
would occur as a consequence thereof; and
(b) the Company would, at the time of such Restricted Payment and after
giving pro forma effect thereto as if such Restricted Payment had been made
at the beginning of the applicable four-quarter period, have been permitted
to incur at least $1.00 of additional Indebtedness pursuant to the Fixed
Charge Coverage Ratio test set forth in the first paragraph of the covenant
described below under the caption "--Incurrence of Indebtedness and Issuance
of Preferred Stock"; and
(c) such Restricted Payment, together with the aggregate amount of all
other Restricted Payments made by the Company and its Restricted Subsidiaries
after March 12, 1998 (excluding Restricted Payments permitted by clauses
(ii), (iii) and (iv) of the next succeeding paragraph), is less than the sum,
without duplication, of (i) 50% of the Consolidated Net Income of the Company
for the period (taken as one accounting period) from the beginning of the
first fiscal quarter commencing after March 12, 1998 to the end of the
Company's most recently ended fiscal quarter for which internal financial
statements are available at the time of such Restricted Payment (or, if such
Consolidated Net Income for such period is a deficit, less 100% of such
deficit), plus (ii) 100% of the aggregate net cash proceeds received by the
Company since March 12, 1998 as a contribution to its common equity capital
or from the issue or sale of Equity Interests of the Company (other than
Disqualified Stock) or from the issue or sale of Disqualified Stock or debt
securities of the Company that have been converted into such Equity Interests
(other than Equity Interests (or Disqualified Stock or convertible debt
securities) sold to a Restricted Subsidiary of the Company), plus (iii) to
the extent that any Restricted Investment that was made after March 12, 1998
is sold for cash or otherwise liquidated or repaid for cash, 100% of the net
cash proceeds thereof (less the cost of disposition, if any), but only to the
extent not included in subclause (i) of this clause (c).
The foregoing provisions will not prohibit (i) the payments and
applications of the proceeds to be received by the Company from the issuance
of the Units; (ii) the payment of any dividend within 60 days after the date
of declaration thereof, if at said date of declaration such payment would
have complied with the provisions of this covenant; (iii) the redemption,
repurchase, retirement, defeasance or other acquisition of any Equity
Interests of the Company in exchange for, or out of the net cash proceeds of
the substantially concurrent sale (other than to a Restricted 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, defeasance
or other acquisition will be excluded from clause (c) of the preceding
paragraph; (iv) the defeasance, redemption, repurchase or other acquisition
of subordinated Indebtedness with the net cash proceeds from an
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incurrence of Permitted Refinancing Indebtedness or the substantially
concurrent sale (other than to a Restricted 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
defeasance, redemption or repurchase will be excluded from clause (c) of the
preceding paragraph; (v) the payment of any dividend by a Restricted
Subsidiary of the Company to the holders of its Equity Interests on a pro
rata basis; and (vi) so long as no Default or Event of Default will have
occurred and be continuing immediately after such transaction, the
repurchase, redemption or other acquisition or retirement for value of any
Equity Interests of the Company or any Restricted Subsidiary of the Company
held by any member of the Company's (or any of its Restricted Subsidiaries')
management; provided that the aggregate price paid for all such repurchased,
redeemed, acquired or retired Equity Interests will 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.
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 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) will be the fair
market value on the date of the Restricted Payment of the asset(s) or
securities proposed to be transferred or issued by the Company or such
Restricted Subsidiary, as the case may be, pursuant to the Restricted
Payment. The fair market value of any non-cash Restricted Payment will be
determined by the Board of Directors, such determination to be based upon an
opinion or appraisal issued by an accounting, appraisal or investment banking
firm of national standing if such fair market value exceeds $1.0 million.
DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING RESTRICTED SUBSIDIARIES
So long as any New Shares are outstanding, the Company will not, and will
not permit any of its Restricted Subsidiaries to, directly or indirectly,
create or otherwise cause or suffer to exist or become effective any
encumbrance or restriction on the ability of any Restricted Subsidiary to
(i)(a) pay dividends or make any other distributions to the Company or any of
its Restricted Subsidiaries (1) on its Capital Stock or (2) with respect to
any other interest or participation in, or measured by, its profits, or (b)
pay any Indebtedness owed to the Company or any of its Restricted
Subsidiaries, (ii) make loans or advances to the Company or any of its
Restricted Subsidiaries or (iii) transfer any of its properties or assets to
the Company or any of its Restricted Subsidiaries. However, the foregoing
restrictions will not apply to encumbrances or restrictions existing under or
by reason of (a) Existing Indebtedness as in effect on March 12, 1998 and any
amendments, modifications, restatements, renewals, increases, supplements,
refundings, replacements or refinancings thereof; provided that such
amendments, modifications, restatements, renewals, increases, supplements,
refundings, replacement or refinancings are no more restrictive, with respect
to such dividend and other payment restrictions, than those as in effect on
March 12, 1998, (b) the indenture governing the Discount Notes and the
Discount Notes, (c) applicable law, (d) 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 encum-
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brance or restriction is not applicable to any Person, or the properties or
assets of any Person, other than the Person, or the property or assets of the
Person, so acquired; provided that, in the case of Indebtedness, such
Indebtedness was permitted by the covenant below under the caption
"--Incurrence of Indebtedness and Issuance of Preferred Stock," (e) customary
non-assignment provisions in leases entered into in the ordinary course of
business and consistent with past practices, (f) 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, (g) restrictions relating to a Restricted Subsidiary formed for the
sole purpose of engaging in accounts receivable financing, (h) any agreement
for the sale of a Restricted Subsidiary that restricts distributions by that
Restricted Subsidiary pending its sale, (i) Permitted Refinancing
Indebtedness; provided that the restrictions contained in the agreements
governing such Permitted Refinancing Indebtedness are no more restrictive,
taken as a whole, than those contained in the agreements governing the
Indebtedness being refinanced and (j) secured Indebtedness otherwise
permitted to be incurred pursuant to the provisions of the covenant described
below under the caption "--Liens" that limits the right of the debtor to
dispose of the assets securing such Indebtedness.
INCURRENCE OF INDEBTEDNESS AND ISSUANCE OF PREFERRED STOCK
So long as any New Shares are outstanding, the Company will not, and will
not permit any of its Restricted Subsidiaries to, directly or indirectly,
create, incur, issue, assume, guarantee or otherwise become directly or
indirectly liable, contingently or otherwise, with respect to (collectively,
"incur") any Indebtedness (including Acquired Debt) and the Company will not
permit any of its Restricted Subsidiaries to issue any shares of preferred
stock; provided, however, that so long as no Default or Event of Default has
occurred or 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 internal financial statements are available immediately preceding the
date on which such additional Indebtedness is incurred is issued would have
been at least 1.75 to 1, if such additional Indebtedness is incurred prior to
March 15, 2000, or at least 2.0 to 1, if such additional Indebtedness is
incurred on or after March 15, 2000, in each case, determined on a pro forma
basis (including a pro forma application of the net proceeds therefrom), as
if the additional Indebtedness had been incurred at the beginning of such
four-quarter period.
The provisions of the immediately preceding paragraph will not apply to
the incurrence of any of the following items of Indebtedness (collectively,
"Permitted Debt"):
(i) the incurrence by the Company and its Restricted Subsidiaries of
Indebtedness from a bank or other financial institution in an aggregate
principal amount not to exceed $200.0 million at any one time outstanding,
less any Net Proceeds of Asset Sales applied to permanently reduce any such
Indebtedness pursuant to the provisions of the Restated Certificate of
Incorporation, described under "--Repurchase at the Option of Holders--Asset
Sales;"
(ii) the incurrence by the Company and its Restricted Subsidiaries of the
Existing Indebtedness, other than pursuant to the Fonda Credit Facility or
the Sweetheart Credit Facilities;
(iii) the incurrence by the Company of Indebtedness represented by the
Discount Notes and the indenture governing the Discount Notes;
(iv) the incurrence by the Company or any of its Restricted Subsidiaries
of Indebtedness represented by Capital Lease Obligations, mortgage financings
or purchase money obligations, in each case incurred for the purpose of
financing all or any part of the purchase price or cost of construction or
improvement of property, plant or equipment used in the business of the
Company or such Restricted Subsidiary, in an aggregate principal amount not
to exceed $5.0 million at any time outstanding;
(v) the incurrence by the Company or any of its Restricted Subsidiaries of
Indebtedness in connection with the acquisition of assets or a new Restricted
Subsidiary; provided that such Indebtedness was incurred by the prior owner
of such assets or such Restricted Subsidiary prior to such acquisition by the
Company or one of its Restricted Subsidiaries and was not incurred in
connection with, or in contemplation of, such acquisition by the Company or
one of its Restricted Subsidiaries; and provided further that the principal
amount (or accreted value, as applicable) of such Indebtedness, together with
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any other outstanding Indebtedness incurred pursuant to this clause (v) and
any Permitted Refinancing Indebtedness incurred to refund, refinance or
replace any Indebtedness incurred pursuant to this clause (v), does not
exceed $5.0 million;
(vi) the incurrence by the Company or any of its Restricted Subsidiaries
of Permitted Refinancing Indebtedness in exchange for, or the net proceeds of
which are used to refund, refinance or replace Indebtedness (other than
intercompany Indebtedness) that was permitted to be incurred under the first
paragraph hereof or clauses (ii), (iii), (iv) or (v) of this covenant;
(vii) the incurrence by the Company or any of its Restricted Subsidiaries
of intercompany Indebtedness between or among the Company and any of its
Restricted Subsidiaries; provided, however, that (a) any subsequent issuance
or transfer of Equity Interests that results in any such Indebtedness being
held by a Person other than the Company or a Restricted Subsidiary thereof
and (b) any sale or other transfer of any such Indebtedness to a Person that
is not either the Company or a Restricted Subsidiary thereof will be deemed,
in each case, to constitute an incurrence of such Indebtedness by the Company
or such Restricted Subsidiary, as the case may be, that was not permitted by
this clause (vii);
(viii) the incurrence by the Company or any of its Restricted Subsidiaries
of Hedging Obligations that are incurred for the purpose of fixing or hedging
interest rate risk with respect to any floating rate Indebtedness that is
permitted by the terms of the indenture governing the Discount Notes to be
outstanding; and
(ix) the incurrence by the Company or any of its Restricted Subsidiaries
of additional Indebtedness in an aggregate principal amount (or accreted
value, as applicable) not to exceed $25.0 million at any one time
outstanding.
For purposes of determining compliance with this covenant, in the event
that an item of Indebtedness meets the criteria of more than one of the
categories of Permitted Debt described in clauses (i) through (ix) above or
is entitled to be incurred pursuant to the first paragraph of this covenant,
the Company will, in its sole discretion, classify such item of Indebtedness
in any manner that complies with this covenant. Accrual of interest,
accretion or amortization of original issue discount, and the payment of
interest on any Indebtedness in the form of additional Indebtedness with the
same terms will not be deemed to be an incurrence of Indebtedness for
purposes of this covenant; provided, in each such case, that the amount
thereof is included in Fixed Charges of the Company as accrued.
TRANSACTIONS WITH AFFILIATES
So long as any New Shares are outstanding, the Company will not, and will
not permit any of its Restricted Subsidiaries to, make any payment to, or
sell, lease, transfer or otherwise dispose of any of its properties or assets
to, or purchase any property or assets from, or enter into or make or amend
any transaction, contract, agreement, understanding, loan, advance or
guarantee with, or for the benefit of, any Affiliate (each of the foregoing,
an "Affiliate Transaction"), unless (i) such Affiliate Transaction is on
terms that are no less favorable to the Company or the relevant Restricted
Subsidiary than those that would have been obtained in a comparable
transaction by the Company or such Restricted Subsidiary with an unrelated
Person and (ii) (a) with respect to any Affiliate Transaction or series of
related Affiliate Transactions involving aggregate consideration in excess of
$1.0 million, the Board of Directors will have passed a resolution 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, the Board of Directors will have
received an opinion as to the fairness to the Holders of such Affiliate
Transaction from a financial point of view issued by an accounting, appraisal
or 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 the following will not be deemed to be Affiliate
Transactions: (1) the Indenture of Lease dated as of January 1, 1995, between
Dennis Mehiel and Fonda relating to the Jacksonville Facility except for any
purchases of property by Fonda that may arise thereunder; (2) any
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employment agreement entered into by the Company or any of its Restricted
Subsidiaries in the ordinary course of business and consistent with the past
practice of the Company or such Restricted Subsidiary in an amount not to
exceed $1.00 million per annum; (3) transactions between or among the Company
and its Restricted Subsidiaries; (4) Restricted Payments and Permitted
Investments that are permitted by the provisions of the Restated Certificate
of Incorporation described above under the caption "--Restricted Payments;"
and (5) transactions entered into in connection with the Transactions.
LIMITATION ON ISSUANCES AND SALES OF CAPITAL STOCK IN WHOLLY OWNED
RESTRICTED SUBSIDIARIES
So long as any New Shares are outstanding, the Company (i) will not, and
will not permit any Wholly Owned Restricted Subsidiary of the Company to,
transfer, convey, sell, lease or otherwise dispose of any Capital Stock in
any Wholly Owned Restricted 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, lease or other disposition is of
all the Capital Stock in such Wholly Owned Restricted Subsidiary and (b) the
cash Net Proceeds from such transfer, conveyance, sale, lease or other
disposition are applied in accordance with paragraph (f) hereof, and (ii)
will not permit any Wholly Owned Restricted Subsidiary of the Company to
issue any of its Equity Interests (other than, if necessary, 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.
PAYMENTS FOR CONSENT
So long as any New Shares are outstanding, neither the Company nor any of
its Restricted Subsidiaries will, directly or indirectly, pay or cause to be
paid any consideration, whether by way of interest, fee or otherwise, to any
holder of New Shares for or as an inducement to any amendment or modification
of any of the terms or provisions of the Restated Certificate of
Incorporation unless such consideration is offered to be paid or is paid to
all holders of New Shares that amend or modify, or agree to amend or modify,
in the time frame set forth in the solicitation documents relating to such
amendment or modification.
MERGER, CONSOLIDATION OR SALE OF ASSETS
So long as any New Shares are outstanding, 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 corporation or the entity or the Person formed by or
surviving any such consolidation or merger (if other than the Company) or to
which such sale, assignment, transfer, lease, conveyance or other disposition
will 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)
immediately after such transaction no Default or Event of Default exists; and
(iii) 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 will have been made (A) will have Consolidated Net Worth
immediately after the transaction equal to or greater than the Consolidated
Net Worth of the Company immediately preceding the transaction and (B) will,
at the time of such transaction and after giving pro forma effect thereto as
if such transaction had occurred at the beginning of the applicable
four-quarter period, be permitted to incur at least $1.00 of additional
Indebtedness pursuant to the Fixed Charge Coverage Ratio test set forth in
the first paragraph of the covenant described above under the caption
"--Incurrence of Indebtedness and Issuance of Preferred Stock."
LIENS
So long as any New Shares are outstanding, 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.
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BUSINESS ACTIVITIES
So long as any New Shares are outstanding, the Company will not, and will
not permit any Subsidiary to, engage in any business other than Permitted
Businesses, except to such extent as would not be material to the Company and
its Restricted Subsidiaries taken as a whole.
CORPORATE STANDING
So long as any New Shares are outstanding, the Company will do or cause to
be done all things necessary to preserve and keep in full force and effect
(i) its corporate existence, and the corporate, partnership or other
existence of each of its Restricted Subsidiaries, in accordance with the
respective organizational documents (as they may be amended from time to
time) of the Company or any such Restricted Subsidiary and (ii) the rights
(charter and statutory), licenses and franchises of the Company and its
Restricted Subsidiaries; provided, however, that the Company will not be
required to preserve any such right, license or franchise, or the corporate,
partnership or other existence of any of its Restricted Subsidiaries, if the
Board of Directors of the Company will determine that the preservation
thereof is no longer desirable in the conduct of the business of the Company
and its Restricted Subsidiaries, taken as a whole, and that the loss thereof
is not adverse in any material respect to the holders of the New Shares.
The preceding covenants described under the caption "--Certain Covenants"
will in no way limit the power and authority of the Company to take any of
the actions restricted thereby. Rather, a violation of any such paragraphs
will have the consequences set forth above in the first paragraph under the
caption "--Voting Rights," and only such consequences.
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 Shares or for any claim based on, in respect of, or by reason
of, such obligations or their creation. Each Holder of New Shares by
accepting a New Share waives and releases all such liability. The waiver and
release are part of the consideration for issuance of the New Shares. 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.
TRANSFER AND EXCHANGE
The Registrar and the Transfer Agent 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. The
Company is not required to transfer or exchange any New Share selected for
redemption. Also, the Company is not required to transfer or exchange any New
Share for a period of 15 days before a selection of New Shares to be
redeemed.
The registered holder of a New Share will be treated as the owner of it
for all purposes.
AMENDMENT, SUPPLEMENT AND WAIVER
Except as specified under the caption "--Voting Rights," the Restated
Certificate of Incorporation or the New Shares may be amended with the
consent of the holders of at least a majority in interest of the voting
Common Stock then outstanding (including, without limitation, consents
obtained in connection with a purchase of, or tender offer or exchange offer
for, New Shares).
CONCERNING THE TRANSFER AGENT
There exist certain limitations on the rights of the Transfer Agent,
should the Transfer Agent 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 Transfer Agent will
be permitted to engage in other transactions with the Company; 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.
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The holders of a majority in interest of the then outstanding New Shares
will have the right to direct the time, method and place of conducting any
proceeding for exercising any remedy available to the Transfer Agent, subject
to certain exceptions. In case an Event of Default shall occur (which shall
not be cured), the Transfer Agent 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. The Transfer Agent will be under no obligation to exercise any of
its rights or powers at the request of any holder of New Shares, unless such
holder shall have offered to the Transfer Agent security and indemnity
satisfactory to it against any loss, liability or expense.
ADDITIONAL INFORMATION
Anyone who receives this Prospectus may obtain a copy of the Restated
Certificate of Incorporation and the Registration Rights Agreement without
charge by writing to SF Holdings Group, Inc., 115 Stevens Avenue, Valhalla,
New York 10595, Attention: General Counsel.
REGISTRATION RIGHTS; LIQUIDATED DAMAGES
The Company, AIPM and the Initial Purchaser entered into the Registration
Rights Agreement dated as of March 20, 1998. Pursuant to the Registration
Rights Agreement, the Company agreed to file with the Commission the Exchange
Offer Registration Statement on the appropriate form under the Securities Act
with respect to the New Shares. 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 Shares. If the Company does not meet its obligations under
the Registration Rights Agreement, it may be required to pay to each holder
of the New Shares Liquidated Damages in an amount equal to 50 basis points
per annum of the Liquidation Amount of New Shares, or the aggregate
outstanding principal amount of Subordinated Notes, as applicable, held by
such Holder 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 Liquidation Amount of the New Shares, or the
aggregate outstanding principal amount of Subordinated Notes, as applicable.
Holders of New Shares are not entitled to any registration rights with
respect to the New Shares. 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 Shares. 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 Shares will not retain any rights under
the Registration Rights Agreement.
CERTAIN DEFINITIONS
Set forth below are certain defined terms used in the Restated Certificate
of Incorporation. Reference is made to the Restated Certificate of
Incorporation 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 became 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 Restricted 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
Stock of a Person shall be deemed to be control.
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"Asset Sale" means (i) the sale, lease, conveyance or other disposition of
any assets or rights (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 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--Merger, Consolidation or Sale of Assets" and not
by the provisions described under the caption "--Repurchase at the Option of
Holders--Asset Sales"), 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, in the case of either clause (i) or (ii), whether in
a single transaction or a series of related transactions (a) that have a fair
market value in excess of $2.5 million or (b) for net proceeds in excess of
$2.5 million. Notwithstanding the foregoing, the following items shall not be
deemed to be Asset Sales: (i) a transfer of assets by the Company to a
Restricted Subsidiary or by a Restricted Subsidiary to the Company or to
another Restricted Subsidiary and (ii) a Restricted Payment that is permitted
by the covenant described above under the caption "--Restricted Payments."
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 Shares elected to exercise their rights under the Restated
Certificate of Incorporation 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.
"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 or limited liability
company, partnership or membership 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, excluding stock appreciation rights issued in the
ordinary course of business.
"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 (provided that the full faith and
credit of the United States is pledged in support 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 Thompson 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, (v) commercial paper having the highest rating obtainable from Moody's
Investors Service, Inc. or Standard & Poor's Corporation and in each case
maturing within one year after the date of acquisition and (vi) money market
funds at least 95% of the assets of which constitute Cash Equivalents of the
kinds described in clauses (i) -(v) of this definition.
"CEG" means Creative Expressions Group, Inc., and CEG Holdings, LLC.
"Change of Control" means the occurrence of any of the following: (i) the
sale, lease, transfer, conveyance or other disposition (other than by way of
merger or consolidation), in one or a series of related transactions, of all
or substantially all of the assets of the Company and its Restricted
Subsidiaries taken as a whole to any "person" (as such term is used in
Section 13(d)(3) of the Exchange Act) or "group" (as defined in Sections
13(d)(3) and 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
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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
such term is 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.
The definition of Change of Control includes a phrase relating to the
sale, lease, transfer, conveyance or other disposition of "all or
substantially all" of the assets of the Company and its Subsidiaries taken as
a whole. Although there is a developing body of case law interpreting the
phrase "substantially all," there is no precise established definition of the
phrase under applicable law. Accordingly, the ability of a Holder of Shares
to require the Company to repurchase such Shares as a result of a sale,
lease, transfer, conveyance or other disposition of less than all of the
assets of the Company and its Subsidiaries taken as a whole to another Person
or group may be uncertain.
"Consolidated Cash Flow" means, with respect to any Person for any period,
the Consolidated Net Income of such Person and its Restricted Subsidiaries
for such period plus (i) an amount equal to any extraordinary loss plus any
net loss realized in connection with an Asset Sale (to the extent such losses
were deducted in computing such Consolidated Net Income), plus (ii) provision
for taxes based on income or profits of such Person and its Restricted
Subsidiaries for such period, to the extent that such provision for taxes was
included in computing such Consolidated Net Income, plus (iii) consolidated
interest expense of such Person and its Restricted Subsidiaries for such
period, whether paid or accrued and whether or not capitalized (including,
without limitation, amortization of debt issuance costs and original issue
discount, non-cash interest payments, the interest component of any deferred
payment obligations, the interest component of all payments associated with
Capital Lease Obligations, commissions, discounts and other fees and charges
incurred in respect of letter of credit or bankers' acceptance financings,
and net payments (if any) pursuant to Hedging Obligations), to the extent
that any such expense was deducted in computing such Consolidated Net Income,
plus (iv) depreciation, amortization (including amortization of goodwill and
other intangibles but excluding amortization of prepaid cash expenses that
were paid in a prior period) and other non-cash charges (excluding any such
non-cash charge to the extent that it represents an accrual of or reserve for
cash charges in any future period or amortization of a prepaid cash expense
that was paid in a prior period) of such Person and its Restricted
Subsidiaries for such period to the extent that such depreciation,
amortization and other non-cash charges were deducted in computing such
Consolidated Net Income, minus (v) non-cash items increasing such
Consolidated Net Income for such period, in each case, on a consolidated
basis and determined in accordance with GAAP. Notwithstanding the foregoing,
the provision for taxes on the income or profits of, and the depreciation and
amortization and other non-cash charges of, a Restricted Subsidiary of the
referent Person shall be added to Consolidated Net Income to compute
Consolidated Cash Flow only to the extent that a corresponding amount would
be permitted at the date of determination to be dividended to the Company by
such Restricted 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
Restricted 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 Restricted 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 that Net Income is not at the date of determination permitted without any
prior
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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) income of any Unrestricted Subsidiary shall be excluded whether or not
distributed to the Company or any of its Restricted Subsidiaries.
"Consolidated Net Worth" means, with respect to any Person as of any date,
the sum of (i) the consolidated equity of the common stockholders of such
Person and its consolidated Restricted Subsidiaries as of such date plus (ii)
the respective amounts reported on such Person's balance sheet as of such
date with respect to any series of preferred stock (other than Disqualified
Stock) that by its terms is not entitled to the payment of dividends unless
such dividends may be declared and paid only out of net earnings in respect
of the year of such declaration and payment, but only to the extent of any
cash received by such Person upon issuance of such preferred stock, less (x)
all write-ups (other than write-ups resulting from foreign currency
translations and write-ups of tangible assets of a going concern business
made within 12 months after the acquisition of such business) subsequent to
the date of the Indenture in the book value of any asset owned by such Person
or a consolidated Restricted Subsidiary of such Person, (y) all investments
as of such date in unconsolidated Subsidiaries and in Persons that are not
Subsidiaries (except, in each case, Permitted Investments), and (z) all
unamortized debt discount and expense and unamortized deferred charges as of
such date, all of the foregoing determined in accordance with GAAP.
"Continuing Directors" means, as of any date of determination, any member
of the Board of Directors of the Company who (i) was a member of such Board
of Directors on March 12, 1998 or (ii) was nominated for election or elected
to such Board of Directors with the approval of a majority of the Continuing
Directors who were members of such Board at the time of such nomination or
election.
"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.
"Discount Note Registration Rights Agreement" means the Registration
Rights Agreement, dated as of March 12, 1998, by and among the Company and
the other parties named on the signature pages thereof, as such agreement may
be amended, modified or supplemented from time to time.
"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, at the option of the holder thereof), 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 June 14, 1998; provided, however, that
any Capital Stock that would constitute Disqualified Stock solely because the
holders thereof have the right to require the Company to repurchase such
Capital Stock upon the occurrence of a Change of Control or an Asset Sale
shall not constitute Disqualified Stock if the terms of such Capital Stock
provide that the Company may not repurchase or redeem any such Capital Stock
pursuant to such provisions unless such repurchase or redemption complies
with the covenant described above under the caption "Certain
Covenants--Restricted Payments."
"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).
"Equity Offering" means an underwritten public offering of common stock
(other than Disqualified Stock) of the Company registered under the
Securities Act (other than a public offering registered on Form S-8 under the
Securities Act).
"Event of Default" is ascribed the meaning set forth in Section 6.01 of
the indenture governing the Discount Notes, as more fully described in that
Registration Statement on Form S-4, Registration Number 333-50683 dated April
22, 1998.
"Existing Indebtedness" means Indebtedness of the Company and its
Restricted Subsidiaries in existence on March 12, 1998, including
Indebtedness represented by the Demand Note, until such amounts are repaid.
