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Filed Pursuant to Rule 424(b)(3)
Registration File No.: 333-50683
SF HOLDINGS GROUP, INC.
OFFER TO EXCHANGE ITS
12 3/4% SERIES B SENIOR SECURED DISCOUNT NOTES DUE 2008
WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT FOR
ANY AND ALL OF ITS OUTSTANDING
12 3/4% SERIES A SENIOR SECURED DISCOUNT NOTES DUE 2008
($144,000,000 PRINCIPAL AMOUNT AT MATURITY OUTSTANDING)
THE EXCHANGE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 5:00 P.M., NEW
YORK CITY TIME, ON AUGUST 4, 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 $144,000,000 principal amount
at maturity of 12 3/4% Series B Senior Secured Discount Notes due 2008 (the
"New Notes") for an identical face amount of the outstanding 12 3/4% Series A
Senior Secured Discount Notes due 2008 (the "Old Notes" and, with the New
Notes, the "Notes"). The terms of the New Notes are identical in all material
respects to the terms of the Old Notes except that the registration and other
rights relating to the exchange of Old Notes for New Notes and the restrictions
on transfer set forth on the Old Notes will not appear on the New Notes. See
"The Exchange Offer." The New Notes are being offered hereunder in order to
satisfy certain obligations of SF Holdings under a Registration Rights
Agreement dated as of March 12, 1998 (the "Registration Rights Agreement")
among SF Holdings, Bear, Stearns & Co. Inc. and SBC Warburg Dillon Read Inc.
(the "Initial Purchasers"). Based on an interpretation by the staff of the
Securities and Exchange Commission (the "Commission") set forth in no-action
letters issued to third parties unrelated to SF Holdings, New Notes issued
pursuant to the Exchange Offer in exchange for Old Notes may be offered for
resale, resold, and otherwise transferred by a holder thereof (other than a
holder which is an "affiliate" of 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 Notes are acquired in the ordinary
course of such holder's business and such holder has no arrangement with any
person to participate in or is engaged in or is planning to be engaged in the
distribution of such New Notes.
The New Notes will mature on March 15, 2008. Until March 15, 2003, no
interest will accrue on the New Notes, but the sum of the initial offering
price to investors and the portion of the excess of the principal amount over
such initial offering price which shall have been accreted thereon (the
"Accreted Value") will increase between the date of original issuance of the
Old Notes and March 15, 2003. Beginning on March 15, 2003, interest on the New
Notes will accrue at the rate of 12 3/4% per annum and will be payable in cash
semi-annually in arrears on September 15 and March 15 of each year, commencing
on September 15, 2003. The New Notes will be redeemable at the option of SF
Holdings at any time on and after March 15, 2003 at the redemption prices set
forth herein. In addition, prior to March 15, 2001, SF Holdings may redeem up
to one-third of the aggregate principal amount of Notes at a redemption price
equal to 112.75% of the Accreted Value thereof, plus Liquidated Damages
thereon, if any, 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 that is 91 days after the date on which the New Notes 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
two-thirds of the original aggregate principal amount of Notes remains
outstanding immediately after the occurrence of such redemption. Upon the
occurrence of a Change of Control (as defined in the "definition" section of
"Description of New Notes") SF Holdings will be required to make an offer to
repurchase each holder's New Notes at an offer price equal to 101% of the
aggregate principal amount thereof, plus accrued and unpaid interest and
Liquidated Damages thereon, if any, to the date of repurchase (or, in the case
of repurchases of New Notes prior to March 15, 2003, at a purchase price equal
to 101% of the Accreted Value thereof, plus Liquidated Damages thereon, if any,
as of the date of repurchase). See "Description of New Notes." For purposes
hereof, "Liquidated Damages" shall mean any liquidated damages owing as a
result of SF Holdings' failure to file a timely registration statement and have
such registration statement declared effective by the Commission by a certain
date pursuant to Section 5 of the Registration Rights Agreement.
THE NEW NOTES WILL BE SUBORDINATE TO ALL INDEBTEDNESS AND OTHER
LIABILITIES AND COMMITMENTS OF SF HOLDINGS' SUBSIDIARIES. As of April 26, 1998,
such indebtedness 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." The New
Notes will rank senior in right of payment to any subordinated indebtedness of
SF Holdings incurred in the future, and will rank equally in right of payment
with any other senior indebtedness of SF Holdings incurred in the future.The
New Notes will be secured by a first priority pledge of all of the corporate
stock owned by SF Holdings of Sweetheart Holdings Inc. ("Sweetheart") and The
Fonda Group, Inc. ("Fonda"), and all intercompany notes issued by SF Holdings
in favor of Sweetheart and Fonda. See "Description of New Notes--Security."
(Cover continued on following page)
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SEE "RISK FACTORS" BEGINNING ON PAGE 18 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 8, 1998.
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(Continued from cover page)
SF Holdings will accept for exchange from an Eligible Holder any and all
Old Notes that are validly tendered prior to 5:00 p.m., New York City time, on
the Expiration Date. For purposes of the Exchange Offer, "Eligible Holder"
shall mean the registered owner of any Old Notes that remain Transfer
Restricted Securities, as reflected on the records of The Bank of New York, as
registrar for the Old Notes (in such capacity, the "Registrar"), or any person
whose Old Notes are held of record by the depository of the Old Notes. Tenders
of Old Notes may be withdrawn at any time prior to 5:00 p.m., New York City
time, on the Expiration Date. For purposes of the Exchange Offer, "Transfer
Restricted Securities" means each Old Note until the earliest to occur of (i)
the date on which such Old Note is exchanged in this Exchange Offer and
entitled to be resold to the public by the holder thereof without complying
with the prospectus delivery provisions of the Securities Act, (ii) the date on
which such Old Note is registered under the Securities Act and is disposed of
in a shelf registration statement, if applicable, or (iii) the date on which
such Old Note has been distributed to the public pursuant to Rule 144 under the
Securities Act or by a broker-dealer pursuant to the plan of distribution
described herein. See "Plan of Distribution."
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 Notes, it will
promptly return the Old Notes to the holders thereof. See "The Exchange Offer."
Each broker-dealer that receives New Notes for its own account pursuant to
the Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of such New Notes. The Letter of Transmittal states
that by so acknowledging and by delivering a prospectus, a broker-dealer will
not be deemed to admit that it is an "underwriter" within the meaning of the
Securities Act. This Prospectus, as it may be amended or supplemented from time
to time, may be used by a broker-dealer in connection with resales of New Notes
received in exchange for Old Notes where such Old Notes were acquired by such
broker-dealer as a result of market-making activities or other trading
activities. Any broker-dealer that acquired Old Notes directly from 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 Notes received in exchange for such Old Notes. 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
Notes. To the extent that Old Notes are tendered and accepted in the Exchange
Offer, a holder's ability to sell untendered Old Notes could be adversely
affected. If a market for the New Notes should develop, the New Notes could
trade at a discount from their principal amount. SF Holdings does not currently
intend to list the New Notes on any securities exchange or to seek approval for
quotation through any automated quotation system. There can be no assurance
that an active public market for the New Notes will develop.
The Exchange Agent for the Exchange Offer is The Bank of New York.
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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 Notes remain outstanding it will furnish to the holders of
the Notes, and if required by the Exchange Act, file with the Commission all
annual, quarterly and current reports that 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 Notes remain outstanding, SF
Holdings has agreed to make available to any prospective purchaser of the Old
Notes or beneficial owner of the Old Notes in connection with any sale thereof
the information required by Rule 144A(d)(4) under the Securities Act.
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 NOTES UPON WRITTEN OR ORAL REQUEST AND
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 THE COMPANY 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 than 5% and decided to rationalize certain product lines, and
in connection therewith, disposed of
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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 the 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 "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 NOTES
Units (the "Units") consisting of $144.0 million principal amount at
maturity of 12 3/4% Series A Senior Secured Discount Notes due 2008 and 288,000
shares of Class C Common Stock of SF Holdings (the "Shares") were sold by SF
Holdings to Bear, Stearns & Co. Inc. and SBC Warburg Dillon Read Inc.
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on March 12, 1998 (the "Closing Date") pursuant to a Purchase Agreement, dated
as of March 5, 1998 (the "Purchase Agreement"), among SF Holdings and the
Initial Purchasers. The Initial Purchasers subsequently resold the Units in
reliance on Rule 144A under the Securities Act and other available exemptions
under the Securities Act on or about March 12, 1998. SF Holdings and the
Initial Purchasers 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 Notes. The Exchange Offer is intended to
satisfy certain of SF Holdings' obligations under the Registration Rights
Agreement with respect to the Old Notes. See "The Exchange Offer--Purpose and
Effects."
The Old Notes were issued under the indenture dated as of March 12, 1998
(the "Indenture") between SF Holdings and The Bank of New York as trustee (in
such capacity, the "Trustee"). The New Notes are also being issued under the
Indenture and are entitled to the benefits of the Indenture. The form and terms
of the New Notes will be identical in all material respects to the form and
terms of the Old Notes except that (i) the New Notes have been registered under
the Securities Act and, therefore, will not bear legends restricting the
transfer thereof, (ii) holders of New Notes will not be entitled to the
Liquidated Damages otherwise payable under the terms of the Registration Rights
Agreement and (iii) holders of New Notes will not be, and upon the consummation
of the Exchange Offer, Eligible Holders of Old Notes will no longer be,
entitled to certain rights under the Registration Rights Agreement intended for
the holders of unregistered securities. The Exchange Offer shall be deemed
consummated upon the delivery of SF Holdings to the Exchange Agent under the
Indenture of New Notes in the same aggregate principal amount as the aggregate
principal amount of Old Notes that are validly tendered by holders thereof
pursuant to the Exchange Offer. See "The Exchange Offer--Termination of Certain
Rights" and "--Procedures for Tendering" and "Description of New
Notes--Registration Rights; Liquidated Damages."
The proceeds received by SF Holdings from the issuance of the Units were
used to fund a portion of the cash required by SF Holdings to consummate the
Sweetheart Investment and to pay certain fees and expenses associated with the
issuance of the Units. There will be no proceeds to SF Holdings from any
exchange pursuant to the Exchange Offer.
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 12 3/4%
Series B Senior Secured Discount Notes due 2008
(the "New Notes," and with the Old Notes, the
"Notes") for an identical face amount of the
outstanding Old Notes (the "Exchange Offer"). As
of the date of this Prospectus, $144.0 million in
aggregate principal amount at maturity of the Old
Notes is outstanding, the maximum amount
authorized by the Indenture for all Notes. As of
July 6, 1998, there was one registered holder of
the Old Notes, Cede & Co. ("Cede"), which held
$144.0 million of aggregate principal amount at
maturity of the Old Notes. See "The Exchange
Offer--Terms of the Exchange Offer."
EXPIRATION DATE............. 5:00 p.m., New York City time, on August 4,
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 Notes being
tendered for exchange.
7
<PAGE>
However, the Exchange Offer is subject to
certain customary conditions, which may be
waived by the Company. See "The Exchange
Offer--Conditions of the Exchange Offer."
ACCRETED VALUE OF THE
OLD NOTES................... Until March 15, 2003, no interest will accrue on
the New Notes, but the Accreted Value will
increase (representing amortization of original
issue discount) between the date of original
issuance of the Old Notes and March 15, 2003 at a
rate of 12 3/4% per annum of the initial offering
price of the Old Notes. Eligible Holders whose
Old Notes are accepted for exchange will have the
right to receive the increase in Accreted Value
from the date of original issuance of the Old
Notes. Beginning on March 15, 2003, interest on
the New Notes will accrue at the rate of 12 3/4%
per annum.
PROCEDURES FOR TENDERING
OLD NOTES.................. Each holder of Old Notes wishing to accept the
Exchange Offer must complete, sign and date the
Letter of Transmittal, or a facsimile thereof, in
accordance with the instructions contained herein
and therein, and mail or otherwise deliver such
Letter of Transmittal, or such facsimile,
together with the Old Notes and any other
required documentation to the exchange agent (the
"Exchange Agent") at the address set forth
herein. Old Notes may be physically delivered,
but physical delivery is not required if a
confirmation of a book-entry of such Old Notes to
the Exchange Agent's account at The Depositary
Trust Company ("DTC" or the "Depositary") is
delivered in a timely fashion. By executing the
Letter of Transmittal, each holder will represent
to SF Holdings that, among other things, the New
Notes acquired pursuant to the Exchange Offer are
being obtained in the ordinary course of business
of the person receiving such New Notes, whether
or not such person is the holder, that neither
the holder nor any such other person is engaged
in, or intends to engage in, or has an
arrangement or understanding with any person to
participate in, the distribution of such New
Notes and 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 Notes for
its own account in exchange for Old Notes, where
such Old Notes were acquired by such broker or
dealer as a result of market-making activities or
other trading activities, must acknowledge that
it will deliver a prospectus in connection with
any resale of such New Notes. See "The Exchange
Offer--Procedures for Tendering" and "Plan of
Distribution."
GUARANTEED DELIVERY
PROCEDURES.................. Eligible Holders of Old Notes who wish to tender
their Old Notes and (i) whose Old Notes are not
immediately available or (ii) who cannot deliver
their Old Notes or any other documents required
by the Letter of Transmittal to the Exchange
Agent prior to the Expiration Date (or complete
the procedure for book-entry transfer on a timely
basis), may tender their Old
8
<PAGE>
Notes according to the guaranteed delivery
procedures set forth in the Letter of
Transmittal. See "The Exchange Offer--Guaranteed
Delivery Procedures."
ACCEPTANCE OF OLD NOTES AND
DELIVERY OF NEW NOTES...... Upon satisfaction or waiver of all conditions
of the Exchange Offer, SF Holdings will accept
any and all Old Notes that are properly tendered
in the Exchange Offer prior to 5:00 p.m., New
York City time, on the Expiration Date. The New
Notes issued pursuant to the Exchange Offer will
be delivered promptly after acceptance of the Old
Notes. See "The Exchange Offer--Procedures for
Tendering."
WITHDRAWAL RIGHTS........... Tenders of Old Notes may be withdrawn at any
time prior to 5:00 p.m., New York City time, on
the Expiration Date. See "The Exchange
Offer--Withdrawal of Tenders."
