<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 28, 1998
REGISTRATION NO. 333-67221
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
AMENDMENT NO. 1 TO FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
FAVORITE BRANDS INTERNATIONAL, INC.
AND THE GUARANTORS IDENTIFIED IN FOOTNOTE (1) BELOW
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 2064 75-2608980
(STATE OR OTHER (PRIMARY STANDARD (I.R.S. EMPLOYER
JURISDICTION OF INDUSTRIAL IDENTIFICATION NUMBER)
INCORPORATION OR CLASSIFICATION CODE
ORGANIZATION) NUMBER)
25 TRI-STATE INTERNATIONAL
LINCOLNSHIRE, IL 60069
(847) 405-5800
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
---------------
BROOKS B. GRUEMMER, ESQ.
FAVORITE BRANDS INTERNATIONAL, INC.
25 TRI-STATE INTERNATIONAL
LINCOLNSHIRE, IL 60069
(847) 405-5800
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
COPIES OF CORRESPONDENCE TO:
CHRISTOPHER E. AUSTIN, ESQ.
CLEARY, GOTTLIEB, STEEN & HAMILTON
ONE LIBERTY PLAZA
NEW YORK, NEW YORK 10006
---------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the Registration Statement becomes effective.
- -------
(1) The following domestic direct subsidiaries of Favorite Brands
International, Inc. are Guarantors of the Notes and are Co-Registrants, each
of which is incorporated in the jurisdiction and has the I.R.S. Employer
Identification Number indicated: Trolli Inc., a Delaware corporation (52-
1716800) and Sather Trucking Corp., a Delaware corporation (41-1849044) .
CALCULATION OF REGISTRATION FEE
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
TITLE OF EACH PROPOSED PROPOSED
CLASS OF MAXIMUM MAXIMUM
SECURITIES TO BE AMOUNT TO BE OFFERING PRICE AGGREGATE AMOUNT OF
REGISTERED REGISTERED PER UNIT OFFERING PRICE(1) REGISTRATION FEE(3)
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
10 3/4% Senior
Subordinated Notes due
2006................. $200,000,000 100% $200,000,000 $55,600
- ------------------------------------------------------------------------------------------
Guarantees of 10 3/4%
Senior Subordinated
Notes due 2006....... $200,000,000 (2) (2) (2)
- ------------------------------------------------------------------------------------------
</TABLE>
- -------------------------------------------------------------------------------
(1) Estimated solely for the purposes of calculating the registration fee
pursuant to Rule 457 under the Securities Act of 1933, as amended.
(2) No additional consideration for the Guarantees of the 10 3/4% Series B
Senior Subordinated Notes due 2006 will be furnished. Pursuant to Rule
457(n) under the Securities Act, no separate fee is payable with respect to
such Guarantees.
(3) A registration fee of $55,600 has previously been paid.
---------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+THE INFORMATION CONTAINED IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE +
+AMENDED. THESE SECURITIES MAY NOT BE SOLD UNTIL THE RELATED REGISTRATION +
+STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION OR ANY APPLICABLE +
+STATE SECURITIES COMMISSION BECOMES EFFECTIVE. THIS PROSPECTUS IS NOT AN +
+OFFER TO SELL NOR IS IT SEEKING AN OFFER TO BUY THESE SECURITIES IN ANY STATE +
+WHERE THE OFFER OR SALE IS NOT PERMITTED. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION--DATED DECEMBER 28, 1998
PROSPECTUS
EXCHANGE OFFER FOR
$200,000,000
10 3/4% SENIOR NOTES DUE 2006
OF FAVORITE BRANDS INTERNATIONAL, INC.
Terms of the Exchange Offer
. We believe that the exchange of notes will not
. We are offering to be a taxable exchange for U.S. federal income
exchange the notes that tax purposes.
we sold in a private
offering for new
registered exchange . We will not receive any proceeds from the
notes. exchange offer.
. The exchange offer . The terms of the notes to be issued are
expires 5:00 p.m., New identical to the outstanding notes, except for
York City time, February the transfer restrictions and registration
, 1999, unless rights relating to the outstanding notes.
extended.
. Tenders of outstanding
notes may be withdrawn
any time prior to the
expiration of the
exchange offer.
. All outstanding notes
that are validly
tendered and not validly
withdrawn will be
exchanged.
WE ARE NOT MAKING AN OFFER TO EXCHANGE NOTES IN ANY JURISDICTION WHERE THE
OFFER IS NOT PERMITTED.
INVESTING IN THE NOTES ISSUED IN THE EXCHANGE OFFER INVOLVES CERTAIN RISKS.
SEE "RISK FACTORS" BEGINNING ON PAGE 11 .
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED THE NOTES TO BE DISTRIBUTED IN THE EXCHANGE OFFER, NOR
HAVE ANY OF THESE ORGANIZATIONS DETERMINED THAT THIS PROSPECTUS IS TRUTHFUL OR
COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
, 1999
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary................................................. 1
Risk Factors....................................................... 11
The Exchange Offer................................................. 21
Use of Proceeds.................................................... 32
Selected Consolidated Historical Financial Data.................... 32
Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................. 35
Business........................................................... 49
Information Regarding Our Market and Industry Data................. 63
Management......................................................... 64
Principal Stockholders............................................. 71
Certain Relationships and Related Transactions..................... 75
Description of Bank Facilities and Other Indebtedness.............. 77
Description of the Exchange Notes.................................. 81
Exchange and Registration Rights Agreement......................... 125
Certain United States Income Tax Considerations.................... 129
Book-Entry; Delivery and Form...................................... 130
Plan of Distribution............................................... 134
Legal Matters...................................................... 134
Experts............................................................ 135
Index to Financial Statements...................................... F-1
</TABLE>
i
<PAGE>
PROSPECTUS SUMMARY
The following summary highlights selected information from this prospectus and
may not contain all of the information that is important to you. This
prospectus includes specific terms of the notes we are offering, as well as
information regarding our business and detailed financial data. We encourage
you to read this prospectus in its entirety.
THE EXCHANGE OFFER
On May 19, 1998, we issued $200,000,000 aggregate principal amount of 10 3/4%
Senior Notes due 2006 to Chase Securities, Inc. and BancAmerica Robertson
Stephens in a private offering. These initial purchasers sold the notes to
institutional investors in transactions exempt from the registration
requirements of the Securities Act of 1933. The notes are guaranteed by Trolli
Inc. and Sather Trucking Corp., two subsidiaries of the Company.
Exchange and Registration Rights Agreement
When we issued the initial notes, we entered into an Exchange and
Registration Rights Agreement in which we agreed to use our best efforts to
complete the exchange offer of the initial notes on or prior to February 13,
1999.
The Exchange Offer
Under the terms of the exchange offer, you are entitled to exchange the
initial notes in the exchange offer for registered exchange notes with
substantially identical terms. You should read the discussion under the heading
"Description of the Exchange Notes" for further information regarding the
exchange notes. As of this date, there are $200,000,000 aggregate principal
amount of the initial notes outstanding. The initial notes may be tendered only
in integral multiples of $1,000.
Resale of Exchange Notes
We believe that the exchange notes issued in the exchange offer may be
offered for resale, resold or otherwise transferred by you without compliance
with the registration and prospectus delivery provisions of the Securities Act
of 1933, provided that:
. you are acquiring the exchange notes in the ordinary course of your
business;
. you are not participating, do not intend to participate, and have no
arrangement or understanding with any person to participate, in the
distribution of the exchange notes; and
. you are not an "affiliate" of ours.
If any of the foregoing are not true and you transfer any exchange note
without delivering a prospectus meeting the requirements of the Securities Act
or without an exemption from the registration requirements of the Securities
Act, you may incur liability under the Securities Act. We do not assume or
indemnify you against such liability.
Each broker-dealer that is issued exchange notes for its own account in
exchange for initial notes that were acquired by the broker-dealer as a result
of market making or other trading activities, must acknowledge that it will
deliver a prospectus meeting the requirements of the Securities Act in
connection with any resale of the exchange notes. A broker-dealer may use this
prospectus for an offer to resell, resale or other transfer of the exchange
notes.
1
<PAGE>
Consequences of Failure to Exchange Initial Notes
If you do not exchange your initial notes for exchange notes, you will no
longer be able to force us to register the initial notes under the Securities
Act. In addition, you will not be able to offer or sell the initial notes
unless they are registered under the Securities Act, or unless you offer or
sell them under an exemption from the requirements of, or in a transaction not
subject to, the Securities Act.
Expiration Date
The exchange offer will expire at 5:00 p.m., New York City time, on February
, 1999 unless we decide to extend the expiration date.
Interest on the Exchange Notes
The exchange notes will accrue interest at 10 3/4% per year, from either the
last date we paid interest on the initial notes you exchanged, or if you
surrendered your initial notes for exchange after the record date for an
interest payment date occurring after the date you exchanged your notes, the
date we paid interest on those initial notes. We will pay interest on the
exchange notes on May 15 and November 15 of each year.
Conditions to the Exchange Offer
We will proceed with the exchange offer, so long as:
. the exchange offer does not violate any applicable law or applicable
interpretation of law of the staff of the Securities and Exchange
Commission;
. no litigation materially impairs our ability to proceed with the exchange
offer; and
. we obtain all the governmental approvals we deem necessary for the
exchange offer.
Procedures for Tendering Initial Notes
If you wish to accept the exchange offer, you must complete, sign and date
the letter of transmittal, or a facsimile of the letter of transmittal and
transmit it together with all other documents required by the letter of
transmittal, including the initial notes to be exchanged, to LaSalle National
Bank, as exchange agent at the address set forth on the cover page of the
letter of transmittal. Alternatively, you can tender your initial notes by
following the procedures for book-entry transfer, as described in this
document.
Guaranteed Delivery Procedure
If you wish to tender your initial notes and you cannot get your required
documents to the exchange agent by the expiration date, you may tender your
initial notes according to the guaranteed delivery procedure described under
the heading "The Exchange Offer--Guaranteed Delivery Procedure."