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"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 debt issuance costs and
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 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, whether or not in cash, on any series of preferred stock
of such Person, other than dividend payments on Equity Interests payable
solely in Equity Interests of the Company (other than Disqualified Stock) or
to the Company or a Restricted Subsidiary of the Company, 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 referent Person 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
Subsidiaries following the Calculation Date.
"Fonda" means The Fonda Group, Inc.
"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 March 12, 1998.
"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, by way of a pledge of
assets or through letters of credit or reimbursement agreements in respect
thereof), of all or any part of any Indebtedness.
"Hedging Obligations" means, with respect to any Person, the obligations
of such Person under (i) interest rate swap agreements, interest rate cap
agreements and interest rate collar agreements and (ii) other agreements or
arrangements designed to protect such Person against fluctuations in interest
rates.
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"Holder" means a Person in whose name a Discount Note is registered.
"Indebtedness" means, with respect to any Person, any indebtedness of such
Person, whether or not contingent, in respect of borrowed money or evidenced
by bonds, notes, debentures or similar instruments or letters of credit (or
reimbursement agreements in respect thereof) or banker's acceptances or
representing Capital Lease Obligations or the balance deferred and unpaid of
the purchase price of any property or representing any Hedging Obligations,
except any such balance that constitutes an accrued expense or trade payable,
if and to the extent any of the foregoing (other than letters of credit and
Hedging Obligations) would appear as a liability upon a balance sheet of such
Person prepared in accordance with GAAP, as well as all Indebtedness of
others secured by a Lien on any asset of such Person (whether or not such
Indebtedness is assumed by such Person) and, to the extent not otherwise
included, the Guarantee by such Person of any indebtedness of any other
Person. The amount of any Indebtedness outstanding as of any date shall be
(i) the accreted value thereof, in the case of any Indebtedness issued with
original issue discount, and (ii) the principal amount thereof, together with
any interest thereon that is more than 30 days past due, in the case of any
other Indebtedness.
"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. If the Company or any Restricted Subsidiary of the Company sells or
otherwise disposes of any Equity Interests of any direct or indirect
Subsidiary of the Company such that, after giving effect to any such sale or
disposition, such Person is no longer a Subsidiary of the Company, the
Company shall be deemed to have made an Investment on the date of any such
sale or disposition equal to the fair market value of the Equity Interests of
such Subsidiary not sold or disposed of in an amount determined as provided
in the final paragraph of the covenant described above under the caption
"Certain Covenants--Restricted Payments."
"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).
"Net Income" means, with respect to any Person, the net income (loss) of
such Person, determined in accordance with GAAP and before any reduction in
respect of preferred stock dividends, excluding, however, (i) any gain (but
not loss), together with any related provision for taxes on such gain (but
not loss), realized in connection with (a) any Asset Sale (including, without
limitation, dispositions pursuant to sale and leaseback transactions) or (b)
the disposition of any securities by such Person or any of its Restricted
Subsidiaries or the extinguishment of any Indebtedness of such Person or any
of its Restricted Subsidiaries and (ii) any extraordinary or nonrecurring
gain (but not loss), together with any related provision for taxes on such
extraordinary or nonrecurring gain (but not loss).
"Net Proceeds" means the aggregate cash proceeds received by the Company
or any of its Restricted Subsidiaries in respect of any Asset Sale
(including, without limitation, any cash received upon the sale 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) and any
relocation expenses incurred as a result thereof, taxes paid or payable as a
result thereof (after taking into account any available tax credits or
deductions and any tax sharing arrangements), amounts required to be applied
to the repayment of Indebtedness secured by a Lien on the asset or assets
that were the subject of such Asset Sale, and any reserve for adjustment in
respect of the sale price of such asset or assets established in accordance
with GAAP.
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"Non-Recourse Debt" means Indebtedness (i) as to which neither the Company
nor any of its Restricted Subsidiaries (a) provides credit support of any
kind (including any undertaking, agreement or instrument that would
constitute Indebtedness), (b) is directly or indirectly liable (as a
guarantor or otherwise), or (c) constitutes the lender; and (ii) no default
with respect to which (including any rights that the holders thereof may have
to take enforcement action against an Unrestricted Subsidiary) would permit
(upon notice, lapse of time or both) any holder of any other Indebtedness
(other than the Discount Notes) 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.
"Offering" means the offering of the Units by the Company.
"Offering Memorandum" means the Offering Memorandum, dated March 5, 1998,
governing the Offering of the Units by the Company.
"Permitted Business" means the business of producing and selling food
service, packaging, tissue and party goods products and such other businesses
as the Company and its Restricted Subsidiaries were engaged in on March 12,
1998, and reasonable expansions and extensions thereof.
"Permitted Investments" means (a) any Investment in the Company or in a
Restricted Subsidiary of the Company; (b) any Investment in Cash Equivalents;
(c) any Investment by the Company or any Restricted Subsidiary of the Company
in a Person that is evidenced by Capital Stock or Subsidiary Intercompany
Notes that are pledged to the Trustee as Collateral for the Discount Notes,
if as a result of such Investment (i) such Person becomes a Restricted
Subsidiary of the Company or (ii) such Person is merged, consolidated or
amalgamated with or into, or transfers or conveys substantially all of its
assets to, or is liquidated into, the Company or a Restricted Subsidiary of
the Company; (d) any Investment made as a result of the receipt of non-cash
consideration from an Asset Sale that was made pursuant to and in compliance
with the covenant described above under the caption "Repurchase at the Option
of Holders--Asset Sales;" (e) a $2.6 million loan from Fonda to CEG, as in
effect on March 12, 1998 as such loan may be amended or refinanced in a
manner not adverse to Fonda, the Company or the Holders of the Discount
Notes; and (f) other Investments in an aggregate amount not to exceed $5.0
million.
"Permitted Liens" means (i) Liens on Indebtedness of the Company's
Restricted Subsidiaries that was permitted by the terms of the Restated
Certificate of Incorporation to be incurred; (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 Restricted Subsidiary of the Company; provided that such
Liens were in existence prior to the contemplation of such merger or
consolidation and do not extend to any assets other than those of the Person
merged into or consolidated with the Company or any Restricted Subsidiary;
(iv) Liens on property existing at the time of acquisition thereof by the
Company or any Restricted Subsidiary of the Company, provided that such Liens
were in existence prior to the contemplation of such acquisition; (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 (including
Capital Lease Obligations) permitted by clause (iv) of the third paragraph of
the covenant entitled "Incurrence of Indebtedness and Issuance of Preferred
Stock" covering only the assets acquired with such Indebtedness; (vii) Liens
existing on March 12, 1998; (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 Restricted Subsidiary of the Company with respect to
obligations that do not exceed $2.5 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
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impair the use thereof in the operation of business by the Company or such
Restricted Subsidiary; (x) Liens in favor of the holders of Discount Notes;
and (xi) renewals or refundings of any Liens referred to in clauses (iii)
through (x) above provided that any such renewal or refunding does not extend
to any assets or secure any Indebtedness not securing or secured by the Liens
being renewed or refinanced.
"Permitted Refinancing Indebtedness" 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 Indebtedness does not exceed the principal amount
of (or accreted value, if applicable), plus accrued interest on, the
Indebtedness so extended, refinanced, renewed, replaced, defeased or refunded
(plus the amount of reasonable expenses incurred in connection therewith);
(ii) such Permitted Refinancing Indebtedness has a final maturity date later
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
Discount Notes, such Permitted Refinancing Indebtedness has a final maturity
date later than the final maturity date of, and is subordinated in right of
payment to, the Discount Notes on terms at least as favorable to the Holders
of Discount Notes as those contained in the documentation governing the
Indebtedness being extended, refinanced, renewed, replaced, defeased or
refunded; and (iv) such Indebtedness is incurred either by the Company or by
the Subsidiary who is the obligor on the Indebtedness being extended,
refinanced, renewed, replaced, defeased or refunded.
"Principals" means 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.
"Restricted Investment" means an Investment other than a Permitted
Investment.
"Restricted Subsidiary" of a Person means any Subsidiary of the referent
Person that is not an Unrestricted Subsidiary.
"Significant Subsidiary" means any Restricted Subsidiary that would be a
"significant subsidiary" as defined in Article 1, Rule 1-02 of Regulation
S-X, promulgated pursuant to the Act, as such Regulation is in effect on the
date hereof.
"Subsidiary" means, with respect to any Person, (i) any corporation,
association or other business entity of which more than 50% of the total
voting power of shares of Capital Stock entitled (without regard to the
occurrence of any contingency) to vote in the election of directors, managers
or trustees thereof is at the time owned or controlled, directly or
indirectly, by such Person or one or more of the other Subsidiaries of that
Person (or a combination thereof) and (ii) any partnership (a) the sole
general partner or the managing general partner of which is such Person or a
Subsidiary of such Person or (b) the only general partners of which are such
Person or of one or more Subsidiaries of such Person (or any combination
thereof); provided, however, that Sweetheart shall be deemed to be a
Subsidiary of the Company for so long as the Company directly or indirectly
owns at least 50% of Sweetheart's aggregate outstanding common stock.
"Subsidiary Intercompany Notes" means the intercompany notes, subordinate
in right of payment to the Discount Notes issued by Subsidiaries of the
Company in favor of the Company to evidence advances by the Company, in each
case, in the form attached as Annex B to the indenture governing the Discount
Notes.
"Sweetheart" means Sweetheart Holdings Inc. and its Subsidiaries.
"Unrestricted Subsidiary" means (i) any Subsidiary (other than Fonda or
Sweetheart or any successor to any of them) that is designated by the Board
of Directors as an Unrestricted Subsidiary pursuant to a Board Resolution;
but only to the extent that such Subsidiary: (a) has no Indebtedness other
than Non-Recourse Debt; (b) is not party to any agreement, contract,
arrangement or understanding with
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the Company or any Restricted Subsidiary of the Company unless the terms of
any such agreement, contract, arrangement or understanding are no less
favorable to the Company or such Restricted Subsidiary than those that might
be obtained at the time from Persons who are not Affiliates of the Company;
(c) is a Person with respect to which neither the Company nor any of its
Restricted Subsidiaries has any direct or indirect obligation (x) to
subscribe for additional Equity Interests or (y) to maintain or preserve such
Person's financial condition or to cause such Person to achieve any specified
levels of operating results; (d) has not guaranteed or otherwise directly or
indirectly provided credit support for any Indebtedness of the Company or any
of its Restricted Subsidiaries; and (e) has at least one director on its
board of directors that is not a director or executive officer of the Company
or any of its Restricted Subsidiaries and has at least one executive officer
that is not a director or executive officer of the Company or any of its
Restricted Subsidiaries. Any such designation by the Board of Directors shall
be evidenced to the Trustee by filing with the Trustee a certified copy of
the Board Resolution giving effect to such designation and an Officers'
Certificate certifying that such designation complied with the foregoing
conditions and was permitted by the covenant described above under the
caption "Certain Covenants--Restricted Payments." If, at any time, any
Unrestricted Subsidiary would fail to meet the foregoing requirements as an
Unrestricted Subsidiary, it shall thereafter cease to be an Unrestricted
Subsidiary for purposes of the Indenture and any Indebtedness of such
Subsidiary shall be deemed to be incurred by a Restricted Subsidiary of the
Company as of such date (and, if such Indebtedness is not permitted to be
incurred as of such date under the covenant described under the caption
"Incurrence of Indebtedness and Issuance of Preferred Stock," the Company
shall be in default of such covenant). The Board of Directors of the Company
may at any time designate any Unrestricted Subsidiary to be a Restricted
Subsidiary; provided that such designation shall be deemed to be an
incurrence of Indebtedness by a Restricted Subsidiary of the Company of any
outstanding Indebtedness of such Unrestricted Subsidiary and such designation
shall only be permitted if (i) such Indebtedness is permitted under the
covenant described under the caption "Certain Covenants--Incurrence of
Indebtedness and Issuance of Preferred Stock," calculated on a pro forma
basis as if such designation had occurred at the beginning of the
four-quarter reference period, and (ii) no Default or Event of Default would
be in existence following such designation.
"Voting Stock" of any Person as of any date means the Capital Stock of
such Person that is at the time entitled to vote in the election of the Board
of Directors of such Person.
"Weighted Average Life to Maturity" means, when applied to any
Indebtedness at any date, the number of years obtained by dividing (i) the
sum of the products obtained by multiplying (a) the amount of each then
remaining installment, sinking fund, serial maturity or other required
payments of principal, including payment at final maturity, in respect
thereof, by (b) the number of years (calculated to the nearest one-twelfth)
that will elapse between such date and the making of such payment, by (ii)
the then outstanding principal amount of such Indebtedness.
"Wholly Owned Restricted Subsidiary" of any Person means a Restricted
Subsidiary of such Person all of the outstanding Capital Stock or other
ownership interests of which (other than directors' qualifying shares) shall
at the time be owned by such Person or by one or more Wholly Owned Restricted
Subsidiaries of such Person and one or more Wholly Owned Restricted
Subsidiaries of such Person.
PROVISIONS GENERALLY APPLICABLE TO ALL SECURITIES
BOOK-ENTRY, DELIVERY AND FORM
Except as set forth below, the New Shares will be issued in registered and
global form. New Shares will be issued at the closing of the Exchange Offer
(the "Closing") only against payment in immediately available funds.
The New Shares initially will be issued in the form of one global share
(the "Global Share"). The Global Shares will be deposited upon issuance with
the Transfer Agent as custodian for The Depository Trust Company ("DTC"), in
New York, New York, and registered in the name of DTC or its nominee, in each
case for credit to an account of a direct or indirect participant in DTC as
described below.
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Except as set forth below, the Global Share may be transferred, in whole
and not in part, only to another nominee of DTC or to a successor of DTC or
its nominee. Beneficial interests in the Global Share may not be exchanged
for Securities in certificated form except in the limited circumstances
described below. See "--Exchange of Book-Entry Securities for Certificated
Securities." Except in the limited circumstances described below, owners of
beneficial interests in the Global Share will not be entitled to receive
physical delivery of Certificated Securities (as defined below).
Initially, the Transfer Agent will act as Paying Agent and Registrar with
respect to the New Shares. The New Shares may be presented for registration
of transfer and exchange at the offices of the Registrar.
DEPOSITORY PROCEDURES
The following description of the operations and procedures of DTC,
Euroclear and Cedel are provided solely as a matter of convenience. These
operations and procedures are solely within the control of the respective
settlement systems and are subject to changes by them from time to time. The
Company takes no responsibility for these operations and procedures and urges
investors to contact the system or their participants directly to discuss
these matters.
DTC has advised the Company that DTC is a limited-purpose trust company
created to hold securities for its participating organizations (collectively,
the "Participants") and to facilitate the clearance and settlement of
transactions in those securities between Participants through electronic
book-entry changes in accounts of its Participants. The Participants include
securities brokers and dealers (including the Initial Purchaser), banks,
trust companies, clearing corporations and certain other organizations.
Access to DTC's system is also available to other entities such as banks,
brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a Participant, either directly or indirectly
(collectively, the "Indirect Participants"). Persons who are not Participants
may beneficially own securities held by or on behalf of DTC only through the
Participants or the Indirect Participants. The ownership interests in, and
transfers of ownership interests in, each actual purchaser of each security
held by or on behalf of DTC are recorded on the records of the Participants
and Indirect Participants.
DTC has also advised the Company that, pursuant to procedures established
by it, (i) upon deposit of the Global Share, DTC will credit the accounts of
Participants designated by the Initial Purchaser with portions of the
principal amount of the Global Share and (ii) ownership of the New Shares
evidenced by the Global Share will be shown on, and the transfer of ownership
thereof will be effected only through, records maintained by DTC (with
respect to the Participants) or by the Participants and the Indirect
Participants (with respect to other owners of beneficial interest in the
Global Securities).
Investors in the Global Share may hold their interests therein directly
through DTC, if they are Participants in such system, or indirectly through
organizations (including Euroclear and Cedel) which are Participants in such
system. 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 beneficial
interests in a Global Share to such persons will be limited to that extent.
Because DTC can act only on behalf of Participants, which in turn act on
behalf of Indirect Participants and certain banks, the ability of a person
having beneficial interests in a Global Share to pledge such interests to
persons or entities that do not participate in the DTC system, or otherwise
take actions in respect of such interests, may be affected by the lack of a
physical certificate evidencing such interests. For certain other
restrictions on the transferability of the New Shares, see "--Exchange of
Book-Entry Securities for Certificated Securities."
Except as described below, owners of interests in the Global Share will
not have New Shares registered in their names, will not receive physical
delivery of New Shares in certificated form and will not be considered the
registered owners or "holders" thereof for any purpose.
Payments in respect of the dividends, if any, and Liquidated Damages, if
any, on any New Shares registered in the name of DTC or its nominee will be
payable by the Trustee to DTC in its capacity as the registered holder. The
Company and the Trustee will treat the persons in whose names the New Shares
are registered as the owners thereof for the purpose of receiving such
payments and for any and all other purposes whatsoever. Consequently, neither
the Company nor the Trustee nor any agent of the Company
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or the Trustee has or will have any responsibility or liability for (i) any
aspect of DTC's records or any Participant's or Indirect Participant's
records relating to or payments made on account of beneficial ownership
interest in the Global Shares, or for maintaining, supervising or reviewing
any of DTC's records or any Participant's or Indirect Participant's records
relating to the beneficial ownership interests in the Global Shares or (ii)
any other matter relating to the actions and practices of DTC or any of its
Participants or Indirect Participants. DTC has advised the Company that its
current practice, upon receipt of any payment in respect of securities such
as the New Shares, is to credit the accounts of the relevant Participants
with the payment on the payment date, in amounts proportionate to their
respective holdings in the relevant security as shown on the records of DTC
unless DTC has reason to believe it will not receive payment on such payment
date. Payments by the Participants and the Indirect Participants to the
beneficial owners of New Shares will be governed by standing instructions and
customary practices and will be the responsibility of the Participants or the
Indirect Participants and will not be the responsibility of DTC, the Trustee
or the Company. Neither the Company nor the Trustee will be liable for any
delay by DTC or any of its Participants in identifying the beneficial owners
of the New Shares, and the Company, the Trustee may conclusively rely on and
will be protected in relying on instructions from DTC or its nominee for all
purposes.
Interests in the Global Share are expected to be eligible to trade in
DTC's Same-Day Funds Settlement System and secondary market trading activity
in such interests will, therefore, settle in immediately available funds,
subject in all cases to the rules and procedures of DTC and its Participants.
See "--Same Day Settlement and Payment."
Transfers between Participants in DTC will be effected in accordance with
DTC's procedures, and will be settled in same day funds, and transfers
between participants in Euroclear and Cedel will be effected in the ordinary
way in accordance with their respective rules and operating procedures.
Cross-market transfers between the Participants in DTC, on the one hand,
and Euroclear or Cedel participants, on the other hand, will be effected
through DTC in accordance with DTC's rules on behalf of Euroclear or Cedel,
as the case may be, by its respective depositary; however, such cross-market
transactions will require delivery of instructions to Euroclear or Cedel, as
the case may be, by the counterparty in such system in accordance with the
rules and procedures and within the established deadlines (Brussels time) of
such system. Euroclear or Cedel, as the case may be, will, if the transaction
meets its settlement requirements, deliver instructions to its respective
depositary to take action to effect final settlement on its behalf by
delivering or receiving interests in the Global Share in DTC, and making or
receiving payment in accordance with normal procedures for same-day funds
settlement applicable to DTC. Euroclear participants and Cedel participants
may not deliver instructions directly to the depositories for Euroclear or
Cedel.
DTC has advised the Company that it will take any action permitted to be
taken by a holder of New Shares only at the direction of one or more
Participants to whose account DTC has credited the interests in the Global
Share and only in respect of such portion of the aggregate principal amount
of the New Shares as to which such Participant or Participants has or have
given such direction. However, if there is an Event of Default with respect
to the New Shares, DTC reserves the right to exchange the Global Share for
legended Securities in certificated form, and to distribute such Securities
to its Participants.
Although DTC, Euroclear and Cedel have agreed to the foregoing procedures
to facilitate transfers of interests in the Global Share among Participants
in DTC, Euroclear and Cedel, they are under no obligation to perform or to
continue to perform such procedures, and such procedures may be discontinued
at any time. Neither the Company nor the Trustee, nor any of their respective
agents will have any responsibility for the performance by DTC, Euroclear or
Cedel or their respective participants or indirect participants of their
respective obligations under the rules and procedures governing their
operations.
EXCHANGE OF BOOK-ENTRY SECURITIES FOR CERTIFICATED SECURITIES
A beneficial interest in the Global Share is exchangeable for New Shares
in the form of registered certificated securities if (i) DTC (x) notifies the
Company that it is unwilling or unable to continue as
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depositary for the Global Share and the Company thereupon fails to appoint a
successor depositary or (y) has ceased to be a clearing agency registered
under the Exchange Act, (ii) the Company, at its option, notifies the
Transfer Agent in writing that it elects to cause the issuance of the
Certificated Securities or (iii) there shall have occurred and be continuing
a Default or Event of Default with respect to the New Shares. In addition,
beneficial interests in the Global Share may be exchanged for New Shares in
the form of Certificated Securities upon request but only upon prior written
notice given to the Transfer Agent by or on behalf of DTC. In all cases,
Certificated Securities delivered in exchange for any Global Share or
beneficial interests therein will be registered in the names, and issued in
any approved denominations, requested by or on behalf of the depositary (in
accordance with its customary procedures) unless the Company determines
otherwise in compliance with applicable law.
SAME DAY SETTLEMENT AND PAYMENT
Payments in respect of the New Shares represented by the Global Share
(including dividends and Liquidated Damages, if any) shall be made by wire
transfer of immediately available funds to the accounts specified by the
Global Share holder. With respect to Certificated Securities, the Company
will make all dividend payments, if any, and Liquidated Damages payments, 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 Shares
represented by the Global Shares are expected to be eligible to trade in the
PORTAL market and to trade in the Depositary's Same-Day Funds Settlement
System, and any permitted secondary market trading activity in such New
Shares will, therefore, be required by the Depositary to be settled in
immediately available funds. The Company expects that secondary trading in
the Certificated Securities will also be settled in immediately available
funds.
Because of time zone differences, the securities account of a Euroclear or
Cedel participant purchasing an interest in the Global Share from a
Participant in DTC will be credited, and any such crediting will be reported
to the relevant Euroclear or Cedel participant, during the securities
settlement processing day (which must be a business day for Euroclear and
Cedel) immediately following the settlement date of DTC. DTC has advised the
Company that cash received in Euroclear or Cedel as a result of sales of
interests in the Global Share by or through a Euroclear or Cedel participant
to a Participant in DTC will be received with value on the settlement date of
DTC but will be available in the relevant Euroclear or Cedel cash account
only as of the business day for Euroclear or Cedel following DTC's settlement
date.
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DESCRIPTION OF CAPITAL STOCK
COMMON STOCK
SF Holdings is authorized to issue an aggregate of 18,000,000 shares of
common stock, par value $.001 per share, consisting of 15,000,000 shares of
Class A Common Stock, 1,000,000 shares of Class B Common Stock and 2,000,000
shares of Class C Common Stock. There are currently 5,625,838 shares of Class
A Common Stock, 564,586 shares of Class B Common Stock, and 399,000 shares of
Class C Common Stock outstanding. The shares of Class A Common Stock are held
by four stockholders of record and the shares of Class B Common Stock are
held by one stockholder of record. The rights of holders of Class A, Class B
and Class C Common Stock are identical except as to voting and conversion
rights.
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. Each share of Class B Common
Stock is entitled to one-tenth of a vote per share and shall vote together
with the Class A Common Stock as a single class; provided, however, that the
vote of the holders of a majority of the shares of Class B Common Stock shall
be required for the amendment or modification of the Certificate of
Incorporation of SF Holdings in any way that would adversely affect the
powers, preferences and rights of the Class B Common Stock. The holders of
Class C Common Stock are not entitled to any vote whatsoever, except to the
extent otherwise provided by law.
The holders of all classes 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 SF Holdings, 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 SF Holdings. All currently
outstanding shares of the Common Stock are fully paid and nonassessable.
Each share of Class B Common Stock may, at any time, be converted into a
fully paid and non-assessable share of Class A Common Stock at the option of
any holder other than a "Non-Converting Holder" (as defined in SF Holdings'
certificate of incorporation), or at the option of any Non-Converting Holder
concurrently with a sale or other transfer of shares of Class B Common Stock
to any person, firm or corporation other than a Non-Converting Holder. In
addition, the current holder of the Class B Common Stock has anti-dilution
protections.
Each share of Class C Common Stock may, following an underwritten initial
public offering of shares of Common Stock of SF Holdings, be converted into a
fully paid and non-assessable share of Class A Common Stock at the option of
any holder, or at the option of SF Holdings.
PREFERRED STOCK
SF Holdings is authorized to issue an aggregate of 120,000 shares of
preferred stock, par value $.001 per share, consisting of 20,000 shares of
Exchangeable Preferred Stock and 100,000 shares of Class B Preferred Stock
(the "Class B Preferred"). There are currently 3,000 shares of Exchangeable
Preferred Stock and 15,000 shares of Class B Series 1 Preferred issued and
outstanding.
Exchangeable Preferred Stock. See "Description of New Shares" for a more
detailed discussion of the terms of the Exchangeable Preferred Stock. The
holders of the Exchangeable Preferred Stock are entitled to receive
cumulative dividends at an annual rate equal to 1.0% over the interest rate
of the Discount Notes. Until the fifth anniversary of the consummation of the
Sweetheart Investment, dividends on the Exchangeable Preferred Stock will be
payable quarterly in arrears, at the option of SF Holdings, (i) in cash or
(ii) by issuing shares of Exchangeable Preferred Stock with an aggregate
Liquidation Amount equal to the amount of such dividends. From and after such
time, dividends are payable quarterly in arrears in cash, subject to certain
exceptions.
The Exchangeable Preferred Stock is convertible into subordinated
indebtedness of SF Holdings, subject to certain conditions, at the option of
SF Holdings, which shall have terms comparable to the Exchangeable Preferred
Stock.
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The Exchangeable Preferred Stock is required to be redeemed on the date
immediately following the 11th anniversary of the consummation of the
Sweetheart Investment at a redemption price per share, in cash, equal to the
aggregate liquidation value, plus the cash value of any accrued and unpaid
dividends payable in kind and the amount of any accrued and unpaid cash
dividends.