THE EXCHANGE AGENT.......... The Bank of New York is the exchange agent (in
such capacity, the "Exchange Agent"). The address
and telephone number of the Exchange Agent are
set forth in "The Exchange Offer--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 NOTES.... Based on interpretations by the staff of the
Commission set forth in no-action letters issued
to third parties, SF Holdings believes that New
Notes issued pursuant to the Exchange Offer to an
Eligible Holder in exchange for Old Notes may be
offered for resale, resold and otherwise
transferred by such Eligible Holder (other than
(i) a broker-dealer who purchased the Old Notes
directly from 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 Notes in the ordinary
course of business and is not participating, and
has no arrangement or understanding with any
person to participate, in a distribution of the
New Notes. Each broker-dealer that receives New
Notes for its own account in exchange for Old
Notes, where such Old Notes were acquired by such
broker as a result of market-making or other
trading activities, must acknowledge that it will
deliver a prospectus in connection with any
resale of such New Notes. See "The Exchange
Offer--Purposes and Effects" and "Plan of
Distribution."
9
<PAGE>
DESCRIPTION OF NEW NOTES
The Exchange Offer applies to $144.0 million aggregate principal amount at
maturity of Old Notes. The terms of the New Notes are identical in all material
respects to the Old Notes, except for certain transfer restrictions and
registration and other rights relating to the exchange of the Old Notes for New
Notes. The New Notes will evidence the same debt as the Old Notes and will be
entitled to the benefits of the Indenture under which both the Old Notes were,
and the New Notes will be, issued. See "Description of New Notes."
SECURITIES OFFERED.......... $144.0 million in aggregate principal amount at
maturity of 12 3/4% Series B Senior Secured
Discount Notes due 2008.
MATURITY.................... March 15, 2008.
INTEREST.................... Until March 15, 2003, no interest will accrue
on the New Notes, but the Accreted Value will
increase (representing amortization of original
issue discount) between the date of original
issuance of the Old Notes and March 15, 2003.
Beginning on March 15, 2003, interest on the New
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.
RANKING..................... The New Notes will be effectively subordinated
to all indebtedness and other liabilities and
commitments of SF Holdings' subsidiaries, which
as of April 26, 1998, after giving pro forma
effect to the Transactions would have totaled
$802.2 million. The New Notes will rank senior in
right of payment to any subordinated indebtedness
of SF Holdings incurred in the future, and will
rank equally in right of payment with any other
senior indebtedness of SF Holdings incurred in
the future. As of June 1, 1998, SF Holdings had
no indebtedness ranking equally with the New
Notes outstanding.
SECURITY.................... The New Notes will be secured by a first
priority pledge of all of the Capital Stock owned
by SF Holdings of Sweetheart and Fonda and all
intercompany notes issued by SF Holdings in favor
of Sweetheart and Fonda. See "Description of New
Notes--Security."
REDEMPTION.................. The New Notes will be redeemable at the option
of SF Holdings at any time on or after March 15,
2003 at the redemption prices set forth herein.
In addition, prior to March 15, 2001, SF Holdings
may redeem up to one-third of the aggregate
principal amount of Notes at a redemption price
equal to 112.75% of the Accreted Value thereof,
plus Liquidated Damages thereon, if any, with the
net cash proceeds of an Equity Offering; provided
that at least two-thirds of the original
aggregate principal amount of Notes remains
outstanding immediately after the occurrence of
such redemption. See "Description of New
Notes--Optional Redemption."
10
<PAGE>
CHANGE OF CONTROL........... Upon the occurrence of a Change of Control, SF
Holdings will be required to make an offer to
repurchase each holder's New Notes at an offer
price equal to 101% of the aggregate principal
amount thereof, plus accrued and unpaid interest
and Liquidated Damages thereon, if any, to the
date of repurchase (or, in the case of
repurchases of New Notes prior to March 15, 2003,
at a purchase price equal to 101% of the Accreted
Value thereof, plus Liquidated Damages thereon,
if any, as of the date of repurchase). There can
be no assurance that SF Holdings will have the
financial resources to repurchase the New Notes
upon a Change of Control. See "Description of New
Notes--Repurchase at the Option of Holders."
COVENANTS................... The indenture pursuant to which the New Notes
will be issued contain certain covenants that,
among other things, limit the ability of SF
Holdings to incur additional indebtedness, issue
additional preferred stock, pay dividends or make
other distributions, repurchase 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.
See "Description of New Notes--Certain
Covenants."
USE OF PROCEEDS............. There will be no proceeds to SF Holdings from
any exchange pursuant to the Exchange Offer. The
net proceeds from the issuance of the Units were
used to fund a portion of the cash required by SF
Holdings to consummate the Sweetheart Investment
and to pay certain fees and expenses associated
with the issuance of the Units. See "The
Sweetheart Investment" and "Use of Proceeds."
ABSENCE OF A PUBLIC MARKET
FOR THE NEW NOTES.......... The New Notes are a new issue of securities
with no established market, and the Company does
not expect that an active trading market in the
Notes will develop. Accordingly, there can be no
assurance as to the development or liquidity of
any market for the New Notes. The Initial
Purchasers have advised the Company that they
currently make a market in the Notes. The Company
does not currently intend to apply for listing of
the New Notes on any securities exchange.
RISK FACTORS
See "Risk Factors" for a discussion of factors that should be considered
by Eligible Holders evaluating the Exchange Offer.
11
<PAGE>
SUMMARY 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 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)
12
<PAGE>
- ----------
(a) Cash interest expense consists of interest expense, excluding interest on
the 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.
13
<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)
14
<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.
15
<PAGE>
SUMMARY HISTORICAL FINANCIAL DATA OF SWEETHEART HOLDINGS INC.
(DOLLARS IN THOUSANDS)
<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)
--------------- ----------------------------------------------------------------
<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 37,517 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)
========= ======== ========= ========= ========= =========
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
Cash interest expense (2) ......... 14,038 3,063 34,140 35,121 35,272 38,241
Capital expenditures .............. 14,557 1,956 39,428 51,625 50,236 47,757
Depreciation and
amortization (3) ................. 28,507 2,050 25,783 34,207 39,813 44,152
Ratio of earnings to fixed
charges (4) ...................... N/A 1.1x 1.4x 1.2x 1.2x N/A
OTHER NON-GAAP FINANCIAL
DATA:
Adjusted Sweetheart
EBITDA (5) ....................... $ 51,738 $ 5,710 $ 79,059 $ 82,585 $ 88,168 $ 43,976
Ratio of Adjusted Sweetheart
EBITDA to cash interest
expense (5)(2) ................... 3.7x 1.9x 2.3x 2.4x 2.5x 1.1x
<CAPTION>
SIX MONTHS
ENDED MARCH 31,
---------------------------
1997 1998
------------- -------------
(SUCCESSOR)
---------------------------
<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)
========= =========
OTHER GAAP FINANCIAL DATA:
Net cash provided by (used
in) operating activities (1) ..... $ (18,060) $ (18,542)
Net cash (used in) investing
activities ....................... (24,889) (4,710)
Net cash provided by (used
in) financing activities ......... 42,271 23,861
Cash interest expense (2) ......... 18,276 20,605
Capital expenditures .............. 24,889 20,342
Depreciation and
amortization (3) ................. 21,605 21,540
Ratio of earnings to fixed
charges (4) ...................... N/A N/A
OTHER NON-GAAP FINANCIAL
DATA:
Adjusted Sweetheart
EBITDA (5) ....................... $ 1,239 $ 1,702
Ratio of Adjusted Sweetheart
EBITDA to cash interest
expense (5)(2) ................... 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)
16
<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 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 tax, 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 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.
17
<PAGE>
RISK FACTORS
Holders of the Old Notes should carefully consider the following matters,
as well as the other information contained in this Prospectus, before deciding
to tender their Old Notes in the Exchange Offer.
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. Therefore, in order to generate
sufficient cash flow to meet SF Holdings' debt obligations, including the
principal amount at maturity on the New Notes, cash interest when due,
redeeming the New Notes or repurchasing the New Notes upon the occurrence of a
Change of Control or otherwise, the Company will be required to refinance the
New Notes and/or the Subsidiary Debt Instruments. There can be no assurance
that the Company will be able to do so or the assets of the Company would be
sufficient to enable the Company to make any payments in respect of the New
Notes when required. 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 creditors, including holders of the
Notes, 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 Notes will be effectively
subordinated to all liabilities, including trade payables, of the subsidiaries
of the Company.
SUBORDINATION; SUBSTANTIAL LEVERAGE; ABILITY TO SERVICE INDEBTEDNESS; LIQUIDITY
Although the New Notes will rank senior in right of payment to any
subordinated indebtedness of SF Holdings incurred in the future, they will be
subordinate to all indebtedness and other liabilities of SF Holdings'
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
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 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 Notes,
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 contain, and the Indenture will contain,
numerous financial and other restrictive covenants, including, among other
things, limitations on the ability of the Company to incur additional
indebtedness, to create liens and other encumbrances, to make certain payments
and investments, to sell or otherwise dispose of assets, 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, may
18
<PAGE>
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.
INDENTURE AND CREDIT FACILITY RESTRICTIONS
The Subsidiary Debt Instruments contain, and the Indenture contains,
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, 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
limit, and the Indenture limits, 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 Notes."
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 Notes at a price equal to 101% of the
aggregate principal amount thereof, plus accrued and unpaid interest and
Liquidated Damages thereon, if any, to the date of repurchase (or, in the case
of repurchases of Notes prior to March 15, 2003, at a repurchase price equal to
101% of the Accreted Value thereof, plus Liquidated Damages thereon, if any, as
of the date of repurchase). 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 Notes upon a Change of Control will be dependent on SF
Holdings' ability to refinance the indebtedness under the New Notes or the
Subsidiary Debt Instruments. If SF Holdings is unable to refinance the
indebtedness under the New Notes or the Subsidiary Debt Instruments, SF
Holdings will likely not have the financial resources to repurchase New Notes
upon the occurrence of a Change of Control. In addition, the requirement to
repurchase the New Notes upon a Change of Control may discourage persons from
making a tender offer for or a bid to acquire 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
19
<PAGE>
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 Notes--Repurchase at the Option of
Holders--Change of Control."
ORIGINAL ISSUE DISCOUNT; LIMITATIONS ON HOLDERS' CLAIMS
The New Notes will be issued at a substantial original issue discount from
their principal amount at maturity. Consequently, purchasers of the New Notes
will be required to include amounts in gross income for federal income tax
purposes in advance of receipt of the cash payment to which the income is
attributable. See "Federal Income Tax Consequences" for more detailed
discussions of the federal income tax consequences to the purchasers of the New
Notes resulting from the purchase, ownership or disposition thereof.
Under the Indenture, in the event of an acceleration of the maturity of
the New Notes upon the occurrence of certain events of default, the holders of
the New Notes may be entitled to recover only the amount which may be declared
due and payable pursuant to the Indenture, which will be less than the
principal amount at maturity of such New Notes. See "Description of New
Notes--Events of Default and Remedies."
If a bankruptcy case is commenced by or against SF Holdings under Title II
of the United States Code, as amended (the "Bankruptcy Code"), the claim of a
holder of New Notes with respect to the principal amount thereto may be limited
to an amount equal to the sum of (i) the issue price of the New Notes as set
forth on the cover page hereof and (ii) that portion of the original issue
discount (as determined on the basis of such issue price) which is not deemed
to constitute "unmatured interest" for purposes of the Bankruptcy Code. In
addition, there can be no assurance that bankruptcy court would compute the
accrual of interest under the same rules as those used for the calculation of
original issue discount under federal income tax law and, accordingly, a holder
might be required to recognize gain or loss in the event of a distribution
related to such bankruptcy case.
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 accompanies the
implementation of both raw materials and subsequent selling price changes. In
the event
20
<PAGE>
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 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 charges and could result in additional operating
charges, which could impair the Company's liquidity. See "--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 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."
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
21
<PAGE>
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. SF Holdings 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 the Company. See "Management."
LABOR MATTERS
As of April 26, 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 Springfield,
Augusta and Toronto CBAs 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 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 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."
22
<PAGE>
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
Notes, and there can be no assurance that such a market will develop. In
addition, the New Notes will not be listed on any national securities exchange.
Although the New Notes are eligible for trading in the Private Offerings,
Resales and Trading through Automatic Linkages ("PORTAL") market, the New Notes
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 Purchasers have made a market in the
Old Notes as permitted by applicable law and regulation; however, the Initial
Purchasers are not obligated to do so and any such market-making activities may
be discontinued at any time without notice. In addition, such market-making
activities may be limited during the Exchange Offer 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 Notes 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 Notes may be
subordinated to existing or future indebtedness of SF Holdings or found not to
be enforceable in accordance with their terms, and the pledge of the Capital
Stock of Sweetheart and Fonda owned by SF Holdings (the "Pledge") may be found
not to be enforceable in accordance with its terms. Under such statutes, if a
court were to find that, at the time (a) the Notes were issued or (b) the
Capital Stock of Sweetheart and Fonda was pledged, SF Holdings was insolvent,
or was rendered insolvent by the issuance of the Notes and the substantially
concurrent use of the proceeds therefrom, was engaged in a business or
transaction for which the assets remaining with 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 Notes and the Pledge, or subordinate the Notes and the
Pledge to all other indebtedness of SF Holdings. In such event, there can be no
assurance that any repayment of the Notes could ever be recovered by holders of
the Notes.
For purposes of the foregoing, the measure of insolvency varies depending
upon the law of the jurisdiction which is being applied. Generally, however, SF
Holdings would be considered to have been
23
<PAGE>
insolvent at the time the Notes and Pledge 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 Notes and the Pledge 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 Notes and the Pledge were issued, that
the issuances constituted fraudulent transfers on another of the grounds
summarized above.
FORWARD-LOOKING STATEMENTS
Certain of the matters discussed in this Prospectus may constitute
forward-looking statements, and as such may involve known and unknown risks,
uncertainties and other factors which may cause the actual results, performance
or achievements of the Company to be materially different from future results,
performance or achievements expressed or implied by such forward looking
statements. Important factors that could cause the actual results, performance
or achievements of the Company to differ materially from the Company's
expectations are disclosed in this Prospectus ("Cautionary Statements"),
including, without limitation, those statements made in conjunction with the
forward-looking statements included under "Risk Factors" and otherwise herein.