Withdrawal Rights
You may withdraw the tender of your initial notes at any time prior to 5:00
p.m., New York City time, on the expiration date. To withdraw, you must send a
written or facsimile transmission notice of withdrawal to the exchange agent at
its address set forth herein under "The Exchange Offer--Exchange Agent" by 5:00
p.m., New York City time, on the expiration date.
Acceptance of Initial Notes and Delivery of Exchange Notes
If all of the conditions to the exchange offer are satisfied or waived, we
will accept any
2
<PAGE>
and all initial notes that are properly tendered in the exchange offer prior to
5:00 p.m., New York City time, on the expiration date. We will deliver the
exchange notes promptly after the expiration date.
Tax Considerations
You should consult your tax adviser about the tax consequences of this
exchange as they apply to your individual circumstances.
Exchange Agent
LaSalle National Bank is serving as exchange agent for the exchange offer.
Fees and Expenses
We will bear all expenses related to consummating the exchange offer and
complying with the Registration Rights Agreement.
DESCRIPTION OF THE EXCHANGE NOTES
Issuer
Favorite Brands International, Inc.
Notes Offered
$200,000,000 aggregate principal amount of 10 3/4% Senior Notes due 2006. The
form and terms of the exchange notes are the same as the form and terms of the
initial notes, except that the exchange notes will be registered under the
Securities Act and, therefore, will not bear legends restricting their transfer
and will not be entitled to registration under the Securities Act. The exchange
notes will evidence the same debt as the initial notes and both the initial
notes and the exchange notes are governed by the same indenture.
Maturity
May 15, 2006.
Interest Payment Dates
May 15 and November 15 of each year.
Sinking Fund
None.
Optional Redemption
On or after May 15, 2003, we may redeem the exchange notes, in whole or in
part from time to time, at the redemption prices described in this prospectus
under the heading "Description of the Exchange Notes," plus accrued and unpaid
interest, if any, to the date of redemption. In addition, on or prior to May
15, 2001, we may redeem up to 35% of the original aggregate principal amount of
the exchange notes with the proceeds of certain public offerings of equity in
our company.
Change of Control
Upon a change of control, we will be required to make an offer to purchase
exchange notes at a price equal to 101% of their original aggregate principal
amount, together with accrued and unpaid interest, if any, to the date of
purchase.
Subsidiary Guarantees
Some of our subsidiaries will guarantee the exchange notes. If we cannot make
payments on the exchange notes when they are due, the guarantor subsidiaries
are obligated to make them.
Ranking
The exchange notes will be senior unsecured obligations of our company. The
3
<PAGE>
subsidiary guarantees will be senior unsecured obligations of our subsidiaries.
The Company has incurred substantial secured indebtedness. The assets of the
Company that secure the secured indebtedness will be available to pay the
exchange notes only after all existing and future secured indebtedness has been
paid in full.
As of September 26, 1998, the aggregate principal amount of our outstanding
indebtedness was $590.4 million (excluding unused commitments and letters of
credit), $195.0 million of which was secured indebtedness. Assuming we had
completed this offering on September 26, 1998:
. the exchange notes would have been effectively senior to $195.0 million
of subordinated indebtedness; and
. the exchange notes would have been effectively junior to $195.4 million
of indebtedness, consisting of secured indebtedness and subsidiary
indebtedness.
Our company and its subsidiaries may in the future issue additional senior
secured indebtedness under certain circumstances. The exchange notes would be,
in effect, subordinated to this senior secured indebtedness to the extent of
its security interest in assets of our company or its subsidiaries.
Restrictive Covenants
The indenture under which the exchange notes will be issued contains
covenants for your benefit which, among other things, restrict our ability to:
. incur indebtedness;
. pay dividends on, and redeem the capital stock of, our company and
certain of its subsidiaries;
. redeem certain subordinated obligations;
. sell assets;
. sell the stock of our subsidiaries;
. enter into transactions with affiliates;
. enter into sale-leaseback transactions;
. create liens;
. enter into certain lines of business; and
. consolidate, merge, or sell substantially all of our assets.
THE COMPANY
OVERVIEW
Our company was formed in September 1995 to acquire the marshmallow and
caramel business of Kraft Foods, Inc., a subsidiary of Philip Morris Companies,
Inc. We have grown primarily through five subsequent acquisitions. Today, our
company is the fourth largest confections company in the United States. We
compete primarily in the marshmallow, fruit snack and non-chocolate candy
categories of the confections market with a broad portfolio of products.
Marshmallow Products
We are the largest United States manufacturer of marshmallow products, which
include marshmallows, marshmallow creme and dehydrated marshmallow bits. We
have the number one market position in branded and ingredient marshmallow
products. Based on Nielson data, our Jet-Puffed marshmallow brand has a 79%
share of the branded marshmallow market and a 47% share of the total
marshmallow market. We are also the market leader in the ingredient marshmallow
category, which includes dehydrated marshmallow bits that are used primarily in
cereals and hot beverages. We estimate that we
4
<PAGE>
have a 98% share of the dehydrated marshmallow bits market. We also manufacture
private label marshmallow products.
Fruit Snacks
We sell our fruit snack products under the Farley's brand name. Based on
Nielson data, our fruit snacks hold the number two market position with a 22%
market share. Our growth strategy for this category includes the use of
exclusive licenses for popular children's characters, such as Nickelodeon's
Rugrats.
Branded Gummis
We market a variety of gummi products under the Trolli brand name, including
BriteCrawlers, Gummi Beans, Trolli Squiggles and Apple O's. Based on Nielson
data, Trolli has the number two market position in the gummi market with a 15%
share.
General Line Candy
We sell general line candy primarily under the Farley's and Sathers brand
names and under private labels. Our product line includes more than 100
varieties of non-chocolate and chocolate candies, gummis, caramels, nuts and
snacks. Our company is the second largest general line candy supplier in the
United States, and our Sathers line is the leading brand of general line candy
in the convenience store channel.
Distribution Network
We sell our retail products to grocery stores, mass merchandisers,
drugstores, convenience stores and club stores under branded and private
labels. We sell these products through a sales network consisting of more than
25 independent food brokers supported by an internal sales organization that
focuses on large national accounts, distributors and ingredients purchasers. We
operate 13 manufacturing and packaging facilities and a nationwide distribution
network that delivers products to more than 5,000 customers.
ACQUISITIONS AND BUSINESS INTEGRATION
In August 1996, we acquired three companies:
. Kidd & Company, Inc., a major competitor in the private label marshmallow
market;
. Farley Candy Company, the second largest supplier of general line candy
in the United States; and
. Sathers Inc. and Sather Trucking Corp., the third largest supplier of
general line candy in the United States.
In January 1997, we acquired Dae Julie, Inc., a manufacturer of general line
gummis and jells. In April 1997, we acquired Trolli Inc., a manufacturer of
branded gummis.
We began to consolidate all of the acquired businesses in fiscal 1998. To
date, we have completed a number of integration initiatives, including closing
some production facilities, consolidating some sales, marketing and customer
service functions, reducing the number of distribution facilities,
consolidating two separate trucking fleets, eliminating more than 1,400 stock
keeping units and consolidating some management information systems. More
recently, at the end of fiscal 1998, we decided that we would close our Melrose
Park production facility in December 1998 and our Skokie production facility in
April 1999.
FISCAL 1998 DIFFICULTIES
During fiscal 1998, the integration process proceeded more slowly and was
more difficult
5
<PAGE>
than anticipated. These delays and difficulties, as well as a significant
increase in trade spending, caused a substantial deterioration in our results
of operations beginning in fiscal 1998. Trade spending generally refers to
amounts that we pay or credit to trade customers when selling our products.
These amounts are intended to be used by our trade customers for promotional
activities, including advertising, temporary price reductions and displays, and
to secure shelf space, in order to increase consumer sales.
In fiscal 1998, we started to initiate programs to control trade spending
more effectively. Trade spending and integration issues continued, however, and
are now expected to continue into fiscal 1999. As a result, we recently took a
number of additional actions to address these issues and restructure our
business. We have hired a new Chief Executive Officer; a President, Chief
Operating Officer and Chief Financial Officer; and a number of other new key
managers, including a Vice President of Sales and a Vice President of
Information Systems. We have also implemented a number of additional procedures
and controls to monitor trade spending more effectively and are now planning to
implement new trade spending programs in the third quarter of fiscal 1999 for
most of our products. We have centralized some of our sales forecasting,
production and capacity planning and inventory management processes in order to
the management of the supply chain. We plan to integrate further our
distribution network by further reducing the number of distribution centers
that we use.
USE OF PROCEEDS
We will not receive any cash proceeds from the issuance of the exchange
notes.
FORWARD-LOOKING STATEMENTS
Certain of the information contained in this prospectus, including
information with respect to our plans and strategy for our business and its
financing, are forward-looking statements. For a discussion of important
factors that could cause actual results to differ materially from the forward-
looking statements, see "Risk Factors."
PRINCIPAL EXECUTIVE OFFICE
Our headquarters are located at 25 Tri-State International, Lincolnshire,
Illinois 60069 (telephone number (847) 405-5800).
6
<PAGE>
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-4 under the Securities Act covering the exchange notes.
This prospectus does not contain all of the information included in the
registration statement. Any statement made in this prospectus concerning the
contents of any contract, agreement or other document is not necessarily
complete. If we have filed any of those contracts, agreements or other
documents as an exhibit to the registration statement, you should read the
exhibit for a more complete understanding of the document or matter involved.
Each statement regarding a contract, agreement or other document is qualified
in its entirety by reference to the actual document.
Following the exchange offer, we will be required to file periodic reports
and other information with the SEC under the Securities Exchange Act of 1934,
as amended. In the indenture governing the exchange notes, we have agreed to
file with the SEC financial and other information for public availability. In
addition, the indenture governing the exchange notes requires us to deliver to
you, or to LaSalle National Bank for forwarding to you, copies of all reports
that we file with the SEC without any cost to you. We will also furnish such
other reports as we may determine or as the law requires.