SF Holdings has the right but not the obligation to redeem the
Exchangeable Preferred Stock, in whole or in part, (i) at any time after the
fifth anniversary of the consummation of the Sweetheart Investment and (ii)
prior to the third anniversary of the consummation of the Sweetheart
Investment at any time following an initial public offering by SF Holdings,
subject to certain restrictions, on the same terms and at comparable
percentages as specified under "Description of New Notes--Optional
Redemption," with respect to the optional redemption of the New Notes.
In the event of a Change of Control, each holder of Exchangeable Preferred
Stock has the right to require SF Holdings to repurchase its stock at a
purchase price equal to 101% of the liquidation value, plus the cash value of
any accrued and unpaid dividends payable in kind and the amount of any
accrued and unpaid cash dividends.
The holders of Exchangeable Preferred Stock are not entitled to any voting
rights, except as described below or as otherwise required by applicable law.
In the event SF Holdings fails to (i) pay dividends for six or more quarters,
(ii) satisfy any mandatory redemption obligation, (iii) make a "repurchase
offer" within 30 days following a "Change of Control" or (iv) comply with any
of the covenants set forth in the Restated Certificate of Incorporation for a
period of 30 days, SF Holdings's board of directors will be increased by two
members and the holders of a majority of the outstanding shares of the
Exchangeable Preferred Stock, voting as a separate class, will be entitled to
elect two members to SF Holdings's board of directors. The approval of the
holders of a majority of the Exchangeable Preferred Stock, voting as a
separate class, is also required for (i) the authorization of any series of
preferred stock senior to the Exchangeable Preferred Stock, (ii) the
amendment or modification of any provisions of SF Holdings's Restated
Certificate of Incorporation in a manner that would adversely affect the
voting powers, designation, preferences and rights of the Exchangeable
Preferred Stock and (iii) any merger or consolidation or sale of all or
substantially all of the assets of SF Holdings if the terms of such
transaction do not provide for the repurchase or redemption of all of the
Exchangeable Preferred Stock. See "--Description of the New Shares."
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 SF Holdings.
Issuance of Class B Preferred, while providing 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 SF Holdings. SF Holdings has no present plans to issue any shares of Class
B Preferred.
Class B Series 1 Preferred. The holder of the Class B Series 1 Preferred
is not entitled to receive dividends. The Class B Series 1 Preferred is
convertible, at any time, into 1,334,945 shares of Class A Common Stock, at
the option of the holder and is required to be redeemed on the date
immediately following the 12th anniversary of the consummation of the
Sweetheart Investment at a redemption price per share, in cash, equal to the
aggregate liquidation value. The holder of the Class B Series 1 Preferred is
not entitled to any voting rights, except as otherwise required by law. In
the event any shares of Class
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B Series 1 Preferred are redeemed (the "Redemption Amount"), the Sweetheart
Stockholders will have the right to redeem that number of the Exchange
Warrants or shares of Class C Common Stock issuable upon exercise of the
Exchange Warrants, as the case may be, equal to 10% of the value of the
Redemption Amount.
REGISTRATION RIGHTS
After the earlier to occur of March 15, 2002 or the occurrence of a
Triggering Event (as defined herein), the holders of one-quarter or more of
the Common Shares will be entitled to require SF Holdings to effect one
registration (a "Demand Registration") under the Securities Act of the Common
Shares, subject to certain limitations. As used herein, "Triggering Event"
means the occurrence of any of the following events: (i) the day immediately
prior to a Change of Control, (ii) the 90th day (or such earlier date as
determined by SF Holdings in its sole discretion) following the initial
Equity Offering of SF Holdings or (iii) other than as a result of the initial
Equity Offering of SF Holdings, the day on which a class of common equity
securities of SF Holdings is listed on a national securities exchange or
authorized for quotation on the Nasdaq National Market System or is otherwise
subject to registration under the Exchange Act. As used herein, "Equity
Offering" shall have the same meaning as set forth in the "Description of New
Shares."
Upon a demand, SF Holdings will (a) notify the holders of all of the
Common Shares that a demand registration has been requested, (b) prepare,
file and use its best efforts to cause to become effective within 120 days of
such demand registration statement in respect of all of the Common Shares
which holders request, no later than 30 days after the date of such notice,
to have included therein (the "Included Securities"); provided, that if such
demand occurs during the "lock up" or "black out" period (not to exceed 180
days) imposed on SF Holdings pursuant to any underwriting or purchase
agreement relating to an underwritten Rule 144A or registered public offering
of Common Stock or securities convertible into or exchangeable or exercisable
for Common Stock, SF Holdings shall not be required to so notify holders of
the Shares and file such demand registration statement prior to the end of
such "lock up" or "black out" period, in which event SF Holdings will use its
best efforts to cause such demand registration statement to become effective
no later than 30 days after the end of such "lock up" or "black out" period
and (c) keep such registration statement continuously effective for the
shorter of (i) 180 days (the "Effectiveness Period") and (ii) such period of
time as all of the Common Shares included in such registration statement
shall have been sold thereunder; provided, that SF Holdings may postpone the
filing period, suspend the effectiveness of any registration statement,
suspend the use of any prospectus and shall not be required to amend or
supplement the registration statement, any related prospectus or any document
incorporated therein by reference (other than an effective registration
statement being used for an underwritten offering) in the event that, and for
a period (a "Black Out Period") not to exceed an aggregate of 45 days with
respect to a Demand Registration, (i) an event or circumstance occurs and is
continuing as a result of which the registration statement, any related
prospectus or any document incorporated therein by reference as then amended
or supplemented would, in SF Holdings's good faith judgment, contain an
untrue statement of a material fact or omit to state a material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading, and (ii)(A) SF
Holdings determines in its good faith judgment that the disclosure of such an
event at such time would have a material adverse effect on the business,
operations or prospects of SF Holdings or (B) the disclosure otherwise
relates to a material business transaction which has not yet been publicly
disclosed; provided further, that the Effectiveness Period shall be extended
by the number of days in any Black Out Period. In the event of any "lock up"
or "black out" period in any underwriting or purchase agreement, SF Holdings
will so notify the holders of the Common Shares.
Holders of Common Shares will also have the right to include the Common
Shares in any registration statement under the Securities Act filed by SF
Holdings for its own account or for the account of any of its security
holders covering the sale of Common Stock (other than (a) a registration
statement on Form S-4 or S-8 or (b) a registration statement filed in
connection with an offer of securities solely to existing security holders or
(c) a Demand Registration) for sale on the same terms and conditions as the
securities of SF Holdings or any other selling security holder included
therein (a "Piggy-Back Registration") if and whenever any such registration
statement is filed under the Securities Act, except that the Piggy-Back
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Registration right of holders of the Common Shares shall not apply to any
Equity Offering that is the initial Equity Offering of SF Holdings unless the
securities of other selling security holders are to be included therein. In
the case of a Piggy-Back Registration, the number of the Common Shares
requested to be included therein is subject to a reduction (a "Cut Back") to
the extent that SF Holdings is advised by the managing underwriter, if any,
therefor that the total number or type of the Common Shares to be included
therein is such as to materially and adversely affect the success of the
offering. Any such reduction shall be pro rata among holders of the Common
Shares. If SF Holdings grants any Piggy-Back Registration rights to any
person other than to such persons who have Piggy-Back Registration rights
existing on the date of the closing of the offering, such securities subject
to the Piggy-Back Registration rights shall be cut back prior to any of the
Common Shares.
If SF Holdings has complied with all its obligations with respect to a
Demand Registration or a Piggy-Back Registration relating to an underwritten
public offering, all holders of the Common Shares, upon request of the lead
managing underwriter with respect to such underwritten public offering, will
be required to not sell or otherwise dispose of any of the Common Shares
owned by them for a period not to exceed 180 days from the consummation of
such underwritten public offering, provided, that such requirement shall
apply to the Common Shares not sold in a Demand Registration or Piggy-Back
Registration due to a Cut Back for a period not to exceed 90 days from such
date of consummation.
See "The Sweetheart Investment" for registration rights granted to the
Sweetheart Stockholders.
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CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is a general discussion of United States federal income tax
consequences generally applicable to the purchase, ownership and disposition
of New Shares and Subordinated Notes to a holder who purchases New Shares
pursuant to the Exchange Offer (a "holder"). This entire discussion is based
on the advice of Kramer, Levin, Naftalis & Fankel, counsel to the Company.
This summary is based on the United States federal income tax laws,
regulations, rulings and decisions now in effect, all of which are subject to
change, possibly on a retroactive basis. This summary does not address the
tax consequences applicable to investors that may be subject to special tax
rules, such as banks, thrifts, real estate investment trusts, regulated
investment companies, insurance companies, dealers in securities or
currencies, tax-exempt investors or persons that will hold New Shares or
Subordinated Notes as a position in a "straddle," as part of a "synthetic
security" or "hedge," as part of a "conversion transaction" or other
integrated investment. This summary also does not address the tax
consequences to persons that have a functional currency other than the U.S.
dollar or the tax consequences to shareholders, partners or beneficiaries of
a holder of New Shares or Subordinated Notes. Further, it does not include
any description of any alternative minimum tax consequences, estate tax
consequences or the tax laws of any state or local government or of any
foreign government that may be applicable to the New Shares or Subordinated
Notes. The discussion assumes that the New Shares and Subordinated Notes will
be held as capital assets within the meaning of section 1221 of the Internal
Revenue Code of 1986, as amended (the "Code"). Certain proposed tax
legislation, if enacted in substantially the same form as proposed, may
affect some of the federal income tax consequences discussed herein. See
"--Proposed Legislation."
For purposes of this discussion, a "U.S. Holder" means a citizen or
resident of the United States, a corporation, partnership or other entity
(other than a trust) created or organized in the United States or under the
laws of the United States or any political subdivision thereof, an estate
whose income is includible in gross income for United States federal income
tax purposes regardless of its source or, in general, a trust, if a U.S.
court is able to exercise primary supervision over the administration of the
trust and one or more U.S. persons have the authority to control all
substantial decisions of the trust. A "Non-U.S. Holder" means a holder who is
not a U.S. Holder.
PROSPECTIVE INVESTORS SHOULD CONSULT THEIR OWN TAX ADVISORS WITH REGARD TO
THE APPLICATION OF THE TAX CONSIDERATIONS DISCUSSED BELOW TO THEIR PARTICULAR
SITUATIONS AS WELL AS THE APPLICATION OF ANY STATE, LOCAL, FOREIGN OR OTHER
TAX LAWS.
ALLOCATION OF BASIS
Each holder of New Shares will have a tax basis in the New Shares equal to
the amount of cash paid by the holder for Share Units, reduced by the portion
of such cash allocable to the Common Shares represented by such Share Units,
which allocation will be based on the relative fair market values of the Old
Shares and the Common Shares at the time the Share Units were acquired.
CLASSIFICATION OF PREFERRED STOCK
Although the characterization of an instrument as debt or equity is a
facts and circumstances determination that cannot be predicted with
certainty, SF Holdings intends to treat the New Shares as stock for federal
income tax purposes, and the remainder of this discussion assumes that such
treatment will be respected.
TAX CONSEQUENCES TO U.S. HOLDERS
DISTRIBUTIONS ON THE NEW SHARES
Distributions to U.S. Holders on the New Shares, whether paid in cash or
with shares of Old Shares, will be taxable as ordinary income to the extent
that the amount thereof does not exceed SF Holdings' current or accumulated
earnings and profits (as determined for federal income tax purposes). To the
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extent that the amount of distributions paid on the New Shares exceeds such
current or accumulated earnings and profits, such distributions will be
treated first as a return of capital, thus reducing the holder's adjusted tax
basis in the New Shares, and then as gain from the sale or exchange of such
stock, which will be taxed as capital gain, and will be long-term capital
gain if the holder's holding period for the New Shares exceeds one year. The
most favorable tax rate on long-term capital gains of individual holders
(generally 20%) will not be available unless the holding period exceeds 18
months. For purposes of the remainder of this discussion, the term "dividend"
refers to a distribution taxed as ordinary income as described above, unless
the context indicates otherwise.
Dividends received by corporate U.S. Holders will be eligible for the 70%
dividends-received deduction under section 243 of the Code, subject to
certain limitations. Under section 246(c) of the Code, the 70%
dividends-received deduction will not be available with respect to New Shares
which are held for 45 days or less (90 days in the case of a dividend on New
Shares attributable to a period or periods aggregating more than 366 days
("Preference Dividends")), including the day of disposition but excluding the
day of acquisition, during the 90 day period (180 day period for Preference
Dividends) beginning 45 days (or 90 days for Preference Dividends) before the
date on which the New Shares become ex-dividend. The length of time that a
shareholder is deemed to have held stock for these purposes is reduced for
periods during which the shareholder's risk of loss with respect to the stock
is diminished by reason of the existence of certain options, contracts to
sell, short sales or other similar transactions. Section 246(c) of the Code
also denies the dividends-received deduction to the extent that a corporate
taxpayer is under an obligation, with respect to substantially similar or
related property, to make payments corresponding to the dividend received.
Under section 246(b) of the Code, the aggregate dividends-received deductions
allowed may not exceed 70% of the taxable income (with certain adjustments)
of the corporate shareholder. Moreover, under section 246A of the Code, the
dividends-received deduction is proportionately reduced to the extent that a
corporate shareholder incurs indebtedness "directly attributable" to an
investment in the New Shares. Special rules may apply to corporate U.S.
Holders upon the receipt of any "extraordinary dividends" with respect to the
New Shares.
REDEMPTION PREMIUM
If the redemption price of redeemable preferred stock exceeds its issue
price by more than a de minimis amount (the product of (i) 1/4 of 1% of the
redemption price and (ii) the number of complete years to maturity), such
excess (the redemption premium) will likely be treated as a constructive
distribution on such preferred stock, over the term of the preferred stock,
using a constant yield method similar to that described below for accruing
original issue discount. See "--Original Issue Discount." It is not clear how
the issue price of the New Shares is to be determined for these purposes.
Since the offering of the Share Units occurred in close proximity to the
original issuance of the Old Shares, it is likely that the issue price is
equal to the portion of the purchase price of the Share Units allocable to
the Old Shares. However, it is also possible that the issue price is equal to
the fair market value of the Old Shares assigned by the Company upon original
issuance to the Company stockholders. In either case the Old Shares were
issued with more than a de minimis amount of redemption premium, though the
amount of the premium is less if the latter approach is adopted. HOLDERS OF
NEW SHARES SHOULD CONSULT THEIR TAX ADVISORS CONCERNING THE APPLICATION OF
THE RULES REGARDING REDEMPTION PREMIUM.
Pursuant to regulations (the "section 305(c) Regulations"), constructive
distributions on the New Shares may also arise due to its optional redemption
provisions if, based on all of the facts and circumstances as of the date the
Old Shares were issued, an optional redemption was more likely than not to
occur. Even if redemption were more likely than not to occur, however,
constructive distribution treatment would not result if the redemption
premium were solely in the nature of a penalty for premature redemption. For
this purpose, a penalty for premature redemption is a premium paid as a
result of changes in economic or market condition over which neither the
issuer nor the holder has control, such as changes in prevailing dividend
rates. The section 305(c) Regulations provide a safe harbor pursuant to which
constructive distribution treatment will not result from an issuer call right
if the issuer and the holder are unrelated, there are no arrangements that
effectively require the issuer to redeem the stock and exercise of the option
to redeem would not reduce the yield of the stock. Although SF Holdings
believes that the optional redemption provisions with respect to the New
Shares would not be treated as
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more likely than not to be exercised under these rules, that the redemption
premium is in the nature of a penalty for premature redemption and that the
safe harbor would apply, this determination cannot be made with certainty at
this time. Moreover, the right to require a redemption upon the occurrence of
a contingency (such as a Change of Control) could under certain circumstances
result in constructive distributions, although SF Holdings does not believe
that such result should apply to the New Shares. No assurance can be given as
to the treatment of the optional redemption premium or Change of Control
premium with respect to the New Shares under the section 305(c) Regulations.
REDEMPTION, SALE OR EXCHANGE OF THE NEW SHARES
A redemption of New Shares for cash or in exchange for Subordinated Notes,
or a sale of New Shares that does not qualify for nonrecognition treatment
pursuant to the Code, will be a taxable event to U.S. Holders. A redemption
of New Shares for cash will be treated as a dividend distribution, which will
be taxable as a dividend to the extent of SF Holdings' current or accumulated
earnings and profits (as discussed above), unless the redemption (i) results
in a "complete termination" of the shareholder's stock interest in SF
Holdings under section 302(b)(3) of the Code, (ii) is "substantially
disproportionate" with respect to the shareholder under section 302(b)(92) of
the Code or (iii) is "not essentially equivalent to a dividend" with respect
to the shareholder under section 302(b)(1) of the Code, in each case taking
into account both actual and constructive ownership. A distribution to a
shareholder will be "not essentially equivalent to a dividend" if it results
in a "meaningful reduction" in the shareholder's stock interest in SF
Holdings. If, as a result of a redemption for cash of the New Shares, a
shareholder of SF Holdings whose relative stock interest in SF Holdings is
minimal and who exercises no control over corporate affairs suffers a
reduction in his proportionate interest in SF Holdings (including any
ownership of Exchangeable Preferred Stock, Class C Common Stock and any
shares constructively owned), that shareholder should be regarded as having
suffered a meaningful reduction in his interest in SF Holdings.
If the redemption is not treated as a distribution taxable as a dividend,
the redemption of the New Shares for cash would result in taxable gain or
loss equal to the difference between the amount of cash received and the
holder's adjusted tax basis in the New Shares redeemed. Such gain or loss
would be capital gain or loss and would be long-term capital gain or loss if
the holding period for the New Shares exceeded one year. The most favorable
tax rate on long-term capital gains of individual holders (generally 20%)
will not be available unless the holding period exceeds 18 months.
A redemption of New Shares by exchange for Subordinated Notes will be
subject to the same general rules as a redemption for cash, except that U.S.
Holder's capital gain or loss would be equal to the difference between the
issue price of the Subordinated Notes and the holder's adjusted tax basis in
the New Shares. The "issue price" of the Subordinated Notes would be
determined in the manner described below for purposes of computing original
issue discount (if any) on the Subordinated Notes. See "--Original Issue
Discount."
If a redemption of New Shares is treated as a distribution that is taxable
as a dividend, the holder's adjusted tax basis in the redeemed New Shares
will be transferred to any remaining stock holdings in SF Holdings. To the
extent a redemption of New Shares constitutes a dividend, it may constitute
an "extraordinary dividend" to a corporate holder to which special rules will
apply. See "--Distributions on the New Shares."
ORIGINAL ISSUE DISCOUNT OF SUBORDINATED NOTES
If the stated redemption price at maturity of Subordinated Notes issued in
exchange for New Shares exceeds their issue price by more than a de minimis
amount, the Subordinated Notes will be treated as having original issue
discount ("OID") equal to the entire amount of such excess. OID will
generally be considered de minimis as long as it is less than 1/4 of 1% of
the stated redemption price at maturity of the Subordinated Notes multiplied
by the number of complete years to maturity. If the Subordinated Notes are
deemed to be traded on an established securities market on or at any time
during the 60-day period ending 30 days after their issue date, the issue
price of the Subordinated Notes will be their fair market value as determined
as of the issue date. Similarly, if the New Shares, but not the Subordinated
Notes
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issued in exchange therefor, is deemed to be traded on an established
securities market at the time of the exchange, then the issue price of each
Subordinated Notes should be the fair market value of the New Shares
exchanged therefor at the time of the exchange. Subject to certain
limitations described in Treasury regulations, the Subordinated Notes or the
New Shares generally will be deemed to be traded on an established securities
market if, among other things, price quotations are readily available from
dealers, brokers or traders or the security appears on a system of general
circulation that provides a reasonable basis to determine fair market value
based either on recent price quotations or recent sales transactions. In the
event that neither the New Shares nor the Subordinated Notes are deemed to be
traded on an established securities market, the issue price of the
Subordinated Notes will be their stated principal amount or, in the event the
Subordinated Notes do not bear "adequate stated interest" within the meaning
of section 1274 of the Code, their "imputed principal amount," which is
generally the sum of the present values of all payments due under the
Subordinated Notes, discounted from the date of payment to their issue date
at the appropriate "applicable federal rate."
The stated redemption price at maturity of the Subordinated Notes would
equal the total of all payments required to be made thereon, other than
payments of qualified stated interest. Qualified stated interest generally is
stated interest that is unconditionally payable in cash or other property
(other than debt instruments of the issuer) at least annually at a single
fixed rate. Therefore, Subordinated Notes that are issued when SF Holdings
has the option to pay interest in additional Subordinated Notes thereon
should be treated as having been issued without any qualified stated
interest. In such case, the sum of all interest payable pursuant to the
stated interest rate on such Subordinated Notes over the entire term should
be treated as OID and accrued into income under a constant yield method
regardless of the holder's regular accounting method, and the holder should
not treat the receipt of stated interest or additional Subordinated Notes as
interest for federal income tax purposes.
A portion of the adjusted issue price of a holder's Subordinated Notes
must be allocated to additional Subordinated Notes issued in payment of
interest thereon in proportion to their respective principal amounts. That
is, the initial Subordinated Notes and the additional Subordinated Notes will
have the same adjusted issue price and inherent amount of OID per dollar of
principal amount and will be treated as having the same yield to maturity.
Similar treatment will be applied when further additional Subordinated Notes
are issued.
Each U.S. Holder of a Subordinated Note will be required to include in
gross income an amount equal to the sum of the "daily portions" of the OID
for all days during the taxable year in which such holder holds the
Subordinated Note. The daily portions of OID required to be included in a
holder's gross income in a taxable year will be determined under a
constant-yield method by allocating to each day during the taxable year in
which the holder holds the Subordinated Notes a pro rata portion of the OID
thereon which is attributable to the "accrual period" in which such day is
included. The amount of the OID attributable to each accrual period will be
the product of the "adjusted issue price" of the Subordinated Note at the
beginning of such accrual period multiplied by the "yield to maturity" of the
Subordinated Note (properly adjusted for the length of the accrual period).
The adjusted issue price of a Subordinated Note at the beginning of an
accrual period is the original issue price of the Subordinated Note increased
by the aggregate amount of OID that has accrued in all prior accrual periods
and reduced by any cash payments previously made on the Subordinated Note.
The "yield to maturity" is the discount rate that, when used in computing the
present value of all principal and interest payments to be made under the
Subordinated Note, produces an amount equal to the issue price of the
Subordinated Note. An "accrual period" may be of any length and may vary in
length over the term of the debt instrument, provided that each accrual
period is no longer than one year and each scheduled payment of principal or
interest occurs on either the final day or the first day of an accrual
period.
In the event the Subordinated Notes are not issued with OID, because they
are issued at a time when SF Holdings does not have the option to defer
paying interest thereon and the redemption price of the Subordinated Notes
does not exceed their issue price by more than a de minimis amount, stated
interest should be included in income by a U.S. Holder in accordance with its
regular method of accounting.
BOND PREMIUM ON SUBORDINATED NOTES
If the New Shares are exchanged for Subordinated Notes and the issue price
of the Subordinated Notes (as determined above) exceeds the amount payable at
the maturity date (or earlier call date, if
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appropriate) of the Subordinated Notes, such excess will be deductible by the
U.S. Holder of the Subordinated Notes as amortizable bond premium over the
term of the Subordinated Notes (taking into account earlier call dates, as
appropriate), under a yield-to-maturity formula, only if an election by the
holder under section 171 of the Code is made or is already in effect. An
election under section 171 is available only if the Subordinated Notes are
held as capital assets. This election is revocable only with the consent of
the Internal Revenue Service (the "IRS") and applies to all obligations owned
or subsequently acquired by the holder. To the extent the excess is deducted
as amortizable bond premium, the U.S. Holder's adjusted tax basis in the
Subordinated Notes will be reduced.
REDEMPTION OR SALE OF SUBORDINATED NOTES
Generally, any redemption or sale of Subordinated Notes by a U.S. Holder
would result in taxable gain or loss equal to the difference between the
amount of cash received (except to the extent that cash received is
attributable to accrued interest) and the U.S. Holder's tax basis in the
Subordinated Notes. The tax basis of a U.S. Holder who received a
Subordinated Note in exchange for New Shares will generally be equal to the
issue price of the Subordinated Note on the date the Subordinated Note is
issued, increased by any OID on the Subordinated Note included in the
holder's income prior to sale or redemption of the Subordinated Note, and
reduced by any amortizable bond premium applied against the holder's income
prior to sale or redemption of the Subordinated Note. Such gain or loss would
be capital gain or loss and would be long-term capital gain or loss if the
holding period exceeded one year. Special rules may apply to U.S. Holders who
acquired their Subordinated Notes at a discount (i.e., market discount) in
the secondary market. Such U.S. Holders are urged to consult their tax
advisors regarding the consequences to them of a redemption or sale of (and
of holding) Subordinated Notes.
APPLICABLE HIGH YIELD DISCOUNT OBLIGATIONS
Pursuant to section 163 of the Code, the "disqualified portion" of the OID
accruing on certain debt instruments may be treated as a dividend eligible
for the dividends-received deduction by corporate U.S. Holders. The
corporation issuing such debt instrument would not be entitled to deduct this
"disqualified portion" of the OID accruing on such debt instrument and would
be allowed to deduct the remainder of the OID only when paid.
This treatment would apply to "applicable high yield discount obligations"
("AHYDO"), which generally are debt instruments that have a term of more than
five years, have a yield to maturity that equals or exceeds five percentage
points over the "applicable federal rate" and have "significant" OID. A debt
instrument is treated as having "significant" OID if the aggregate amount
that would be includible in gross income with respect to such debt instrument
for periods before the close of any accrual period ending five years or more
after the date of issue exceeds the sum of (i) the aggregate amount of
interest to be paid in cash under the debt instrument before the close of
such accrual period and (ii) the product of the initial issue price of such
debt instrument and its yield to maturity. For purposes of determining
whether a Subordinated Note is an AHYDO, U.S. Holders are bound by SF
Holdings' determination of the appropriate accrual period. It is impossible
to determine at the present time whether a Subordinated Note will be treated
as an AHYDO.