All written forward looking statements attributable to the Company are
expressly qualified in their entirety by the Cautionary Statements.
CONSEQUENCES OF FAILURE TO EXCHANGE
Holders of Old Notes who do not exchange their Old Notes for New Notes
pursuant to the Exchange Offer will continue to be subject to the restrictions
on transfer of such Old Notes as set forth in the legend thereon as a
consequence of the issuance of the Old Notes pursuant to exemptions from, or in
transactions not subject to, the registration requirements of the Securities
Act and applicable state securities laws. In general, the Old Notes may not be
offered or sold, unless registered under the Securities Act, except pursuant to
an exemption from, or in a transaction not subject to, the Securities Act and
applicable state securities laws. SF Holdings does not currently anticipate
that it will register the Old Notes under the Securities Act. New Notes issued
pursuant to the Exchange Offer in exchange for Old Notes may be offered for
resale, resold or otherwise transferred by Holders thereof (other than any such
holder which is an "affiliate" of 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
Notes are acquired in the ordinary course of such holders' business and such
holders have no arrangement with any person to participate in the distribution
of such Notes. Each broker-dealer that receives New Notes for its own account
pursuant to the Exchange Offer must acknowledge that it will deliver a
prospectus in connection with any resale of such New Notes. The Letter of
Transmittal states that, by so acknowledging and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it is an "underwriter" within
the meaning of the Securities Act. This Prospectus, as it may be amended or
supplemented from time to time, may be used by a broker-dealer in connection
with resales of New Notes received in exchange for Old Notes where such Old
Notes were acquired by such broker-dealer as a result of market-making
activities or other trading activities. 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 Notes may not be offered or sold unless
they have been registered or qualified for sale in such jurisdictions or an
exemption from registration or qualification is available and is complied with.
To the extent that Old Notes are tendered and accepted in the Exchange Offer,
the trading market for untendered and tendered but unaccepted Old Notes will be
adversely affected.
24
<PAGE>
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
25
<PAGE>
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, American Industrial
Partners Management Company, Inc. ("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.
26
<PAGE>
USE OF PROCEEDS
There will be no proceeds to SF Holdings from the exchange pursuant to the
Exchange Offer. The net proceeds from the issuance of the Units were used as
follows:
<TABLE>
<CAPTION>
(DOLLARS IN MILLIONS)
<S> <C>
SOURCES OF FUNDS:
Units .................................... $ 77.5
Exchangeable Preferred Stock ............. 30.0
SF Holdings equity investment(1) ......... 15.0
Demand Note(2) ........................... 7.0
-------
TOTAL ................................... $ 129.5
=======
USES OF FUNDS:
Purchase of Sweetheart Equity:
Cash .................................... $ 88.0
Exchangeable Preferred Stock ............ 30.0
Demand Note(2) .......................... 7.0
Fees and expenses ........................ 4.5
-------
TOTAL ................................... $ 129.5
=======
</TABLE>
- ----------
(1) An affiliate of Dennis Mehiel made a capital investment in SF Holdings of
$15.0 million in cash in exchange for shares of Class B Series 1
Preferred, par value $.001 per share, of SF Holdings (the "Class B Series
1 Preferred"). See "Description of Capital Stock."
(2) The Demand Note was satisfied in full immediately following the
consummation of the Sweetheart Investment. See "The Sweetheart
Investment."
27
<PAGE>
THE EXCHANGE OFFER
PURPOSE AND EFFECTS
The Units, comprised of the Old Notes and the Shares, were sold by SF
Holdings on March 12, 1998 to the Initial Purchasers, 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 Notes, SF
Holdings and the Initial Purchasers entered into a Registration Rights
Agreement dated as of March 12, 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 Notes for New Notes within 45 days following the
closing date of the issuance of the Old Notes. 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 Notes pursuant
to the Exchange Offer. A copy of the Registration Rights Agreement has been
filed as an exhibit to the Exchange Offer Registration Statement.
The Exchange Offer is being made pursuant to the Registration Rights
Agreement to satisfy SF Holdings' obligations thereunder. For purposes of the
Exchange Offer, the term "Eligible Holder" shall mean the registered owner of
any Old Notes that remain Transfer Restricted Securities, as reflected on the
records of The Bank of New York as registrar for the Old Notes (in such
capacity, the "Registrar"), or any person whose Old Notes are held of record by
the depository of the Old Notes. SF Holdings is not required to include any
securities other than the New Notes in the Exchange Offer Registration
Statement. Holders of Old Notes who do not tender their Old Notes or whose Old
Notes are tendered but not accepted would have to rely on exemptions from
registration requirements under the securities laws, including the Securities
Act, if they wish to sell their Old Notes.
Based on interpretations by the staff of the Commission set forth in
no-action letters issued to third parties unrelated to SF Holdings, SF Holdings
believes that the New Notes issued pursuant to the Exchange Offer in exchange
for Old Notes may be offered for resale, resold and otherwise transferred by
any holder of such New Notes (other than a person that is an "affiliate" of 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
Notes are acquired in the ordinary course of such holder's business and such
holder is not participating and does not intend to participate, and has no
arrangement or understanding with any person to participate, in the
distribution of such New Notes.
If any person were to be participating in the Exchange Offer for the
purpose of distributing securities in a manner not permitted by the
Commission's interpretation, (i) the position of the staff of the Commission
enunciated in interpretive letters would be inapplicable to such person and
(ii) such person would be required to comply with the registration and
prospectus delivery requirements of the Securities Act in connection with any
resale transaction. Each broker-dealer that receives New Notes for its own
account in exchange for Old Notes, where such Old Notes were acquired by such
broker-dealer as a result of market-making activities or other trading
activities, must acknowledge that it will deliver a prospectus in connection
with any resale of such New Notes. See "Plan of Distribution."
The Exchange Offer is not being made to, nor will SF Holdings accept
surrenders for exchange from, holders of Old Notes in any jurisdiction in which
the Exchange Offer or the acceptance thereof would not be in compliance with
the securities or blue sky laws of such jurisdiction. Prior to the Exchange
Offer, however, SF Holdings will use its best efforts to register or qualify
the New Notes for offer and sale under the securities or blue sky laws of such
jurisdictions as is necessary to permit consummation of the Exchange Offer and
do any and all other acts or things necessary or advisable to enable the offer
and sale in such jurisdictions of the New Notes.
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this Prospectus
and in the accompanying Letter of Transmittal, SF Holdings will accept any and
all Old Notes validly tendered prior to 5:00 p.m.,
28
<PAGE>
New York City time, on the Expiration Date (as defined below). SF Holdings will
issue up to $144,000,000 aggregate principal amount at maturity of New Notes in
exchange for a like principal amount of outstanding Old Notes which are validly
tendered and accepted in the Exchange Offer. Subject to the conditions of the
Exchange Offer described below, SF Holdings will accept any and all Old Notes
which are so tendered. Holders may tender some or all of their Old Notes
pursuant to the Exchange Offer; however, the Old Notes may be tendered only in
multiples of $1,000. See "Description of New Notes."
The form and terms of the New Notes will be the same in all material
respects as the form and terms of the Old Notes, except that (i) the New Notes
will be registered under the Securities Act and hence will not bear legends
restricting the transfer thereof, (ii) because the New Notes will be
registered, holders of the New Notes will not be entitled to Liquidated Damages
which would have been payable under the terms of the Registration Rights
Agreement in respect of Old Notes constituting Transfer Restricted Securities
held by such holders during any period in which a Registration Default was
continuing and (iii) because the New Notes will be registered, holders of New
Notes will not be, and upon the consummation of the Exchange Offer, Eligible
Holders of Old Notes will no longer be, entitled to certain rights under the
Registration Rights Agreement intended for the holders of unregistered
securities.
Holders of Old Notes do not have any appraisal or dissenters' rights under
the General Corporation Law of the State of Delaware or the Indenture in
connection with the Exchange Offer. SF Holdings intends to conduct the Exchange
Offer in accordance with the provisions of the Registration Rights Agreement.
Old Notes which are not tendered for exchange or are tendered but not accepted
in the Exchange Offer will remain outstanding and be entitled to the benefits
of the Indenture, but will not be entitled to any registration rights under the
Registration Rights Agreement.
SF Holdings shall be deemed to have accepted validly tendered Old Notes
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 Notes from SF
Holdings.
If any tendered Old Notes are not accepted for exchange because of an
invalid tender, the occurrence of certain other events set forth herein or
otherwise, certificates for any such unaccepted Old Notes will be returned,
without expense, to the tendering holder thereof as promptly as practicable
after the Expiration Date.
Eligible Holders who tender Old Notes in the Exchange Offer will not be
required to pay brokerage commissions or fees or, subject to the instructions
in the Letter of Transmittal, transfer taxes with respect to the exchange of
Old Notes pursuant to the Exchange Offer. 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 4, 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
Notes for any New Notes or to extend or terminate the Exchange Offer and not
accept for exchange any Old Notes for any New Notes if any of the events set
forth below under the caption "Conditions of the Exchange Offer" shall have
occurred and shall not have been waived by 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 determined by SF Holdings to constitute a material change, SF Holdings
will promptly disclose such
29
<PAGE>
amendment in a manner reasonably calculated to inform the holders of Old Notes
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 Notes, 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's rights set forth
below under the caption "Conditions of the Exchange Offer."
TERMINATION OF CERTAIN RIGHTS
The Registration Rights Agreement provides that, subject to certain
exceptions, in the event of a Registration Default, Eligible Holders of Old
Notes are entitled to receive Liquidated Damages in an amount equal to 50 basis
points per annum of the Accreted Value of Old Notes 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 Accreted
Value of the Old Notes. 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
Notes without being succeeded immediately by a post-effective amendment to the
Exchange Offer Registration Statement that cures such failure and is
immediately declared effective. Following the cure of all Registration
Defaults, the accrual of Liquidated Damages will cease.
Holders of New Notes will not be and, upon consummation of the Exchange
Offer, Eligible Holders of Old Notes will no longer be, entitled to (i) the
right to receive Liquidated Damages or (ii) certain other rights under the
Registration Rights Agreement intended for holders of Transfer Restricted
Securities. The Exchange Offer shall be deemed consummated upon the occurrence
of the delivery by SF Holdings to the Registrar under the Indenture of New
Notes in the same aggregate principal amount as the aggregate principal amount
of Old Notes that are tendered by holders thereof pursuant to the Exchange
Offer.
PROCEDURES FOR TENDERING
Only an Eligible Holder of Old Notes may tender such Old Notes in the
Exchange Offer. To tender in the Exchange Offer, an Eligible Holder must
complete, sign and date the Letter of Transmittal, or a facsimile thereof, have
the signatures thereon guaranteed if required by the Letter of Transmittal, and
mail or otherwise deliver such Letter of Transmittal or such facsimile,
together with the Old Notes (unless such tender is being effected pursuant to
the procedure for book-entry transfer described below) and any other required
documents, to the Exchange Agent prior to 5:00 p.m., New York City time, on the
Expiration Date.
Any financial institution that is a participant in the Depositary's
Book-Entry Transfer Facility System may make book-entry delivery of the Old
Notes by causing the Depositary to transfer such Old Notes into the Exchange
Agent's account in accordance with the Depositary's procedure for such
transfer. Although delivery of Old Notes may be effected through book-entry
transfer into the Exchange Agent's account at the Depositary, the Letter of
Transmittal (or facsimile thereof), with any required signature guarantees and
any other required documents, must, in any case, be transmitted to and received
or confirmed by the Exchange Agent at its addresses as set forth under the
caption "Exchange Agent" below prior to 5:00 p.m., New York City time, on the
Expiration Date. DELIVERY OF DOCUMENTS TO THE DEPOSITARY IN ACCORDANCE WITH ITS
PROCEDURES DOES NOT CONSTITUTE DELIVERY TO THE EXCHANGE AGENT.
The tender by an Eligible Holder of Old Notes will constitute an agreement
between such holder and SF Holdings in accordance with the terms and subject to
the conditions set forth herein and in the Letter of Transmittal.
30
<PAGE>
The method of delivery of Old Notes and the Letter of Transmittal and all
other required documents to the Exchange Agent is at the election and risk of
the Eligible Holders. Instead of delivery by mail, it is recommended that
Eligible Holders use an overnight or hand delivery service. In all cases,
sufficient time should be allowed to assure delivery to the Exchange Agent on
or before the Expiration Date. No Letter of Transmittal or Old Notes should be
sent to 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 Notes tendered pursuant thereto are tendered (i)
by a registered holder who has not completed the box entitled "Special Issuance
Instructions" or "Special Delivery Instructions" on the Letter of Transmittal,
or (ii) for the account of an Eligible Institution. In the event that
signatures on a Letter of Transmittal or a notice of withdrawal, as the case
may be, are required to be guaranteed, such guarantee must be by an Eligible
Institution.
If the Letter of Transmittal or any Old Notes or bond powers are signed by
trustees, executors, administrators, guardians, attorneys-in-fact, officers of
corporations or others acting in a fiduciary or representative capacity, such
persons should so indicate when signing, and unless waived by 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 Notes 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
Notes not properly tendered or any Old Notes 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 Notes. 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 Notes 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 Notes, neither SF
Holdings, the Exchange Agent nor any other person shall incur any liability for
failure to give such notification. Tenders of Old Notes will not be deemed to
have been made until such defects or irregularities have been cured or waived.
Any Old Notes received by the Exchange Agent that are not properly tendered and
as to which the defects or irregularities have not been cured or waived will be
returned by the Exchange Agent to the tendering holders, unless otherwise
provided in the Letter of Transmittal, as soon as practicable following the
Expiration Date.
In addition, 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 Notes that remain outstanding subsequent to the Expiration
Date and (ii) to the extent permitted by applicable law, to purchase Old Notes
in privately negotiated transactions or otherwise. The terms of any such
purchases or offers could differ from the terms of the Exchange Offer.