You may read and copy the registration statement, including the attached
exhibits, and any reports, statements or other information that we file at the
SEC's public reference room in Washington, D.C. You can request copies of these
documents, upon payment of a duplicating fee, by writing the SEC. Please call
the SEC at 1-800-SEC-0330 for further information on the operation of the
public reference rooms. Our SEC filings will also be available to the public on
the SEC Internet site (http://www.sec.gov).
You should rely only on the information provided in this prospectus. No
person has been authorized to provide you with different information.
The information in this prospectus is accurate as of the date on the front
cover. You should not assume that the information contained in this prospectus
is accurate as of any other date.
7
<PAGE>
SUMMARY CONSOLIDATED HISTORICAL FINANCIAL DATA
The table on page 10 sets forth summary historical consolidated financial and
other data for the periods ended and as of the dates indicated.
The summary consolidated historical financial data as of, and for the periods
ended, June 29, 1996, June 28, 1997 and June 27, 1998 have been derived from,
and should be read in conjunction with, the audited Consolidated Financial
Statements of the Company, and the notes thereto, which are included elsewhere
in this prospectus. The financial data as of, and for the periods ended, June
30, 1994, June 30, 1995, and September 24, 1995 have been derived from the
unaudited financial statements of Kraft's marshmallow and caramel business. In
the table, we refer to Kraft's marshmallow and caramel business as the
"Predecessor." For more information regarding this data, see "Risk Factors--
Uncertainty of Financial Information Related to the Kraft Business."
The unaudited financial data for the 13 weeks ended September 27, 1997 and
for the 13 weeks ended September 26, 1998 were derived from, and should be read
in conjunction with, the interim consolidated financial information of the
Company as of such dates included elsewhere in this prospectus. In our opinion,
those statements reflect all adjustments, consisting of only normal, recurring
adjustments, necessary for a fair presentation of the data. Operating results
for the 13 weeks ended September 26, 1998 are not necessarily indicative of
results to be expected for full fiscal 1999.
The Company's results of operations for the year ended June 28, 1997 include
the results of Farley, Sathers and Kidd from the date of their acquisition on
August 30, 1996, the results of Dae Julie from the date of its acquisition on
January 27, 1997 and the results of Trolli from the date of its acquisition on
April 1, 1997.
As a result of the significant number of acquisitions completed by the
Company during the periods presented below, the historical consolidated
financial information is not indicative of the results of operations, financial
position or cash flows of the Company for the historical periods presented had
the Company been organized and owned all of its current subsidiaries for such
periods.
As you review the information contained in the table on page 10, you should
note the following:
. Restructuring and business integration costs. The Company recorded
restructuring and business integration costs during the year ended June
27, 1998 and the 13 weeks ended September 27, 1997 and September 26,
1998. These include, among other things, charges for impairment of
property, plant and equipment, staff consolidation and related costs,
incremental freight, distribution and warehousing consolidation expenses
and manufacturing integration costs.
. Interest expense. Our cash interest expense for the Senior Subordinated
Notes increased by one percent per annum beginning on October 1, 1998.
. Extraordinary charge. The extraordinary charge relates to the early
extinguishment of debt. See Note 10 to the Company's Consolidated
Financial Statements, included elsewhere in this prospectus.
8
<PAGE>
. Cumulative effect of change in accounting principle. The cumulative
effect of change in accounting principle relates to the Company's
adoption of Statement of Position 98-5, "Reporting on the Costs of Start-
up Activities" during the first quarter of fiscal 1999. See Note 16 to
the Company's Consolidated Financial Statements, included elsewhere in
this prospectus.
. Adjusted EBITDA. Adjusted EBITDA is defined as income (loss) from
operations before depreciation, amortization of goodwill and other
intangibles, and restructuring and business integration costs. The
Company believes that Adjusted EBITDA provides useful information
regarding the Company's ability to service its debt, and the Company
understands that this information is considered by some investors to be
an additional basis for evaluating the Company's ability to pay interest
and repay debt. Adjusted EBITDA does not, however, represent cash flow
from operations as defined by generally accepted accounting principles
and should not be considered as a substitute for net income as an
indicator of the Company's operating performance or cash flow as a
measure of liquidity. Because Adjusted EBITDA is not calculated
identically by all companies, the presentation here may not be comparable
to other similarly titled measures of other companies.
. Ratio of earnings to fixed charges. The ratio of earnings to fixed
charges has been calculated by dividing income (loss) before income
taxes, extraordinary charge and cumulative effect of change in accounting
principle and fixed charges by fixed charges. Fixed charges for this
purpose include interest expense, amortization of deferred financing
costs and the portion of rent expense deemed to be representative of the
interest factor. The earnings described above were insufficient to cover
fixed charges by $0.8 million for the 40 weeks ended June 29, 1996, $0.7
million for the 52 weeks ended June 28, 1997, $74.3 million for the 52
weeks ended June 27, 1998 and $14.5 million for the 13 weeks ended
September 26, 1998.
You should also read the following information together with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Company's Consolidated Financial Statements, and the notes thereto,
appearing elsewhere in this prospectus.
9
<PAGE>
SUMMARY CONSOLIDATED HISTORICAL FINANCIAL DATA
<TABLE>
<CAPTION>
PREDECESSOR COMPANY
------------------------------- ---------------------------------------------------------
FISCAL FISCAL JULY 1,
YEAR YEAR 1995 40 WEEKS 52 WEEKS 52 WEEKS 13 WEEKS 13 WEEKS
ENDED ENDED THROUGH ENDED ENDED ENDED ENDED ENDED
JUNE 30, JUNE 30, SEPTEMBER 24, JUNE 29, JUNE 28, JUNE 27, SEPTEMBER 27, SEPTEMBER 26,
1994 1995 1995 1996 1997 1998 1997 1998
-------- -------- ------------- -------- -------- -------- ------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Net sales............... $144,881 $151,488 $36,133 $127,629 $652,538 $763,921 $203,570 $ 196,640
Costs and expenses:
Cost of sales........... 82,600 87,436 20,943 74,289 433,707 493,095 129,407 123,508
Selling, marketing and
administrative........ 44,376 46,439 10,897 38,110 176,506 237,147 53,827 69,004
Amortization of
intangible assets..... -- -- -- 7,454 9,540 13,670 3,061 3,004
Restructuring and
business integration
costs................. -- -- -- -- -- 39,689 3,445 1,047
-------- -------- ------- -------- -------- -------- -------- ---------
126,976 133,875 31,840 119,853 619,753 783,601 189,740 196,563
-------- -------- ------- -------- -------- -------- -------- ---------
Income (loss) from oper-
ations................. 17,905 17,613 4,293 7,776 32,785 (19,680) 13,830 77
Interest expense....... -- -- -- 8,589 33,463 54,581 12,745 14,577
-------- -------- ------- -------- -------- -------- -------- ---------
Income (loss) before
income taxes,
extraordinary charge
and cumulative effect
of change in accounting
principle.............. 17,905 17,613 4,293 (813) (678) (74,261) 1,085 (14,500)
Provision (benefit) for
income taxes.......... 7,162 7,045 1,717 (305) 960 (27,419) 908 (5,356)
-------- -------- ------- -------- -------- -------- -------- ---------
Income (loss) before
extraordinary charge
and cumulative effect
of change in accounting
principle.............. 10,743 10,568 2,576 (508) (1,638) (46,842) 177 (9,144)
Extraordinary charge--
early debt
extinguishment, net of
income tax benefit..... -- -- -- -- -- 8,591 4,154 --
Cumulative effect of
change in accounting
principle, net of
income tax benefit..... -- -- -- -- -- -- -- 2,503
-------- -------- ------- -------- -------- -------- -------- ---------
Net income (loss)....... $ 10,743 $ 10,568 $ 2,576 $ (508) $ (1,638) $(55,433) $ (3,977) $ (11,647)
======== ======== ======= ======== ======== ======== ======== =========
OTHER FINANCIAL DATA:
Adjusted EBITDA......... $ 20,055 $ 19,813 $ 4,801 $ 17,978 $ 61,874 $ 61,306 $ 27,062 $ 11,234
Net cash provided by
(used in) operating
activities............. N/A N/A N/A 22,480 32,550 12,559 (2,360) (30,741)
Net cash used in
investing activities... N/A N/A N/A (212,932) (367,209) (27,313) (4,662) (5,592)
Net cash provided by
financing activities... N/A N/A N/A 191,388 336,900 18,017 17,276 32,467
Depreciation and amorti-
zation................. 2,150 2,200 508 10,202 29,089 41,297 9,787 10,110
Capital expenditures.... 1,900 2,400 692 8,544 31,018 27,010 4,584 5,592
Ratio of earnings to
fixed charges.......... N/A N/A N/A -- -- -- -- --
BALANCE SHEET DATA (END
OF PERIOD):
Cash and cash equiva-
lents.................. $ -- $ -- $ -- $ 936 $ 3,177 $ 6,440 $ 13,431 $ 2,574
Total assets............ 32,500 37,301 26,529 208,692 807,053 809,556 841,946 829,776
Total debt, including
current portion........ -- -- -- 134,800 533,367 557,390 556,898 590,440
Divisional/stockholder's
equity................. 23,012 33,580 36,156 59,492 176,912 137,745 172,935 126,098
</TABLE>
- -------
N/A: Not available.
10
<PAGE>
RISK FACTORS
You should consider carefully the following factors and other information in
this Prospectus before making an investment in the Notes.
Risks Associated with the Exchange Offer
FAILURE TO PARTICIPATE IN THE EXCHANGE OFFER WILL HAVE ADVERSE CONSEQUENCES
If you do not exchange your initial notes for exchange notes pursuant to the
exchange offer, you will continue to be subject to the restrictions on transfer
of your initial notes. In general, the initial notes may not be offered or
sold, unless:
. they are registered under the Securities Act and applicable state
securities laws; or
. they are offered or sold pursuant to an exemption from the registration
requirements of the Securities Act; or
. they are offered or sold in a transaction that is not subject to the
Securities Act.
We do not intend to register the initial notes under the Securities Act. To the
extent initial notes are tendered and accepted in the exchange offer, the
trading market, if any, for the initial notes would be adversely affected. See
"The Exchange Offer."