If a Subordinated Note is treated as an AHYDO, a corporate U.S. Holder
would be treated as receiving dividend income (to the extent of SF Holdings'
current or accumulated earnings and profits), solely for purposes of the
dividends-received deduction, in an amount equal to the "dividend equivalent
portion" of the disqualified portion" of the OID of such AHYDO. The
"disqualified portion" of the OID is equal to the lesser of (i) the amount of
the OID or (ii) the portion of the "total return" on such obligation (the
excess of all payments to be made with respect to such obligation over its
issue price) that bears the same ratio to the obligation's total return as
the "disqualified yield" (the extent to which the yield exceeds the
applicable federal rate plus 6%) bears to the obligation's yield to maturity.
The dividend equivalent portion of the disqualified portion is the amount
thereof that would be treated as a dividend if distributed by the issuer with
respect to its stock.
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PROPOSED LEGISLATION
On February 2, 1998, the Clinton Administration released a budget proposal
(the "1998 Budget Proposal"). The 1998 Budget Proposal contains certain
revenue-raising items in the form of proposed tax law changes. Among these
proposed tax law changes are several items that, if enacted into law
substantially as proposed, would affect the tax treatment of corporate
holders of New Shares. U.S. Holders are urged to consult their own tax
advisors regarding the possible effects of this proposed legislation.
TAX CONSEQUENCES TO NON-U.S. HOLDERS
DIVIDENDS ON THE NEW SHARES
Dividends paid to a Non-U.S. Holder of New Shares that are not effectively
connected with the conduct by the Non-U.S. Holder of a trade or business
within the United States will be subject to United States federal income tax,
which generally will be withheld at a rate of 30% of the gross amount of the
dividends unless the rate is reduced by an applicable income tax treaty.
Under currently applicable Treasury regulations, dividends paid to an address
in a country other than the United States are presumed to be paid to a
resident of such country for purposes of the withholding discussed above
(unless the payor has knowledge to the contrary) and, under the current
interpretation of Treasury regulations, for purposes of determining the
applicability of a tax treaty rate. However, under the New Withholding
Regulations (defined below), a Non-U.S. Holder of New Shares who wishes to
claim the benefit of an applicable treaty rate would be required to satisfy
certain certification and other requirements. In addition, under the New
Withholding Regulations, SF Holdings may elect to withhold only on the
portion of dividend distributions paid out of accumulated and reasonably
estimated current earnings and profits of SF Holdings.
Dividends paid to a Non-U.S. Holder of New Shares that are effectively
connected with a United States trade or business conducted by such Non-U.S.
Holder are taxed at the graduated rates applicable to United States citizens,
resident aliens and domestic corporations, and are not subject to withholding
tax if the Non-U.S. Holder gives an appropriate statement to SF Holdings or
its paying agent in advance of the dividend payment. In addition to the
graduated tax described above, effectively connected dividends received by a
Non-U.S. Holder that is a corporation may also be subject to an additional
branch profits tax at a rate of 30% (or such lower rate as may be specified
by an applicable income tax treaty).
INTEREST ON THE SUBORDINATED NOTES
Interest and previously accrued OID paid by SF Holdings to a Non-U.S.
Holder will not be subject to United States federal income or withholding tax
if such interest is not effectively connected with the conduct of a trade or
business within the United States by such Non-U.S. Holder and such Non-U.S.
Holder (i) does not actually or constructively own 10% or more of the total
combined voting power of all classes of stock of SF Holdings, (ii) is not a
controlled foreign corporation with respect to which SF Holdings is a
"related person" within the meaning of the Code and (iii) certifies, under
penalties of perjury, that such holder is not a United States person and
provides such holder's name and address.
Interest and previously accrued OID paid to a Non-U.S. Holder of the
Subordinated Notes that is effectively connected with a United States trade
or business conducted by such Non-U.S. Holder is taxed at the graduated rates
applicable to United States citizens, resident aliens and domestic
corporations, and are not subject to withholding tax if the Non-U.S. Holder
gives an appropriate statement to SF Holdings or its paying agent in advance
of the interest payment. In addition to the graduated tax, effectively
connected interest received by a Non-U.S. Holder that is a corporation may
also be subject to an additional branch profits tax at a rate of 30% (or such
lower rate as may be specified by an applicable income tax treaty).
GAIN ON DISPOSITION OF THE NEW SHARES AND SUBORDINATED NOTES
A Non-U.S. Holder will generally not be subject to United States federal
income tax on gain recognized on a sale, redemption or other disposition of a
Subordinated Note unless (i) the gain is
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effectively connected with the conduct of a trade or business within the
United States by the Non-U.S. Holder or (ii) in the case of a Non-U.S. Holder
who is a nonresident alien individual, such holder is present in the United
States for 183 or more days in the taxable year and certain other
requirements are met.
A Non-U.S. Holder generally will not be subject to United States federal
income tax or withholding on gain recognized upon the sale or other
disposition of New Shares unless: (i) the gain is effectively connected with
the conduct of a trade or business within the United States by the Non-U.S.
Holder, (ii) in the case of a Non-U.S. Holder who is a nonresident alien
individual, such holder is present in the United States for 183 or more days
in the taxable year and certain other conditions are met, or (iii) the New
Shares constitute a United States real property interest by reason of SF
Holdings' status as a "United States real property holding corporation"
("USRPHC") for federal income tax purposes at any time within the shorter of
the five-year period preceding such disposition of such Non-U.S. Holder's
holding period for such New Shares. SF Holdings does not believe that it is
or it will become a USRPHC for federal income tax purposes.
If a Non-U.S. Holder falls under clause (i) in the two preceding
paragraphs or clause (iii) in the preceding paragraph, the holder will be
taxed on the net gain derived from the sale under the graduated United States
federal income tax rates that are applicable to United States citizens,
resident aliens and domestic corporations, as the case may be, and may be
subject to withholding under certain circumstances (and, with respect to
corporate Non-U.S. Holders, may also be subject to the branch profits tax
described above). If an individual Non-U.S. Holder falls under clause (ii) in
the two preceding paragraphs, the holder generally will be subject to United
States federal income tax at a rate of 30% on the gain derived from the sale
and may be subject to withholding under certain circumstances.
FEDERAL ESTATE TAXES
If interest on the Subordinated Notes is exempt from withholding of United
States federal income tax under the rules described above, the Subordinated
Notes will not be included in the estate of a deceased Non-U.S. Holder for
United States federal estate tax purposes. An individual Non-U.S. Holder who
owns, or is treated as owning, New Shares at the time of his or her death or
has made certain lifetime transfers of an interest in New Shares will be
required to include the value of such New Shares in his or her gross estate
for United States federal income tax purposes, unless an applicable estate
tax treaty provides otherwise.
NEW WITHHOLDING REGULATIONS
The Treasury Department recently promulgated final regulations regarding
the withholding and information reporting rules applicable to Non-U.S.
Holders (the "New Withholding Regulations"). In general, the New Withholding
Regulations do not significantly alter the substantive withholding and
information reporting requirements but rather unify current certification
procedures and forms and clarify reliance standards. The New Withholding
Regulations are generally effective for payments made after December 31,
1999, subject to certain transition rules. NON-U.S. HOLDERS SHOULD CONSULT
THEIR OWN TAX ADVISORS WITH RESPECT TO THE IMPACT, IF ANY, OF THE NEW
WITHHOLDING REGULATIONS.
INFORMATION REPORTING AND BACKUP WITHHOLDING
SF Holdings will, where required, report to the U.S. Holders of New Shares
and Subordinated Notes and to the IRS the amount of any interest (including
OID) paid on the Subordinated Notes and the amount of dividends paid on New
Shares in each calendar year and the amounts of tax withheld, if any, with
respect to such payments.
A U.S. Holder of New Shares or Subordinated Notes may be subject to backup
withholding at a rate of 31% with respect to dividends paid on New Shares,
interest on Subordinated Notes and gross proceeds upon sale or retirement of
the New Shares, unless such holder: (i) is a corporation or other exempt
recipient and, when required, demonstrates that fact; or (ii) provides a
correct taxpayer identification
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number, certifies, when required, that such holder is not subject to backup
withholding and otherwise complies with applicable requirements of the backup
withholding rules. Backup withholding is not an additional tax; any amounts
so withheld are creditable against the holder's federal income tax, provided
the required information is provided to the IRS.
A Non-U.S. Holder of New Shares or Subordinated Notes may also be subject
to certain information reporting or backup withholding if certain requisite
certification is not received or other exemptions do not apply.
THE U.S. FEDERAL INCOME TAX DISCUSSION SET FORTH ABOVE IS INTENDED FOR
GENERAL INFORMATION ONLY AND MAY NOT BE APPLICABLE TO A PARTICULAR HOLDER'S
SITUATION. PERSONS CONSIDERING A PURCHASE OF THE SHARES ARE URGED TO CONSULT
THEIR OWN TAX ADVISORS REGARDING THE PARTICULAR TAX CONSEQUENCES OF
PURCHASING, OWNING AND DISPOSING OF THE SHARES, INCLUDING THE TAX
CONSEQUENCES UNDER STATE, LOCAL OR FOREIGN LAWS AND THE POSSIBLE EFFECTS OF
CHANGES (POSSIBLY INCLUDING RETROACTIVE CHANGES) IN STATE, LOCAL, FOREIGN AND
U.S. FEDERAL TAX LAWS.
PLAN OF DISTRIBUTION
Based on interpretations by the staff of the Commission set forth in
no-action letters issued to third parties, SF Holdings believes that New
Shares issued pursuant to the Exchange Offer to an Eligible Holder in
exchange for Old Shares may be offered for resale, resold and otherwise
transferred by such Eligible Holder (other than (i) a broker-dealer who
purchased the Old Shares directly from SF Holdings 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 SF Holdings 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 Shares 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
Shares.
Each broker-dealer that holds Old Shares which were acquired for its own
account as a result of market-making activities or other trading activities
(other than Old Shares acquired directly from SF Holdings or an affiliate of
SF Holdings), may exchange the Old Shares for New Shares 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 Shares 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. SF Holdings 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.
SF Holdings will not receive any proceeds from any sale of the New Shares
by broker-dealers. New Shares 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 Shares 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
Shares. Any broker-dealer that resells New Shares 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 Shares may be deemed to be an
"underwriter' within the meaning of the Securities Act and any profit on any
such resale of New Shares 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.
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By acceptance of the Exchange Offer, each broker-dealer and holder that
receives New Shares pursuant to the Exchange Offer hereby agrees to notify SF
Holdings prior to using the Prospectus in connection with the sale or
transfer of New Shares, and each broker-dealer and holder agrees that upon
receipt of any notice from SF Holdings 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 Shares until
such broker-dealer or holder (i) receives copies of a supplemental prospectus
or (ii) is advised in writing by SF Holdings 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 SF Holdings's request
and at its expense, each holder will deliver to SF Holdings all copies, other
than permanent file copies in such Holder's possession, of the Prospectus
covering such New Shares that was current at the time of receipt of such
Notice.
LEGAL MATTERS
The legality of the New Shares being offered hereby will be passed upon
for the Company by Kramer, Levin, Naftalis & Frankel, New York, New York.
EXPERTS
The financial statements of Fonda as of July 28, 1996 and July 27, 1997,
and for each of the three years in the period ended July 27, 1997 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 Sweetheart as of September 30, 1996 and 1997,
and for each of the three years in the period ended September 30, 1997
included in this Prospectus have been audited by Arthur Andersen LLP,
independent public accountants, 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.
CHANGE IN CERTIFYING ACCOUNTANTS
On April 29, 1998, Sweetheart's Board of Directors appointed Deloitte &
Touche LLP as its certifying accountants replacing Arthur Andersen LLP (the
"Former Accountants").
During Sweetheart's two most recent fiscal years and the subsequent
interim period through April 29, 1998, 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. Neither of the Former Accountants' reports on
Sweetheart's financial statements for the fiscal years ended September 30,
1996 or 1997 contained an adverse opinion or disclaimer of opinion, or was
qualified or modified as to uncertainty, audit scope, or accounting
principles.
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UNAUDITED PRO FORMA CONDENSED FINANCIAL DATA OF SWEETHEART AND FONDA
The Sweetheart Pro Forma Statements of Operations have been derived from
Sweetheart's historical statements of operations for the fiscal year ended
September 30, 1997 and the nine and twelve months ended March 31, 1998, and
give effect to (i) the Sweetheart Bakery Disposition and (ii) the Sweetheart
Closures, as if each such transaction had occurred on the first day of
Sweetheart's fiscal year ended September 30, 1997. The Sweetheart Pro Forma
Statement of Operations for the nine months ended March 31, 1998 combines the
first half of Fiscal 1998 and the fourth quarter of Fiscal 1997. The Fonda
Pro Forma Statements of Income have been derived from Fonda's historical
statements of income for the fiscal year ended July 27, 1997 and the nine and
twelve months ended April 26, 1998, and give effect to (i) the 1997 Fonda
Acquisitions, (ii) the February 24, 1997 issuance of the Fonda Notes, (iii)
the Leisureway Acquisition and (iv) the Natural Dam Mill Disposition, as if
each such transaction had occurred on the first day of Fonda's fiscal year
ended July 27, 1997.
SWEETHEART UNAUDITED PRO FORMA CONDENSED
STATEMENT OF OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30, 1997
---------------------------------------------------------
HISTORICAL BAKERY OTHER SWEETHEART
SWEETHEART DISPOSITION (A) ADJUSTMENTS PRO FORMA
------------ --------------- ------------- ------------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales .......................... $886,017 $(31,652) $854,365
Cost of sales ...................... 821,021 (28,946) $(5,472)(b) 786,603
------------ --------------- ------------- ------------
Gross profit ...................... 64,996 (2,706) 5,472 67,762
------------ --------------- ------------- ------------
Selling, general and administrative
expenses .......................... 66,792 (1,164) 65,628
Loss on asset disposal and
impairment ........................ 24,550 -- 24,550
Restructuring charges .............. 9,680 -- (9,680)(b) --
Other income, net .................. (73) -- (73)
------------ --------------- ------------- ------------
Income (loss) from operations .... (35,953) (1,542) 15,152 (22,343)
Interest expense, net .............. 40,265 -- 40,265
------------ --------------- ------------- ------------
Income (loss) before taxes,
cumulative effect of an accounting
change and extraordinary loss .... (76,218) (1,542) 15,152 (62,608)
Income tax (benefit) expense (c) .. (30,487) (617) 6,061 (25,043)
------------ --------------- ------------- ------------
Income (loss) before cumulative
effect of an accounting change and
extraordinary loss ................ $(45,731) $ (925) $ 9,091 $(37,565)
============ =============== ============= ============
OTHER GAAP FINANCIAL DATA:
Cash interest expense (d) .......... $ 38,241 $ 38,241
Capital expenditures ............... 47,757 $ (1,568) 46,189
Depreciation and amortization (e) . 44,152 (888) $ (88) 43,176
OTHER NON-GAAP FINANCIAL DATA:
Adjusted Sweetheart EBITDA (f) .... $ 43,976 $ 46,930
Ratio of Adjusted Sweetheart EBITDA
to cash interest expense (f)(d) .. 1.1x 1.2x
</TABLE>
See Notes to Sweetheart Unaudited Pro Forma Condensed Statements of
Operations.
P-1
<PAGE>
SWEETHEART UNAUDITED PRO FORMA CONDENSED
STATEMENT OF OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED MARCH 31, 1998
----------------------------------------------------------
HISTORICAL BAKERY OTHER SWEETHEARTS
SWEETHEART DISPOSITION (A) ADJUSTMENTS PRO FORMA
------------ --------------- ------------- -------------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales .......................... $629,117 $(12,158) $616,959
Cost of sales ...................... 588,129 (10,800) $ (1,729)(b) 575,600
------------ --------------- ------------- -------------
Gross profit ...................... 40,988 (1,358) 1,729 41,359
------------ --------------- ------------- -------------
Selling, general and administrative
expenses .......................... 55,668 (461) 55,207
Loss on asset disposal and
impairment ........................ 24,550 -- 24,550
Restructuring charges .............. 20,207 -- (20,207)(b) --
Other (income) expense, net ....... 5,842 -- (8,147) (2,305)
------------ --------------- ------------- -------------
Income (loss) from operations .... (65,279) (897) 30,083 (36,093)
Interest expense, net .............. 32,133 -- 32,133
------------ --------------- ------------- -------------
Income (loss) before taxes,
cumulative effect of an accounting
change and extraordinary loss .... (97,412) (897) 30,083 (68,226)
Income tax (benefit) expense (c) .. (38,962) (359) 12,033 (27,288)
------------ --------------- ------------- -------------
Income (loss) before cumulative
effect of an accounting change and
extraordinary loss ................ $(58,450) $ (538) $ 18,050 $(40,938)
============ =============== ============= =============
OTHER GAAP FINANCIAL DATA:
Cash interest expense (d) .......... $(30,675) $ 30,675
Capital expenditures ............... 30,596 $ (341) 30,255
Depreciation and amortization (e) . 32,868 (305) $ (22) 32,541
OTHER NON-GAAP FINANCIAL DATA:
Adjusted Sweetheart EBITDA (f) .... $ 17,911 $ 18,418
Ratio of Adjusted Sweetheart EBITDA
to cash interest expense (f)(d) .. 0.6x 0.6x
</TABLE>
See Notes to Sweetheart Unaudited Pro Forma Condensed Statements of
Operations.
P-2
<PAGE>
SWEETHEART UNAUDITED PRO FORMA CONDENSED
STATEMENT OF OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED MARCH 31, 1998
---------------------------------------------------------
HISTORICAL BAKERY OTHER SWEETHEART
SWEETHEART DISPOSITION (A) ADJUSTMENTS PRO FORMA
------------ --------------- ------------- ------------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales .......................... $881,078 $(23,643) $857,435
Cost of sales ...................... 809,456 (21,859) $ (3,436)(b) 784,161
------------ --------------- ------------- ------------
Gross profit ...................... 71,622 (1,784) 3,436 73,274
------------ --------------- ------------- ------------
Selling, general and administrative
expenses .......................... 72,001 (845) 71,156
Loss on asset disposal and
impairment ........................ 24,550 -- 24,550
Restructuring charges .............. 20,207 -- (20,207)(b) --
Other (income) expense, net ....... 5,505 -- (8,147) (2,642)
------------ --------------- ------------- ------------
Income (loss) from operations .... (50,641) (939) 31,790 (19,790)
Interest expense, net .............. 42,262 -- 42,262
------------ --------------- ------------- ------------
Income (loss) before taxes,
cumulative effect of an accounting
change and extraordinary loss .... (92,903) (939) 31,790 (62,052)
Income tax (benefit) expense (c) .. (37,159) (376) 12,717 (24,818)
------------ --------------- ------------- ------------
Income (loss) before cumulative
effect of an accounting change and
extraordinary loss ................ $(55,744) $ (563) $ 19,073 $(37,234)
============ =============== ============= ============
OTHER GAAP FINANCIAL DATA:
Cash interest expense (d) .......... $ 40,570 $ 40,570
Capital expenditures ............... 43,210 $ (655) 42,555
Depreciation and amortization (e) . 44,087 (668) $ (44) 43,375
OTHER NON-GAAP FINANCIAL DATA:
Adjusted Sweetheart EBITDA (f) .... $ 44,436 $ 46,223
Ratio of Adjusted Sweetheart EBITDA
to cash interest expense (f)(d) ... 1.1x 1.1x
</TABLE>
See Notes to Sweetheart Unaudited Pro Forma Condensed Statements of
Operations.
P-3
<PAGE>
NOTES TO SWEETHEART UNAUDITED PRO FORMA CONDENSED STATEMENTS OF OPERATIONS
(a) Reflects the elimination of the results of operations of Sweetheart's
bakery operations as a result of the Sweetheart Bakery Disposition.
(b) Reflects the elimination of certain costs as a result of the Sweetheart
Closures, as well as the elimination of the restructuring charges and
other one-time charges incurred in connection therewith.
(c) For pro forma purposes, the income tax provision was calculated at 40%
based on enacted statutory rates applied to pro forma pre-tax income
and the provision of SFAS No. 109.
(d) Cash interest expense consists of interest expense, excluding
amortization of deferred financing costs of $3,571, $2,336 and $3,240
for Fiscal 1997 and the nine and twelve months ended March 31, 1998,
respectively.
(e) Depreciation and amortization excludes amortization of debt issuance
costs which are included in interest expense.
(f) Adjusted Sweetheart EBITDA represents income (loss) from operations,
before interest expense, provision for income taxes, depreciation and
amortization, loss on asset disposal and impairment, restructuring
expenses, the Sweetheart Reduction which represents one-time charges of
$8,147 associated with the Sweetheart Investment and the gain on the
Sweetheart Bakery Disposition of $3,459 in the nine and twelve month
periods ended March 31, 1998. EBITDA is generally accepted as providing
information regarding a company's ability to service debt. Adjusted
Sweetheart 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.
P-4
<PAGE>
FONDA UNAUDITED PRO FORMA CONDENSED
STATEMENT OF INCOME
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED JULY 27, 1997
------------------------------------------------------------------------
NATURAL DAM
FONDA MILL ACQUISITIONS OTHER FONDA PRO
HISTORICAL DISPOSITION (A) HISTORICAL (B) ADJUSTMENTS FORMA
------------ --------------- -------------- ------------- -----------
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Net sales .......................... $252,513 $(19,340) $29,677 $262,850
Cost of goods sold ................. 196,333 (13,114) 21,595 $ 90(c) 204,904
------------ --------------- -------------- ------------- -----------
Gross profit ....................... 56,180 (6,226) 8,082 (90) 57,946
------------ --------------- -------------- ------------- -----------
Selling, general and administrative
expenses .......................... 37,168 (2,125) 5,908 (1,561)(d) 39,390
Other income, net .................. (1,608) -- -- (1,608)
------------ --------------- -------------- ------------- -----------
Income from operations ............. 20,620 (4,101) 2,174 1,471 20,164
Interest expense, net .............. 9,017 -- -- 3,067(e) 12,084
------------ --------------- -------------- ------------- -----------
Income before taxes and
extraordinary loss ................ 11,603 (4,101) 2,174 (1,596) 8,080
Income taxes (f) ................... 4,872 (1,722) 913 (670) 3,393
------------ --------------- -------------- ------------- -----------
Income before extraordinary loss .. $ 6,731 $ (2,379) $ 1,261 $ (926) $ 4,687
============ =============== ============== ============= ===========
OTHER GAAP FINANCIAL DATA:
Cash interest expense (g) .......... $ 8,309 $ 11,520
Capital expenditures ............... 10,363 $ (8,601) 1,762
Depreciation and amortization (h) . 4,440 (171) $ 351 $ 786 5,406
OTHER NON-GAAP FINANCIAL DATA:
Adjusted Fonda EBITDA (i) .......... $ 23,942 $ 23,962
Ratio of Adjusted Fonda EBITDA to
cash interest expense (i)(g) ..... 2.9x 2.1x
</TABLE>
See Notes to Fonda Unaudited Pro Forma Condensed Statement of Income.
P-5
<PAGE>
FONDA UNAUDITED PRO FORMA CONDENSED
STATEMENT OF INCOME
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED APRIL 26, 1998
------------------------------------------------------------------------
NATURAL
FONDA DAM MILL ACQUISITIONS OTHER FONDA
HISTORICAL DISPOSITION (A) HISTORICAL (B) ADJUSTMENTS PRO FORMA
------------ --------------- -------------- ------------- -----------
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Net sales .......................... $203,597 $(13,152) $4,292 $194,737
Cost of goods sold ................. 167,520 (11,464) 3,253 35(c) 159,344
------------ --------------- -------------- ------------- -----------
Gross profit ....................... 36,077 (1,688) 1,039 (35) 35,393
------------ --------------- -------------- ------------- -----------
Selling, general and administrative
expenses .......................... 26,003 (775) 930 (130)(d) 26,028
Other income, net................... (9,566) -- -- -- (9,566)
Income from operations ............. 19,640 (913) 109 95 18,931
Interest expense, net .............. 9,151 -- -- 9,151
------------ --------------- -------------- ------------- -----------
Income before taxes and
extraordinary loss ................ 10,489 (913) 109 95 9,780
Income taxes (f) ................... 4,406 (383) 46 40 4,109
------------ --------------- -------------- ------------- -----------
Income before extraordinary loss .. $ 6,083 $ (530) $ 63 $ 55 $ 5,671
============ =============== ============== ============= ===========
OTHER GAAP FINANCIAL DATA:
Cash interest expense (g) .......... $ 9,071 $ 8,738
Capital expenditures ............... 6,245 $ (2,385) 3,860
Depreciation and amortization (h) . 4,153 (103) $ 23 $ 140 4,213
OTHER NON-GAAP FINANCIAL DATA:
Adjusted Fonda EBITDA (i) .......... $ 14,560 $ 13,578
Ratio of Adjusted Fonda EBITDA to
cash interest expense (i)(g) ..... 1.6x 1.6x
</TABLE>
See Notes to Fonda Unaudited Pro Forma Condensed Statement of Income.
P-6
<PAGE>
FONDA UNAUDITED PRO FORMA CONDENSED
STATEMENT OF INCOME
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED APRIL 26, 1998
------------------------------------------------------------------------
NATURAL
FONDA DAM MILL ACQUISITIONS OTHER FONDA
HISTORICAL DISPOSITION (A) HISTORICAL (B) ADJUSTMENTS PRO FORMA
------------ --------------- -------------- ------------- -----------
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Net sales .......................... $271,566 $(18,682) $9,035 $261,919
Cost of goods sold ................. 215,033 (15,072) 6,867 53(c) 206,881
------------ --------------- -------------- ------------- -----------
Gross profit ....................... 56,533 (3,610) 2,168 (53) 55,038
------------ --------------- -------------- ------------- -----------
Selling, general and administrative
expenses .......................... 39,043 (1,298) 1,639 (67)(d) 39,317
Other income, net .................. (11,174) -- -- (11,174)
------------ --------------- -------------- ------------- -----------
Income from operations ............. 28,664 (2,312) 529 14 26,895
Interest expense, net .............. 11,370 -- -- 346(e) 11,716
------------ --------------- -------------- ------------- -----------
Income before taxes and
extraordinary loss ................ 17,294 (2,312) 529 (332) 15,179
Income taxes (f) ................... 7,263 (970) 222 (139) 6,376
------------ --------------- -------------- ------------- -----------
Income before extraordinary loss .. $ 10,031 $ (1,342) $ 307 $(193) $ 8,803
============ =============== ============== ============= ===========
OTHER GAAP FINANCIAL DATA:
Cash interest expense (g) .......... $ 11,456 $ 11,152
Capital expenditures ............... 13,139 $ (8,899) 4,240
Depreciation and amortization (h) . 5,118 220 $ 91 $ 381 5,810
OTHER NON-GAAP FINANCIAL DATA:
Adjusted Fonda EBITDA (i) .......... $ 23,431 $ 21,531
Ratio of Adjusted Fonda EBITDA to
cash interest expense (i)(g) ..... 2.0x 1.9x
</TABLE>
See Notes to Fonda Unaudited Pro Forma Condensed Statement of Income.