By tendering, each Eligible Holder will represent to SF Holdings that,
among other things, the New Notes acquired pursuant to the Exchange Offer are
being obtained in the ordinary course of business by the person receiving such
New Notes, whether or not such person is the holder, and that neither the
Eligible Holder nor any such other person has an arrangement or understanding
with any person to participate in the distribution of such New Notes and that
neither the Eligible Holder nor any such other person is an "affiliate," as
defined in Rule 405 under the Securities Act, of SF Holdings. If the holder is
a broker-dealer that will receive New Notes for its own account in exchange for
Old Notes that were acquired as a result of market-making activities or other
trading activities, such holder by tendering will acknowledge that it will
deliver a prospectus in connection with any resale of such New Notes.
31
<PAGE>
GUARANTEED DELIVERY PROCEDURES
Eligible Holders who wish to tender their Old Notes and (i) whose Old
Notes are not immediately available, or (ii) who cannot deliver their Old Notes
and other required documents to the Exchange Agent or cannot complete the
procedure for book-entry transfer prior to the Expiration Date, may effect a
tender if:
(a) The tender is made through an Eligible Institution;
(b) Prior to the Expiration Date, the Exchange Agent receives from such
Eligible Institution a properly completed and duly executed Notice of
Guaranteed Delivery (by facsimile transmission, mail or hand delivery)
setting forth the name and address of the Eligible Holder, the certificate
number(s) of such Old Notes (if available) and the principal amount of Old
Notes tendered together with a duly executed Letter of Transmittal (or a
facsimile thereof), stating that the tender is being made thereby and
guaranteeing that, within three business days after the Expiration Date,
the certificate(s) representing the Old Notes to be tendered in proper form
for transfer (or a confirmation of a book entry transfer into the Exchange
Agent's account at the Depositary of Old Notes delivered electronically)
and any other documents required by the Letter of Transmittal will be
deposited by the Eligible Institution with the Exchange Agent; and
(c) Such certificate(s) representing all tendered Old Notes in proper
form for transfer (or confirmation of a book-entry transfer into the
Exchange Agent's account at the Depositary of Old Notes delivered
electronically) and all other documents required by the Letter of
Transmittal are received by the Exchange Agent within three business days
after the Expiration Date.
Upon request to the Exchange Agent, a Notice of Guaranteed Delivery will
be sent to Eligible Holders who wish to tender their Old Notes according to the
guaranteed delivery procedures set forth above.
WITHDRAWAL OF TENDERS
Except as otherwise provided herein, tenders of Old Notes may be withdrawn
at any time prior to 5:00 p.m., New York City time, on the Expiration Date,
unless previously accepted for exchange.
To withdraw a tender of Old Notes in the Exchange Offer, a written or
facsimile transmission notice of withdrawal must be received by the Exchange
Agent at its address set forth herein prior to 5:00 p.m., New York City time,
on the Expiration Date, and prior to acceptance for exchange thereof by SF
Holdings. Any such notice of withdrawal must (i) specify the name of the person
having deposited the Old Notes to be withdrawn (the "Depositor"), (ii) identify
the Old Notes to be withdrawn (including the certificate number or numbers and
principal amount of such Old Notes), (iii) be signed by the Depositor in the
same manner as the original signature on the Letter of Transmittal by which
such Old Notes were tendered (including any required signature guarantees) or
be accompanied by documents of transfer sufficient to have the Trustee with
respect to the Old Notes register the transfer of such Old Notes into the name
of the person withdrawing the tender, and (iv) specify the name in which any
such Old Notes are to be registered, if different from that of the Depositor.
All questions as to the validity, form and eligibility (including time of
receipt) of such withdrawal notices will be determined by SF Holdings in its
sole discretion, whose determination shall be final and binding on all parties.
Any Old Notes so withdrawn will be deemed not to have been validly tendered for
purposes of the Exchange Offer, and no New Notes will be issued with respect
thereto unless the Old Notes so withdrawn are validly re-tendered. Any Old
Notes which have been tendered but which are not accepted for exchange or which
are withdrawn will be returned to the holder thereof without cost to such
holder as soon as practicable after withdrawal, rejection of tender or
termination of the Exchange Offer. Properly withdrawn Old Notes may be
re-tendered by following one of the procedures described above under
"Procedures for Tendering" at any time prior to the Expiration Date.
CONDITIONS OF THE EXCHANGE OFFER
In addition, and notwithstanding any other term of the Exchange Offer, SF
Holdings will not be required to accept for exchange any Old Notes tendered for
any New Notes and may terminate or amend the Exchange Offer as provided herein
before the acceptance of such Old Notes, if any of the following conditions
exist:
32
<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 Notes 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 Notes pursuant to the Exchange Offer. If, however, certificates
representing New Notes or Old Notes for principal amounts not tendered or
accepted for exchange are to be delivered to, or are to be issued in the name
of, any person other than the registered holder of the Old Notes tendered, or
if tendered Old Notes are registered in the name of any person other than the
person signing the Letter of Transmittal, or if a transfer tax is imposed for
any reason other than the exchange of Old Notes pursuant to the Exchange Offer,
then the
33
<PAGE>
amount of any such transfer taxes (whether imposed on the registered holder or
any other persons) will be payable by the tendering holder. If satisfactory
evidence of payment of such taxes or exemption therefrom is not submitted with
the Letter of Transmittal, the amount of such transfer taxes will be billed
directly to such tendering holder.
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 Notes for the New Notes in the Exchange Offer should
not constitute an exchange for federal income purposes. Consequently, (i) no
gain or loss should be realized by a U.S. Holder upon receipt of a New Note;
(ii) the holding period of the New Note should include the holding period of
the Old Note exchanged therefor and (iii) the adjusted tax basis of the New
Note should be the same as the adjusted tax basis of the Old Note exchanged
therefor immediately before the exchange. Even if the exchange of an Old Note
for a New Note were treated as an exchange, however, such an exchange should
constitute a tax-free recapitalization for federal income tax purposes.
Accordingly, a New Note should have the same issue price as an Old Note and a
U.S. Holder should have the same adjusted basis and holding period in the New
Note as it had in an Old Note immediately before the exchange. As used herein,
the term "U.S. Holder" means a person who is, for United States federal income
tax purposes, (i) a citizen or resident of the United States; (ii) a
corporation, partnership or other entity created or organized in or under the
laws of the United States or any political subdivision thereof; or (iii) an
estate or trust the income of which is subject to United States federal income
taxation regardless of its source.
CONSEQUENCES OF FAILURE TO EXCHANGE OLD NOTES
Generally, Eligible Holders (other than any holder who is an "affiliate"
of SF Holdings within the meaning of Rule 405 under the Securities Act) who
exchange their Old Notes for New Notes pursuant to the Exchange Offer may offer
such New Notes for resale, resell such New Notes, and otherwise transfer such
New Notes without compliance with the registration and prospectus delivery
provisions of the Securities Act, provided such New Notes are acquired in the
ordinary course of the holders' business, and such holders have no arrangement
with any person to participate in a distribution of such New Notes. Each
broker-dealer that receives New Notes for its own account in exchange for Old
Notes, where such Old Notes were acquired by such broker-dealer as a result of
market-making activities or other trading activities, must acknowledge that it
will deliver a prospectus in connection with any resale of such New Notes. See
"Plan of Distribution." To comply with the securities laws of certain
jurisdictions, it may be necessary to qualify for sale or register the New
Notes prior to offering or selling such New Notes. Upon request by Eligible
Holders prior to the Exchange Offer, SF Holdings will register or qualify the
New Notes in certain jurisdictions subject to the conditions in the
Registration Rights Agreement. If an Eligible Holder does not exchange such Old
Notes for New Notes pursuant to the Exchange Offer, such Old Notes will
continue to be subject to the restrictions on transfer contained in the legend
thereon and will not have the benefit of any covenant regarding registration
under the Securities Act. In general, the Old Notes may not be offered or sold,
unless registered under the Securities Act, except pursuant to an exemption
from, or in a transaction not subject to, the Securities Act and applicable
state securities laws. To the extent that Old Notes are tendered and accepted
in the Exchange Offer, a holder's ability to sell untendered Old Notes could be
adversely affected.
Participation in the Exchange Offer is voluntary and holders should
carefully consider whether to accept the Exchange Offer and tender their Old
Notes. Holders of Old Notes are urged to consult their financial and tax
advisors in making their own decisions on what action to take.
ACCOUNTING TREATMENT
The New Notes will be recorded at the same carrying value as the Old
Notes, as reflected in 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 Notes.
34
<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
101 Barclay Street 101 Barclay Street 7E
Corporate Trust Services Window New York, New York 10286
Ground Level Attn: Reorganization Section
New York, New York 10286
Attn: Reorganization Section
FacsimileNumber (for Eligible Institutions Only and Withdrawal Notices Only):
(212) 571-3080
Confirm Receipt of Notice of Guaranteed Delivery by Telephone:
(212) 815-3687
For Information Call:
(212) 515-3687
Requests for additional copies of this Prospectus or the Letter of
Transmittal should be directed to the Exchange Agent.
35
<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 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 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.
36
<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.
37
<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.
38
<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 Notes, net of fair value of the Shares ............. 75,110
Fair value of the Shares issued in connection with the 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 Class C Common Stock 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.
39
<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.
40
<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.
41
<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.
42
<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>
NINE 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
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 Shares ....................... 243 182 243
------- ------ -------
$10,579 $7,935 $10,579
======= ====== =======
</TABLE>
<PAGE>
(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 issued
to the Sweetheart Stockholders and amortization of discount resulting from
an allocation of fair value to the Class C Common Stock.
<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 Class C Common
Stock .................................. 94 71 94
------ ------ ------
$4,219 $3,165 $4,219
====== ====== ======
</TABLE>
43
<PAGE>
(h) Cash interest expense consists of interest expense, excluding interest on
the 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.
44
<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)
45
<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.
46
<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 37,517 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>
47
<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.
48
<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 periods 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.
49
<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 $144.0 million
aggregate principal amount at maturity of Old Notes and Shares, for proceeds of
$77.5 million. Until March 15, 2003, no interest will accrue on the Old Notes,
but the Accreted Value will increase between the date of original issuance and
March 15, 2003. Beginning on March 15, 2003, interest on the Old 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 Old Notes will mature on March 15, 2008. See
"Prospectus Summary--Issuance of the Old Notes."
On March 12, 1998, SF Holdings issued 3,000 share units (the "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 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
50
<PAGE>
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 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
51
<PAGE>
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
net 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
slightly 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 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.
52
<PAGE>
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%.
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.
53
<PAGE>
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 the Company's election, at a rate per annum equal to
(i) LIBOR plus 2.25% or (ii) an Alternate Base Rate (being the higher of the
(a) Base Rate publicly announced by the Agent and (b) Federal Funds Rate in
effect on such day plus 0.5%) plus 0.25%. 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.
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
54
<PAGE>
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>
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
55
<PAGE>
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.
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
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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.
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.
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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 an
investigation of Sweetheart's strategic alternatives.
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.
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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 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 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% and (ii) with respect to the
term loan borrowings, the Index Rate 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.
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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.
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
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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.
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 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.
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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 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
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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 (collectively, the
"Sweetheart CBAs"). The Sweetheart 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. As of
March 31, 1998, approximately 22% of such Sweetheart hourly employees were
covered by the Sweetheart CBAs. The current expiration dates of the
Springfield, Augusta and Toronto CBA's 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.
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 and cover all production, maintenance and distribution hourly-paid
employees at each respective facility. The Fonda CBAs 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 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.
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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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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 1997 170,000 56,000 -- 1,950
Senior Vice President, 1996 26,153(3) -- -- 1,950
Chief Financial Officer and 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 Officer 1997 491,667 -- 10,000 129,800
of Sweetheart Holdings Inc. and 1996 400,000 498,000 -- 18,200
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 1997 163,500 -- -- 150,600
of 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.
<PAGE>
(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.
73
<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 the 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.
74
<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, 1998,
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."
75
<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 for $0.2 million. Management believes 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."
76
<PAGE>
DESCRIPTION OF NEW NOTES
GENERAL
The New Notes will be issued pursuant to the Indenture between SF Holdings
and The Bank of New York, as trustee (the "Trustee"). The terms of the New
Notes include those stated in the Indenture and those made a part of the
Indenture by reference to the Trust Indenture Act of 1939, as amended (the
"Trust Indenture Act"). The New Notes are subject to all such terms, and
Holders of New Notes are referred to the Indenture and the Trust Indenture Act
for a statement thereof. The following summary of the material provisions of
the Indenture, the Pledge Agreement and the Registration Rights Agreement does
not purport to be complete and is qualified in its entirety by reference to
such documents, including the definitions therein of certain terms used below.
Copies of the Indenture, Pledge Agreement and Registration Rights Agreement 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 New Notes will rank senior in right of payment to any subordinated
indebtedness of the Company incurred in the future, and will rank equally in
right of payment with any other senior indebtedness of the Company incurred in
the future. The New Notes will be secured by a first priority pledge of all of
the Capital Stock owned by the Company of the current and future Restricted
Subsidiaries of the Company, including without limitation, Fonda and
Sweetheart. See "--Security."
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 Notes 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 Notes 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."
SECURITY
The New Notes will be secured by a pledge of all of the Capital Stock
owned by the Company of, and all intercompany notes issued in favor of the
Company by, all of the current and future Restricted Subsidiaries of the
Company, including Fonda and Sweetheart. The Company has entered into a pledge
agreement (the "Pledge Agreement") providing for the pledge of the Collateral
by the Company to The Bank of New York, as collateral agent (in such capacity,
the "Collateral Agent") for the Holders of the New Notes. The Pledge Agreement
will prohibit the creation of any new directly owned Restricted Subsidiaries of
the Company unless the Company pledges such Capital Stock of such Restricted
Subsidiary that is owned by the Company in accordance with the terms of the
Pledge Agreement. In addition, the Pledge Agreement will prohibit intercompany
loans from the Company to any of its Restricted Subsidiaries unless such loans
are documented in the form of promissory notes payable to the Company and the
Company pledges such promissory notes in accordance with the terms of the
Pledge Agreement. Such pledges will secure the payment and performance when due
of all of the Obligations of the Company under the Indenture and the New Notes
as provided in the Pledge Agreement.