SINCE THE EXCHANGE NOTES ARE NOT SECURED, OUR ASSETS MAY BE INSUFFICIENT TO PAY
AMOUNTS DUE ON YOUR NOTES
The exchange notes will be unsecured senior obligations of our company and
will be equal in right of payment to all existing and future indebtedness of
our company, other than indebtedness that is expressly subordinated to the
exchange notes. In particular, the exchange notes, the $17 million loan from
Texas Pacific Group and indebtedness under our bank facilities will be equal in
right of payment and will all be senior in right of payment to our senior
subordinated notes. The exchange notes and the $17 million TPG loan, however,
will be unsecured, while indebtedness outstanding under our bank facilities is
secured by substantially all of the assets of our company and our subsidiary
guarantors. In addition, our company and some of our subsidiaries may incur
other senior indebtedness, which may be substantial in amount, including
secured indebtedness.
Because the exchange notes are unsecured obligations of our company, your
right of repayment may be compromised in the following situations:
. our company or some of its subsidiaries enter into bankruptcy, liquidation,
reorganization, or other winding-up;
. there is a default in payment under our bank facilities or other secured
indebtedness; or
. there is an acceleration of any indebtedness under our bank facilities or
other secured indebtedness.
If any of these events occurs, the assets of our company and some of our
subsidiaries must pay all indebtedness under the bank facilities and other
secured indebtedness before those assets would be available to pay the
obligations on the exchange notes, the guarantees of payment of the exchange
notes by our subsidiaries and other senior indebtedness. In that event, there
may not be sufficient assets remaining to pay amounts due on any of the
exchange notes and the subsidiary guarantees.
11
<PAGE>
THERE IS NO PRIOR MARKET FOR THE EXCHANGE NOTES; IF ONE DEVELOPS, IT MAY NOT BE
LIQUID
The exchange notes are new securities for which there currently is no market.
We do not intend to apply for listing of the exchange notes on any securities
exchange or for quotation through an automated quotation system. Although Chase
Securities Inc., one of the purchasers of our initial notes, has informed us
that it currently intends to make a market in the exchange notes, it is not
obligated to do so, and any such market making may be discontinued at any time
without notice. In addition, this market making activity may be limited during
the pendency of the exchange offer. It is not certain that any market for the
exchange notes will develop or that any such market would be liquid. The
liquidity of the trading market in these notes, and the market price quoted for
these notes, may be adversely affected by changes in the overall market for
high yield securities and by changes in our financial performance or prospects
or in the prospects for companies in our industry generally. As a result, you
cannot be sure that an active trading market will develop for these notes.
Risks Associated with Our Business
DIFFICULTY IN INTEGRATING ACQUIRED BUSINESSES MAY CONTINUE TO ADVERSELY AFFECT
OUR OPERATIONS
We have acquired five companies since August 1996. Since that time, we have
been working to integrate the operations and products of Farley, Sathers, Kidd
and Dae Julie and, to a more limited extent, Trolli, into our operations. The
integration to date has proceeded more slowly and was more difficult than we
originally contemplated and, as a result, our financial position and results of
operations have been adversely affected. Although we have implemented a number
of initiatives to address certain of our integration issues, we may be required
to implement a number of additional initiatives over the next several years in
order to effectively integrate the acquired companies. Furthermore, additional
operating issues may arise in connection with integrating the acquired
companies and the measures that we have taken to date to address the current
integration issues may not adequately resolve these issues. We expect
integration difficulties to continue to adversely affect our results of
operations in fiscal 1999.
OUR TRADE SPENDING LEVELS ARE VERY HIGH; LOWERING THEM MAY RESULT IN LOWER
SALES OF OUR PRODUCTS
Trade spending generally refers to amounts that we pay or credit to trade
customers, such as retailers, when selling our products. These amounts are
intended to be used by our trade customers for promotional activities,
including advertising, temporary price reductions and displays, and to secure
shelf space, in order to increase consumer sales. The combined effect of the
lack of effective controls and information systems, increased competitive
activities in some product categories and ineffective execution of trade
spending programs, resulted in a significant increase in our trade spending in
fiscal 1998 as compared to previous years. The increase in trade spending has
adversely affected our financial position and results of operations in fiscal
1998 and we anticipate that the trade spending levels in fiscal 1999 will be at
least equal to those in fiscal 1998.
Beginning in the third quarter of fiscal 1999, we plan to implement newly
designed trade spending programs for most of our products. The goal of our new
trade spending programs is to reduce trade spending as a percentage of net
sales and to more effectively spend our trade dollars. There are, however, a
12
<PAGE>
number of risks related to our new trade spending programs. These risks include
the possibility that lower levels of trade spending may result in lower sales
of our products. Therefore, we can give no assurance that trade spending levels
will decline or, if they do decline, that our sales will not be adversely
affected.
LIQUIDITY RISK COULD IMPAIR OUR ABILITY TO FUND OPERATIONS AND COULD JEOPARDIZE
OUR FINANCIAL CONDITION
We have incurred net losses in each of fiscal 1996, fiscal 1997, fiscal 1998
and the first quarter of fiscal 1999. Our continued net losses and
substantially leveraged capital structure have impaired our liquidity and
available sources of liquidity. Unless we successfully integrate our acquired
businesses, achieve our planned trade spending and other cost savings and
otherwise are able to implement our business strategy, we will continue to
incur net losses and will not generate sufficient cash flows to fully meet our
debt service requirements in the future.
In the first quarter of fiscal 1999, we had negative cash flow from
operations of $30.7 million, compared to negative cash flow from operations of
$2.4 million in the first quarter of fiscal 1998. Our cash flow from operations
declined from $32.6 million in fiscal 1997 to $12.6 million in fiscal 1998. As
a result of poor recent operating performance, in September 1998 we requested
and received an amendment to our bank facilities to avoid a future default
under the financial covenants. In connection with this amendment, TPG, an
affiliate of our company, loaned us $17.0 million, all of which was used to
repay amounts outstanding under our revolving credit facility.
In addition, on October 1, 1998, the interest rate on $195.0 million of
senior subordinated notes due 2007 increased by one percent (from 10.25% to
11.25%) because we were unable to obtain a rating on such notes of at least B-
from Standard & Poor's Ratings Service and B3 from Moody's Investors Service,
Inc. The senior subordinated notes are rated CCC+ by Standard & Poor's Rating
Service and Caa1 by Moody's Investors Service.
We will need to improve our operating results and cash flow in order to meet
our debt service obligations and to comply with our debt covenants. We cannot
assure you, however, that our business will generate sufficient cash flow from
operations, that currently anticipated cost savings and operating improvements
will be realized on schedule or that future borrowings will be available to us
under our credit facility in an amount sufficient to enable us to pay our
indebtedness, including these notes, or to fund our other liquidity needs. We
may need to refinance all or a portion of our indebtedness, including these
notes on or before maturity. We cannot assure you that we will be able to
refinance any of our indebtedness, including our credit facility and these
notes, on commercially reasonable terms, if at all.
SUBSTANTIAL LEVERAGE AND INSUFFICIENT EARNINGS TO COVER FIXED CHARGES
We are highly leveraged. As of September 26, 1998, we had outstanding
indebtedness of $590.4 million and could have borrowed an additional $25.8
million under our revolving credit facility. Our earnings were insufficient to
cover fixed charges by $74.3 million in fiscal 1998 and by $14.5 million for
the 13 weeks ended September 26, 1998. As of September 26, 1998, our debt to
equity ratio was 4.7 to 1. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
13
<PAGE>
Our substantial level of debt has important consequences, which include the
following:
. our ability to obtain additional financing in the future for working
capital, capital expenditures, acquisitions, general corporate purposes
or other purposes may be impaired;
. a substantial portion of our cash flow from operations must be dedicated
to the payment of principal and interest on our indebtedness, thereby
reducing the funds available for other operations and business
opportunities;
. certain of our borrowings bear interest at variable rates, which could
result in a higher interest expense in the event of increases in general
market interest rates;
. we may be substantially more leveraged than certain of our competitors,
which may place us at a competitive disadvantage;
. our substantial degree of leverage may limit our flexibility to adjust to
changing market conditions, reduce our ability to withstand competitive
pressures and make us more vulnerable to a downturn in general economic
conditions or in our business;
. a significant portion of our indebtedness will become due prior to the
maturity of the exchange notes; and
. our ability to refinance the exchange notes in order to pay the principal
of the exchange notes at maturity or upon a change of control may be
adversely affected.
OUR DEBT COVENANTS RESTRICT OUR BUSINESS IN MANY WAYS
The indenture for the exchange notes, our amended bank facilities and note
agreement relating to our senior subordinated notes, contain covenants that
restrict our business in a number of important ways. These covenants limit our
ability to:
. incur indebtedness;
. pay dividends on, and redeem the capital stock of, our company and
certain of its subsidiaries;
. redeem certain subordinated obligations;
. sell assets;
. sell the stock of our subsidiaries;
. enter into transactions with affiliates;
. enter into sale-leaseback transactions;
. create liens;
. enter into certain lines of business; and
. consolidate, merge, or sell substantially all of our assets.
The indenture also requires a guarantee of payment of the exchange notes from
some of our existing and future subsidiaries.
In addition, the bank facilities contain covenants that require us to comply
with specified financial ratios and satisfy certain financial tests.
Our company's ability to comply with those agreements in the future may be
affected by prevailing economic, financial and industry conditions, certain of
which are beyond our control. Breaching any of those covenants or restrictions
could result in a default under the indenture, the bank facilities or the note
agreement. Moreover, the indenture, the bank facilities and the note agreement
would allow our creditors to require acceleration of the payment of principal
and interest on those notes or loans if certain events of default occurred or
if the principal and interest on some of our other indebtedness were
accelerated. If the indebtedness under the bank facilities were to be
accelerated, it is not certain whether our
14
<PAGE>
assets would be sufficient to repay in full that indebtedness and our other
indebtedness, including the exchange notes.