P-7
<PAGE>
NOTES TO FONDA UNAUDITED PRO FORMA CONDENSED STATEMENTS OF INCOME
(a) Reflects the elimination of the results of operations of the Natural
Dam mill as a result of the Natural Dam Mill Disposition.
(b) The results of operations of each entity acquired in the 1997 Fonda
Acquisitions and Leisureway Acquisition are included in Fonda's
historical results of operations commencing with such entity's
respective acquisition date. The adjustments reflect the additional
results of operations of the acquired entities as if such acquisitions
had occurred at the beginning of the year ended July 27, 1997.
(c) Reflects an increase in depreciation expense resulting from the
allocation of the purchase price to the long-term assets acquired based
on fair value and an average life ranging from 8 to 30 years.
(d) Reflects adjustments to general and administrative expenses resulting
from the 1997 Fonda Acquisitions and the Leisureway Acquisition, as
follows:
<TABLE>
<CAPTION>
NINE MONTHS TWELVE MONTHS
YEAR ENDED ENDED ENDED
JULY 27, 1997 APRIL 26, 1998 APRIL 26, 1998
--------------- -------------- --------------
<S> <C> <C> <C>
Goodwill amortization over twenty years:
1997 Fonda Acquisitions ..................... $ 440 $ 44
Leisureway Acquisition....................... 373 $ 155 249
Contractual reduction in officer
compensation:
1997 Fonda Acquisitions ..................... (1,439) --
Leisureway Acquisition ...................... (935) (285) (360)
--------------- -------------- --------------
$(1,561) $(130) $ (67)
=============== ============== ==============
</TABLE>
(e) Reflects (i) the elimination of interest income attributable to cash
used to finance a portion of the 1997 Fonda Acquisitions, (ii)
additional interest expense resulting from the issuance of the Fonda
Notes and borrowings under the Fonda Credit Facility to finance the
1997 Fonda Acquisitions and the Leisureway Acquisition and (iii) the
elimination of interest expense relating to indebtedness that was
repaid with a portion of the proceeds of the Fonda Notes and the
Natural Dam Mill Disposition.
(f) For pro forma purposes, the income tax provision was calculated at 42%
based on enacted statutory rates applied to pro forma pre-tax income
and the provisions of SFAS No. 109.
(g) Cash interest expense consists of interest expense, excluding
amortization of deferred financing costs of $564, $413 and $564 for
Fiscal 1997 and the nine and twelve months ended April 26, 1998,
respectively.
(h) Depreciation and amortization excludes amortization of deferred
financing costs, which are included in interest expense.
(i) Adjusted Fonda EBITDA represents income from operations before interest
expense, provision for income taxes, other income and depreciation and
amortization. EBITDA is generally accepted as providing information
regarding a company's ability to service debt. Adjusted Fonda 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.
Adjusted Fonda EBITDA does not reflect the elimination of $2.8 million
and $0.8 million of fixed costs in Fiscal 1997 and the twelve months
ended April 26, 1998, respectively, that would not have been incurred
had the Three Rivers and Long Beach facilities been closed at the
beginning of the year ended July 27, 1997.
P-8
<PAGE>
SF HOLDINGS GROUP, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
<S> <C>
PAGE
THE FONDA GROUP, INC.:
Independent Auditors' Report ................................................................. F-2
Balance Sheets as of July 28, 1996 and July 27, 1997 and (unaudited) April 26, 1998 ......... F-3
Statements of Income for the Years Ended July 30, 1995, July 28, 1996 and July 27, 1997 and
(unaudited) the Nine Months Ended April 27, 1997 and April 26, 1998 ......................... F-4
Statements of Cash Flows for the Years Ended July 30, 1995, July 28, 1996 and July 27, 1997
and (unaudited) the Nine Months ended April 27, 1997 and April 26, 1998 ..................... F-5
Notes to Financial Statements................................................................. F-6
SWEETHEART HOLDINGS INC.:
Report of Independent Public Accountants ..................................................... F-18
Consolidated Balance Sheets as of September 30, 1996 and 1997 and (unaudited)
March 31, 1998 .............................................................................. F-19
Consolidated Statements of Operations for the Years Ended September 30, 1995, 1996 and 1997
and (unaudited) the Six Months Ended March 31, 1997 and 1998 ................................ F-20
Consolidated Statements of Cash Flows for the Years Ended September 30, 1995, 1996 and 1997
and (unaudited) the Six Months Ended March 31, 1997 and 1998 ................................ F-21
Consolidated Statements of Shareholders' Equity for the Years Ended September 30, 1995, 1996
and 1997 and (unaudited) the Six Months ended March 31, 1998 ................................ F-22
Notes to Financial Statements ................................................................ F-23
</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 27, 1997 and the related statements of income
and cash flows for each of the three years in the period ended July 27, 1997.
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 27, 1997 and the results of its operations and its cash flows for
each of the three years in the period ended July 27, 1997 in conformity with
generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Stamford, Connecticut
September 25, 1997
(July 1, 1998 as to Note 16)
F-2
<PAGE>
THE FONDA GROUP, INC.
BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
JULY 28, 1996 JULY 27, 1997 APRIL 26, 1998
--------------- --------------- --------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash ........................................... $ 1,467 $ 5,908 $ 3,655
Accounts receivable, less allowance for
doubtful accounts of $549, $961 and $569,
respectively .................................. 27,173 30,009 26,751
Due from affiliates ............................ 994 1,207 5,920
Inventories .................................... 37,467 40,834 38,450
Deferred income taxes .......................... 5,435 6,780 6,855
Refundable income taxes ........................ 822 1,657 --
Other current assets ........................... 1,160 4,178 1,212
--------------- --------------- --------------
Total current assets .......................... 74,518 90,573 82,843
Property, plant and equipment, net .............. 46,350 59,261 48,907
Goodwill, net ................................... 5,400 15,405 22,047
Other assets, net ............................... 9,900 14,365 24,877
--------------- --------------- --------------
TOTAL ASSETS .................................... $136,168 $179,604 $178,674
=============== =============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ............................... $ 14,671 $ 7,340 $ 11,634
Accrued expenses ............................... 14,893 24,611 21,706
Current maturities of long-term debt ........... 6,023 619 466
--------------- --------------- --------------
Total current liabilities ..................... 35,587 32,570 33,806
Long-term debt .................................. 81,740 122,368 122,443
Other liabilities ............................... 2,345 1,436 1,676
Deferred income taxes ........................... 2,444 6,144 7,368
--------------- --------------- --------------
Total liabilities ............................. 122,116 162,518 165,293
Redeemable common stock, $.01 par value, 7,000
shares issued, 7,000, 6,500 and zero shares
outstanding, respectively ...................... 2,179 2,076 --
Stockholders' equity ............................ 11,873 15,010 13,381
--------------- --------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ..... $136,168 $179,604 $178,674
=============== =============== ==============
</TABLE>
See notes to financial statements.
F-3
<PAGE>
THE FONDA GROUP, INC.
STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED NINE MONTHS ENDED
----------------------------------------------------------
JULY 30, JULY 28, JULY 27, APRIL 27, APRIL 26,
1995 1996 1997 1997 1998
---------- ---------- ---------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales ....................................... $97,074 $204,903 $252,513 $184,544 $203,597
Cost of goods sold .............................. 76,252 161,304 196,333 148,820 167,520
---------- ---------- ---------- ----------- -----------
Gross profit .................................. 20,822 43,599 56,180 35,724 36,077
Selling, general and administrative expenses ... 13,568 29,735 37,168 24,128 26,003
Other income, net ............................... -- -- (1,608) -- (9,566)
Management fee .................................. 544 -- -- -- --
---------- ---------- ---------- ----------- -----------
Income from operations ......................... 6,710 13,864 20,620 11,596 19,640
Interest expense (net of $490 interest income in
Fiscal 1997 and $333 in Fiscal 1998 nine
months) ........................................ 2,943 7,934 9,017 6,798 9,151
---------- ---------- ---------- ----------- -----------
Income before income taxes and extraordinary
loss ........................................... 3,767 5,930 11,603 4,798 10,489
Provision for income taxes ...................... 1,585 2,500 4,872 2,015 4,406
---------- ---------- ---------- ----------- -----------
Income before extraordinary loss ............... 2,182 3,430 6,731 2,783 6,083
Extraordinary loss from debt extinguishment, net -- -- 3,495 3,495 --
---------- ---------- ---------- ----------- -----------
Net income (loss) .............................. $ 2,182 $ 3,430 $ 3,236 $ (712) $ 6,083
========== ========== ========== =========== ===========
</TABLE>
See notes to financial statements.
F-4
<PAGE>
THE FONDA GROUP, INC.
STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED NINE MONTHS ENDED
----------------------------------------------------------
JULY 30, JULY 28, JULY 27, APRIL 27, APRIL 26,
1995 1996 1997 1997 1998
---------- ---------- ---------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Operating activities:
Net income (loss) ............................. $ 2,182 $ 3,430 $ 3,236 $ (712) $ 6,083
Adjustments to reconcile net income to net
cash provided by (used in) operating
activities:
Depreciation and amortization ................ 1,669 3,450 4,440 3,475 4,153
Amortization and write-off of debt issuance
costs ....................................... 560 1,021 2,640 2,634 413
Elimination of unamortized debt discount .... -- -- 2,108 2,108 --
Provision for doubtful accounts .............. 184 148 457 99 113
Deferred income taxes ........................ (1,690) 533 3,005 (910) 1,051
Gain on business disposition.................. -- -- -- -- (9,325)
Gain on sale of equipment .................... -- -- -- -- (446)
Interest capitalized on debt ................. -- 165 684 684 --
Changes in assets and liabilities (net of
business acquisitions and disposition):
Accounts receivable ......................... (6,543) 6,826 (2,007) (3,973) 2,153
Due from affiliates ......................... 464 (994) (213) 994 (4,713)
Inventories ................................. (6,648) (299) (1,178) (3,131) 1,673
Other current assets ........................ (309) (26) (3,273) 160 2,885
Accounts payable and accrued expenses ...... 3,840 8,782 (1,019) 466 (434)
Income taxes payable (refundable) ........... 3,029 (3,644) (1,280) (1,320) 3,218
Other ....................................... (1,512) (1,719) 673 105 (482)
---------- ---------- ---------- ----------- -----------
Net cash provided by (used in) operating
activities .................................. (4,774) 17,673 8,273 679 6,342
---------- ---------- ---------- ----------- -----------
Investing activities:
Capital expenditures .......................... (1,608) (1,314) (10,363) (3,469) (6,245)
Proceeds from business disposition............. -- -- -- -- 20,843
Proceeds from disposition of equipment ....... -- -- -- -- 574
Payments for business acquisitions ............ (27,985) (45,218) (23,043) (3,416) (6,901)
Payment for Management Services Agreement ..... -- -- -- -- (7,000)
Note receivable from affiliate ................ -- -- (2,600) (2,600) --
---------- ---------- ---------- ----------- -----------
Net cash provided by (used in) investing
activities ................................. (29,593) (46,532) (36,006) (9,485) 1,271
---------- ---------- ---------- ----------- -----------
Financing activities:
Net increase (decrease) in revolving credit
agreement .................................... (7,225) 14,745 (32,842) (32,842) 390
Proceeds from long-term debt .................. 47,520 18,803 120,000 120,000 --
Repayments of long-term debt .................. (3,638) (2,499) (49,879) (50,989) (468)
Debt issuance costs ........................... (2,395) (843) (4,902) (4,696 ) --
Acquisition of common stock ................... -- -- (203) -- (9,788)
---------- ---------- ---------- ----------- -----------
Net cash provided by (used in) financing
activities ................................... 34,262 30,206 32,174 31,473 (9,866)
---------- ---------- ---------- ----------- -----------
Net increase (decrease) in cash ................ (105) 1,347 4,441 22,667 (2,253)
Cash, beginning of period ...................... 225 120 1,467 1,467 5,908
---------- ---------- ---------- ----------- -----------
Cash, end of period ............................ $ 120 $ 1,467 $ 5,908 $ 24,134 $ 3,655
========== ========== ========== =========== ===========
Supplemental cash flow information:
Cash paid during the period for:
Interest, including $163 capitalized in
Fiscal 1997 and $192 in Fiscal 1998 nine
months ...................................... $ 2,114 $ 6,029 $ 5,018 $ 4,685 $ 7,484
Income taxes, net of refunds.................. -- 5,611 614 1,630 272
Businesses acquired:
Fair value of assets acquired ................ $ 37,777 $ 59,090 $ 23,637 $ 9,336
Cash paid .................................... 27,985 45,218 23,043 6,901
---------- ---------- ---------- -----------
Liabilities assumed (including notes payable
to sellers of $9,250 during Fiscal 1996) ... $ 9,792 $ 13,872 $ 594 $ 2,435
========== ========== ========== ===========
</TABLE>
See notes to financial statements.
F-5
<PAGE>
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 at such time. The remaining 4% of
the Company's common stock was distributed to American International Life
Insurance Company of New York ("AIG") (see Note 16).
2. SIGNIFICANT ACCOUNTING POLICIES
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.
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 1995, 1996 and 1997
fiscal years were fifty-two week periods ended July 30, 1995, July 28, 1996
and July 27, 1997, respectively.
INVENTORIES -- Inventories are valued at the lower of cost (first-in,
first-out method) or market.
PROPERTY, PLANT AND EQUIPMENT -- Property, plant and equipment is 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.
GOODWILL -- Goodwill represents the excess of the purchase price over the
fair value of tangible and identifiable intangible net assets acquired and is
amortized on a straight-line basis over twenty years. The carrying value of
goodwill is reviewed when facts and circumstances suggest that it may be
impaired. The Company assesses its recoverability by determining whether the
amortization of the goodwill balance over its remaining life can be recovered
through undiscounted projected future cash flows.
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 unamortized debt
issuance costs of $2.8 million at July 28, 1996 and $4.8 million at July 27,
1997 incurred in connection with obtaining financing which are being
amortized over the terms of the respective borrowing agreements.
FAIR VALUE OF FINANCIAL INSTRUMENTS -- The carrying value of financial
instruments including cash, accounts receivable and accounts payable
approximate fair value because of the relatively short maturities of these
instruments. The carrying value of long-term debt, including the current
portion and subordinated debt, approximate fair value based upon market rates
for similar instruments.
INTERIM FINANCIAL STATEMENTS -- The accompanying balance sheet as of April
26, 1998 and the statements of income and cash flows for the nine months
ended April 27, 1997 and April 26, 1998 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.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS -- In June 1997, the
Financial Accounting Standards Board issued Statement of Financial Accounting
Standards (SFAS) No. 131, Disclosures about Segments of an Enterprise and
Related Information, which will be effective for the Company beginning August
1, 1998. SFAS No. 131 redefines how operating segments are determined and
requires disclosure of certain financial and descriptive information about a
company's operating segments. The Company has not yet completed its analysis
of which operating segments, if any, it will report on.
F-6
<PAGE>
FONDA GROUP, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
3. BUSINESS ACQUISITIONS
The following acquisitions have been accounted for under the purchase
method and their results of operations have been included in the statements
of income since the respective dates of acquisition. Goodwill amortization
was less than $.1 million in Fiscal 1995, $.2 million in Fiscal 1996 and $.4
million in Fiscal 1997.
The following summarized, unaudited pro forma results of operations assume
the business acquisitions, excluding the 1998 acquisition, occurred as of the
beginning of the respective years (in thousands).
<TABLE>
<CAPTION>
YEARS ENDED
----------------------------------
JULY 30, JULY 28, JULY 27,
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
Net sales ........................ $238,645 $286,849 $271,777
Income before extraordinary loss $ 1,764 $ 6,308 $ 7,412
</TABLE>
1998 ACQUISITION
In January 1998, the Company acquired certain net assets of Leisureway,
Inc., a manufacturer of white paper plates for $7.2 million, including a
deferred payment of $.3 million and acquisition costs, subject to a working
capital adjustment. The excess of the purchase price over the Company's
preliminary evaluation of the fair value of the net assets acquired was $7.5
million and has been recorded as goodwill.
1997 ACQUISITIONS
In June 1997, the Company acquired all of the outstanding capital stock of
Heartland Mfg. Corp., a manufacturer of paper plates, for $12.6 million,
including acquisition costs. The excess of the purchase price over the
Company's evaluation of the fair value of the net assets acquired was $9.3
million and has been recorded as goodwill.
Also in June 1997, the Company acquired from Tenneco Inc. net assets
relating to the manufacture of placemats and other disposable tabletop
products for $6.6 million, including acquisition costs. The excess of the
purchase price over the Company's evaluation of the fair value of the net
assets acquired was $1.3 million and has been recorded as goodwill.
1996 ACQUISITIONS
In May 1996, the Company acquired certain net assets of two divisions
(James River-California and Natural Dam) of the Specialties Operations
Division (the "Division") of James River Paper Corporation ("James River")
for $13.1 million (including a final purchase price adjustment consummated in
Fiscal 1997), including acquisition costs. The purchase price consisted of
cash and a promissory note to the seller for $7 million, see Note 9 (which
was later reduced to $2.2 million in a final settlement of this note
simultaneous with the final purchase price adjustment). In Fiscal 1997,
management decided to close the James River--California facility which
produced tissue-based products. The Natural Dam mill 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. Natural Dam received all of its steam
energy requirements at 50% of historical cost in calendar 1997 and expects to
receive significantly increased savings for the next 40 years thereafter. In
addition, Natural Dam expects to receive land lease payments from the
operator of the land occupied by the co-generation facility. See Note 15. The
$10 million in benefits from the co-generation facility is included in
long-term assets acquired and is being amortized based upon Natural Dam's
annual savings over the 42-year remaining life of the contract. See Note 16.
The excess of the Company's evaluation of the fair value of the net assets
acquired (including $10 million in benefits from the co-generation facility)
over the final adjusted
F-7
<PAGE>
FONDA GROUP, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
3. BUSINESS ACQUISITIONS (Continued)
purchase price was $6.3 million and has been allocated to 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.
In December 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 Company's evaluation of the fair value of the net assets
acquired was $4.6 million and has been recorded as goodwill.
In November 1995, the Company acquired substantially all of the net assets
of Alfred Bleyer & Co., Inc. ("Maspeth"), a manufacturer of paper plates and
cups, for $10 million, including acquisition costs. The purchase price
consisted of cash and a promissory note to the seller for $2.25 million. The
excess of the Company's evaluation of the fair value of the net assets over
the purchase price was $.1 million and has been allocated to the long-term
assets.
1995 ACQUISITION
In March 1995, the Company acquired substantially all of the net assets of
the Scott Foodservice Division ("Hoffmaster") from Scott Paper Company
("Scott") for $28 million, including acquisition costs. Hoffmaster produces
colored and custom-printed napkins and placemats. The excess of the purchase
price over the Company's evaluation of the fair value of the net assets
acquired was $.8 million and has been recorded as goodwill.
4. OTHER INCOME, NET
Other income, net in Fiscal 1997 includes a net $2.9 million from the
settlement of a lawsuit. Partially offsetting this gain was a $1.3 million
charge for costs of the closure of the Company's Three Rivers, Michigan
facility. The charge covers the costs for the termination of employees as
well as ongoing costs to maintain the facility until its disposition. See
Note 16 for other income, net in the nine months ended April 26, 1998.
5. INVENTORIES
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
JULY 28, JULY 27, APRIL 26,
1996 1997 1998
---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Raw materials .. $17,015 $18,143 $16,130
Work-in-process 339 391 278
Finished goods . 19,126 20,345 20,010
Other ........... 987 1,955 2,032
---------- ---------- -----------
$37,467 $40,834 $38,450
========== ========== ===========
</TABLE>
F-8
<PAGE>
FONDA GROUP, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
6. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
LIVES IN JULY 28, JULY 27, APRIL 26,
YEARS 1996 1997 1998
---------- ---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Land and buildings ............. 20-40 $ 17,675 $ 21,703 $ 21,430
Machinery and equipment ........ 3-12 42,492 46,108 44,161
Leasehold improvements ......... 5-10 950 955 763
Construction in progress ...... 767 8,794 3,001
---------- ---------- -----------
61,884 77,560 69,355
Less: accumulated depreciation (15,534) (18,299) (20,448)
---------- ---------- -----------
$ 46,350 $ 59,261 $ 48,907
========== ========== ===========
</TABLE>
Property, plant and equipment includes property and equipment under
capital lease as follows (in thousands):
<TABLE>
<CAPTION>
JULY 28, JULY 27, APRIL 26,
1996 1997 1998
---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Building........................ $2,217 $2,217 $2,217
Equipment....................... 350 -- --
Less: accumulated depreciation (830) (554) (610)
---------- ---------- -----------
$1,737 $1,663 $1,607
========== ========== ===========
</TABLE>
Depreciation expense was $1.7 million in Fiscal 1995, $3.2 million in
Fiscal 1996 and $3.9 million in 1997.
7. 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. The Company
had sales to one customer representing approximately 11% of net sales in
Fiscal 1996.
8. ACCRUED EXPENSES
Accrued expenses consist of the following (in thousands):
<TABLE>
<CAPTION>
JULY 28, JULY 27, APRIL 26,
1996 1997 1998
---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Accrued compensation $ 4,367 $ 8,149 $ 8,027
Accrued interest .... 639 4,716 1,780
Accrued promotion ... 2,310 2,555 2,651
Other ................ 7,577 9,191 9,248
---------- ---------- -----------
$14,893 $24,611 $21,706
========== ========== ===========
</TABLE>
F-9
<PAGE>
FONDA GROUP, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
9. LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
JULY 28, JULY 27, APRIL 26,
1996 1997 1998
---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Revolving credit agreement ................................... $32,842 $ -- $ 390
9 1/2% Series A Senior Subordinated Notes due 2007 .......... -- 120,000 120,000
Subordinated notes payable to the Equitable .................. 13,796 -- --
Subordinated note payable to James River (see Note 3), plus
capitalized interest of $165,000, due May 2007, bearing
interest at 10% ............................................. 7,165 -- --
Term loan payable to a bank, with interest payable monthly at
LIBOR plus 2.5%, principal payable monthly through March 31,
2000; collateralized by machinery and equipment and certain
real estate ................................................. 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 ...................................................... 4,500 -- --
Other ........................................................ 4,224 2,987 2,519
---------- ---------- -----------
87,763 122,987 122,909
Less amounts due within one year ............................. 6,023 619 466
---------- ---------- -----------
$81,740 $122,368 $122,443
========== ========== ===========
</TABLE>
On February 27, 1997, the Company issued $120 million of 9 1/2% Series A
Senior Subordinated Notes due 2007 (the "Notes"). Interest is payable
semi-annually in March and September. Proceeds from the issuance of the Notes
were primarily used to retire debt. The Company incurred a $3.5 million
extraordinary loss (net of a $2.5 million income tax benefit) in connection
with the early retirement of debt consisting of the write-off of unamortized
debt issuance costs, elimination of unamortized discount and prepayment
penalties.
In Fiscal 1997, the Company entered into a $50 million revolving credit
agreement with a bank, expiring March 31, 2000 and collateralized by eligible
accounts receivable and inventories. At July 27, 1997, there was no
outstanding balance and $37.1 million was the maximum advance available based
upon eligible collateral. At October 26, 1997, $8 million was outstanding and
$37.6 million was the maximum advance available. A commitment fee of .375%
per annum is charged on the unutilized portion of the facility. At July 27,
1997, borrowings were available at the bank's prime rate (8.50%) plus .25%
and at LIBOR (approximately 5.65%) plus 2.25%. The revolving credit agreement
and the Notes contain certain restrictive covenants with respect to, among
others, (i) mergers and acquisitions, (ii) capital expenditures, (iii)
dividends, and (iv) additional indebtedness. In addition, the revolving
credit agreement requires that the Company satisfy certain financial
covenants.
On May 24, 1995, the Company issued $10 million of 14% subordinated notes
due May 24, 2002 to The Equitable Life Assurance Society of the United States
(the "Equitable"). In connection therewith, the Company granted warrants,
which expire in May 2003, to the Equitable to purchase 9,176 shares of its
Class B common stock for $.01 per share. See Note 16. The fair value of the
warrants ($1.2 million) at the date of issuance was recorded as paid-in
capital with a corresponding reduction in the carrying value of the
subordinated notes. On December 29, 1995, the Company issued $6 million of
14% subordinated notes due December 30, 2002 to the Equitable. In connection
therewith, the Company issued 3,666 shares of its Class B common stock to the
Equitable (the "Equitable Shares"). The fair value of the common
F-10
<PAGE>
FONDA GROUP, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
9. LONG-TERM DEBT (Continued)
stock ($1.3 million) at the date of issuance was recorded as common stock and
paid-in capital with a corresponding reduction in the carrying value of the
subordinated notes. The discounts on the subordinated notes were amortized as
additional interest expense over the terms of such notes until the
subordinated notes were repaid with proceeds from the issuance of the Notes.
Such discount amortization was $.1 million in Fiscal 1995, $.3 million in
Fiscal 1996 and $.1 million in Fiscal 1997.