So long as no Default or Event of Default shall have occurred and be
continuing, and subject to certain terms and conditions in the Indenture and
the Pledge Agreement, the Company will be entitled to receive all cash
dividends, interest and other payments made upon or with respect to the
Collateral and to exercise any voting and other consensual rights pertaining to
the Collateral. Upon the occurrence and
77
<PAGE>
during the continuance of a Default or Event of Default, (a) all rights of the
Company to exercise such voting or other consensual rights shall cease, and all
such rights shall become vested in the Collateral Agent, which, to the extent
permitted by law, shall have the sole right to exercise such voting and other
consensual rights, (b) all rights of the Company to receive all cash dividends,
interest and other payments made upon or with respect to the Collateral will
cease and such cash dividends, interest and other payments will be paid to the
Collateral Agent, and (c) the Collateral Agent may sell the Collateral or any
part thereof in accordance with the terms of the Pledge Agreement. All funds
distributed under the Pledge Agreement and received by the Collateral Agent for
the benefit of the Holders of the New Notes will be distributed by the
Collateral Agent in accordance with the provisions of the Indenture.
Under the terms of the Pledge Agreement, the Collateral Agent will
determine the circumstances and manner in which the Collateral will be disposed
of, including, but not limited to, the determination of whether to release all
or any portion of the Collateral from the Liens created by the Pledge Agreement
and whether to foreclose on the Collateral following a Default or Event of
Default. Moreover, upon the full and final payment and performance of all
Obligations of the Company under the Indenture and the New Notes, the Pledge
Agreement will terminate and the Collateral will be released.
PRINCIPAL, MATURITY AND INTEREST
Each New Note will be limited in aggregate principal amount at maturity to
$1,000 and will mature on March 15, 2008. The Old Notes were issued at a
substantial discount from their principal amount at maturity, together with the
Common Stock, to generate gross proceeds to the Company of approximately $77.5
million. Until March 15, 2003, no interest will accrue on the New Notes, but
the Accreted Value will increase (representing amortization of original issue
discount) between the date of original issuance of the Old Notes and March 15,
2003, on a semi-annual bond equivalent basis using a 360-day year comprised of
twelve 30-day months, such that the Accreted Value will be equal to the full
principal amount at maturity of the New Notes on March 15, 2003. Beginning on
March 15, 2003, interest on the New 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, to Holders of
record on the immediately preceding March 1 and September 1. Interest on the
New Notes will accrue from the most recent date to which interest has been paid
or, if no interest has been paid, from March 15, 2003. Interest will be
computed on the basis of a 360-day year comprised of twelve 30-day months.
Principal of and premium, interest and Liquidated Damages, if any, on the New
Notes will be payable at the office or agency of the Company maintained for
such purpose or, at the option of the Company, payment of interest and
Liquidated Damages may be made by check mailed to the Holders of the New Notes
at their respective addresses set forth in the register of Holders of New
Notes; provided that all payments of principal, premium, interest and
Liquidated Damages with respect to New Notes the Holders of which have given
wire transfer instructions to the Company will be required to be made by wire
transfer of immediately available funds to the accounts specified by the
Holders thereof. Until otherwise designated by the Company, the Company's
office or agency will be the office of the Trustee maintained for such purpose.
The New Notes will be issued in denominations of $1,000 and integral multiples
thereof.
OPTIONAL REDEMPTION
Except as provided in the next paragraph, the New Notes will not be
redeemable at the Company's option prior to March 15, 2003. Thereafter, the New
Notes will be subject to redemption at any time at the option of the Company,
in whole or in part, upon not less than 30 nor more than 60 days' notice, at
the redemption prices (expressed as percentages of principal amount) set forth
below plus accrued and unpaid interest and Liquidated Damages thereon, if any,
to the applicable redemption date, if redeemed during the twelve-month period
beginning on March 15 of the years indicated below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
- ---- ----------
<S> <C>
2003 ................................. 106.375%
2004 ................................. 104.250%
2005 ................................. 102.125%
2006 and thereafter .................. 100.000%
</TABLE>
78
<PAGE>
Prior to March 15, 2001, the Company may, at its option, redeem up to
one-third of the aggregate principal amount at maturity of Notes at a
redemption price equal to 112.75% of the Accreted Value thereof, plus
Liquidated Damages thereon, if any, with the net cash proceeds of an Equity
Offering; provided that at least two-thirds of the original aggregate principal
amount at maturity of Notes remains outstanding immediately after the
occurrence of such redemption (excluding Notes held by the Company and its
Subsidiaries); and provided, further, that any such redemption shall occur
within 60 days of the date of the closing of such Equity Offering.
SELECTION AND NOTICE
If less than all of the New Notes are to be redeemed at any time,
selection of New Notes for redemption will be made by the Trustee in compliance
with the requirements of the principal national securities exchange, if any, on
which the New Notes are listed, or, if the New Notes are not so listed, on a
pro rata basis, by lot or by such other method as the Trustee shall deem fair
and appropriate; provided that no New Notes of $1,000 or less shall be redeemed
in part. Notices of redemption shall be mailed by first class mail at least 30
but not more than 60 days before the redemption date to each Holder of Notes to
be redeemed at its registered address. Notices of redemption may not be
conditional. If any New Note is to be redeemed in part only, the notice of
redemption that relates to such New Note shall state the portion of the
principal amount thereof to be redeemed. A new New Note in principal amount
equal to the unredeemed portion thereof will be issued in the name of the
Holder thereof upon cancellation of the original New Note. New Notes called for
redemption become due on the date fixed for redemption. On and after the
redemption date, interest ceases to accrue on New Notes or portions of them
called for redemption.
MANDATORY REDEMPTION
Except as set forth below under "--Repurchase at the Option of Holders,"
the Company is not required to make mandatory redemption or sinking fund
payments with respect to the New Notes.
REPURCHASE AT THE OPTION OF HOLDERS
CHANGE OF CONTROL
Upon the occurrence of a Change of Control, the Company will be required
to make an offer to each Holder of New Notes to repurchase all or any part
(equal to $1,000 or an integral multiple thereof) of such Holder's New Notes
pursuant to the offer described below (the "Change of Control Offer") at an
offer price in cash equal to 101% of the aggregate principal amount thereof,
plus accrued and unpaid interest and Liquidated Damages thereon, if any, to the
date of purchase (or, in the case of repurchases of Notes prior to , 2003, at a
purchase price equal to 101% of the Accreted Value thereof, plus Liquidated
Damages thereon, if any, as of the date of repurchase) (the "Change of Control
Payment"). Within ten days following any Change of Control, the Company will
mail a notice to each Holder describing the transaction or transactions that
constitute the Change of Control and offering to repurchase New Notes on the
date specified in such notice, which date shall 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"), pursuant to the procedures required by the Indenture
and described in such notice. The Company will comply with the requirements of
Rule 14e-1 under the Exchange Act and any other securities laws and regulations
thereunder to the extent such laws and regulations are applicable in connection
with the repurchase of the New Notes as a result of a Change of Control.
On the Change of Control Payment Date, the Company will, to the extent
lawful, (1) accept for payment all New Notes or portions thereof properly
tendered pursuant to the Change of Control Offer, (2) deposit with the Paying
Agent an amount equal to the Change of Control Payment in respect of all New
Notes or portions thereof so tendered and (3) deliver or cause to be delivered
to the Trustee the New Notes so accepted together with an Officers' Certificate
stating the aggregate principal amount at maturity of New Notes or portions
thereof being purchased by the Company. The Paying Agent will promptly mail to
each Holder of New Notes so tendered the Change of Control Payment for such New
Notes, and the
79
<PAGE>
Trustee will promptly authenticate and mail (or cause to be transferred by book
entry) to each Holder a new New Note equal in principal amount at maturity to
any unpurchased portion of the New Notes surrendered, if any; provided that
each such new New Note will be in a principal amount at maturity of $1,000 or
an integral multiple thereof. The Company will publicly announce the results of
the Change of Control Offer on or as soon as practicable after the Change of
Control Payment Date.
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" and "Risk Factors--Holding Company
Structure and Related Considerations." The Company's failure to make a Change
of Control Offer when required or to purchase tendered New Notes when tendered
would constitute an Event of Default under the Indenture.
The Change of Control provisions described above will be applicable
whether or not any other provisions of the Indenture are applicable. Except as
described above with respect to a Change of Control, the Indenture does not
contain provisions that permit the Holders of the New Notes to require that the
Company repurchase or redeem the New Notes in the event of a takeover,
recapitalization or similar transaction.
The Company will not be required to make a Change of Control Offer upon a
Change of Control if a third party makes the Change of Control Offer in the
manner, at the times and otherwise in compliance with the requirements set
forth in the Indenture applicable to a Change of Control Offer made by the
Company and purchases all New Notes validly tendered and not withdrawn under
such Change of Control Offer.
ASSET SALES
The Indenture provides that the Company will not, and will not permit any
of its Restricted Subsidiaries to, 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 set forth in an
Officers' Certificate delivered to the Trustee) of the assets or Equity
Interests issued or sold or otherwise disposed of and (ii) at least 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 and
liabilities that are by their terms subordinated to the New Notes) that are
assumed by the transferee of any such assets pursuant to a customary novation
agreement that releases the Company or such Restricted Subsidiary from further
liability and (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), shall 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 the Indenture. Any
Net Proceeds from Asset Sales that are not applied or invested as provided in
the first sentence of this paragraph will be deemed to constitute "Excess
Proceeds." When the aggregate amount of Excess Proceeds exceeds $10.0 million,
the Company will be required to make an offer to all Holders of New Notes (an
"Asset Sale Offer") to purchase the maximum principal amount of New Notes that
may be purchased out of the Excess Proceeds, at an offer price in cash in an
amount equal to 100% of the aggregate principal amount thereof, plus accrued
and unpaid interest and Liquidated Damages thereon, if any, to the date of
purchase (or, in the case of purchases of New Notes prior to March 15, 2003, at
a purchase price equal to 100% of the Accreted Value thereof, plus Liquidated
Damages thereon, if
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any), in accordance with the procedures set forth in the Indenture; provided
however, that such offer will not be required if the application of such Excess
Proceeds to repurchase New Notes would cause an Event of Default under the
Subsidiary Debt Instruments. If the aggregate purchase price of New Notes
tendered into such Asset Sale Offer surrendered by Holders thereof is less than
the amount of Excess Proceeds, the Company may use such Excess Proceeds for
general corporate purposes (subject to the restrictions of the Indenture). If
the aggregate purchase price of New Notes tendered into such Asset Sale Offer
surrendered by Holders thereof exceeds the amount of Excess Proceeds, the
Trustee shall select the New Notes to be purchased on a pro rata basis. Upon
completion of such Asset Sale Offer, the amount of Excess Proceeds shall be
reset at zero.
CERTAIN COVENANTS
RESTRICTED PAYMENTS
The Indenture provides that the Company will not, and will not permit any
of its Restricted Subsidiaries to, directly or indirectly: (i) declare or pay
any dividend or make any other payment or distribution on account of the
Company's or any of its Restricted Subsidiaries' Equity Interests (including,
without limitation, any payment in connection with any merger or consolidation
involving the Company or any of its Restricted Subsidiaries) 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 New 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 shall 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 the date of the Indenture (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 the date of the Indenture to the end of the Company's most
recently ended fiscal quarter for which internal financial statements are
available at the time of such Restricted Payment (or, if such Consolidated
Net Income for such period is a deficit, less 100% of such deficit), plus
(ii) 100% of the aggregate net cash proceeds received by the Company since
the date of the Indenture 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 the date of the Indenture 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).
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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 as described under "Use of Proceeds" (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 the
Indenture; (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 shall 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 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 shall 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 shall 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 shall not exceed $1.0 million in any twelve-month
period plus the aggregate cash proceeds received by the Company (or any of its
Restricted Subsidiaries) during any such twelve-month period from any issuance
of Equity Interests by the Company (or any of its Restricted Subsidiaries) to
members of management of the Company (or any of its Restricted Subsidiaries)
(provided that such proceeds are excluded from clause (c) of the preceding
paragraph); and provided, further, that such repurchase, redemption or other
acquisition or retirement may not include any Equity Interests owned, directly
or indirectly, but 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) shall 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 shall be determined by
the Board of Directors whose resolution with respect thereto shall be delivered
to the Trustee, 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. Not later than the
date of making any Restricted Payment, the Company shall deliver to the Trustee
an Officers' Certificate stating that such Restricted Payment is permitted and
setting forth the basis upon which the calculations required by the covenant
"Restricted Payments" were computed, together with a copy of any fairness
opinion or appraisal required by the Indenture.
INCURRENCE OF INDEBTEDNESS AND ISSUANCE OF PREFERRED STOCK
The Indenture provides that 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
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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 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 Indenture also provides that the Company will not incur any
Indebtedness that is contractually subordinated in right of payment to any
other Indebtedness of the Company unless such Indebtedness is also
contractually subordinated in right of payment to the New Notes on
substantially identical terms; provided, however, that no Indebtedness of the
Company shall be deemed to be contractually subordinated in right of payment to
any other Indebtedness of the Company solely by virtue of being unsecured.
The provisions of the first paragraph of this covenant 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 Indenture, 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
New Notes and the Indenture;
(iv) the incurrence by the Company or any of its Restricted Subsidiaries
of Indebtedness represented by Capital Lease Obligations, mortgage
financings or purchase money obligations, in each case incurred for the
purpose of financing all or any part of the purchase price or cost of
construction or improvement of property, plant or equipment used in the
business of the Company or such Restricted Subsidiary, in an aggregate
principal amount not to exceed $5.0 million at any time outstanding;
(v) the incurrence by the Company or any of its Restricted Subsidiaries
of Indebtedness in connection with the acquisition of assets or a new
Restricted Subsidiary; provided that such Indebtedness was incurred by the
prior owner of such assets or such Restricted Subsidiary prior to such
acquisition by the Company or one of its Restricted Subsidiaries and was
not incurred in connection with, or in contemplation of, such acquisition
by the Company or one of its Restricted Subsidiaries; and provided further
that the principal amount (or accreted value, as applicable) of such
Indebtedness, together with any other outstanding Indebtedness incurred
pursuant to this clause (v) 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 by the Indenture to be
incurred under the first paragraph hereof or clauses (ii), (iii), (iv) or
(v) of this paragraph;
(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,
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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 shall be deemed, in each case,
to constitute an incurrence of such Indebtedness by the Company or such
Restricted Subsidiary, as the case may be, 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 this Indenture 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 shall, 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.