UNCERTAINTY OF FINANCIAL INFORMATION RELATED TO THE KRAFT BUSINESS
Kraft did not operate the marshmallow and caramel business that it sold to us
as a separate business unit. Therefore, Kraft did not regularly prepare
separate financial statements for this business. The books and records for the
pre-acquisition periods relating to that business have not been separately
audited. We were granted limited access to Kraft's books and records prior to
and since the closing of the Kraft acquisition. The data included in
"Prospectus Summary--Summary Consolidated Historical Financial Data" and
"Selected Consolidated Historical Financial Data" include estimates of certain
expenses associated with the historical operations of the business as part of
Kraft, and were derived from unaudited information provided by Kraft. As a
result of the factors listed above, this data may not be representative of the
costs of operating this business going forward.
WE ARE EXPOSED TO GENERAL RISKS OF THE FOOD INDUSTRY
The food products manufacturing industry is subject to many risks, including:
. adverse changes in general economic conditions;
. adverse changes in local markets (resulting in greater risks inherent in the
limited shelf life of food products in the case of oversupply);
. food spoilage and contamination;
. lack of attractiveness of a particular food product line after its novelty
has worn off;
. evolving consumer preferences and nutritional and health-related concerns;
. federal, state and local food processing controls;
. consumer product liability claims;
. product tampering; and
. the availability and expense of insurance.
WE MAY NOT BE ABLE TO PASS THROUGH INCREASES IN THE PRICES OF RAW MATERIALS TO
OUR CUSTOMERS
We use agricultural commodities, flavors, other raw materials and packaging
in the production of our products and we purchase these items from commodity
processors, importers, other food companies and packaging manufacturers. The
primary raw materials we use in our products include sugar, corn products
(dextrose, starch and corn syrup), gelatin and packaging. Our principal raw
materials are generally available from several suppliers, except for two of
Trolli's key ingredients, which are only available from one domestic supplier
and other international sources. The prices of our raw materials are affected
by several factors, including government agricultural policies, weather
conditions, competition among suppliers and demand among users. Movement in the
price level of these raw materials can have a corresponding impact on finished
product costs, and hence, on gross margins. Our ability to pass through
increases in costs of raw materials to our customers depends on competitive
conditions and pricing methodologies in the markets in which we operate.
Material increases in the prices of raw materials may occur and we may not be
able to pass any such price increases through to our customers.
OUR SALES AND EARNINGS FLUCTUATE BASED ON SEASONAL FACTORS, OVER WHICH WE DO
NOT HAVE CONTROL
Our sales and earnings are subject to a variety of seasonal factors, which
vary among our product lines. Our cash needs also vary based on seasonal
factors, with the second and
15
<PAGE>
third fiscal quarters ordinarily generating the most significant working
capital requirements. In light of the seasonality of our business, results for
any interim period do not necessarily indicate the results that we may realize
for the full year. Our quarterly results of operations may also fluctuate as a
result of a variety of other factors, including the timing of new product
introductions, promotional activities and price increases. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Seasonality."
THE CONFECTIONS BUSINESS IS VERY COMPETITIVE
The confections business is highly competitive. Numerous brands and products
compete for shelf space and sales. Together, the four largest companies
(Hershey, M&M/Mars, Nestle and our company) account for the majority of United
States sales volume in chocolate and non-chocolate candy. Our significant
competitors include General Mills and Brach's in the fruit snacks category,
Brach's in the general line candy category, Nabisco (Gummi Savers), Hershey
(Amazin' Fruit) in the branded gummis category and International Home Foods
(Campfire) in the marshmallows category. In addition, our branded marshmallow
products compete with private label products, and our general line candy
products compete with private label products, as well as products of numerous
regional "rebaggers." Some of our competitors are larger than us or are
divisions of larger companies and certain of these competitors have
substantially greater financial and other resources available to them. It is
not certain that we can compete successfully with these other companies. In
addition, many of our competitors are substantially less leveraged and have in
the past used their relative financial flexibility to engage in competitive
activity that reduces our margins. Competitive pressures or other factors have
in the past and could in the future cause our products to lose market share,
result in significant price erosion or require us to make additional
expenditures for trade spending or other promotional activities, which have had
a material adverse effect on us in the past, and could do so in the future.
THE LOSS OF ANY OF OUR MAJOR CUSTOMERS COULD ADVERSELY AFFECT OUR SALES
We derive our revenue primarily from the sale of our products to grocery
stores, mass merchandisers, drugstores, convenience stores and club stores and
from sales of our ingredients products to major food manufacturers. Wal-Mart,
Sam's Clubs and McLane, which are affiliated with each other, in
the aggregate accounted for approximately 17% of fiscal 1998 net sales. Our
next largest customer accounted for approximately three percent of fiscal 1998
net sales. Continued consolidation in the retail food industry is expected to
result in an increasingly concentrated customer base. The loss of significant
customers or a significant reduction in their purchases from us could have a
material adverse effect on us.
UNIONIZATION OF OUR EMPLOYEES COULD INCREASE OUR COSTS AND COULD ADVERSELY
AFFECT OUR ABILITY TO OPERATE OUR FACILITIES EFFICIENTLY
Currently, unions represent the employees of only one of our 13 manufacturing
and packaging facilities, Trolli's Creston, Iowa facility. Approximately 430
employees, representing fewer than 10% of our full-time employees, work at that
facility, and approximately 360 employees are covered by that contract, which
expires in August 2001. Employees of our Kendallville, Indiana facility, which
employs approximately 650 workers, defeated unionization of the plant in
elections held in October 1997 and May 1998. If more of
16
<PAGE>
our employees vote to join a union or if there is increased union activity at
our facilities, there is a risk that our costs would increase or that contract
terms and union activities such as work stoppages or lockouts could adversely
affect our ability to operate our facilities efficiently.
THERE ARE POTENTIAL CONFLICTS OF INTEREST IN OUR CORPORATE GOVERNANCE
We are wholly owned by Favorite Brands International Holding Corp., which in
turn is controlled by TPG and InterWest Partners. As a result of agreements
among TPG and InterWest affiliates and some other stockholders of Holdings,
TPG has the power to select five directors of the nine-member Board of
Directors of Holdings, two of whom must not be affiliates of TPG and must be
reasonably acceptable to InterWest. InterWest has the power to select two
members of the Board, one of whom must not be an affiliate of InterWest and
must be reasonably acceptable to TPG. Under the agreements, TPG designees
acting with one other member would be able to adopt resolutions providing for
certain fundamental actions, including amendment of Holdings' charter
documents, issuance of additional capital stock, the sale, lease or
disposition of 50% or more of Holdings' consolidated assets or a merger or
other business combination. The interests of TPG, InterWest and their
affiliates may conflict with those of the holders of exchange notes. See
"Principal Stockholders."
OUR BUSINESS MAY SUFFER DURING THE TRANSITION TO NEW MANAGEMENT OR IF ANY OF
OUR KEY PERSONNEL LEAVES THE COMPANY
Several of our key personnel have joined us recently. In particular, Chief
Executive Officer Richard Harshman joined us in October 1998; President, Chief
Operating Officer and Chief Financial Officer Steve Kaplan, in May 1998;Vice
President of Information Services John Niemzyk, in July 1998; Vice President
of Supply Chain Dan Boekelheide, in November 1997; and Vice President of Sales
Paul Hervey, in May 1998. The management transition with respect to these
officers or the loss of services of these officers may adversely affect our
business, financial condition and operating results.
Jose Minski serves as the Chief Operating Officer of Trolli under an
employment agreement that expires at the end of calendar 1998. In the first
quarter of calendar 1999, some former stockholders of Trolli who are related
to Mr. Minski are entitled to earn additional cash payments based on Trolli's
earnings. See "Certain Relationships and Related Transactions." Mr. Minski has
indicated that he will not continue his employment with us after 1998,
although he has agreed to serve on Holdings' Board of Directors. The loss of
Mr. Minski's services may adversely affect the Trolli business.
IF A CHANGE OF CONTROL OCCURS, WE MAY NOT HAVE SUFFICIENT ASSETS TO PAY
AMOUNTS DUE ON THE EXCHANGE NOTES
The Indenture requires us, if a change of control occurs, to make an offer
to purchase all or any part of the exchange notes at a price in cash equal to
101% of the aggregate principal amount of the exchange notes plus accrued and
unpaid interest, if any, to the date of purchase. The note agreement also
requires us to make an offer to purchase our senior subordinated notes if
similar change of control events occur. Our bank facilities prohibit us from
repurchasing any exchange notes or senior subordinated notes, with limited
exceptions. They also provide that certain change of control events constitute
a default under our bank facilities. Any future credit agreements or other
agreements relating to indebtedness to which we become a party may contain
similar restrictions and provisions.
If a change of control occurs at a time when we are prohibited from
purchasing the
17
<PAGE>
exchange notes and the senior subordinated notes, we could seek the consent of
our lenders to purchase these notes. In the alternative, we could attempt to
refinance the borrowings that contain such a prohibition. If we do not obtain
such a consent or refinance such borrowings, we would remain prohibited from
purchasing the exchange notes and the senior subordinated notes. In that case,
our failure to purchase tendered exchange notes would constitute a default
under the indenture and/or the note agreement, which, in turn, could result in
amounts outstanding under our bank facilities being declared due and payable.
Any such declaration could have adverse consequences for us and the holders of
exchange notes. In the event of a change of control, it is not certain that we
would have sufficient assets to satisfy all of our obligations under the bank
facilities, the exchange notes and the senior subordinated notes. The
provisions relating to a change of control in the indenture and the note
agreement may make it more difficult for a potential acquiror to obtain control
of us.
FAILURE OF YEAR 2000 COMPLIANCE INITIATIVES COULD ADVERSELY AFFECT US
We are assessing and upgrading our information systems on a facility by
facility basis. We have not completed our assessment of systems that
incorporate computing devices for manufacturing and other equipment. Because
this assessment is not yet completed, it may be necessary to revise the
estimate of our remediation costs or difficulties. Our information systems are
scheduled to be compliant by the end of fiscal 1999. We cannot guarantee,
however, that we will successfully complete our system replacements and
modifications, or that these replacements and modifications will be timely
completed. We may also not be able to recruit and/or retain key information
systems personnel. In addition, if our key third party suppliers and vendors do
not identify and implement required year 2000 modifications, our financial and
operating results may adversely affected.