10. STOCKHOLDERS' EQUITY AND REDEEMABLE COMMON STOCK
Stockholders' equity consists of the following (in thousands, except share
data) (see Note 16):
<TABLE>
<CAPTION>
JULY 28, JULY 27, APRIL 26,
1996 1997 1998
------------ ------------ -------------
(UNAUDITED)
<S> <C> <C> <C>
Preferred Stock, $.01 par value, 1,000 shares
authorized, none issued ........................................ $ -- $ -- $ --
Preferred Stock Class B, $.01 par value,
100,000 shares authorized, none issued ......................... -- -- --
Common Stock Class A, $.01 par value,
400,000 shares authorized, 184,000 issued and outstanding in
Fiscal 1996 and 1997, 100 issued and outstanding at
April 26, 1998 ................................................. 2 2 _
Common Stock Class B, $.01 par value,
20,000 shares authorized, 3,666 issued, 3,666, 2,666
and zero outstanding, respectively ............................. -- -- --
Common Stock Class C, $.01 par value,
200,000 shares authorized, none issued ......................... -- -- --
Paid-in capital ................................................. 3,500 3,500 _
Retained earnings ............................................... 8,371 11,643 13,381
Treasury stock, at cost, 1,000 shares Class B Common Stock at
July 27, 1997 .................................................. -- (135) _
------------ ------------ -------------
$11,873 $15,010 $13,381
============ ============ =============
</TABLE>
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 $4 million
subordinated note made by Four M in favor of AIG. In Fiscal 1997, 500 AIG
Shares were acquired by the Company pursuant to the Stock Repurchase (as
defined below). Concurrent with the distribution, the Company and AIG entered
into a redemption agreement, whereby AIG has the right to 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 party. The aggregate repurchase price for
the outstanding AIG Shares is $2.8 million discounted from March 31, 2007 at
a rate of 3% per annum. The redemption agreement also contains redemption
rights whereby the Company can require AIG to redeem the remaining AIG Shares
after March 31, 2000 on the same terms specified above. The AIG Shares are
disclosed at the present value of their liquidation value on the balance
sheets. The 1995 transfer of the present value of the liquidation value of
the redeemable common stock and the annual accretion to liquidation value has
been charged to retained earnings.
In April 1997, the Company offered to repurchase up to 74,000 shares of
common stock at $135 per share from the Company's stockholders on a pro rata
basis (the "Stock Repurchase"). In Fiscal 1997, pursuant to the Stock
Repurchase, the Company redeemed 500 of the AIG Shares and 1,000 of the
F-11
<PAGE>
FONDA GROUP, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
10. STOCKHOLDERS' EQUITY AND REDEEMABLE COMMON STOCK (Continued)
Equitable Shares for $135 per share. The repurchase of the 500 AIG Shares for
less than the present value of the liquidation amount as of the date of
repurchase resulted in a credit to retained earnings. The Equitable Shares
have been reported as Treasury Stock.
In September 1997 and January 1998, pursuant to the Stock Repurchase, the
Company redeemed 61,865 and 10,635 shares of Class A common stock for $8.4
million and $1.4 million, respectively, which have been included as treasury
stock within stockholders' equity. The Company has completed such stock
repurchase.
In September 1997, the Board of Directors granted the majority stockholder
15,000 options to purchase Class A Common Stock at an option price of $135
per share. Options to purchase 5,000 shares vest on October 1, 1997, and
options to purchase an additional 5,000 shares vest on October 1, 1998 and
October 1, 1999 respectively, or upon an initial public offering of the
Company's common stock, whichever occurs first; provided that the majority
stockholder is employed by the Company on the applicable vesting date (see
Note 16).
The changes in retained earnings consists of the following (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED NINE MONTHS
---------------------------------- ENDED
JULY 30, JULY 28, JULY 27, APRIL 26,
1995 1996 1997 1998
---------- ---------- ---------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Balance, beginning of year ................. $ 4,938 $5,005 $ 8,371 $11,643
Net income ................................ 2,182 3,430 3,236 6,083
Common stock repurchased and cancelled .... -- -- -- (6,420)
Transfer of liquidation value of
redeemable common stock .................. (2,094) -- 100 2,123
Accretion of redeemable common stock ..... (21) (64) (64) (48)
---------- ---------- ---------- -------------
Balance, end of period ..................... $ 5,005 $8,371 $11,643 $13,381
========== ========== ========== =============
</TABLE>
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 and grants vest over a five-year period. The Company
granted 5,850 in Fiscal 1995, 9,500 in Fiscal 1996 and 10,980 units in Fiscal
1997 at an aggregate value on the date of grant of $.2 million, $.3 million
and $.4 million, respectively. The Company recorded compensation expense of
$.1 million in Fiscal 1996 and less than $.1 million in Fiscal 1997.
F-12
<PAGE>
FONDA GROUP, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
11. INCOME TAXES
The provision (benefit) for income taxes consists of the following (in
thousands):
<TABLE>
<CAPTION>
YEARS ENDED
----------------------------------
JULY 30, JULY 28, JULY 27,
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
Current:
Federal .. $ 2,577 $1,526 $1,449
State ..... 698 441 418
---------- ---------- ----------
3,275 1,967 1,867
---------- ---------- ----------
Deferred:
Federal .. (1,381) 423 2,328
State ..... (309) 110 677
---------- ---------- ----------
(1,690) 533 3,005
---------- ---------- ----------
$ 1,585 $2,500 $4,872
========== ========== ==========
</TABLE>
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 28, JULY 27,
1996 1997
---------- ----------
<S> <C> <C>
Deferred tax assets:
Capitalized inventory costs ............................. $ 881 $ 785
Allowance for doubtful accounts receivable .............. 180 349
Accruals for health insurance and other employee
benefits ............................................... 1,824 1,911
Inventory and sales related reserves .................... 662 567
Pension reserve ......................................... 1,158 433
Benefit of tax carryforwards ............................ -- 370
Other.................................................... 1,495 1,485
---------- ----------
6,200 5,900
Deferred tax liabilities:
Depreciation ............................................ (3,209) (5,264)
---------- ----------
$ 2,991 $ 636
========== ==========
</TABLE>
A reconciliation of the income tax provision to the amount computed using
the Federal statutory rate is as follows (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED
----------------------------------
JULY 30, JULY 28, JULY 27,
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
Income tax at statutory rate ................ $1,281 $2,076 $4,061
State income taxes (net of Federal benefit) 232 365 712
Other ....................................... 72 59 99
---------- ---------- ----------
$1,585 $2,500 $4,872
========== ========== ==========
</TABLE>
F-13
<PAGE>
FONDA GROUP, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
12. LEASES
The Company leases certain of its facilities and equipment under operating
leases. Future minimum payments under noncancellable operating leases with
remaining terms of one year or more are $1.2 million in Fiscal 1998, $.9
million in Fiscal 1999, $.9 million in Fiscal 2000, $.8 million in Fiscal
2001, $.8 million in Fiscal 2002, and $2.6 million thereafter.
Rent expense was $1.2 million in Fiscal 1995, $1.8 million in Fiscal 1996
and $2 million in Fiscal 1997.
13. 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 facility from its majority stockholder. Annual payments
under the lease are $.2 million plus annual increases based on changes in the
Consumer Price Index ("CPI") through December 31, 2014. In addition, from
January 1, 1998 to July 31, 2006, the majority stockholder may require the
Company to purchase the facility for $1.5 million, subject to a CPI-based
escalation. The purchase price would be $.4 million in cash and the balance
in a seven-year note secured by a lien covering the facility with interest
payable at 2% over prime. Rent expense, net of sublease income on a portion
of the premises subleased to Four M, was $.1 million in each of the fiscal
years 1995, 1996 and 1997. See Note 16.
On February 27, 1997, the Company loaned $2.6 million to CEG for five
years at an interest rate of 10%, the proceeds of which were applied to CEG's
prepayment of certain obligations to James River. See Note 16.
Net sales to CEG were $1.9 million in Fiscal 1996 and $7.8 million in
Fiscal 1997. Net sales to Fibre Marketing Group, LLC, a waste paper recovery
business of which Four M and a Director of the Company are members, were $.2
million in Fiscal 1995, $4 million in Fiscal 1996 and $3.6 million in Fiscal
1997. Net purchases of corrugated containers from Four M were $.2 million in
Fiscal 1996 and $.9 million in Fiscal 1997. The Company believes that the
terms on which it sold or purchased products from related parties were at
least as favorable as those it could otherwise have obtained from unrelated
third parties and were negotiated on an arm's length basis.
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. The $.5 million fee in 1995 was based on the time allocated to the
Company's matters by certain Four M corporate personnel and 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.
14. EMPLOYEE BENEFIT PLANS
The Company provides certain union and non-union employees with retirement
and disability income benefits under defined benefit pension plans. Pension
costs are based upon the actuarially determined normal costs plus interest on
and amortization of the unfunded liabilities. On December 31, 1996, the
benefit accruals were frozen for participants in the non-union pension plans
resulting in a $.7 million reduction in the pension liability. The Company's
policy has been to fund annually the minimum contributions required by
applicable regulations.
Pursuant to the Asset Purchase Agreement covering the Hoffmaster
acquisition, Scott made required aggregate contributions of $.9 million to
the Hoffmaster plans. As such, in Fiscal 1997, the Company reversed a $.7
million pension reserve that it had previously accrued for such
contributions.
F-14
<PAGE>
FONDA GROUP, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
14. EMPLOYEE BENEFIT PLANS (Continued)
The net periodic pension cost for benefits earned in the respective years
is computed as follows (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED
----------------------------------
JULY 30, JULY 28, JULY 27,
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
Service cost .............. $ 269 $ 731 $ 433
Interest cost ............. 204 455 403
Return on plan assets .... (123) (313) (751)
Deferred gain ............. -- -- 487
---------- ---------- ----------
Net periodic pension cost $ 350 $ 873 $ 572
========== ========== ==========
</TABLE>
The funded status of the plans and the amount recognized in the balance
sheets is as follows (in thousands):
<TABLE>
<CAPTION>
JULY 28, 1996 JULY 27, 1997
---------------------------- ----------------------------
ASSETS ACCUMULATED ASSETS ACCUMULATED
EXCEED BENEFITS EXCEED BENEFITS
ACCUMULATED EXCEED ACCUMULATED EXCEED
BENEFITS ASSETS BENEFITS ASSETS
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Accumulated benefit obligation:
Vested ............................................... $1,307 $2,964 $2,004 $3,515
Non-vested ........................................... 35 33 30 49
------------- ------------- ------------- -------------
Total ................................................. $1,342 $2,997 $2,034 $3,564
============= ============= ============= =============
Projected benefit obligation .......................... $2,499 $2,997 $2,034 $3,564
Plan assets at fair value, primarily common stocks and
government obligations ............................... 930 1,689 2,170 2,846
------------- ------------- ------------- -------------
Projected benefit obligation in excess of plan assets 1,569 1,308 (136) 718
Unrecognized net gain (loss) .......................... (81) 1 136 329
------------- ------------- ------------- -------------
Accrued pension cost .................................. $1,488 $1,309 $ -- $1,047
============= ============= ============= =============
</TABLE>
The actuarial present values of accumulated and projected benefit
obligations were determined using discount rates of 8%, except for non-union
plans which used 7% in Fiscal 1997, and an assumed rate of increase in
compensation levels of 4%. The expected rate of return on assets was assumed
to be 8%.
The Company provides 401(k) savings and investment plans for the benefit
of non-union employees. Employee contributions are matched at the discretion
of the Company. On January 1, 1997, the Company adopted a defined
contribution benefit plan for all non-union employees for which contributions
and costs are based on participant earnings. The costs for these plans were
less than $.1 million in Fiscal 1995, $.4 million in Fiscal 1996 and $.8
million in Fiscal 1997.
The Company also participates in multi-employer pension plans for certain
of its union employees. Contributions to these plans, at a defined rate per
hour worked, amounted to $.9 million in Fiscal 1995, $1.3 million in Fiscal
1996, and $.6 million in Fiscal 1997.
15. COMMITMENTS AND CONTINGENCIES
The Company is subject to legal proceeding and other claims arising in the
ordinary course of its business. The Company maintains insurance coverage of
types and in amounts which it believes to be
F-15
<PAGE>
FONDA GROUP, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
15. COMMITMENTS AND CONTINGENCIES (Continued)
adequate and 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.
The Company has commitments to purchase paperboard from three major
vendors. The total annual commitment is for the purchase of 49,200 tons of
paperboard through April 2001. The price per ton will be based on market
rates, less applicable rebates for all of these commitments. In addition, the
Company has a commitment through calendar 1999 to purchase 14,500 tons of
tissue paper in 1997, 11,000 tons in 1998 and 10,000 tons in 1999, at market
rates.
16. SUBSEQUENT EVENTS
In February 1998, the Company decided to close its Jacksonville, Florida
facility and relocate such manufacturing capacity and equipment to other
sites. The Company accrued $0.3 million primarily related to severance and
continuing lease costs after the facility is closed.
On March 12, 1998, the Company entered into an agreement with CEG, whereby
CEG will manufacture and distribute certain party goods products currently
manufactured by the Company for a period of five years, subject to extension.
In connection therewith, the Company will receive an annual royalty equal to
5% of CEG's cash flow, as determined in accordance with a formula specified
in such agreement. Pursuant to such agreement, during a transition period,
the Company is manufacturing such party goods products for CEG on a contract
basis. In Fiscal 1997, the Company's net sales of such party goods products
were approximately $30 million.
On March 12, 1998, the Company amended certain terms of the $2.6 million
Promissory Note dated February 27, 1997, made by CEG in favor of the Company
(the "CEG Note"). The 10% annual interest rate on the CEG Note was converted
to pay-in-kind, the note's 2002 maturity was extended for an additional three
years and the note was made subordinate to Senior Debt (as such term is
defined therein). In connection with such amendment, the Company was issued a
warrant to purchase, for a nominal amount, 2.5% of CEG's common stock. The
Company believes that the terms of such loan and the amendments thereto 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.
On March 12, 1998, SF Holdings Group, Inc. ("SF Holdings"), a Delaware
corporation principally owned by the majority stockholder of the Company,
issued and sold $77.5 million in gross proceeds of units, each unit
consisting of 12 3/4% Senior Secured Notes due 2008 and Two shares of Class C
common stock of SF Holdings. The net proceeds of such offering were used to
fund the acquisition (the "Sweetheart Investment") by SF Holdings of 90% of
the total outstanding common stock, including 48% of the voting stock, of
Sweetheart Holdings, Inc. ("Sweetheart"). The Company also consummated the
following transactions:
(1) All of the shares of the Company were converted into shares of SF
Holdings pursuant to a merger of a subsidiary of SF Holdings into the
Company. (the "Stockholders Exchange") and the Company became a wholly-owned
subsidiary of SF Holdings;
(2) The 15,000 options to purchase Class A common stock of the Company
granted to the majority stockholder (see Note 10) were converted into options
to purchase Class A common stock of SF Holdings;
(3) Prior to the Stockholders Exchange, outstanding warrants to purchase
9,176 shares of Class B common stock of the Company (see Note 9) were
exercised and such shares were converted into shares of Class B common stock
of SF Holdings; and
(4) SF Holdings assigned substantially all of its rights under the
Management Services Agreement between SF Holdings and American Industrial
Partners Management Company, Inc. ("AIPM"), as amended, to the Company in
consideration for the payment of $7.0 million. During the term of the
F-16
<PAGE>
FONDA GROUP, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
16. SUBSEQUENT EVENTS (Continued)
Management Services Agreement, Fonda has the right, subject to the direction
of the board of directors of Sweetheart, to manage Sweetheart's day-to-day
operations for and on behalf of Sweetheart, including but not limited to, the
right to cause Sweetheart to (i) acquire and dispose of assets; (ii) employ,
determine compensation of and terminate employees of Sweetheart other than
the Chief Executive Officer, Chief Operating Officer and Chief Financial
Officer; and (iii) take all other actions associated with the management of
the day-to-day operations of the business of Sweetheart. For the first three
years after the consummation of the Sweetheart Investment, AIPM will continue
to provide certain financial advisory services to Sweetheart for which it
will receive certain fees. In consideration of Fonda's performance of
services, it will receive certain fees during the term of the agreement.
On March 24, 1998, the Company consummated an agreement to sell
substantially all of the fixed assets and certain related working capital of
Natural Dam, pursuant to which Fonda realized net proceeds, of $24.6 million,
including a note receivable of $3.7 million, and recorded gain of $9.3
million.
In May 1998, the Company purchased a 38.2% ownership interest in Fibre
Marketing Group, LLC ("Fibre Marketing"), a limited liability company engaged
in the waste paper recovery business, from a director of the Company for $0.2
million. Four M Corporation, an affiliate of the Company, owns a 50% interest
in Fibre Marketing. In Fiscal 1997, net sales to Fibre Marketing were $3.6
million. The Company believes that the terms on which it purchased such
interest was at least as favorable as those it could otherwise have obtained
from an unrelated third party and were negotiated on an arms length basis.
On May 27, 1998, the Company announced its decision to close its
administrative offices in St. Albans, Vermont and to relocate such offices,
including its principal executive offices, to the Company's Oshkosh,
Wisconsin facility. The costs associated with such relocation will be
recorded in the fourth fiscal quarter.
On July 1, 1998, the Company consummated an agreement with the owner of
the co-generation facility at its Natural Dam mill, whereby among other
things (a) the operator terminated its obligations to supply steam to Natural
Dam; and (b) the operator is not obligated to make fixed rent payments for
three years following the consummation of such agreement and has the right to
terminate the land lease payments in return for a lump sum cash payment and
the delivery of certain equipment. As a result, the Company will record a
gain in its fourth fiscal quarter.
F-17
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Sweetheart Holdings Inc.:
We have audited the accompanying consolidated balance sheets of Sweetheart
Holdings Inc. (a Delaware corporation) and subsidiaries as of September 30,
1996 and 1997 and the related consolidated statements of operations,
shareholders' equity and cash flows for the years ended September 30, 1995,
1996 and 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Sweetheart Holdings Inc.
and Subsidiaries as of September 30, 1996 and 1997, and the consolidated
results of their operations and their cash flows for the years ended
September 30, 1995, 1996 and 1997 in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Baltimore, Maryland
December 8, 1997
(except with respect to
the matter discussed in
Note 20, as to which the
date is March 12, 1998)
F-18
<PAGE>
SWEETHEART HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 30,
---------------------- MARCH 31,
1996 1997 1998
---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ........................ $ 4,371 $ 2,650 $ 3,259
Restricted cash .................................. 28,870 29,016 --
Cash in escrow ................................... -- 13,323 10,286
Receivables, less allowances of $2,466, $1,740
and $2,823, respectively ........................ 88,183 85,774 79,484
Inventories ...................................... 172,838 148,845 147,708
Deferred income taxes ............................ 1,771 2,471 2,471
Assets held for sale, net ........................ -- 8,466 --
Other current assets ............................. 20,099 20,868 18,613
---------- ---------- -----------
Total current assets ............................ 316,132 311,413 261,821
Property, plant and equipment ..................... 527,394 527,999 540,200
Less--Accumulated depreciation .................... 99,561 145,508 164,838
---------- ---------- -----------
Net property, plant and equipment ................. 427,833 382,491 375,362
Deferred income taxes ............................. -- 12,471 36,644
Other assets ...................................... 18,645 13,155 14,986
---------- ---------- -----------
TOTAL ASSETS ...................................... $762,610 $719,530 $688,813
========== ========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ................................. $ 70,472 $ 58,933 $ 70,116
Accrued payroll and related costs ................ 47,828 40,528 43,945
Other current liabilities ........................ 33,918 43,815 44,955
Current portion of long-term debt ................ 1,535 1,369 5,559
---------- ---------- -----------
Total current liabilities ....................... 153,753 144,645 164,575
Long-term debt ................................... 385,579 430,499 417,429
Deferred income taxes ............................ 17,803 -- --
Other non-current liabilities..................... 84,060 69,775 67,938
Shareholders equity:
Common Stock--par value $.01 per share; 3,000,000
shares authorized; 1,046,000 shares issued and
outstanding...................................... 101,100 101,100 --
Class A Common Stock--par value $.01 per share;
1,100,000 shares authorized; 1,046,000 shares
issued and outstanding........................... -- -- 101,100
Class B Common Stock--par value $.01 per share;
4,600,000 shares authorized; 4,393,200 shares
issued and outstanding........................... -- -- 44
Cumulative translation adjustment ................ (322) (507) (841)
Retained earnings (accumulated deficit) ......... 21,060 (25,611) (61,432)
Note receivable related to purchase of common
stock ........................................... (423) (371) --
---------- ---------- -----------
Total shareholders' equity ...................... 121,415 74,611 38,871
---------- ---------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ...... $762,610 $719,530 $688,813
========== ========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-19
<PAGE>
SWEETHEART HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED SIX MONTHS ENDED
SEPTEMBER 30, MARCH 31,
-----------------------------------------------------------
1995 1996 1997 1997 1998
---------- ---------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales ...................... $986,618 $959,818 $886,017 $398,107 $393,168
Cost of sales .................. 874,593 846,719 821,021 385,530 373,965
---------- ---------- ----------- ----------- -----------
Gross profit .................. 112,025 113,099 64,996 12,577 19,203
---------- ---------- ----------- ----------- -----------
Selling, general, and
administrative ................ 66,089 61,788 66,792 32,915 38,124
Loss on asset disposal and
impairment .................... -- -- 24,550 --
Restructuring charges .......... -- -- 9,680 -- 10,527
Other (income) expense, net .... (1,197) 4,271 (73) 582 6,160
---------- ---------- ----------- ----------- -----------
Operating income (loss) ...... 47,133 47,040 (35,953) (20,920) (35,608)
Interest expense, net .......... (37,410) (37,517) (40,265) (19,501) (21,498)
---------- ---------- ----------- ----------- -----------
Income (loss) before income
taxes, cumulative effect of
an accounting change and
extraordinary loss ........... 9,723 9,523 (76,218) (40,421) (57,106)
Income tax expense (benefit) .. 3,903 3,809 (30,487) (16,168) (22,840)
---------- ---------- ----------- ----------- -----------
Income (loss) before
cumulative effect of an
accounting change and
extraordinary loss ........... 5,820 5,714 (45,731) (24,253) (34,266)
Cumulative effect of a change
in accounting principle (net
of income taxes of $1,007) ... -- -- -- -- (1,511)
Extraordinary loss on debt
extinguishment (net of income
taxes of $627) ................ -- -- 940 -- --
---------- ---------- ----------- ----------- -----------
Net income (loss) ............ $ 5,820 $ 5,714 $(46,671) $(24,253) $(35,777)
========== ========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-20
<PAGE>
SWEETHEART HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED SIX MONTHS ENDED
SEPTEMBER 30, MARCH 31,
-------------------------------------------------------------
1995 1996 1997 1997 1998
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) ................... $ 5,820 $ 5,714 $ (46,671) $ (24,253) $ (35,777)
Adjustments to reconcile net income
(loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization ..... 37,741 43,373 47,723 23,384 22,988
Asset impairment expense .......... -- -- 24,550 -- --
Gain on sale of property, plant
and equipment .................... -- -- -- -- (786)
Gain on sale of bakery business ... -- -- -- -- (3,459)
Cumulative effect of change in
accounting principle ............. -- -- -- -- 1,511
Extraordinary loss, net of tax ... -- -- 940 -- --
Deferred income taxes ............. 3,144 2,645 (30,487) (16,168) (22,840)
Decrease (increase) in receivables . (17,863) 14,103 (1,341) 11,129 6,290
Decrease (increase) in inventories . 21,055 (20,878) 23,993 8,011 1,137
Increase (decrease) in accounts
payable ............................ 4,852 5,259 (11,541) (8,392) 11,183
Other, net .......................... (3,850) (6,708) (10,408) (11,771) 1,211
----------- ----------- ----------- ----------- -----------
Net cash provided by (used in)
operating activities ............. 50,899 43,508 (3,242) (18,060) (18,542)
----------- ----------- ----------- ----------- -----------
Cash flows from investing activities:
Additions to property, plant, and
equipment .......................... (51,625) (50,236) (47,757) (24,889) (20,342)
Proceeds from sale of bakery
business............................ -- -- -- -- 14,743
Proceeds from sales of property,
plant, and equipment ............... 111 -- 17,843 -- 889
----------- ----------- ----------- ----------- -----------
Net cash used in investing
activities ....................... (51,514) (50,236) (29,914) (24,889) (4,710)
----------- ----------- ----------- ----------- -----------
Cash flows from financing activities:
Proceeds from debt .................. 103,852 194,160 331,216 170,058 225,392
Repayment of debt ................... (103,535) (178,235) (286,364) (126,595) (232,838)
Payment received on common stock
note receivable .................... -- 77 52 52 371
(Increase) decrease in restricted
cash ............................... (3,932) (12,904) (146) (1,244) 29,016
(Increase) decrease in cash in
escrow ............................. -- -- (13,323) -- 3,037
Payment of financing fees ........... -- -- -- -- (1,117)
----------- ----------- ----------- ----------- -----------
Net cash (used in) provided by
financing activities ............. (3,615) 3,098 31,435 42,271 23,861
----------- ----------- ----------- ----------- -----------
Net (decrease) increase in cash and
cash equivalents .................... (4,230) (3,630) (1,721) (678) 609
Cash and cash equivalents, beginning
of year ............................. 12,231 8,001 4,371 4,371 2,650
----------- ----------- ----------- ----------- -----------
Cash and cash equivalents, end of
year ................................ $ 8,001 $ 4,371 $ 2,650 $ 3,693 $ 3,259
=========== =========== =========== =========== ===========
Supplemental cash flow disclosures:
Interest paid ....................... $ 35,748 $ 35,767 $ 38,818 $ 18,529 $ 19,370
=========== =========== =========== =========== ===========
Income taxes paid ................... $ 1,061 $ 2,226 $ -- $ 571 $ 307
=========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-21
<PAGE>
SWEETHEART HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
CUMULATIVE TOTAL
COMMON TRANSLATION RETAINED NOTE SHAREHOLDERS'
STOCK ADJUSTMENT EARNINGS RECEIVABLE EQUITY
---------- ------------- ----------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
Balance, September 30, 1994 ....... $101,100 $(171) $ 9,526 $(500) $109,955
Net income ......................... -- -- 5,820 -- 5,820
Translation adjustment ............. -- 30 -- -- 30
---------- ------------- ----------- ------------ ---------------
Balance, September 30, 1995 ....... 101,100 (141) 15,346 (500) 115,805
Net income ......................... -- -- 5,714 -- 5,714
Payment received on note
receivable ........................ -- -- -- 77 77
Translation adjustment ............. -- (181) -- -- (181)
---------- ------------- ----------- ------------ ---------------
Balance, September 30, 1996 ....... 101,100 (322) 21,060 (423) 121,415
Net loss ........................... -- -- (46,671) -- (46,671)
Payment received on note
receivable......................... -- -- -- 52 52
Translation adjustment ............. -- (185) -- -- (185)
---------- ------------- ----------- ------------ ---------------
Balance, September 30, 1997 ....... 101,100 (507) (25,611) (371) 74,611
Net loss ........................... -- -- (35,777) -- (35,777)
Payment received on note
receivable......................... -- -- -- 371 371
Translation adjustment.............. -- (334) -- -- (334)
Issuance of common stock............ 44 -- -- -- 44
Stock dividend...................... -- -- (44) -- (44)
---------- ------------- ----------- ------------ ---------------
Balance, March 31, 1998
(unaudited)........................ $101,144 $(841) $(61,432) $ -- $ 38,871
========== ============= =========== ============ ===============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-22
<PAGE>
SWEETHEART HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As used in these notes, unless the context otherwise requires, the
"Company" shall refer to Sweetheart Holdings Inc. and its subsidiaries,
including Sweetheart Cup Company Inc.