LIENS
The Indenture provides that the Company will not, and will not permit any
of its Restricted Subsidiaries to, directly or indirectly, create, incur,
assume or suffer to exist any Lien on any asset now owned or hereafter
acquired, or any income or profits therefrom or assign or convey any right to
receive income therefrom, except Permitted Liens.
DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING RESTRICTED SUBSIDIARIES
The Indenture provides that the Company will not, and will not permit any
of its Restricted Subsidiaries to, directly or indirectly, create or otherwise
cause or suffer to exist or become effective any encumbrance or restriction on
the ability of any Restricted Subsidiary to (i)(a) pay dividends or make any
other distributions to the Company or any of its Restricted Subsidiaries (1) on
its Capital Stock or (2) with respect to any other interest or participation
in, or measured by, its profits, or (b) pay any indebtedness owed to the
Company or any of its Restricted Subsidiaries, (ii) make loans or advances to
the Company or any of its Restricted Subsidiaries or (iii) transfer any of its
properties or assets to the Company or any of its Restricted Subsidiaries.
However, the foregoing restrictions will not apply to encumbrances or
restrictions existing under or by reason of (a) Existing Indebtedness as in
effect on the date of the Indenture and any amendments, modifications,
restatements, renewals, increases, supplements, refundings, replacements or
refinancings thereof, provided that such amendments, modifications,
restatements, renewals, increases, supplements, refundings, replacement or
refinancings are no more restrictive, with respect to such dividend and other
payment restrictions than those as in effect on the date of the Indenture, (b)
the Indenture and the New 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 encumbrance or restriction is not
applicable to any Person, or the properties or assets of any Person, other than
the Person, or the property or assets of the Person, so acquired, provided
that, in the case of Indebtedness, such Indebtedness was permitted by the terms
of the Indenture to be incurred, (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
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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
above under the caption "--Liens" that limits the right of the debtor to
dispose of the assets securing such Indebtedness.
MERGER, CONSOLIDATION, OR SALE OF ASSETS
The Indenture provides that the Company may not consolidate or merge with
or into (whether or not the Company is the surviving entity), or sell, assign,
transfer, lease, convey or otherwise dispose of all or substantially all of its
properties or assets in one or more related transactions, to another
corporation, Person or entity unless (i) the Company is the surviving
corporation or the entity or the Person formed by or surviving any such
consolidation or merger (if other than the Company) or to which such sale,
assignment, transfer, lease, conveyance or other disposition shall have been
made is a corporation organized or existing under the laws of the United
States, any state thereof or the District of Columbia; (ii) the entity or
Person formed by or surviving any such consolidation or merger (if other than
the Company) or the entity or Person to which such sale, assignment, transfer,
lease, conveyance or other disposition shall have been made assumes all the
obligations of the Company under the Registration Rights Agreement, the New
Notes, the Pledge Agreement and the Indenture pursuant to supplemental
agreements in a form reasonably satisfactory to the Trustee; (iii) immediately
after such transaction no Default or Event of Default exists; and (iv) except
in the case of a merger of the Company with or into a Wholly Owned Restricted
Subsidiary of the Company, the Company or the entity or Person formed by or
surviving any such consolidation or merger (if other than the Company), or to
which such sale, assignment, transfer, lease, conveyance or other disposition
shall have been made (A) will have Consolidated Net Worth immediately after the
transaction equal to or greater than the Consolidated Net Worth of the Company
immediately preceding the transaction and (B) will, at the time of such
transaction and after giving pro forma effect thereto as if such transaction
had occurred at the beginning of the applicable four-quarter period, be
permitted to incur at least $1.00 of additional Indebtedness pursuant to the
Fixed Charge Coverage Ratio test set forth in the first paragraph of the
covenant described above under the caption "--Incurrence of Indebtedness and
Issuance of Preferred Stock."
TRANSACTIONS WITH AFFILIATES
The Indenture provides that the Company will not, and will not permit any
of its Restricted Subsidiaries to, make any payment to, or sell, lease,
transfer or otherwise dispose of any of its properties or assets to, or
purchase any property or assets from, or enter into or make or amend any
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) the
Company delivers to the Trustee (a) with respect to any Affiliate Transaction
or series of related Affiliate Transactions involving aggregate consideration
in excess of $1.0 million, a resolution of the Board of Directors set forth in
an Officers' Certificate certifying that such Affiliate Transaction complies
with clause (i) above and that such Affiliate Transaction has been approved by
a majority of the disinterested members of the Board of Directors and (b) with
respect to any Affiliate Transaction or series of related Affiliate
Transactions involving aggregate consideration in excess of $5.0 million, an
opinion as to the fairness to the Holders of such Affiliate Transaction from a
financial point of view issued by an 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
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thereunder; (2) any employment agreement entered into by the Company or any of
its Restricted Subsidiaries in the ordinary course of business and consistent
with the past practice of the Company or such Restricted Subsidiary in an
amount not to exceed $1.0 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 Indenture
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
The Indenture provided that 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 "--Repurchase at the Option of Holders--Asset Sales," 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.
LIMITATIONS ON ISSUANCES OF GUARANTEES OF INDEBTEDNESS
The Indenture provided that the Company will not permit any Restricted
Subsidiary, directly or indirectly, to Guarantee or pledge any assets to secure
the payment of any other Indebtedness of the Company , other than any such
Indebtedness incurred pursuant to clauses (i) and (ii) of the definition of
Permitted Debt, unless such Restricted Subsidiary simultaneously executes and
delivers a supplemental indenture to the Indenture providing for the Guarantee
of the payment of the New Notes by such Restricted Subsidiary, which Guarantee
shall be senior to or pari passu with such Restricted Subsidiary's Guarantee of
or pledge to secure such other Indebtedness. Notwithstanding the foregoing, any
such Guarantee by a Restricted Subsidiary of the New Notes shall provide by its
terms that it shall be automatically and unconditionally released and
discharged upon any sale, exchange or transfer, to any Person not an Affiliate
of the Company, of all of the Company's stock in, or all or substantially all
the assets of, such Restricted Subsidiary, which sale, exchange or transfer is
made in compliance with the applicable provisions of the Indenture.
BUSINESS ACTIVITIES
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.
PAYMENTS FOR CONSENT
The Indenture provides that 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
any New Notes for or as an inducement to any consent, waiver or amendment of
any of the terms or provisions of the Indenture or the New Notes unless such
consideration is offered to be paid or is paid to all Holders of the New Notes
that consent, waive or agree to amend in the time frame set forth in the
solicitation documents relating to such consent, waiver or agreement.
REPORTS
The Indenture provides that, whether or not required by the rules and
regulations of the Commission, so long as any New Notes are outstanding, the
Company will furnish to the Holders of New Notes (i) all quarterly and annual
financial information that would be required to be contained in a filing with
the Commission on Forms 10-Q and 10-K if the Company were required to file such
Forms, including
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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, 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. In addition, the
Company has agreed that, for so long as any New Notes remain outstanding, it
will furnish to the Holders and to securities analysts and prospective
investors, upon their request, the information required to be delivered
pursuant to Rule 144A(d)(4) under the Securities Act.
EVENTS OF DEFAULT AND REMEDIES
The Indenture provides that each of the following constitutes an Event of
Default: (i) default for 30 days in the payment when due of interest on the New
Notes; (ii) default in payment when due of the principal of or premium, or
Liquidated Damages, if any, on the New Notes; (iii) failure by the Company or
any of its Subsidiaries to comply with the provisions described under the
captions "--Repurchase at the Option of Holders--Change of Control,"
"--Repurchase at the Option of Holders--Asset Sales," "--Certain
Covenants--Restricted Payments," "--Certain Covenants--Incurrence of
Indebtedness and Issuance of Preferred Stock," or "--Certain Covenants--Merger,
Consolidation or Sale of Assets;" (iv) failure by the Company or any of its
Subsidiaries for 30 days after notice to comply with any of its other
agreements in the Indenture, the New Notes or the Pledge Agreement; (v) default
under any mortgage, indenture or instrument under which there may be issued or
by which there may be secured or evidenced any Indebtedness for money borrowed
by the Company or any of its Restricted Subsidiaries (or the payment of which
is guaranteed by the Company or any of its Restricted Subsidiaries) whether
such Indebtedness or guarantee now exists, or is created after the date of the
Indenture, which default (a) is caused by a failure to pay principal of or
premium, if any, or interest on such Indebtedness prior to the expiration of
the grace period provided in such Indebtedness on the date of such default (a
"Payment Default") or (b) results in the acceleration of such Indebtedness
prior to its express maturity and, in each case, the principal amount of any
such Indebtedness, together with the principal amount of any other such
Indebtedness under which there has been a Payment Default or the maturity of
which has been so accelerated, aggregates $5.0 million or more; (vi) failure by
the Company or any of its Restricted Subsidiaries to pay final judgments
aggregating in excess of $5.0 million and either (a) any creditor commences
enforcement proceedings upon any such judgments or (b) such judgments are not
paid, discharged or stayed for a period of 45 days; (vii) breach by the Company
or any Subsidiary Pledgor of any material representation or warranty set forth
in the Pledge Agreement, or default by the Company or any Subsidiary Pledgor in
the performance of any material covenant set forth in the Pledge Agreement, or
repudiation by the Company or any Subsidiary Pledgor of its material
obligations under the Pledge Agreement or the unenforceability of the Pledge
Agreement against the Company or any Subsidiary Pledgor for any reason; and
(viii) certain events of bankruptcy or insolvency with respect to the Company
or any of its Restricted Subsidiaries.
If any Event of Default occurs and is continuing, the Trustee or the
Holders of at least 25% in principal amount of the then outstanding New Notes
may declare all the New Notes to be due and payable immediately.
Notwithstanding the foregoing, in the case of an Event of Default arising from
certain events of bankruptcy or insolvency, with respect to the Company, any
Significant Subsidiary or any group of Subsidiaries that, taken together, would
constitute a Significant Subsidiary, all outstanding New Notes will
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become due and payable without further action or notice. Upon any acceleration
of maturity of the New Notes, all principal of and accrued interest on and
Liquidated Damages, if any (if on or after March 15, 2003) or Accreted Value
and Liquidated Damages, if any (if prior to March 15, 2003), of the New Notes
shall be due and payable immediately. Holders of the New Notes may not enforce
the Indenture or the New Notes except as provided in the Indenture. Subject to
certain limitations, Holders of a majority in principal amount of the then
outstanding New Notes may direct the Trustee in its exercise of any trust or
power. The Trustee may withhold from Holders of the New Notes notice of any
continuing Default or Event of Default (except a Default or Event of Default
relating to the payment of principal or interest) if it determines that
withholding notice is in their interest.
In the case of any Event of Default occurring by reason of any willful
action (or inaction) taken (or not taken) by or on behalf of the Company with
the intention of avoiding payment of the premium that the Company would have
had to pay if the Company then had elected to redeem the New Notes pursuant to
the optional redemption provisions of the Indenture, an equivalent premium
shall also become and be immediately due and payable to the extent permitted by
law upon the acceleration of the New Notes. If an Event of Default occurs prior
to March 15, 2003 by reason of any willful action (or inaction) taken (or not
taken) by or on behalf of the Company with the intention of avoiding the
prohibition on redemption of the New Notes prior to March 15, 2003, then the
premium specified in the Indenture shall also become immediately due and
payable to the extent permitted by law upon the acceleration of the New Notes.
The Holders of a majority in aggregate principal amount of the New Notes
then outstanding by notice to the Trustee may on behalf of the Holders of all
of the New Notes waive any existing Default or Event of Default and its
consequences under the Indenture except a continuing Default or Event of
Default in the payment of interest on, or the principal of, the New Notes.
The Company is required to deliver to the Trustee annually a statement
regarding compliance with the Indenture, and the Company is required upon
becoming aware of any Default or Event of Default, to deliver to the Trustee a
statement specifying such Default or Event of Default.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS
No director, officer, employee, incorporator or stockholder of the
Company, as such, shall have any liability for any obligations of the Company
under the New Notes, the Indenture or the Pledge Agreement or for any claim
based on, in respect of, or by reason of, such obligations or their creation.
Each Holder of New Notes by accepting a New Note waives and releases all such
liability. The waiver and release are part of the consideration for issuance of
the New Notes. Such waiver may not be effective to waive liabilities under the
federal securities laws and it is the view of the Commission that such a waiver
is against public policy.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Company may, at its option and at any time, elect to have all of its
obligations discharged with respect to the outstanding New Notes ("Legal
Defeasance"). Such Legal Defeasance means that the Company will be deemed to
have paid and discharged the entire indebtedness represented by the outstanding
New Notes except for (i) the rights of Holders of outstanding New Notes to
receive payments in respect of the principal amount at maturity or Accreted
Value (as applicable) of and premium, interest and Liquidated Damages, if any,
on the New Notes when such payments are due or on the redemption date, as the
case may be, (ii) the Company's obligations with respect to the New Notes
concerning issuing temporary New Notes, registration of New Notes, mutilated,
destroyed, lost or stolen New Notes and the maintenance of an office or agency
for payment and money for security payments held in trust, (iii) the rights,
powers, trusts, duties and immunities of the Trustee, and the Company's
obligations in connection therewith and (iv) the Legal Defeasance provisions of
the Indenture. In addition, the Company may, at its option and at any time,
elect to have the obligations of the Company released with respect to certain
covenants that are described in the Indenture ("Covenant Defeasance") and
thereafter any omission to comply with such obligations shall not constitute a
Default or Event of Default with respect to the New Notes. In the event
Covenant Defeasance occurs, certain events (not including non-payment,
bankruptcy,
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receivership, rehabilitation and insolvency events) described under "--Events
of Default and Remedies" will no longer constitute an Event of Default with
respect to the New Notes.