ACTUAL RESULTS OF OUR OPERATIONS MAY DIFFER FROM THOSE CONTAINED IN FORWARD-
LOOKING STATEMENTS
This prospectus contains forward-looking statements. We may also make written
or oral forward-looking statements in our periodic reports to the SEC, in our
annual report to shareholders, in our proxy statements, in our offering
circulars and prospectuses, in press releases and other written materials and
in oral statements made by our officers, directors or employees to third
parties. Statements that are not historical facts, including statements about
our beliefs and expectations, are forward-looking statements. You can identify
these statements by, among other things, the use of forward-looking language,
such as "believes," "expects," "may," "will," "should," "seeks," "plans,"
"scheduled to," "pro forma," "adjusted," "anticipates" or "intends" or the
negative of those terms, or other variations of those terms or comparable
language, or by discussions of strategy or intentions. These statements are
based on current plans, estimates and projections, and therefore you should not
place undue reliance on them. Forward-looking statements speak only as of the
date they are made, and we undertake no obligation to update publicly any of
them in light of new information or future events.
Forward-looking statements involve inherent risks and uncertainties. We
caution you that a number of important factors could cause actual results to
differ materially from those contained in any forward-looking statement. Such
factors include, but are not limited to:
. the competitive environment in the food industry in general and in our
specific market areas;
18
<PAGE>
. the ability to control trade spending levels;
. our significant indebtedness;
. changes in trade spending levels and the impact of reduced trade spending on
sales;
. our ability to successfully integrate the acquired companies and businesses;
. the estimated costs of our year 2000 remediation; and
. our ability successfully to reduce our current cost structure and other
factors referenced in this prospectus.
Risks Associated with Laws, Regulations and Claims Against Us
FAILURE TO COMPLY WITH THE LAWS AND REGULATIONS THAT AFFECT OUR BUSINESS COULD
SUBJECT US TO CIVIL PENALTIES AND CRIMINAL SANCTIONS
Our operations are subject to extensive and increasingly stringent regulation
by the United States Food and Drug Administration, the United States Department
of Agriculture, the Federal Trade Commission and other federal, state and local
authorities regarding the processing, packaging, storage, distribution,
advertising and labeling of our products. We also must comply with laws and
regulations relating to emissions of air pollutants and discharges of waste
water, the remediation of contamination associated with releases of hazardous
substances and the disposal of waste material. Our manufacturing facilities and
products are subject to periodic inspection by federal, state and local
authorities. Compliance with existing federal, state and local laws and
regulations is not expected to have a material adverse effect on our earnings
or our competitive position. If we fail to comply with applicable laws and
regulations, we would be subject to civil remedies, including fines,
injunctions, recalls or seizures, as well as potential criminal sanctions,
which could have a material adverse effect on us. See "Business--Certain Legal
and Regulatory Matters."
WE MAY NOT BE ABLE TO PROTECT ADEQUATELY OUR TRADEMARKS AND OTHER PROPRIETARY
RIGHTS
We believe that our trademarks and other proprietary rights are important to
our success and to our competitive position. Accordingly, we devote substantial
resources to establishing and protecting our trademarks and proprietary rights.
Nonetheless, the actions we take to establish and protect our trademarks and
other proprietary rights may be inadequate to prevent imitation of our products
by others or to prevent others from claiming violations by us of their
trademarks and proprietary rights. For example, Nabisco has filed a claim in
federal court alleging, among other things, that Trolli has infringed on
Nabisco's trademark for a round candy with a hole in the center represented by
Life Savers and Gummi Savers.
We also hold:
. licenses to market gummis under the Trolli brand name in certain other
countries;
. in connection with a product development and license agreement with Mederer
GmbH that expires in April 2007, the right to obtain exclusive licenses to
market new Trolli products in the United States and other countries; and
. licenses to manufacture and sell certain fruit snack products (for example,
our license to use the name and likeness of Rugrats).
These licenses and arrangements are a strategic part of our business. The loss
of these licenses or the failure to obtain renewals when they expire would have
an adverse effect on us.
A PRODUCT LIABILITY JUDGMENT AGAINST US OR A PRODUCT RECALL COULD HAVE A
MATERIAL ADVERSE EFFECT ON US
We may be subject to significant liability if the consumption of any of our
products
19
<PAGE>
causes injury, illness or death. We may also be required to recall products in
the event of contamination or damage to the products. We have not historically
incurred material expenditures for product liability claims other than costs of
insurance premiums. A product liability judgment against us or a product recall
could have a material adverse effect on us.
UNDER FRAUDULENT TRANSFER STATUTES, A COURT MAY VOID OUR OBLIGATIONS AND A
GUARANTOR'S OBLIGATIONS TO YOU OR MAY SUBORDINATE THOSE OBLIGATIONS TO OTHER
INDEBTEDNESS
Under the federal or state fraudulent transfer laws, a court could take
certain actions detrimental to you if it found that, at the time the initial
notes or the guarantees of our subsidiaries were issued:
. we or a guarantor issued the initial notes or a guarantee with the intent of
hindering, delaying or defrauding current or future creditors; or
. we or a guarantor received less than fair consideration or reasonably
equivalent value for incurring the indebtedness represented by the initial
notes or a guarantee, and:
. we or a guarantor were insolvent or rendered insolvent by issuing the
initial notes or the guarantees; or
. we or a guarantor were engaged or about to engage in a business or
transaction for which our assets were unreasonably small; or
. we or a guarantor intended to incur indebtedness beyond our ability to pay,
or believed or should have believed that we would incur indebtedness beyond
our ability to pay.
If a court made this finding, it could:
. void all or part of our obligations, or a guarantor's obligations, to the
holders of exchange notes; or
. subordinate our obligations, or a guarantor's obligations to the holders of
exchange notes to other indebtedness of ours or of the guarantor.
The effect of the court's action would be to entitle the other creditors to be
paid in full before any payment could be made on the exchange notes. In that
event, there would be no assurance that any repayment on the exchange notes
would ever be recovered by the holders of exchange notes.
Under the fraudulent transfer statutes, it is not certain whether a court
would determine that we or a guarantor were insolvent on the date that the
initial notes and guarantees were issued. However, we or a guarantor generally
would be considered insolvent at the time we or the guarantor incur the debt
constituting the initial notes or a guarantee, if:
. the fair saleable value of the relevant assets is less than the amount
required to pay our total existing debts and liabilities, including
contingent liabilities, or those of the guarantor, as they become absolute
and mature; or
. we or the guarantor incurs debts beyond our or its ability to pay as such
debts mature.
To the extent a court voids a guarantee of payment of the initial notes as a
fraudulent conveyance or holds it unenforceable for any other reason, holders
of exchange notes would cease to have any claim against the guarantor. If a
court allowed such a claim, the guarantor's assets would be applied to the
guarantor's liabilities and preferred stock claims. We cannot assure you that a
guarantor's assets would be sufficient to satisfy the claims of the holders of
exchange notes relating to any voided portions of any of the guarantees.
20
<PAGE>
THE EXCHANGE OFFER
This is a summary of material provisions of the Exchange and Registration
Rights Agreement entered into by and among the Company, Trolli Inc. and Sather
Trucking Corp. (the "Guarantors"), and the initial purchasers as of May 19,
1998 (the "Registration Rights Agreement"). It does not purport to be complete
and reference is made to the provisions of the Registration Rights Agreement,
which has been filed as an exhibit to the registration statement and a copy of
which is available as set forth under the heading "Prospectus Summary--Where
You Can Find More Information."
TERMS OF THE EXCHANGE OFFER
General
In connection with the issuance of the initial notes pursuant to a purchase
agreement dated as of May 14, 1998 by and among the Company, the Guarantors and
the initial purchasers (the "Purchase Agreement"), the initial purchasers and
their respective assignees became entitled to the benefits of the Registration
Rights Agreement.
The Registration Rights Agreement requires the Company and the Guarantors to
file the registration statement of which this prospectus is a part for a
registered exchange offer relating to an issue of new notes identical in all
material respects to the initial notes but containing no restrictive legend.
Under the Registration Rights Agreement, the Company and the Guarantors are
required to:
. file the registration statement not later than 180 days following the
date of original issuance of the initial notes (the "Issue Date"),
. use their respective best efforts to cause the registration statement to
become effective no later than 240 days after the Issue Date,
. keep the exchange offer effective for not less than 20 business days (or
longer if required by applicable law) after the date that notice of the
exchange offer is mailed to holders of the initial notes and
. use their respective best efforts to consummate the exchange offer no
later than 270 days after the Issue Date.
The exchange offer being made hereby, if commenced and consummated within the
time periods described in this paragraph, will satisfy those requirements under
the Registration Rights Agreement.
Upon the terms and subject to the conditions set forth in this prospectus and
in the letter of transmittal, all initial notes validly tendered and not
withdrawn prior to 5:00 p.m., New York City time, on the expiration date will
be accepted for exchange. Exchange notes of the same class will be issued in
exchange for an equal principal amount of outstanding initial notes accepted in
the exchange offer. Initial notes may be tendered only in integral multiples of
$1,000. This prospectus, together with the letter of transmittal, is being sent
to all record holders of initial notes as of January , 1999. The exchange
offer is not conditioned upon any minimum principal amount of initial notes
being tendered in exchange. However, our obligation to accept initial notes for
exchange is subject to certain conditions as set forth herein under "--
Conditions."
21
<PAGE>
Initial notes will be deemed accepted when, as and if the Trustee has given
oral or written notice to the exchange agent. The exchange agent will act as
agent for the tendering holders of initial notes for the purposes of receiving
the exchange notes and delivering them to the holders.
Based on interpretations by the staff of the SEC, as set forth in no-action
letters issued to other issuers, we believe that the exchange notes issued in
the exchange offer may be offered for resale, resold or otherwise transferred
by each holder without compliance with the registration and prospectus delivery
provisions of the Securities Act, provided that:
. the holder is not a broker-dealer who acquires the initial notes directly
from the Company for resale pursuant to Rule 144A under the Securities
Act or any other available exemption under the Securities Act;
. the holder is not an "affiliate" of the Company, as that term is defined
in Rule 405 under the Securities Act;
. the exchange notes are acquired in the ordinary course of the holder's
business and the holder is not engaged in, and does not intend to engage
in, a distribution of the exchange notes and has no arrangement or
understanding with any person to participate in a distribution of the
exchange notes.