1. SIGNIFICANT ACCOUNTING POLICIES
a. Principles of Consolidation and Translation
The financial statements include all of the accounts of the Company and
its subsidiaries on a consolidated basis as of September 30, 1996 and 1997
and for the years ended September 30, 1995, 1996 and 1997. For all periods
presented, the consolidated financial statements include all of the accounts
of the Company's United States operations (Sweetheart Holdings Inc. and its
domestic subsidiaries, Sweetheart Cup Company Inc. and Sweetheart Receivables
Corporation) and Lily Cups Inc., a Canadian subsidiary. Assets and
liabilities of Lily Cups Inc. are translated at the rates of exchange in
effect at the balance sheet date. Income amounts are translated at the
average of the monthly exchange rates. The cumulative effect of translation
adjustments is deferred and classified as a cumulative translation
adjustment. All significant intercompany and intergroup accounts and
transactions have been eliminated. The accompanying balance sheet as of
December 31, 1997 and the statements of operations and cash flows for the
three months ended December 31, 1996 and December 31, 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.
b. Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents. Cash overdrafts
are reclassified to accounts payable and accrued payroll and related costs.
Cash balances related to Sweetheart Receivables Corporation are restricted
from transfer to other entities within the Company. Restricted cash is shown
separately on the balance sheet. The balance of restricted cash was $29.0
million and $28.9 million at September 30, 1997 and 1996, respectively. Cash
received as proceeds from the sale of assets is restricted to qualified
capital expenditures under the Bond Indentures (see Note 10), and is held in
escrow with the trustee until utilized. The balance of cash in escrow was
$13.3 million at September 30, 1997.
c. Inventories
Inventories are carried at the lower of cost or market as described in
Note 2. Spare parts of $20.1 million at September 30, 1996 were reclassified
from inventories to other current assets.
d. Assets held for sale
Property, plant, and equipment for the Bakery division was reclassified as
held for sale at September 30, 1997. The Bakery division was sold on November
30, 1997, as discussed in Note 15.
e. Property, Plant and Equipment
Property, plant and equipment is recorded at cost, less accumulated
depreciation, and is depreciated on the straight-line method over the
estimated useful lives of the assets, with the exception of property, plant,
and equipment acquired prior to January 1, 1991, which is depreciated on the
declining balance method.
The asset lives of buildings and fixtures range between 12 and 50 years
and have an average useful life of 38 years. The asset lives of equipment
range between 5 and 18 years and have an average useful life of 13 years.
F-23
<PAGE>
f. Revenue Recognition
Sales of the Company's products are recorded based on shipment of
products.
g. Income Taxes
Deferred income taxes are provided to recognize temporary differences
between the financial reporting basis and the tax basis of the Company's
assets and liabilities. The principal differences relate to depreciation
expense, pension and postretirement benefits and LIFO inventory.
No deferred income taxes have been provided on the cumulative
undistributed earnings of the Canadian subsidiary of Sweetheart Cup Company
Inc. Those earnings (approximately $12.8 million) are considered permanently
reinvested under Accounting Principles Bulletin No. 23. The incremental U.S.
tax costs (deferred taxes) of repatriating these earnings would not be
material.
h. Employee Benefit Plans (also see Note 7)
The Company has various defined benefit plans and a defined contribution
plan for substantially all employees who meet eligibility requirements.
Benefits under the defined benefit plans are based on years of service, and
funding is in accordance with actuarial requirements of the plans, subject to
provisions of the Employee Retirement Income Security Act. The Company makes
contributions to the defined contribution plan in accordance with the plan's
provisions.
i. Postretirement Health Care Plans (also see Note 8)
The Company sponsors various defined benefit postretirement health care
plans that cover substantially all employees who meet eligibility
requirements. These plans are not funded by the Company.
j. Reclassifications
Certain prior year balances have been reclassified to conform with current
presentation.
k. Impact of Recently Issued Accounting Standards
In October 1996, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 123, Accounting for Stock Based Compensation, which
provides an alternative to APB Opinion No. 25, Accounting for Stock Issued to
Employees in accounting for stock based compensation issued to employees. The
Company has adopted only the disclosure provisions of Statement 123, and the
impact was not material.
In October 1996, the Company adopted SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,
which requires impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present and the undiscounted
cash flows estimated to be generated by those assets are less than the
assets' carrying amount. Statement 121 also addresses the accounting for
long-lived assets that are expected to be disposed of. The adoption of SFAS
121 did not have a material impact on net income. In the fourth quarter of
fiscal year 1997, the Company recorded a loss on asset disposal and
impairment. See Note 14.
During 1997, the Financial Accounting Standards Board issued SFAS No. 128,
Earnings per Share, No. 129, Disclosure of Information about Capital
Structure, No. 130, Reporting Comprehensive Income, and No. 131, Disclosures
about Segments of an Enterprise and Related Information. These statements
address presentation and disclosure matters and will have no impact on the
Company's financial position or results of operations. These statements
become effective during the Company's fiscal years 1998 and 1999 and will be
adopted as applicable.
On November 20, 1997, the Emerging Issues Task Force (EITF) reached a
consensus on Issue 97-13 regarding reengineering costs. This consensus
provides guidance about what activities constitute business process
reengineering in connection with the development and installation of software
for internal use
F-24
<PAGE>
and concludes that all reengineering costs, including those incurred in
connection with a software installation, should be expensed as incurred. The
Company has capitalized costs such as those described above through fiscal
year 1997, and as required by this consensus, $1.5 million (net of a $1
million income tax benefit) (unaudited) of these costs were expensed as a
cumulative change in accounting principle in the first quarter of fiscal year
1998.
l. Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the 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 periods. Actual results could differ from those estimates.
2. INVENTORIES
The components of inventories and their valuation methods are as follows
(in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30, MARCH 31,
1996 1997 1998
--------------- --------------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Components
Raw materials and supplies ..... $ 35,166 $ 32,302 $ 27,769
Finished products ............... 129,956 108,842 111,834
Work in progress................. 7,716 7,701 8,105
--------------- --------------- -----------
$172,838 $148,845 $147,708
=============== =============== ===========
Valued at lower of cost or market
First in, first out ("FIFO") ... $ 17,011 $ 15,300 $ 15,038
Last in, first out ("LIFO") .... 155,827 133,545 132,670
--------------- --------------- -----------
$172,838 $148,845 $147,708
=============== =============== ===========
</TABLE>
Had inventories valued on the LIFO basis been stated on a FIFO basis,
inventories would have been $3,999,000, $6,568,000 and $6,685,000 lower than
reported at September 30, 1996 and 1997, and March 31, 1998, respectively.
Cost of sales on a FIFO basis would have been lower by $21,022,000 for the
year ended September 30, 1995, and higher by $11,538,000 and $2,569,000 for
the years ended September 30, 1996 and 1997, respectively.
F-25
<PAGE>
3. PROPERTY, PLANT AND EQUIPMENT
The Company's major classes of property, plant and equipment are as
follows (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30, MARCH 31,
1996 1997 1998
--------------- --------------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Land .............................. $ 26,008 $ 23,801 $ 22,820
Buildings ......................... 90,760 85,808 86,770
Machinery and equipment ........... 375,404 394,754 402,629
Construction in progress .......... 35,222 23,636 27,981
--------------- --------------- -----------
Total ............................ 527,394 527,999 540,200
--------------- --------------- -----------
Accumulated depreciation .......... 99,561 145,508 164,838
--------------- --------------- -----------
Net property, plant and equipment $427,833 $382,491 $375,362
=============== =============== ===========
</TABLE>
4. OTHER ASSETS
The components of long term other assets are as follows (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30, MARCH 31,
1996 1997 1998
--------------- --------------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Debt issuance costs, net of accumulated
amortization .......................... $12,874 $ 8,159 $ 7,456
Intangible pension asset (see Note 7) . 2,484 860 860
Prepaid assets ......................... 1,299 2,423 4,020
Other .................................. 1,988 1,713 2,650
--------------- --------------- -----------
Total long-term ....................... $18,645 $13,155 $14,986
=============== =============== ===========
</TABLE>
Amortization of the above debt issuance costs totaled approximately $3.5
million, $3.6 million and $5.2 million for the years ended September 30,
1995, 1996 and 1997, respectively, of which $3.6 million of the 1997 costs
are included as interest expense in the accompanying statement of operations.
During the year ended September 30, 1997, the Company accelerated $1.6
million of amortization for the debt issuance costs related to Sweetheart
Receivables Corporation and the 1993 Credit Agreement, both of which were
refinanced subsequent to year end (See Note 10). This charge is shown as an
extraordinary loss (net of $627,000 of income taxes) on the consolidated
statement of operations.
5. OTHER CURRENT LIABILITIES
The components of other current liabilities are as follows (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30, MARCH 31,
1996 1997 1998
--------------- --------------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Sales allowances ................................. $ 6,023 $ 7,052 $ 6,116
Restructuring costs .............................. 4,934 13,201 15,227
Taxes other than income taxes .................... 2,288 2,841 2,187
Litigation, claims and assessments (see Note 16) 15,196 15,445 15,251
Interest payable ................................. 2,798 2,806 4,064
Other ............................................ 2,679 2,470 2,110
--------------- --------------- -----------
Total ........................................... $33,918 $43,815 $44,955
=============== =============== ===========
</TABLE>
F-26
<PAGE>
6. OTHER NON-CURRENT LIABILITIES
The components of other non-current liabilities are as follows (in
thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30, MARCH 31,
1996 1997 1998
--------------- --------------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Post retirement health care benefits (see Note 8) $58,725 $57,983 $58,121
Pensions .......................................... 13,620 9,761 8,548
Other ............................................. 11,715 2,031 1,269
--------------- --------------- -----------
Total ............................................ $84,060 $69,775 $67,938
=============== =============== ===========
</TABLE>
7. EMPLOYEE BENEFIT PLANS
A majority of the employees ("participants") are covered under a 401(k)
defined contribution plan. The Company's annual contributions to this defined
contribution plan represent a 50% match on participant contributions. The
Company's match is limited to participant contributions up to 6% of
participant salaries. In addition, the Company is allowed to make
discretionary contributions. Costs charged against operations for this
defined contribution plan were approximately $3,681,000, $3,715,000 and
$3,586,000 for the years ended September 30, 1995, 1996 and 1997,
respectively. Certain employees are covered under defined benefit plans.
Benefits under the plans are generally based on fixed amounts for each year
of service.
The components of net pension expense for domestic defined benefit plans
are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
SEPTEMBER 30, 1995 SEPTEMBER 30, 1996 SEPTEMBER 30, 1997
------------------ ------------------ ------------------
<S> <C> <C> <C>
Service cost ............... $ 952 $ 1,078 $ 1,111
Interest cost .............. 3,230 3,545 3,720
Projected return on assets (1,637) (2,874) (3,212)
Net amortization ........... 16 188 262
------------------ ------------------ ------------------
Net pension expense ....... $ 2,561 $ 1,937 $ 1,881
================== ================== ==================
</TABLE>
The status of defined benefit pension plans using data as of the most
recent actuarial valuation dates is as follows (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30,
1996 1997
--------------- ---------------
<S> <C> <C>
Actuarial present value of benefit obligations
Vested benefits ................................... $ 37,231 $ 41,616
Nonvested benefits ................................ 10,741 11,094
Accumulated and projected benefit obligation ...... 47,972 52,710
Plan assets at fair value .......................... 31,023 39,243
Funded status ..................................... (16,949) (13,467)
Unrecognized prior service cost .................... 2,484 1,529
Unrecognized net gain .............................. (626) 473
Adjustment required to recognize minimum liability (2,484) (860)
--------------- ---------------
Net pension liability ............................. $(17,575) $(12,325)
=============== ===============
</TABLE>
As required by SFAS No. 87, "Employers' Accounting for Pensions," the
Company recognized additional pension liabilities of $2,484,000 and $860,000
as of September 30, 1996 and 1997, respectively, and equal amounts as other
assets.
F-27
<PAGE>
Actuarial assumptions used in calculating the above amounts include a 10%
return on plan assets for the years ended September 30, 1996 and 1997, an
8.0% discount rate on benefit obligations as of September 30, 1996, a 7.75%
weighted average discount rate for the first six months and 8.0% for the
second six months of the year ended September 30, 1996, and a 7.5% discount
rate on benefit obligations as of September 30, 1997, and a weighted average
discount rate of 7.5% for the year ended September 30, 1997.
Data with respect to the Lily Cups Inc., Canada defined benefit plan is
not material and is not included in the above data.
8. POSTRETIREMENT HEALTH CARE PLANS
The Company sponsors various defined benefit postretirement health care
plans that cover substantially all full-time employees. The plans, in most
cases, pay stated percentages of most medical expenses incurred by retirees,
after subtracting payments by Medicare or other providers and after a stated
deductible has been met. Participants generally become eligible after
reaching age 60 with one year of participation. The majority of the Company's
plans are contributory, with retiree contributions adjusted annually. The
accounting for the plans anticipates future cost-sharing changes to the
written plan that are consistent with the Company's announced policies. The
Company does not fund the plans.
The following table analyzes the plans' unfunded, accrued postretirement
health care cost liability as reflected on the balance sheet (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30,
1996 1997
--------------- ---------------
<S> <C> <C>
Accumulated Postretirement Benefit Obligation:
Retirees ......................................... $25,596 $24,936
Other fully eligible participants ................ 6,472 5,731
Other active participants ........................ 17,577 12,166
--------------- ---------------
49,645 42,833
Unrecognized prior service cost .................. 1,536 4,861
Unrecognized actuarial gain ...................... 10,644 13,389
--------------- ---------------
Accrued postretirement health care cost liability $61,825 $61,083
=============== ===============
</TABLE>
The components of net postretirement health care cost are as follows (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
SEPTEMBER 30, 1995 SEPTEMBER 30, 1996 SEPTEMBER 30, 1997
------------------ ------------------ ------------------
<S> <C> <C> <C>
Service cost benefits attributed to service
during the period .......................... $1,497 $1,533 $ 859
Interest cost on accumulated post retirement
benefit obligation ......................... 4,134 3,868 3,098
Net amortization and deferral ............... (118) (187) (1,326)
------------------ ------------------ ------------------
Net postretirement health care cost ....... $5,513 $5,214 $ 2,631
================== ================== ==================
</TABLE>
The weighted average discount rate used in determining the accumulated
postretirement benefit obligation was 8.0%, and 7.5% at September 30, 1996
and 1997, respectively. Net postretirement health care cost was computed
using a weighted average discount rate of 8.5% for the year ended September
30, 1995, 7.75% for the year ended September 30, 1996, and 8.0% for the year
ended September 30, 1997. For measuring the expected postretirement benefit
obligation, a 10% annual rate of increase in the per capita claims cost was
assumed for 1997. This rate is assumed to decrease by 1.0% per year to an
ultimate rate of 5.0%. The health care cost trend rate assumption has a
significant effect on the amounts reported. To
F-28
<PAGE>
illustrate, increasing the assumed health care cost trend rates by one
percentage point in each year would increase the accumulated postretirement
benefit obligation as of September 30, 1996 and September 30, 1997 by
approximately $2.8 million and $2.2 million, respectively, and the aggregate
of the service and interest cost components of net postretirement health care
cost $0.4 million for each of the years ended September 30, 1995 and 1996,
and by approximately $0.2 million for the year ended September 30, 1997.
9. INCOME TAXES
The income tax benefit (provision) includes the following components (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
SEPTEMBER 30, 1995 SEPTEMBER 30, 1996 SEPTEMBER 30, 1997
------------------ ------------------ ------------------
<S> <C> <C> <C>
Current ........
Federal ....... $ -- $ -- $ --
State ......... -- -- --
Foreign ....... (759) (1,164) --
------------------ ------------------ ------------------
Total current (759) (1,164) --
------------------ ------------------ ------------------
Deferred .......
Federal ....... (2,829) (2,315) 26,165
State ......... (315) (330) 3,738
Foreign ....... -- -- 584
------------------ ------------------ ------------------
Total
deferred .... (3,144) (2,645) 30,487
------------------ ------------------ ------------------
$(3,903) $(3,809) $30,487
================== ================== ==================
</TABLE>
The effective tax rate varied from the U.S. Federal tax rate of 35% for
the years ended September 30, 1995, 1996 and 1997 as a result of the
following:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
SEPTEMBER 30, 1995 SEPTEMBER 30, 1996 SEPTEMBER 30, 1997
---------------------- ---------------------- ----------------------
<S> <C> <C> <C>
U.S. Federal tax rate .......................... 35% 35% 35%
State income taxes, net of U.S. Federal tax
impact ........................................ 4 4 4
Other, net ..................................... 1 1 1
---------------------- ---------------------- ----------------------
Effective tax rate ............................ 40% 40% 40%
====================== ====================== ======================
</TABLE>
At September 30, 1997, the Company had deferred tax liabilities of $167
million, of which $32 million are current in nature, and deferred tax assets
of $182 million, of which $35 million are current in nature. Deferred tax
assets and liabilities have been netted as a current asset and a non-current
liability in the accompanying Consolidated Balance Sheets. The principal
temporary differences included above are depreciation, a $75 million
liability, LIFO inventory, a $22 million liability, net operating loss
carryforwards, a $67 million asset, postretirement health and pension
benefits, a $28 million asset, and $17 million of other net miscellaneous
asset items.
The Company has net operating loss carryforwards for income tax purposes
of approximately $170 million, of which $5 million expire in 2004, $51
million expire in 2005, $25 million expire in 2006, $13 million expire in
2007, $28 million expire in 2008, and $48 million expire in 2012.
F-29
<PAGE>
10. LONG-TERM OBLIGATIONS
Long-term debt, including amounts payable within one year, is as follows
(in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30, MARCH 31,
1996 1997 1998
--------------- --------------- -----------
<S> <C> <C> <C>
(i) Sweetheart Cup Company Inc.
Senior Secured Notes, at 9.625%, interest payable
semiannually on March 1 and September 1 of each
year, commencing March 1, 1994, due on September 1,
2000, and are subject to redemption on or after
September 1, 1997 at the option of the Company, in
whole or in part, at the redemption prices set
forth below (expressed as percentages of the
principal amount), plus accrued interest to the
redemption date, for redemptions during the 12
month period beginning September 1, of the
following years: 1997--103.208%, 1998--101.604%,
and 1999--100.000% ................................. $190,000 $190,000 $190,000
Senior Subordinated Notes, at 10.50%, interest
payable semiannually on March 1 and September 1 of
each year, commencing March 1, 1994, due on
September 1, 2003, and are subject to redemption on
or after September 1, 1998 at the option of the
Company, in whole or in part, at the redemption
prices set forth below (expressed as percentages of
the principal amount), plus accrued interest to the
redemption date, for redemption during the 12 month
period beginning September 1, of the following
years: 1998--103.938%, 1999--102.625%,
2000--101.313%, and 2001 and thereafter--100.000% . 110,000 110,000 110,000
Revolving Loan at Bankers Trust's prime rate plus
1.50%, or Bankers Trust's Eurodollar rate plus
2.50%, subject to certain limitations as well as
downward adjustment for any interest period
beginning after October 1, 1994 upon the
satisfaction of certain financial criteria, due on
August 30, 1998 (interest rates--7.91% and 10.0% at
September 30, 1996 and 1997) ....................... 15,800 60,000 --
Revolving Credit Facility with Bank of America
Business Credit, see Note 15. ...................... -- -- 114,929
(ii) Sweetheart Receivables Corporation
Sweetheart Receivables Corporation Series 1994-1 A-V
Trade Receivables-Backed Notes, a private
placement, at Telerate one month LIBOR plus .40%.
Interest payable monthly commencing on October 17,
1994 through the Scheduled Pay-Out Period starting
July 31, 1999 (interest rates--5.90% and 6.06% at
September 30, 1996 and 1997) ....................... 60,000 60,000 --
(iii) Lily Cups Inc.
Term Facility, at Bank of Nova Scotia's prime rate
plus 1.25% payable quarterly, due in equal annual
repayments commencing October 31, 1994 and ending
October 31, 1998 (interest rates--7.0% and 6.0% at
September 30, 1996 and 1997) ....................... 4,210 2,737 1,332
F-30
<PAGE>
SEPTEMBER 30, SEPTEMBER 30, MARCH 31,
1996 1997 1998
--------------- --------------- -----------
Operating Facility, at Bank of Nova Scotia's prime
rate plus 1.25%, repaid and reborrowed until
October 31, 1998, subject to satisfaction of
certain conditions on the date of any such
borrowing (interest rates--7.0% and 6.0% at
September 30, 1996 and 1997) ....................... 3,304 5,431 4,227
--------------- --------------- -----------
383,314 428,168 420,488
Less: Current portion of long-term debt ............. (1,435) (1,369) (5,559)
--------------- --------------- -----------
$381,879 $426,799 $414,929
=============== =============== ===========
</TABLE>
The aggregate annual maturities of long-term debt at September 30, 1997
are as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
1998 ................ $ 1,369
1999 ................ 66,799
2000 ................ 250,000
2001 ................ --
2002 ................ --
2003 and thereafter 110,000
---------
$428,168
=========
</TABLE>
Long-term bonds consist of four industrial development bonds and a loan
from the State of Maryland with interest rates ranging from 6.0% to 6.75%,
due in varying amounts through 2006. The aggregate annual maturities of
long-term bonds at September 30, 1997 are as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
1998 .................... $ --
1999 .................... 2,500
2000 .................... --
2001 .................... --
2002 .................... --
2003 and thereafter .... 1,200
---------
$3,700
=========
</TABLE>
The maximum month-end balances outstanding, average amounts outstanding,
and the weighted average interest rates on the domestic Revolving Loan
Facility and Canadian Operating Facility during the years ended September 30
were as follows (in thousands, except for interest rates):
<TABLE>
<CAPTION>
DOMESTIC REVOLVING CANADIAN OPERATING
LOAN FACILITY FACILITY
-------------------- ------------------
1996 1997 1996 1997
--------- --------- -------- --------
<S> <C> <C> <C> <C>
Maximum month-end balances outstanding $23,000 $60,000 $4,321 $6,123
========= ========= ======== ========
Average amounts outstanding ............ $ 8,660 $48,194 $3,564 $4,843
========= ========= ======== ========
Weighted average interest rates ....... 8.63% 8.52% 8.16% 6.10%
</TABLE>
The 1993 Credit Agreement and the Sweetheart Receivables Corporation
Series 1994-1 A-V Trade Receivables-Backed Notes were refinanced subsequent
to September 30, 1997. See Note 15 for details.
F-31
<PAGE>
1993 Credit Agreement
On August 30, 1993, the Company entered into the 1993 Credit Agreement,
which provided for a $40 million Term Loan and a $75 million Revolving Loan
Facility. The Company prepaid the $40 million Term Loan on September 20, 1994
in connection with the issuance of the Sweetheart Receivables Corporation
1994-1 A-V Trade Receivables-Backed Notes and it may not be reborrowed.
Additionally, certain terms and conditions of the Credit Agreement were
amended. The Revolving Loan Facility is limited to 50% of eligible inventory
of Sweetheart Cup Company Inc. (up to a maximum of $150 million of eligible
inventory). In addition, the combined borrowings outstanding under the
Revolver plus the Sweetheart Receivables Corporation 1994-1 A-V Trade
Receivables-Backed Notes less the aggregate amount of cash on deposit in
certain Sweetheart Receivables Corporation accounts may not exceed $115
million in aggregate. The Revolving Loan borrowings were $15.8 million at
September 30, 1996 and $60.0 million at September 30, 1997.
The borrowings under the 1993 Credit Agreement bear interest, at
Sweetheart Cup Company Inc.'s option, at Bankers Trust Company's prime rate
plus 1.50% or, subject to certain limitations, at Bankers Trust Company's
Eurodollar rate plus 2.50%. Interest rates may be reduced by 0.25% as of
October 1, 1994, and on the first day of any fiscal quarter thereafter,
depending upon Sweetheart Cup Company Inc.'s ratios of cash flow coverage to
interest expense. Up to $15 million of the Revolving Loan Facility may be
utilized to issue Letters of Credit. Approximately $9.7 million in Letters of
Credit were issued on behalf of Sweetheart Cup Company Inc. as of September
30, 1996 and 1997. The 1993 Credit Agreement also provides for the payment of
a commitment fee of 0.5% per annum on the daily average unused amount of the
commitments under the Revolving Loan Facility (approximately $299,600 and
$104,600 for the years ended September 30, 1996 and 1997, respectively, as
well as a 2.75% per annum fee on outstanding Letters of Credit (approximately
$272,400 and $254,000 for the years ended September 30, 1996 and 1997,
respectively).
Loans made pursuant to the Revolving Loan Facility can be borrowed,
repaid, and reborrowed from time to time until final maturity on August 30,
1998. The 1993 Credit Agreement provides for partial mandatory prepayments
upon the issuance of equity by Sweetheart Holdings Inc. or any of its
subsidiaries, and full repayment upon any change of control (as defined in
the 1993 Credit Agreement). The Revolving Loan Facility also requires a $20
million clear-down period between December 1 and January 31 of each year,
commencing December 1, 1994, whereby the average unused revolver during any
consecutive 31-day period within the clear-down period must average $20
million; failure to do so results in an immediate reduction of the Revolving
Loan Facility by $20 million effective immediately succeeding February 1.
The indebtedness of Sweetheart Cup Company Inc. under the 1993 Credit
Agreement is guaranteed by Sweetheart Holdings Inc. and secured by a first
priority perfected security interest in inventory, spare parts and all
proceeds of the foregoing of Sweetheart Cup Company Inc., a first priority
security interest, shared with the holders of the Senior Secured Notes, in
Shared Collateral (as defined in the 1993 Credit Agreement to include
primarily all capital stock owned by Sweetheart Holdings Inc. and Sweetheart
Cup Company Inc. and of each of their respective present and future direct
subsidiaries, all intercompany indebtedness payable to Sweetheart Holdings
Inc. or Sweetheart Cup Company Inc. by Sweetheart Holdings Inc., Sweetheart
Cup Company Inc. or their respective present and future subsidiaries, and any
proceeds from business interruption insurance), and a second priority
perfected security interest in the Senior Secured Note collateral as
described below.