In order to exercise either Legal Defeasance or Covenant Defeasance, (i)
the Company must irrevocably deposit with the Trustee, in trust, for the
benefit of the Holders of the New Notes, cash in U.S. dollars, non-callable
Government Securities, or a combination thereof, in such amounts as will be
sufficient, in the opinion of a nationally recognized firm of independent
public accountants, to pay the principal amount at maturity of or Accreted
Value (as applicable), premium, if any, interest and Liquidated Damages, if
any, on the outstanding New Notes on the stated maturity or on the applicable
redemption date, as the case may be, and the Company must specify whether the
New Notes are being defeased to maturity or to a particular redemption date;
(ii) in the case of Legal Defeasance, the Company shall have delivered to the
Trustee an opinion of counsel in the United States reasonably acceptable to the
Trustee confirming that (A) the Company has received from, or there has been
published by, the Internal Revenue Service a ruling or (B) since the date of
the Indenture, there has been a change in the applicable federal income tax
law, in either case to the effect that, and based thereon such opinion of
counsel shall confirm that, the Holders of the outstanding New Notes will not
recognize income, gain or loss for federal income tax purposes as a result of
such Legal Defeasance and will be subject to federal income tax on the same
amounts, in the same manner and at the same times as would have been the case
if such Legal Defeasance had not occurred; (iii) in the case of Covenant
Defeasance, the Company shall have delivered to the Trustee an opinion of
counsel in the United States reasonably acceptable to the Trustee confirming
that the Holders of the outstanding New Notes will not recognize income, gain
or loss for federal income tax purposes as a result of such Covenant Defeasance
and will be subject to federal income tax on the same amounts, in the same
manner and at the same times as would have been the case if such Covenant
Defeasance had not occurred; (iv) no Default or Event of Default shall have
occurred and be continuing on the date of such deposit (other than a Default or
Event of Default resulting from the borrowing of funds to be applied to such
deposit) or insofar as Events of Default from bankruptcy or insolvency events
are concerned, at any time in the period ending on the 91st day after the date
of deposit; (v) such Legal Defeasance or Covenant Defeasance will not result in
a breach or violation of, or constitute a default under any material agreement
or instrument (other than the Indenture) to which the Company or any of its
Subsidiaries is a party or by which the Company or any of its Subsidiaries is
bound; (vi) the Company must have delivered to the Trustee an opinion of
counsel to the effect that after the 91st day following the deposit, the trust
funds will not be subject to the effect of any applicable bankruptcy,
insolvency, reorganization or similar laws affecting creditors' rights
generally; (vii) the Company must deliver to the Trustee an Officers'
Certificate stating that the deposit was not made by the Company with the
intent of preferring the Holders of New Notes over the other creditors of the
Company with the intent of defeating, hindering, delaying or defrauding
creditors of the Company or others; and (viii) the Company must deliver to the
Trustee an Officers' Certificate and an opinion of counsel, each stating that
all conditions precedent provided for relating to the Legal Defeasance or the
Covenant Defeasance have been complied with.
TRANSFER AND EXCHANGE
A Holder may transfer or exchange New Notes in accordance with the
Indenture. The Registrar and the Trustee may require a Holder, among other
things, to furnish appropriate endorsements and transfer documents and the
Company may require a Holder to pay any taxes and fees required by law or
permitted by the Indenture. The Company is not required to transfer or exchange
any New Note selected for redemption. Also, the Company is not required to
transfer or exchange any New Note for a period of 15 days before a selection of
New Notes to be redeemed.
The registered Holder of a New Note will be treated as the owner of it for
all purposes.
AMENDMENT, SUPPLEMENT AND WAIVER
Except as provided in the next two succeeding paragraphs, the Indenture or
the New Notes may be amended or supplemented with the consent of the Holders of
at least a majority in principal amount, at maturity of the New Notes then
outstanding (including, without limitation, consents obtained in
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connection with a purchase of, or tender offer or exchange offer for, New
Notes), and any existing default or compliance with any provision of the
Indenture or the New Notes may be waived with the consent of the Holders of a
majority in principal amount of the then outstanding New Notes (including,
without limitation, consents obtained in connection with a purchase of, or
tender offer or exchange offer for, New Notes).
Without the consent of each Holder affected, an amendment or waiver may
not (with respect to any New Notes held by a non-consenting Holder): (i) reduce
the principal amount of New Notes whose Holders must consent to an amendment,
supplement or waiver, (ii) reduce the principal amount at maturity of, change
the fixed maturity of, alter the provisions with respect to the redemption of
the New Notes (other than provisions relating to the covenants described above
under the caption "--Repurchase at the Option of Holders") or amend or modify
the calculation of Accreted Value so as to reduce the amount of the Accreted
Value of the New Notes, (iii) reduce the rate of or change the time for payment
of interest on any New Note, (iv) waive a Default or Event of Default in the
payment of principal of or premium, if any, or interest on the New Notes
(except a rescission of acceleration of the New Notes by the Holders of at
least a majority in aggregate principal amount of the New Notes and a waiver of
the payment default that resulted from such acceleration), (v) make any New
Note payable in money other than that stated in the New Notes, (vi) make any
change in the provisions of the Indenture relating to waivers of past Defaults
or the rights of Holders of New Notes to receive payments of principal of or
premium, if any, or interest on the New Notes, (vii) waive a redemption or
repurchase payment with respect to any New Note (other than a payment required
by one of the covenants described above under the caption "--Repurchase at the
Option of Holders"), (viii) make any change in the foregoing amendment and
waiver provisions or (ix) modify any provision of the Indenture with respect to
the priority of the New Notes in right of payment. Notwithstanding the
foregoing, any amendment or waiver to the covenant described above under the
caption "--Repurchase at the Option of Holders--Change of Control" will require
the consent of the Holders of at least two-thirds in aggregate principal amount
of the New Notes then outstanding if such amendment would adversely affect the
rights of Holders of the New Notes.
Notwithstanding the foregoing, without the consent of any Holder of New
Notes, the Company and the Trustee may amend or supplement the Indenture or the
New Notes to cure any ambiguity, defect or inconsistency, to provide for
uncertificated New Notes in addition to or in place of certificated New Notes,
to provide for the assumption of the Company's obligations to Holders of New
Notes in the case of a merger or consolidation or sale of all or substantially
all of the Company's assets, to make any change that would provide any
additional rights or benefits to the Holders of New Notes or that does not
adversely affect the legal rights under the Indenture of any such Holder, or to
comply with requirements of the Commission in order to effect or maintain the
qualification of the Indenture under the Trust Indenture Act.
CONCERNING THE TRUSTEE
The Indenture contains certain limitations on the rights of the Trustee,
should the Trustee become a creditor of the Company, to obtain payment of
claims in certain cases, or to realize on certain property received in respect
of any such claim as security or otherwise. The Trustee will be permitted to
engage in other transactions 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.
The Holders of a majority in principal amount at maturity of the then
outstanding New Notes will have the right to direct the time, method and place
of conducting any proceeding for exercising any remedy available to the
Trustee, subject to certain exceptions. The Indenture provides that in case an
Event of Default shall occur (which shall not be cured), the Trustee will be
required, in the exercise of its power, to use the degree of care of a prudent
man in the conduct of his own affairs. Subject to such provisions, the Trustee
will be under no obligation to exercise any of its rights or powers under the
Indenture at the request of any Holder of New Notes, unless such Holder shall
have offered to the Trustee security and indemnity satisfactory to it against
any loss, liability or expense.
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ADDITIONAL INFORMATION
Anyone who receives this Prospectus may obtain a copy of the Indenture,
the Pledge Agreement 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 and the Initial Purchasers entered into the Registration
Rights Agreement dated as of March 12, 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 Notes. Upon the effectiveness of the Exchange Offer
Registration Statement, the Company will offer to the Holders of Transfer
Restricted Securities pursuant to the Exchange Offer who are able to make
certain representations the opportunity to exchange their Transfer Restricted
Securities for New Notes. If the Company does not meet its obligations under
the Registration Rights Agreement, it may be required to pay to each Holder of
Old Notes Liquidated Damages in an amount equal to 50 basis points per annum of
the Accreted Value of Old Notes 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 Accreted
Value of Old Notes.
Holders of New Notes are not entitled to any registration rights with
respect to the New Notes. The Company agrees for a period of 270 days from the
effective date of this Prospectus to make available a prospectus meeting the
requirements of the Securities Act to any broker-dealer for use in connection
with any resale of any New Notes. The Registration Statement of which this
Prospectus is a part constitutes the registration statement for the Exchange
Offer which is the subject of the Registration Rights Agreement. Upon the
closing of the Exchange Offer, subject to certain limited exceptions, Holders
of untendered Old Notes will not retain any rights under the Registration
Rights Agreement.
CERTAIN DEFINITIONS
Set forth below are certain defined terms used in the Indenture. Reference
is made to the Indenture for a full disclosure of all such terms, as well as
any other capitalized terms used herein for which no definition is provided.
"Accreted Value" means, as of any date of determination prior to March 15,
2003, with respect to any Note, the sum of (a) the initial offering price to
investors of such Note and (b) the portion of the excess of the principal
amount of such 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 12 3/4% per annum of the initial offering price of such
Note, compounded semi-annually on each March 15 and September 15 from the date
of issuance of the Old Notes through the date of determination, computed on the
basis of a 360-day year of twelve 30-day months.
"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.
"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
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course of business consistent with past practices (provided that the sale,
lease, conveyance or other disposition of all or substantially all of the
assets of the Company and its Restricted Subsidiaries taken as a whole will be
governed by the provisions of the Indenture described above under the caption
"Repurchase at the Option of Holders--Change of Control" and/or the provisions
described above under the caption "Certain Covenants--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 Notes elected to exercise their rights under the
Indenture and the Company elected to contest such election, there could be no
assurance as to how a court interpreting New York law would interpret the
phrase.
"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 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"
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(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 Notes to require
the Company to repurchase such Notes 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.
"Collateral" means all shares of Capital Stock in, and all intercompany
notes issued by, all current and future Restricted Subsidiaries of the Company
that are pledged to the Collateral Agent in accordance with the Indenture and
the Pledge Agreement.
"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
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Restricted Subsidiary of that Net Income is not at the date of determination
permitted without any prior governmental approval (that has not been obtained)
or, directly or indirectly, by operation of the terms of its charter or any
agreement, instrument, judgment, decree, order, statute, rule or governmental
regulation applicable to that Restricted Subsidiary or its stockholders, (iii)
the Net Income of any Person acquired in a pooling of interests transaction for
any period prior to the date of such acquisition shall be excluded, (iv) the
cumulative effect of a change in accounting principles shall be excluded and
(v) 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 the date of the Indenture or (ii) was nominated for election or
elected to such Board of Directors with the approval of a majority of the
Continuing Directors who were members of such Board at the time of such
nomination or election.
"Default" means any event that is or with the passage of time or the
giving of notice or both would be an Event of Default.
"Disqualified Stock" means any Capital Stock that, by its terms (or by the
terms of any security into which it is convertible, or for which it is
exchangeable, 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 the date that is 91 days after the date on
which the New Notes mature; 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).
"Existing Indebtedness" means Indebtedness of the Company and its
Restricted Subsidiaries in existence on the date of the Indenture, including
Indebtedness represented by the Demand Note, until such amounts are repaid.
"Fixed Charges" means, with respect to any Person for any period, the sum,
without duplication, of (i) the consolidated interest expense of such Person
and its Restricted Subsidiaries for such period, whether paid or accrued
(including, without limitation, amortization of debt issuance costs and
original issue discount, non-cash interest payments, the interest component of
any deferred payment obligations,
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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 the date of the Indenture.
"Guarantee" means a guarantee (other than by endorsement of negotiable
instruments for collection in the ordinary course of business), direct or
indirect, in any manner (including, without limitation, 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.
"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
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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 "--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.
"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
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permit (upon notice, lapse of time or both) any holder of any other
Indebtedness (other than the New Notes being offered hereby) of the Company or
any of its Restricted Subsidiaries to declare a default on such other
Indebtedness or cause the payment thereof to be accelerated or payable prior to
its stated maturity; and (iii) as to which the lenders have been notified in
writing that they will not have any recourse to the stock or assets of the
Company or any of its Restricted Subsidiaries.
"Obligations" means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Indebtedness.
"Permitted 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 are engaged in on the date of
the Indenture, 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 New 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 the date of
the Indenture as such loan may be amended or refinanced in a manner not adverse
to Fonda, the Company or the Holders of the New 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 Indenture 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 the date of the Indenture; (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 impair the use thereof in the operation of
business by the Company or such Restricted Subsidiary; (x) Liens in favor of
the holders of New 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;
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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 New 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 New Notes on
terms at least as favorable to the Holders of New Notes as those contained in
the documentation governing the Indebtedness being extended, refinanced,
renewed, replaced, defeased or refunded; and (iv) such Indebtedness is incurred
either by the Company or by the 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 New 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.
"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 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
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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 Notes will be issued in registered,
global form in minimum denominations of $1,000 and integral multiples of $1,000
in excess thereof. New Notes will be issued at the closing of the Exchange
Offer (the "Closing") only against payment in immediately available funds.
The New Notes initially will be issued in the form of one global note (the
"Global Note"). The Global Note will be deposited upon issuance with the
Trustee 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.
Except as set forth below, the Global Note 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 Note 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 Note will not be entitled to receive physical delivery
of Certificated Securities (as defined below).
Initially, the Trustee will act as Paying Agent and Registrar with respect
to the New Notes. The New Notes may be presented for registration of transfer
and exchange at the offices of the Registrar.
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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 Purchasers), 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 Note, DTC will credit the accounts of
Participants designated by the Initial Purchasers with portions of the
principal amount of the Global Note and (ii) ownership of the New Notes
evidenced by the Global 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 Note 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 Note 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 Note 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 Notes, see "--Exchange of Book-Entry Securities for
Certificated Securities."
Except as described below, owners of interests in the Global Note will not
have New Notes registered in their names, will not receive physical delivery of
New Notes in certificated form and will not be considered the registered owners
or "Holders" thereof under the Indenture for any purpose.