By tendering the initial notes in exchange for exchange notes, each holder,
other than a broker-dealer, will represent to the Company that:
. any exchange notes to be received by it will be acquired in the ordinary
course of its business;
. it is not engaged in, and does not intend to engage in, a distribution of
such exchange notes and has no arrangement or understanding to
participate in a distribution of the exchange notes; and
. it is not an affiliate, as defined in Rule 405 under the Securities Act,
of the Company.
If a holder of initial notes is engaged in or intends to engage in a
distribution of the exchange notes or has any arrangement or understanding with
respect to the distribution of the exchange notes to be acquired pursuant to
the exchange offer, the holder may not rely on the applicable interpretations
of the staff of the SEC and must comply with the registration and prospectus
delivery requirements of the Securities Act in connection with any secondary
resale transaction. Each broker-dealer that receives exchange notes for its own
account in the exchange offer must acknowledge that it will deliver a
prospectus in connection with any resale of such exchange 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 exchange notes
received in exchange for initial notes where such initial notes were acquired
by the broker-dealer as a result of market-making activities or other trading
activities. The Company has agreed that it will make this prospectus available
to any broker-dealer for a period of time not to exceed 180 days after the
registration statement is declared effective (subject to extension under
certain circumstances) for use in connection with any such resale. See "Plan of
Distribution."
22
<PAGE>
In the event that:
1. because of any change in law or legal interpretations by the SEC's
staff, the Company and the Guarantors are not permitted to effect the
exchange offer, or
2. any initial notes validly tendered pursuant to the exchange offer are
not exchanged for exchange notes within 270 days after the Issue Date,
or
3. an initial purchaser so requests with respect to initial notes or
Private Exchange Securities (as defined in the Registration Rights
Agreement) not eligible to be exchanged for exchange notes in the
exchange offer and held by it following the consummation of the exchange
offer, or
4. any applicable law or interpretations do not permit a holder of initial
notes to participate in the exchange offer, or
5. any holder of initial notes that participates in the exchange offer does
not receive freely transferable exchange notes in exchange for tendered
initial notes (the obligation to comply with a prospectus delivery
requirement being understood not to constitute a restriction on
transferability),
then in the case of clauses (1) through (4) of this sentence, the Company and
the Guarantors shall at their sole expense:
a. as promptly as practicable, file with the SEC a shelf registration
statement covering resales of the initial notes,
b. use their best efforts to cause the shelf registration statement to be
declared effective under the Securities Act and
c. use their best efforts to keep effective the shelf registration
statement until the earlier of two years after Issue Date (or a shorter
period under certain circumstances) or such time as all of the
applicable initial notes have been sold thereunder.
The Company and the Guarantors will, in the event that a shelf registration
statement is filed, provide to each holder of the initial notes copies of the
prospectus that is a part of the shelf registration statement, notify each
holder when the shelf registration statement has become effective and take
certain other actions as are required to permit unrestricted resales of the
exchange notes. A holder that sells initial notes pursuant to the shelf
registration statement will be required to be named as a selling security
holder in the related prospectus and to deliver a prospectus to purchasers,
will be subject to certain of the civil liability provisions under the
Securities Act in connection with its sales and will be bound by the provisions
of the Registration Rights Agreement that are applicable to that holder
(including certain indemnification rights and obligations).
In the event that:
1. the registration statement or the shelf registration statement, as the
case may be, is not filed with the SEC on or prior to 180 days after the
Issue Date,
2. the registration statement or the shelf registration statement, as the
case may be, is not declared effective within 240 days after the Issue
Date,
3. the exchange offer is not consummated on or prior to 270 days after the
Issue Date, or
4. the shelf registration statement is filed and declared effective within
240 days after the Issue Date but shall thereafter cease to be effective
(at any time that the Company and the
23
<PAGE>
Guarantors are obligated to maintain the effectiveness thereof) without
being succeeded within 30 days by an additional registration statement
filed and declared effective (each such event referred to in clauses (1)
through (4), a "Registration Default"),
the Company and the Guarantors will be obligated to pay liquidated damages to
each holder of Transfer Restricted Securities (as defined in the Registration
Rights Agreement), during the period of one or more such Registration
Defaults, in an amount equal to $0.192 per week per $1,000 principal amount of
Transfer Restricted Securities held by such holder until:
. the registration statement or shelf registration statement is filed,
. the registration statement is declared effective and the exchange offer
is consummated,
. the shelf registration statement is declared effective, or
. the shelf registration statement again becomes effective, as the case may
be.
Following the cure of all Registration Defaults, the accrual of liquidated
damages will cease.
Upon consummation of the exchange offer, subject to certain exceptions,
holders of initial notes who do not exchange their initial notes for exchange
notes in the exchange offer will no longer be entitled to registration rights
and will not be able to offer or sell their initial notes, unless the initial
notes are subsequently registered under the Securities Act (which, subject to
certain limited exceptions, the Company will have no obligation to do), except
pursuant to an exemption from, or in a transaction not subject to, the
Securities Act and applicable state securities laws. See "Risk Factors--
Failure to Participate in The Exchange Offer Will Have Adverse Consequences."
Expiration Date; Extensions; Amendments; Termination
The term "expiration date" shall mean February , 1999 (30 calendar days
following the commencement of the exchange offer), unless the exchange offer
is extended if and as required by applicable law, in which case the term
"expiration date" shall mean the latest date to which the exchange offer is
extended.
In order to extend the expiration date, the Company will notify the exchange
agent of any extension by oral or written notice and may notify the holders of
the initial notes by mailing an announcement or by means of a press release or
other public announcement prior to 9:00 A.M., New York City time, on the next
business day after the previously scheduled expiration date.
The Company reserves the right to delay acceptance of any initial notes, to
extend the exchange offer or to terminate the exchange offer and not permit
acceptance of initial notes not previously accepted if any of the conditions
set forth herein under "--Conditions" shall have occurred and shall not have
been waived by the Company (if permitted to be waived), by giving oral or
written notice of such delay, extension or termination to the exchange agent.
The Company also reserves the right to amend the terms of the exchange offer
in any manner deemed by it to be advantageous to the holders of the initial
notes. If any material change is made to terms of the exchange offer, the
exchange offer shall remain open for a minimum of an additional five business
days, if the exchange offer would otherwise expire during such period. Any
such delay in acceptance, extension, termination or amendment will be followed
as promptly as practicable by oral or written notice of the delay to the
exchange agent. If the exchange offer is amended in a manner determined by the
Company to constitute a material change, the Company will promptly disclose
the amendment in a
24
<PAGE>
manner reasonably calculated to inform the holders of the initial notes of the
amendment including providing public announcement, or giving oral or written
notice to the holders of the initial notes. A material change in the terms of
the exchange offer could include, among other things, a change in the timing of
the exchange offer, a change in the exchange agent, and other similar changes
in the terms of the exchange offer.
Without limiting the manner in which the Company may choose to make a public
announcement of any delay, extension, amendment or termination of the exchange
offer, the Company shall have no obligation to publish, advertise, or otherwise
communicate any such public announcement.
Interest on the Exchange Notes
The exchange notes will accrue interest payable in cash at 10 3/4% per annum,
from the later of:
. the last interest payment date on which interest was paid on the initial
notes surrendered in exchange therefor; or
. if the initial notes are surrendered for exchange on a date subsequent to
the record date for an interest payment date to occur on or after the
date of such exchange and as to which interest will be paid, the date of
such interest payment.
Procedures for Tendering
To tender in the exchange offer, a holder of initial notes must complete,
sign and date the letter of transmittal or a facsimile of it, have the
signatures guaranteed if required by the letter of transmittal, and mail or
otherwise deliver the letter of transmittal or facsimile, or an agent's message
together with the initial notes and any other required documents, to the
exchange agent prior to 5:00 p.m., New York City time, on the expiration date.
In addition, either:
. certificates for the initial notes must be received by the exchange agent
along with the letter of transmittal,
. a timely confirmation of a book-entry transfer (a "Book-Entry
Confirmation") of the initial notes, if such procedure is available, into
the exchange agent's account at The Depository Trust Company (the "Book-
Entry Transfer Facility" or "DTC") pursuant to the procedure for book-
entry transfer described below, must be received by the exchange agent
prior to the expiration date, or
. the holder must comply with the guaranteed delivery procedures described
below.
THE METHOD OF DELIVERY OF INITIAL NOTES, LETTERS OF TRANSMITTAL AND ALL OTHER
REQUIRED DOCUMENTS IS AT THE ELECTION AND RISK OF THE HOLDERS. INSTEAD OF
DELIVERY BY MAIL, IT IS RECOMMENDED THAT HOLDERS USE AN OVERNIGHT OR HAND-
DELIVERY SERVICE. IF SUCH DELIVERY IS BY MAIL, IT IS RECOMMENDED THAT
REGISTERED MAIL, PROPERLY INSURED, WITH RETURN RECEIPT REQUESTED, BE USED. IN
ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE TIMELY DELIVERY. NO
LETTERS OF TRANSMITTAL OR INITIAL NOTES SHOULD BE SENT TO THE COMPANY.
Delivery of all documents must be made to the exchange agent at its address
set forth below. Holders of initial notes may also request their respective
brokers, dealers, commercial banks, trust companies or nominees to tender
initial notes for them.
25
<PAGE>
The term "agent's message" means a message, transmitted by the Book-Entry
Transfer Facility to, and received by, the exchange agent and forming a part of
a Book-Entry Confirmation, which states that the Book-Entry Transfer Facility
has received an express acknowledgment from the participant in the Book-Entry
Transfer Facility tendering initial notes that are the subject of the Book-
Entry Confirmation that the participant has received and agrees to be bound by
the terms of the letter of transmittal, and that the Company may enforce this
agreement against the participant.