Senior Secured Notes and Senior Subordinated Notes
Sweetheart Cup Company Inc. is the obligor with respect to $190 million of
Senior Secured Notes and $110 million of Senior Subordinated Notes. The
Senior Secured Notes were issued pursuant to an Indenture among Sweetheart
Cup Company Inc., Sweetheart Holdings Inc., as Guarantor, and United States
Trust Company of New York, as Trustee (the "Senior Secured Indenture"). The
Senior Secured Notes bear interest at 9.625% per annum, payable semi-annually
in arrears on March 1 and September 1 each year to holders of record on
February 15 or August 15 next preceding the interest payment date. The Senior
Secured Notes mature on September 1, 2000 and were issued in denominations of
$1,000 and integral multiples thereof.
F-32
<PAGE>
The Senior Secured Notes are secured by a first priority lien on the
Senior Secured Note collateral (which includes all material properties and
equipment and substantially all of the other assets of Sweetheart Cup Company
Inc., but excludes collateral under the 1993 Credit Agreement, the capital
stock of its subsidiaries, and intercompany indebtedness) and by a second
lien on collateral under the 1993 Credit Agreement (primarily accounts
receivable, inventory, and proceeds thereof as described above). The Senior
Secured Notes and borrowings under the 1993 Credit Agreement are also jointly
secured by Shared Collateral (comprised of pledges of the capital stock of
Lily Canada, the capital stock of any direct subsidiaries formed or acquired
in the future, future intercompany notes, and the proceeds of business
interruption insurance).
The Senior Secured Indenture contains various covenants which prohibit, or
limit, among other things, asset sales, change of control, dividend payments,
equity repurchases or redemptions, the incurrence of additional indebtedness,
the issuance of disqualified stock, certain transactions with affiliates, the
creation of additional liens, and certain other business activities. The
Senior Secured Notes may be redeemed at the dates and prices indicated in the
table above.
The Senior Subordinated Notes were issued pursuant to an Indenture among
Sweetheart Cup Company Inc., Sweetheart Holdings Inc., as Guarantor, and U.S.
Trust Company of Texas, N.A., as Trustee (the "Senior Subordinated
Indenture"). The Senior Subordinated Notes bear interest at 10.50% per annum,
payable semi-annually in arrears on March 1 and September 1 each year to
holders of record on the February 15 or August 15 next preceding the interest
payment date. The Senior Subordinated Notes mature on September 1, 2003 and
were issued in denominations of $1,000 and integral multiples thereof.
The Senior Subordinated Notes are subordinate in right of payment to the
prior payment in full of all Senior Secured Notes, all borrowings under the
1993 Credit Agreement, and all other indebtedness not otherwise prohibited.
As a result of the subordination provisions, and in the event of an
insolvency or liquidation proceeding, holders of the Senior Subordinated
Notes may recover a lesser percentage of their investment than other
creditors of the Company.
The Senior Subordinated Indenture contains various covenants which
prohibit, or limit, among other things, asset sales, change of control,
dividend payments, equity repurchases or redemptions, the incurrence of
additional indebtedness, the issuance of disqualified stock, certain
transactions with affiliates, the creation of additional liens, and certain
other business activities. The Senior Subordinated Notes may be redeemed at
the dates and prices indicated in the table above.
Sweetheart Receivables Corporation Series 1994-1 A-V Trade
Receivables-Backed Notes
Sweetheart Cup Company Inc. securitizes its receivables through its wholly
owned limited purpose, bankruptcy-remote finance subsidiary, Sweetheart
Receivables Corporation ("SRC"). This structure is intended to segregate
receivables from Sweetheart Cup Company Inc.'s other assets or liabilities
and achieve a lower cost of funds based on the credit quality of the
receivables.
On September 20, 1994, SRC issued and sold to Bankers Trust as Placement
Agent, $60 million of Series 1994-1 A-V Trade Receivables-Backed Notes (the
"Notes"), under an indenture and security agreement. The proceeds of the
notes were used to purchase substantially all of the receivables of
Sweetheart Cup Company Inc. on the closing date. SRC's share of the proceeds
of collections on those receivables will be used to purchase newly generated
receivables from Sweetheart Cup Company Inc. on an ongoing basis.
SRC's purchase of receivables from Sweetheart Cup Company Inc. is intended
to be a "true sale" for bankruptcy law purposes and without recourse to
Sweetheart Cup Company Inc., except that Sweetheart Cup Company Inc. will be
required to make payment to SRC for certain dilution of the receivables and
will remain liable for making payments in connection of certain customary
representations and covenants.
SRC grants the Trustee, Manufacturer's and Traders Trust, a first
perfected security interest in the receivables and certain other related
assets, subject to certain limited exceptions. The holders of the Notes have
no recourse to the assets of SRC in respect of obligations under the Notes.
Noteholders are
F-33
<PAGE>
protected by over-collateralization of receivables on the Notes requiring
certain amounts to be set aside in an equalization account and four months of
interest set aside in the carrying cost account by the Trustee. These amounts
may be invested by SRC in highly rated liquid investments such as A-1+
commercial paper and AAA moneymarket funds as rated by Standard & Poors
Corporation. These amounts are shown on the consolidated balance sheet as
restricted cash. Restricted cash totaled $29.0 million and $28.9 million at
September 30, 1997 and 1996, respectively. Sweetheart Cup Company Inc.
retains a promissory note which pays interest monthly at prime rate, subject
to certain limitations, on these and other balances due from SRC.
Sweetheart Cup Company Inc. acts as servicer of the receivables sold. The
interest rate is based on Telerate's one month LIBOR plus .40% and is paid
monthly. The Notes have a first scheduled principal payment date of July 31,
1999 and have a stated maturity date of September 30, 2000. There are certain
early voluntary and involuntary liquidation events. Noteholders are entitled
to certain breakage payments if the Notes are prepaid in part or whole prior
to July 31, 1998. The breakage payment is equal to the present value of the
.40% spread for the period from the prepayment date until the first scheduled
principal payment date, multiplied by the amount of principal prepayment.
The SRC promissory note and equity held by Sweetheart Cup Company Inc.
constitute Shared Collateral which is a first priority interest shared under
the Credit Agreement and Senior Secured Notes.
Canadian Credit Agreement
On December 20, 1989, Lily Cups Inc. entered into a Term and Revolving
Credit Facilities Agreement (the "Canadian Credit Agreement"), consisting of
CDN $14.0 million of Term Advances and CDN $6.0 million of Operating
Advances. Effective August 30, 1993, the Canadian Credit Agreement was
renegotiated and extended to provide for equal annual repayments on the
remaining CDN $9.5 million Term Facility of CDN $1.9 million beginning
October 31, 1994 and ending October 31, 1998 and to provide for an additional
CDN $1.0 million of Operating Advances in addition to the CDN $6.0 million
Operating Facility previously available. The renegotiated and extended
Operating Facility provides for a final repayment on October 31, 1998. Lily
Cups Inc. has pledged substantially all its assets as collateral for the
Canadian Credit Agreement. The Company is charged a 0.5% fee with respect to
any unused balance available under the Canadian Credit Agreement as
renegotiated and extended. At September 30, 1996 and 1997, the available
capacity under the Canadian Credit Agreement was CDN $2.4 million and CDN
$1.4 million, respectively (U.S. $1.8 million and U.S. $1.0 million,
respectively).
11. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments held by the Company:
CURRENT ASSETS AND CURRENT LIABILITIES -- The carrying amount approximates
fair value because of the short maturity of those instruments.
LONG-TERM BONDS -- The carrying amount approximates fair value based on
the nature of the instrument.
LONG-TERM DEBT --The fair value of the Company's Senior Secured Notes and
the Senior Subordinated Notes are based on the quoted market prices at the
end of the fiscal years. The other instruments have variable interest rates
that fluctuate along with current market conditions.
F-34
<PAGE>
The estimated fair values of the Company's financial instruments at
September 30 are as follows (in thousands):
<TABLE>
<CAPTION>
1996 1997
--------------------- ---------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
---------- --------- ---------- ---------
<S> <C> <C> <C> <C>
Cash and cash equivalents .................. $ 4,371 $ 4,371 $ 2,650 $ 2,650
Other current assets ....................... 311,761 311,761 308,763 308,763
Current portion of long-term debt and
bonds...................................... 1,535 1,535 1,369 1,369
Other current liabilities .................. 152,218 152,218 163,276 163,276
Long-term bonds ............................ 3,700 3,700 3,700 3,700
Long-term debt ............................. 381,879 388,792 426,799 428,271
</TABLE>
The fair value of the Company's long-term debt is estimated to be
$6,913,000 higher than the carrying value at September 30, 1996 and
$1,472,000 higher than the carrying value at September 30, 1997. The
differences are primarily the result of fluctuations in the interest rate
market since the issuance of the Company's Senior Secured Notes and Senior
Subordinated Notes.
12. LEASE COMMITMENTS
The Company leases certain transportation vehicles, warehouse and office
facilities, and machinery and equipment under both cancelable and
non-cancelable operating leases, most of which expire within ten years and
may be renewed by the Company. Rent expense under such arrangements totaled
$12,417,000, $15,636,000 and $16,756,000 for the years ended September 30,
1995, 1996 and 1997, respectively. Future minimum rental commitments under
non-cancelable operating leases in effect at September 30, 1997 are as
follows (in thousand of dollars):
<TABLE>
<CAPTION>
<S> <C>
1998 ................ $12,116
1999 ................ 11,207
2000 ................ 9,083
2001 ................ 7,533
2002 ................ 6,767
2003 and thereafter 11,026
---------
$57,732
=========
</TABLE>
Data with respect to Lily Cups Inc.'s rental commitments for the years
1998 and thereafter is not material and is not included in the above table.
13. SHAREHOLDERS' EQUITY
Sweetheart Holdings Inc. has a single-class capital structure consisting
of 3,000,000 shares of common stock, par value $.01 per share. As of August
30, 1993, 1,040,000 shares of single-class stock were issued to AIP, First
Plaza Group Trust (Mellon Bank, N.A., as Trustee) and AT&T Master Pension
Trust (Leeway and Company as nominee) for approximately $100.5 million. All
outstanding shares of single-class common stock are deemed fully paid and
nonassessable. The single-class common stock is neither redeemable nor
convertible, and the holders thereof have no preemptive or other subscription
rights to purchase any securities of Sweetheart Holdings Inc. There currently
is no public market for this common stock. During the third quarter of fiscal
year 1994, the Company issued 6,000 authorized shares of common stock for
$100 per share. The Company received approximately $100,000 in cash and a
$500,000 promissory note in consideration for the shares. The promissory note
is reflected as a reduction to shareholders' equity in the consolidated
balance sheet. There were 1,046,000 shares of single-class common stock
outstanding as of September 30, 1996 and 1997.
F-35
<PAGE>
Subject to Delaware law and limitations in certain debt instruments
(Senior Secured Notes, Senior Subordinated Notes, and borrowings under the
1993 Credit Agreement), common shareholders are entitled to receive such
dividends as may be declared by Sweetheart Holdings Inc.'s Board of Directors
out of funds legally available thereof. In the event of a liquidation,
dissolution or winding up of Sweetheart Holdings, Inc., common shareholders
are entitled to share ratably in all assets remaining after payment or
provision for payment of debts or other liabilities of Sweetheart Holdings
Inc. Each outstanding common share is entitled to one vote on any matter
submitted to a vote of stockholders. This single-class common stock has no
cumulative voting rights.
The Board of Directors of Sweetheart Holdings Inc. approved the Stock
Option and Purchase Plan (the "Plan") during fiscal year 1994 which provides
for the granting of nonqualified and incentive stock options as defined by
the Internal Revenue Code. The Plan is administered by the Compensation
Committee (the "Committee") of the Board of Directors. The Committee has the
authority to select participants, grant stock purchase options, and make all
necessary determinations for the administration of the Plan. The exercise
price per share of common stock under each option is fixed by the Committee
at the time of the grant of the option and is equal to at least 100% of the
fair market value of a share of common stock on the date of grant, but not
less than $100 per share. The Committee determines the term of each option
which may not exceed ten years from the date of grant of the option. Options
are exercisable in equal increments over fiscal years 1994, 1995, 1996, and
1997, depending on certain operating results of the Company. Any options not
exercisable within the above years are exercisable on the ninth anniversary
of the grant of the option. Under the provisions of the Plan, the Committee
may also grant participants the short-term option to purchase shares of
common stock at a price per share equal to not less than the fair market
value of the common stock on the date of grant. Short-term options expire 30
days after the date of grant to the extent not exercised.
The Plan provides for the issuance of up to 103,000 shares of common stock
in connection with the stock options granted under the Plan. Options that are
canceled or expire unexercised are available for future grants. All options
are granted via approval of the Board of Directors. The Company granted
10,400 and 30,135 options during 1996 and 1997, respectively. Options
canceled totaled 6,140 and 11,035 during 1996 and 1997, respectively. At
September 30, 1997, 31,827 shares were available for the granting of
additional options. As the Company's stock is privately held, the value of
the common stock is assumed to be $100 per share at all times during the
year. Although no options were exercised during fiscal year 1996, and 13,818
shares were exercisable at September 30, 1997.
14. NON-RECURRING CHARGES
The Company incurred non-recurring charges in 1997 attributable to plant
restructuring and an impairment of certain long-lived assets.
In the fourth quarter of fiscal 1997, the Company adopted a restructuring
plan designed to improve efficiency and enhance its competitiveness.
Restructuring charges consist of cash charges primarily related to severance
costs, as well as costs to close and exit the Riverside facility, and cease
paper operations at the Springfield facility, substantially all of which will
be paid in fiscal 1998. The Company anticipates substantial completion of
this restructuring in fiscal 1998.
As a result of market conditions experienced by the Company and the
decision to close facilities as described above, the Company reviewed the
carrying value of its long-lived assets. Certain assets were identified which
would be disposed of, abandoned or become obsolete prior to the end of their
accounting useful lives, and were written-down accordingly, resulting in a
pre-tax non-cash charge totaling $24.6 million.
The loss on asset disposal and impairment had no impact on the Company's
1997 cash flow or its ability to generate cash flow in the future. As a
result of this charge, depreciation expense related to these assets will
decrease in future periods.
F-36
<PAGE>
15. SUBSEQUENT EVENTS
1997 Amended and Restated Credit Agreement
On October 24, 1997, the Company entered into the 1997 Amended and
Restated Credit Agreement, which provides for a $135 million Revolving Credit
Facility with Bank of America Business Credit, as Agent and various other
Financial Institutions. At closing on October 24, 1997, Bank of America
Business Credit acquired the outstanding amount of loans from Bankers Trust
Company, made under the 1993 Credit Agreement, referred to in Note 10. The
1993 Credit Agreement was Amended and Restated to increase the facility size
to $135 million, and include receivables as collateral, which had previously
been sold to Sweetheart Receivables Corporation as described in Note 10. The
Company then reacquired the receivables at SRC with the proceeds of the 1997
Amended and Restated Credit Agreement, enabling SRC to repay the Sweetheart
Receivables Corporation 1994-1 A-V Trade Receivables-Backed Notes with those
proceeds and existing restricted cash. Additionally, certain other terms and
conditions of the Credit Agreement were amended.
Availability under the Amended and Restated Credit Agreement is limited to
60% of eligible inventory constituting raw material and work-in-process, and
65% of eligible inventory constituting finished goods, and 40% of eligible
inventory constituting in-transit inventory of Sweetheart Cup Company Inc.
(up to a maximum of $100 million of eligible inventory). Additionally,
eligible accounts from customers, subject to certain restrictions, are
allowed to 85%. These calculations are subject to an overall maximum 80% of
account's not more than 60 days past due, plus 50% of book value of
inventory.
The borrowings under the 1997 Amended and Restated Credit Agreement bear
interest, at Sweetheart Cup Company Inc.'s option, at Bank of America's prime
rate plus 1.00% or, subject to certain limitations, at Bank of America's
Eurodollar rate plus 2.25%. Additionally, the Company must pay certain other
annual and on-going expenses to Bank of America, as Agent. Up to $15 million
of the Facility may be utilized to issue Letters of Credit. The letter of
Credit Fee is 1.75% per annum, plus out of pocket fees and expense. The 1997
Amended and Restated Credit Agreement also provides for the payment of a
commitment fee of 0.5% per annum on the daily average unused amount of the
commitments under the Facility.
Loans made pursuant to the Revolving Loan Facility can be borrowed,
repaid, and reborrowed from time to time until final maturity on August 1,
2000. The 1997 Amended and Restated Credit Agreement provides for partial
mandatory prepayments upon the issuance of equity by Sweetheart Holdings Inc.
or any of its subsidiaries, and full repayment upon any change of control (as
defined in the Agreement).
The indebtedness of Sweetheart Cup Company Inc. under the 1997 Amended and
Restated Credit Agreement is guaranteed by Sweetheart Holdings Inc. and
secured by a first priority perfected security interest in inventory, spare
parts, accounts receivable and all proceeds of the foregoing of Sweetheart
Cup Company Inc., a first priority security interest, shared with the holders
of the Senior Secured Notes, in Shared Collateral (as defined in the 1993
Credit Agreement to include primarily all capital stock owned by Sweetheart
Holdings Inc. and Sweetheart Cup Company Inc. and of each of their respective
present and future direct subsidiaries, all intercompany indebtedness payable
to Sweetheart Holdings Inc. or Sweetheart Cup Company Inc. by Sweetheart
Holdings Inc., Sweetheart Cup Company Inc. or their respective present and
future subsidiaries, and any proceeds from business interruption insurance),
and a second priority perfected security interest in the Senior Secured Note
collateral as described below.
The 1997 Amended and Restated Credit Agreement contains various covenants
which limit, or restrict, among other things, indebtedness, dividends,
leases, capital expenditures, the use of proceeds from asset sales and
certain other business activities. Additionally, the Company must maintain on
a consolidated basis, certain specified ratios at specified times, including,
without limitation, maintenance of minimum fixed charge coverage ratio. The
Company is currently in compliance with all covenants under the 1997 Amended
and Restated Credit Agreement.
Bakery Sale
On November 30, 1997, the Company entered into an agreement to sell assets
of its bakery operation to Ace Baking Company Limited Partnership. Assets
sold included property, plant, and equipment, which
F-37
<PAGE>
have been reclassified to assets held for sale, and inventories.
Consideration of $22.3 million was received, including $20.3 million of cash,
and a $2 million non-interest bearing note. A gain of $4.5 million will be
recognized in fiscal year 1998. Bakery operations represented 3% of net sales
in fiscal year 1997.
16. RELATED-PARTY TRANSACTIONS
AIP, which is Sweetheart Holdings Inc.'s largest stockholder and is a
private investment partnership which makes equity investments, principally in
industrial and manufacturing companies in the United States, is managed by
AIPM, an affiliate of AIP. AIPM receives an annual fee of approximately $1.85
million for providing general management, financial and other corporate
advisory services, and is reimbursed for certain out-of-pocket expenses. The
fees are paid to AIPM pursuant to a management services agreement among AIPM,
Sweetheart Holdings Inc. and Sweetheart Cup Company Inc.
In addition, for the year ended September 30, 1996, the Company reimbursed
AIPM for $950,000 of expenses incurred in connection with an investigation of
the Company's strategic alternatives.
17. BUSINESS SEGMENT AND MAJOR CUSTOMERS
The Company operates in a single industry which is the manufacture and
distribution of paper and plastic related products in foodservice and food
packaging disposables. Sales to a major customer accounted for 13.0%, 13.6%
and 13.7% for the years ended September 30, 1995, 1996 and 1997,
respectively.
18. CONTINGENCIES
A lawsuit entitled Aldridge v. Lily-Tulip, Inc. Salary Retirement Plan
Benefits Committee and Fort Howard Cup Corporation was initially filed in
state court in Georgia in April 1987, and is currently pending against the
Company in federal court. The remaining issue involved in the case is a claim
that the Company wrongfully terminated the Lily-Tulip , Inc. Salary
Retirement Plan (the "Plan") in violation of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"). In December 1994, the United
States Circuit Court of Appeals for the Eleventh Circuit (the "Circuit
Court") ruled that the Plan was terminated on December 31, 1986. Following
that decision, the plaintiffs sought a rehearing which was denied, and
subsequently filed a petition for a writ of certiorari with the United States
Supreme Court, which was also denied. Following remand, in March 1996 the
United States District Court for the Southern District of Georgia entered a
judgment in favor of the Company. Following denial of a motion for
reconsideration, the plaintiffs in April 1997 filed an appeal with the
Circuit Court.
Management believes that the Company will ultimately prevail on the
remaining issues in the Aldridge litigation. Due to the complexity involved
in connection with the claims asserted in this case, the Company cannot
determine at present with any certainty the amount of damages it would be
required to pay should the plaintiffs prevail; accordingly, there can be no
assurance that such amount would not have a material adverse effect on the
Company's financial position or results of operations.
The Company is subject to a variety of environmental and pollution control
laws and regulations in all jurisdictions in which it operates. The Company
is also involved in various other claims and lawsuits incidental to its
business. In the opinion of management, the ultimate liabilities, if any,
after considering the reserves established relating to these matters, will
not materially affect the Company's financial position or results of
operations.
F-38
<PAGE>
19. SUMMARIZED FINANCIAL INFORMATION FOR SWEETHEART CUP COMPANY INC.
The following tables provide summarized financial information for
Sweetheart Cup Company Inc. and subsidiaries (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30,
1996 1997
--------------- ---------------
<S> <C> <C>
Current assets ......... $572,259 $562,731
Noncurrent assets ...... 174,006 176,382
Current liabilities ... 127,728 114,415
Noncurrent liabilities 519,635 563,065
</TABLE>
Prior year amounts below have been reclassified as noted in Note 1, item
(j):
<TABLE>
<CAPTION>
FOR THE FOR THE FOR THE
YEAR ENDED YEAR ENDED YEAR ENDED
SEPTEMBER 30, 1995 SEPTEMBER 30, 1996 SEPTEMBER 30, 1997
------------------ ------------------ ------------------
<S> <C> <C> <C>
Net sales ............................... $986,618 $959,818 $886,017
Gross profit ............................ 71,873 95,503 37,128
Income (loss) from continuing operations
before extraordinary loss .............. 766 20,213 (36,143)
Net income (loss) ....................... 766 20,213 (37,083)
</TABLE>
20. SUBSEQUENT EVENT
On March 12, 1998, the stockholders of the Company consummated an
agreement with SF Holdings Group, Inc. ("Buyer") and Creative Expressions
Group, Inc., an affiilate of Buyer. Pursuant to the agreement, Buyer acquired
from the Company's stockholders 48% of the Company's outstanding common stock
and all of a new class of non-convertible, non-voting common stock, as a
result of which Buyer holds 90% of the total number of outstanding shares of
both classes of the Company's common stock. Upon consummation of the
transaction, the Company's existing stockholders nominated three of the
Company's five directors and Buyer nominated two directors. Significant
actions by the Company's Board of Directors will require the vote of four
directors. Additionally, pursuant to the agreement, The Fonda Group, Inc., an
affiliate of Buyer, manages the day-to-day operations of the Company. The
Company incurred $2.6 million of severance expenses as a result of the
termination of certain officers of the Company pursuant to certain executive
separation agreements. The Company also incurred financial advisory and legal
expenses of approximately $4.4 million in connection with the transaction.
21. UNAUDITED SUBSEQUENT EVENTS
In the quarter ended March 31, 1998, the Company recognized certain
one-time charges, consisting primarily of $4.4 million of financial advisory
and legal fees associated with the investment by SF Holdings and $3.7 million
of severance expenses as a result of the termination of certain officers of
the Company pursuant to executive separation agreements and retention plans
for certain key executives.
In the quarter ended March 31, 1998, the Company reduced its salaried
workforce by approximately 15% and hourly workforce by less than 5%, and
decided to rationalize certain product lines, and in connection therewith,
dispose of the associated property and equipment. In connection with such
plans, the Company recognized $10.5 million of charges for severance and
asset disposition costs, of which $5.0 million of cash expenditures remain
unpaid as of March 31, 1998. The Company anticipates substantial completion
of this restructuring within the next twelve months.
Subsequent to the close of the bakery business sale described in Note 15,
the Company revised its estimate of the gain on such sale to $3.5 million,
which has been reflected in the Company's unaudited financial statements for
the six months ended March 31, 1998.
F-39
<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 ..................... 3
Prospectus Summary ........................ 5
Risk Factors .............................. 22
The Sweetheart Investment ................. 29
Use of Proceeds ........................... 30
The Exchange Offer......................... 31
Capitalization............................. 39
Unaudited Pro Forma Financial Information 40
Unaudited Pro Forma Combined Condensed
Balance Sheet............................. 41
Unaudited Pro Forma Combined Condensed
Statements of Income...................... 43
Selected Historical Financial Data of
Fonda..................................... 48
Selected Historical Consolidated Financial
Data of Sweetheart........................ 50
Management's Discussion and Analysis
of Financial Condition and Results
of Operations............................. 52
Business................................... 66
Management................................. 75
Principal Stockholders..................... 80
Certain Relationships and Related
Transactions.............................. 81
Description of New Shares.................. 82
Description of Capital Stock............... 107
Certain Federal Income Tax Consequences ... 111
Plan of Distribution....................... 118
Legal Matters.............................. 119
Experts.................................... 119
Change in Certifying Accountants........... 119
Unaudited Pro Forma Condensed Financial
Data of Sweetheart and Fonda.............. P-1
Index to Financial Statements.............. F-1
</TABLE>
SF HOLDINGS GROUP, INC.
OFFER TO EXCHANGE 3,000 SHARES OF
13 3/4% SERIES B
EXCHANGEABLE PREFERRED STOCK
DUE 2009
WHICH HAVE BEEN REGISTERED
UNDER THE SECURITIES ACT
FOR ANY AND ALL OF ITS
OUTSTANDING
13 3/4% SERIES A
EXCHANGEABLE PREFERRED STOCK
DUE 2009
------------------------
PROSPECTUS
------------------------
JULY 13, 1998
==============================================================================