Payments in respect of the principal of, premium, if any, interest and
Liquidated Damages, if any, on any New Notes registered in the name of DTC or
its nominee will be payable by the Trustee to DTC in its capacity as the
registered Holder under the Indenture. Under the terms of the Indenture, the
Company and the Trustee will treat the persons in whose names the New Notes 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 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 Notes, 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 Notes 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 Notes (including principal and
interest), is to credit the accounts of the relevant Participants with the
payment on the payment date, in amounts proportionate to their respective
holdings
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in the principal amount of beneficial interest 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 Notes 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 Notes, 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 Note 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 Note 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 Notes only at the direction of one or more
Participants to whose account DTC has credited the interests in the Global Note
and only in respect of such portion of the aggregate principal amount of the
New Notes as to which such Participant or Participants has or have given such
direction. However, if there is an Event of Default under the New Notes, DTC
reserves the right to exchange the Global Note 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 Note 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 Note is exchangeable for New Notes in
the form of registered certificated securities if (i) DTC (x) notifies the
Company that it is unwilling or unable to continue as depositary for the Global
Note 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 Trustee 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 Notes.
In addition, beneficial interests in the Global Note may be exchanged for New
Notes in the form of Certificated Securities upon request but only upon prior
written notice given to the Trustee by or on behalf of DTC in accordance with
the Indenture. In all cases, Certificated Securities delivered in exchange for
any Global Note or beneficial interests therein will be registered in the
names, and issued in any
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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
The Indenture will require that payments in respect of the New Notes
represented by the Global Note (including principal, premium, if any, interest
and Liquidated Damages, if any) be made by wire transfer of immediately
available funds to the accounts specified by the Global Note Holder. With
respect to Certificated Securities, the Company will make all payments of
principal, premium, if any, interest and Liquidated Damages, if any, by wire
transfer of immediately available funds to the accounts specified by the
Holders thereof or, if no such account is specified, by mailing a check to each
such Holder's registered address. The New Notes represented by the Global Notes
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 Notes 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 Note 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 Note 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. 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 New 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 Indenture for a period of 30 days, SF
Holdings' 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' 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' 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.
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 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.
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REGISTRATION RIGHTS
After the earlier to occur of March 15, 2002 or the occurrence of a
Triggering Event, the holders of one-quarter or more of the Shares will be
entitled to require SF Holdings to effect one registration (a "Demand
Registration") under the Securities Act of the 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 Notes."
Upon a demand, SF Holdings will (a) notify the holders of all of the
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 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 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'
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 Shares.
Holders of Shares will also have the right to include the 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 Registration right of holders of the 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
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 Shares to be included
therein is such as to materially and
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adversely affect the success of the offering. Any such reduction shall be pro
rata among holders of the 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 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 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 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 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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FEDERAL INCOME TAX CONSEQUENCES
GENERAL
The following is a general discussion of U.S. federal income tax
consequences of the purchase, ownership and disposition of Notes as of the date
hereof applicable to initial Holders who purchased Units pursuant to the
Offering. This entire discussion is based on the advice of Kramer, Levin,
Naftalis & Frankel, counsel to the Company. This summary applies only to Notes
acquired by the holders thereof and held as capital assets within the meaning
of Section 1221 of the Internal Revenue Code of 1986, as amended (the "Code").
It does not discuss all of the tax consequences that may be relevant to a
Holder in light of its particular circumstances or to Holders subject to
special rules, such as dealers in securities or foreign currencies, financial
institutions, life insurance companies, or regulated investment companies, or
to Holders whose functional currency is not the United States dollar or who
hold the Notes as part of a synthetic security, conversion transaction, or
certain "straddle" or hedging transactions.
The U.S. federal income tax considerations set forth below are based upon
the Code and regulations, rulings and judicial decisions thereunder as of the
date hereof, and such authorities may be repealed, revoked or modified,
possibly with retroactive effect, so as to result in U.S. federal income tax
consequences different from those presented below.
TAX CONSEQUENCES TO U.S. HOLDERS
The following discussion describes United States federal income tax
consequences with respect to U.S. Holders.
For purposes of this discussion, a "U.S. Holder" is a Holder that is an
individual who is a citizen or resident of the United States, a corporation or
a partnership that is created or organized in the United States or under the
laws of the United States or any state thereof or an estate whose income is
includable in gross income regardless of its source. A trust generally is a
U.S. Holder only if a court within the United States is able to exercise
primary supervision over its administration and one or more United States
persons have the authority to control all substantial decisions of the trust.
THE NOTES
Original Issue Discount. The Notes will be issued with original issue
discount ("OID"). As a result, a U.S. Holder will generally be required to
include OID in income as it accrues, rather than upon the receipt of cash
attributable to such income, whether such U.S. Holder uses the cash or accrual
method of accounting.
The amount of OID on a Note generally is the excess of its "stated
redemption price at maturity" over its "issue price." A Note's stated
redemption price at maturity includes all payments required to be made over the
term of the Note other than the payment of "qualified stated interest," which
includes interest that is unconditionally payable in cash or property (other
than debt instruments of the issuer) at least annually at a single fixed rate.
The Notes will not provide for the payment of any qualified stated interest. In
general, the issue price of a Note will be the price at which a substantial
amount of the Units are sold, reduced by the portion of the purchase price of
the Units allocable to Shares. SF Holdings will allocate the purchase price of
a Unit between the Shares and the Note based on their relative fair market
values. Such allocation will be binding on a U.S. Holder, unless the Holder
discloses on a statement attached to its income tax return that it is using a
different allocation.
A U.S. Holder must include in income for the taxable year (whether on the
cash or accrual method of accounting) the sum of the daily portions of OID
accrued for each day of the taxable year in which the Holder held the Note. The
daily portions of OID are determined by determining the OID attributable to
each accrual period and allocating a ratable portion of such amount to each day
in the accrual period. The accrual period may be of any length and may vary in
length over the term of the Note, provided that each accrual period is no
longer than one year and each scheduled payment of principal and interest
occurs on the final day of an accrual period or on the first day of an accrual
period. In general, OID allocable to an
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accrual period equals the product of the (i) adjusted issue price at the
beginning of the accrual period (i.e., the original issue price plus previously
accrued OID minus prior payments made on the Note other than payments of
qualified stated interest) multiplied by (ii) the yield to maturity of the Note
(determined on the basis of compounding at the end of each accrual period). 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 on the Note, produces
an amount equal to the issue price.
In general, payments of interest will be treated first as a payment of
previously accrued OID and then as payment of principal. Such amounts generally
will not be treated as additional interest income. The exchange of a Note for
an Exchange Note pursuant to the Exchange Offer should not be taxable to
Holders. While not free from doubt, any Liquidated Damages paid should
generally be taxable to Holders as ordinary income in accordance with their
method of accounting.
Sale, Exchange or Redemption of a Note. A U.S. Holder will recognize gain
or loss upon the sale, exchange, redemption or other taxable disposition of a
Note in an amount equal to the difference, if any, between the amount received
therefor and the Holder's adjusted tax basis in the Note (generally, the Note's
adjusted issue price). Such gain or loss generally will be long-term capital
gain or loss if the Note was held for more than one year as of the date of
disposition. Long-term capital gain recognized by a U.S. Holder that is an
individual will be taxed at the lowest rates applicable to capital gains if the
U.S. Holder has held the Note for more than 18 months as of the date of
disposition.
Deductibility of OID. If the yield to maturity on the Notes is more than
five percentage points in excess of the applicable Federal rate in effect at
the time the Notes are issued (such rate for February 1998 is 5.84%, based on
semiannual compounding), the Notes will constitute "high yield discount
obligations." In that event, SF Holdings will not be able to deduct accrued OID
until it is paid. In addition, if the yield to maturity exceeds such applicable
Federal rate by more than six percentage points, a portion of the OID
(generally, the portion of the OID reflecting the portion of the yield that
exceeds the applicable Federal rate plus five percentage points) will not be
deductible by SF Holdings even when paid (the "disqualified portion").
Corporate U.S. Holders will be entitled to a dividends received deduction with
respect to the accrual of the disqualified portion of OID, if any, to the
extent of SF Holdings' current and accumulated earnings and profits.
TAX CONSEQUENCES TO NON-U.S. HOLDERS
The following discussion describes United States federal income and estate
tax consequences with respect to the Non-U.S. Holders. Non-U.S. Holders are
Holders who are not U.S. Holders.
INTEREST ON THE 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 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 is 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 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). Interest or previously accrued OID paid to a Non-U.S.
Holder that is not effectively connected with a United States trade or
business, but to which clause(s) (i), (ii), or (iii) in the preceding paragraph
does not apply will be subject to withholding at a rate of 30%, unless the rate
is reduced or eliminated by treaty.
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GAIN ON DISPOSITION OF 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
Note 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 or (ii) in the case
of a Non-U.S. Holder who is a nonresident alien individual and holds the Note
as a capital asset, such holder is present in the United States for 183 or more
days in the taxable year and certain other requirements are met.
If a Non-U.S. Holder falls under clause (i) 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 preceding paragraph, 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 Notes is exempt from withholding of United States
federal income tax under the rules described above, the Notes will not be
included in the estate of a deceased Non-U.S. Holder for United States federal
estate tax purposes.
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 holders of Notes and the
Internal Revenue Service the amount of any interest (including OID) paid on the
Notes in each calendar year and the amounts of tax withheld, if any, with
respect to such payments.
A U.S. Holder of a Note may be subject to information reporting and
possible backup withholding. If applicable, backup withholding would apply at a
rate of 31% with respect to payments of interest or OID on, or the proceeds of
a sale, exchange, redemption, retirement or other disposition of, a Note,
unless (i) such Holder is a corporation or comes within certain other exempt
categories and, when required, demonstrates this fact, or (ii) provides a
taxpayer identification number, certifies as to no loss of exemption from
backup withholding and otherwise complies with applicable backup withholding
rules.
A Non-U.S. Holder of 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 NOTES ARE URGED TO CONSULT
THEIR OWN TAX ADVISORS REGARDING THE PARTICULAR TAX CONSEQUENCES OF PURCHASING,
OWNING AND DISPOSING OF THE NOTES, 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.
109
<PAGE>
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 Notes
issued pursuant to the Exchange Offer to an Eligible Holder in exchange for Old
Notes may be offered for resale, resold and otherwise transferred by such
Eligible Holder (other than (i) a broker-dealer who purchased the Old Notes
directly from 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 Notes in the ordinary course of business and is not
participating, and has no arrangement or understanding with any person to
participate, in a distribution of the New Notes.
Each broker-dealer that holds Old Notes which were acquired for its own
account as a result of market-making activities or other trading activities
(other than Old Notes acquired directly from SF Holdings or an affiliate of SF
Holdings), may exchange the Old Notes for New Notes in the Exchange Offer.
However, such broker-dealer may be deemed an "underwriter" within the meaning
of the Securities Act and, therefore, must deliver a prospectus in connection
with any resales of the New Notes received by such broker-dealer in the
Exchange Offer. This prospectus delivery requirement may be satisfied by
delivery of this Prospectus, as it may be amended or supplemented from time to
time. 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 Notes
by broker-dealers. New Notes received by broker-dealers for their own accounts
pursuant to the Exchange Offer may be sold from time to time in one or more
transactions in the over-the-counter market, in negotiated transactions,
through the writing of options on the New Notes or a combination of such
methods of resale, at market prices at the time of resale, at prices related to
such prevailing market prices or negotiated prices. Any such resales may be
made directly to purchasers or to or through brokers or dealers who may receive
compensation in the form of commissions or concessions from any such
broker-dealer and/or the purchasers of any such New Notes. Any broker-dealer
that resells New Notes that were received by it for its own account pursuant to
the Exchange Offer and any broker or dealer that participates in a distribution
of such New Notes may be deemed to be an "underwriter' within the meaning of
the Securities Act and any profit on any such resale of New Notes and any
commissions or concessions received by any such persons may be deemed to be
underwriting compensation under the Securities Act. The Letter of Transmittal
states that, by acknowledging that it will deliver and by delivering a
prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act.
By acceptance of the Exchange Offer, each broker-dealer and Holder that
receives New Notes pursuant to the Exchange Offer hereby agrees to notify SF
Holdings prior to using the Prospectus in connection with the sale or transfer
of New Notes, and each broker-dealer and Holder agrees that upon receipt of any
notice from 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 Notes 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' 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 Notes that was current
at the time of receipt of such Notice.
LEGAL MATTERS
The legality of the New Notes being offered hereby will be passed upon for
the Company by Kramer, Levin, Naftalis & Frankel, New York, New York.
110
<PAGE>
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.
111
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
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
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 ................................. $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 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>
<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 the 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.
F-24
<PAGE>
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
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
</TABLE>
F-30
<PAGE>
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30, MARCH 31,
1996 1997 1998
-------------- --------------- -----------
<S> <C> <C> <C>
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>
<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>
<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 LOAN CANADIAN OPERATING
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>
<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 ...................... 2
Prospectus Summary ......................... 4
Risk Factors ............................... 18
The Sweetheart Investment .................. 25
Use of Proceeds ............................ 27
The Exchange Offer ......................... 28
Capitalization ............................. 36
Unaudited Pro Forma Financial
Information ............................. 37
Unaudited Pro Forma Combined
Condensed Balance Sheet ................. 38
Unaudited Pro Forma Combined
Condensed Statements of Income .......... 40
Selected Historical Financial Data of
Fonda ................................... 45
Selected Historical Consolidated Financial
Data of Sweetheart ...................... 47
Management's Discussion and Analysis
of Financial Condition and Results
of Operations ........................... 49
Business ................................... 62
Management ................................. 70
Principal Stockholders ..................... 75
Certain Relationships and Related
Transactions ............................ 76
Description of New Notes ................... 77
Description of Capital Stock ............... 103
Federal Income Tax Consequences ............ 107
Plan of Distribution ....................... 110
Legal Matters .............................. 110
Experts .................................... 111
Change in Certifying Accountants ........... 111
Unaudited Pro Forma Condensed
Financial Data of Sweetheart and
Fonda ................................... P-1
Index to Financial Statements .............. F-1
</TABLE>
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SF HOLDINGS GROUP, INC.
OFFER TO EXCHANGE ITS
12 3/4% SERIES B SENIOR
SECURED DISCOUNT NOTES DUE 2008
WHICH HAVE BEEN REGISTERED
UNDER THE SECURITIES ACT
FOR ANY AND ALL OF ITS
OUTSTANDING
12 3/4% SERIES A SENIOR
SECURED DISCOUNT NOTES DUE 2008
--------------
PROSPECTUS
--------------
JULY 8, 1998
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