The tender by a holder of initial notes will constitute an agreement between
such holder and the Company in accordance with the terms and subject to the
conditions set forth here and in the letter of transmittal.
Only a holder of initial notes may tender the initial notes in the exchange
offer. The term "holder" for this purpose means any person in whose name
initial notes are registered on the books of the Company or any other person
who has obtained a properly completed bond power from the registered holder.
Any beneficial owner whose initial notes are registered in the name of a
broker, dealer, commercial bank, trust company or other nominee and who wishes
to tender should contact the registered holder promptly and instruct the
registered holder to tender on his or her behalf. If the beneficial owner
wishes to tender on his or her own behalf, such beneficial owner must, prior to
completing and executing the letter of transmittal and delivering his or her
initial notes, either make appropriate arrangements to register ownership of
the initial notes in such owner's name or obtain a properly completed bond
power from the registered holder. The transfer of registered ownership may take
considerable time.
Signatures on a letter of transmittal or a notice of withdrawal, as the case
may be, must be guaranteed by a member firm of a registered national securities
exchange or of the National Association of Securities Dealers, Inc., a
commercial bank or trust company having an office or correspondent in the
United States or an "eligible guarantor" institution within the meaning of Rule
17Ad-15 under the Exchange Act (each, an "Eligible Institution"), unless the
initial notes tendered pursuant thereto are tendered:
. by a registered holder (or by a participant in DTC whose name appears on
a security position listing as the owner) who has not completed the box
entitled "Special Issuance Instructions" or "Special Delivery
Instructions" on the letter of transmittal and the exchange notes are
being issued directly to such registered holder (or deposited into the
participant's account at DTC); or
. for the account of an Eligible Institution.
If the letter of transmittal is signed by the recordholder(s) of the initial
notes tendered thereby, the signature must correspond with the name(s) written
on the face of the initial notes without alteration, enlargement or any change
whatsoever. If the letter of transmittal is signed by a participant in DTC, the
signature must correspond with the name as it appears on the security position
listing as the holder of the initial notes.
If the letter of transmittal is signed by a person other than the registered
holder of any initial notes listed therein, those initial notes must be
endorsed or accompanied by bond powers and a proxy
26
<PAGE>
that authorize such person to tender the initial notes on behalf of the
registered holder, in each case as the name of the registered holder or holders
appears on the initial notes.
If the letter of transmittal or any initial notes or bond powers are signed
by trustees, executors, administrators, guardians, attorneys-in-fact, officers
of corporations or others acting in a fiduciary or representative capacity,
such persons should so indicate when signing, and unless waived by the Company,
evidence satisfactory to the Company of their authority to so act must be
submitted with the letter of transmittal.
A tender will be deemed to have been received as of the date when the
tendering holder's duly signed letter of transmittal accompanied by initial
notes, or a timely confirmation received of a book-entry transfer of initial
notes into the exchange agent's account at DTC with an agent's message, or a
notice of guaranteed delivery from an Eligible Institution is received by the
exchange agent. Issuances of exchange notes in exchange for initial notes
tendered pursuant to a notice of guaranteed delivery by an Eligible Institution
will be made only against delivery of the letter of transmittal and any other
required documents, and the tendered initial notes or a timely confirmation
received of a book-entry transfer of initial notes into the exchange agent's
account at DTC with the exchange agent.
All questions as to the validity, form, eligibility, time of receipt,
acceptance and withdrawal of the tendered initial notes will be determined by
the Company in its sole discretion, which determination will be final and
binding. The Company reserves the absolute right to reject any and all initial
notes not properly tendered or any initial notes which, if accepted, would, in
the opinion of the Company or its counsel, be unlawful. The Company also
reserves the absolute right to waive any conditions of the exchange offer or
irregularities or defects in tender as to particular initial notes. The
Company's interpretation of the terms and conditions of the exchange offer
(including the instructions in the letter of transmittal) will be final and
binding on all parties. Unless waived, any defects or irregularities in
connection with tenders of initial notes must be cured within such time as the
Company shall determine. Neither the Company, the exchange agent nor any other
person shall be under any duty to give notification of defects or
irregularities with respect to tenders of initial notes, nor shall any of them
incur any liability for failure to give such notification. Tenders of initial
notes will not be deemed to have been made until such irregularities have been
cured or waived. Any initial 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 without cost by the exchange agent to the
tendering holders of such initial notes, unless otherwise provided in the
letter of transmittal, as soon as practicable following the expiration date.
In addition, the Company reserves the right in its sole discretion, subject
to the provisions of the Indenture, to:
. purchase or make offers for any initial notes that remain outstanding
subsequent to the expiration date or, as set forth under "--Expiration
Date; Extensions; Amendments; Termination", to terminate the exchange
offer in accordance with the terms of the Registration Rights Agreement;
and
. to the extent permitted by applicable law, purchase initial notes in the
open market, in privately negotiated transactions or otherwise.
The terms of any such purchases or offers could differ from the terms of the
exchange offer.
27
<PAGE>
Acceptance of Initial Notes for Exchange; Delivery of Exchange Notes
Upon satisfaction or waiver of all of the conditions to the exchange offer,
all initial notes properly tendered will be accepted, promptly after the
expiration date, and the exchange notes will be issued promptly after
acceptance of the initial notes. See "--Conditions" below. For purposes of the
exchange offer, initial notes shall be deemed to have been accepted as validly
tendered for exchange when, as and if the Company has given oral or written
notice thereof to the exchange agent.
In all cases, issuance of exchange notes for initial notes that are accepted
for exchange pursuant to the exchange offer will be made only after timely
receipt by the exchange agent of certificates for such initial notes or a
timely Book-Entry Confirmation of such initial notes into the exchange agent's
account at the Book-Entry Transfer Facility, a properly completed and duly
executed letter of transmittal and all other required documents. If any
tendered initial notes are not accepted for any reason set forth in the terms
and conditions of the exchange offer or if initial notes are submitted for a
greater principal amount than the holder desires to exchange, such unaccepted
or non-exchanged initial notes will be returned without expense to the
tendering holder as promptly as practicable after the expiration or termination
of the exchange offer. In the case of initial notes tendered by the book-entry
transfer procedures described below, the non-exchanged initial notes will be
credited to an account maintained with the Book-Entry Transfer Facility.
Book-Entry Transfer
The exchange agent will make a request to establish an account with respect
to the initial notes at the Book-Entry Transfer Facility for purposes of the
exchange offer within two business days after the date of this prospectus. Any
financial institution that is a participant in the Book-Entry Transfer
Facility's systems may make book-entry delivery of initial notes by causing the
Book-Entry Transfer Facility to transfer such initial notes into the exchange
agent's account at the Book-Entry Transfer Facility in accordance with such
Book-Entry Transfer Facility's procedures for transfer. However, although
delivery of initial notes may be effected through book-entry transfer into the
exchange agent's account at the Book-Entry Transfer Facility, an agent's
message or 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 by the exchange agent at one of the addresses set
forth below under "--Exchange Agent" on or prior to the expiration date or the
guaranteed delivery procedures described below must be complied with. DELIVERY
OF DOCUMENTS TO DTC DOES NOT CONSTITUTE DELIVERY TO THE EXCHANGE AGENT. All
references in the prospectus to deposit of initial notes shall be deemed to
include the Book-Entry Transfer Facility's book-entry delivery method.
Guaranteed Delivery Procedure
If a registered holder of the initial notes desires to tender the notes, and
the notes are not immediately available, or time will not permit the holder's
initial notes or other required documents to reach the exchange agent before
the expiration date, or the procedures for book-entry
transfer cannot be completed on a timely basis and an agent's message
delivered, a tender may be effected if:
1. the tender is made through an Eligible Institution;
28
<PAGE>
2. prior to the expiration date, the exchange agent receives from such
Eligible Institution a properly completed and duly executed letter of
transmittal or facsimile thereof and notice of guaranteed delivery,
substantially in the form provided by the Company, by facsimile
transmission, mail or hand delivery, setting forth the name and address
of the holder of the initial notes and the amount of initial notes
tendered, stating that the tender is being made thereby and guaranteeing
that within five business days after the expiration date, the
certificates for all physically tendered initial notes, in proper form
for transfer, or a Book-Entry Confirmation, as the case may be, and any
other documents required by the letter of transmittal will be deposited
by the Eligible Institution with the exchange agent; and
3. the certificates for all physically tendered initial notes, in proper
form for transfer, or a Book-Entry Confirmation, as the case may be, and
all other documents required by the letter of transmittal are received
by the exchange agent within five business days after the expiration
date.
Withdrawal of Tenders
Except as otherwise provided herein, tenders of initial notes may be
withdrawn at any time prior to 5:00 p.m., New York City time, on the expiration
date.
For a withdrawal to be effective, a written notice of withdrawal must be
received by the exchange agent prior to 5:00 p.m., New York City time on the
business day prior to the expiration date at the address set forth below under
"--Exchange Agent" and prior to acceptance for exchange thereof by the Company.
Any such notice of withdrawal must:
1. specify the name of the person having tendered the initial notes to be
withdrawn (the "Depositor");
2. identify the initial notes to be withdrawn, including, if applicable,
the registration number or numbers and total principal amount of such
initial notes;
3. be signed by the Depositor in the same manner as the original signature
on the letter of transmittal by which such initial notes were tendered
(including any required signature guarantees) or be accompanied by
documents of transfer sufficient to permit the Trustee with respect to
the initial notes to register the transfer of such initial notes into
the name of the Depositor withdrawing the tender;
4. specify the name in which any such initial notes are to be registered,
if different from that of the Depositor; and
5. if the initial notes have been tendered pursuant to the book-entry
procedures, specify the name and number of the participant's account at
DTC to be credited, if different than that of the Depositor.
All questions as to the validity, form and eligibility, time of receipt of
such notices will be determined by the Company, whose determination shall be
final and binding on all parties. Any initial notes so withdrawn will be deemed
not to have been validly tendered for exchange for purposes of the exchange
offer. Any initial notes that have been tendered for exchange and that are not
exchanged for any reason will be returned to the holder thereof without cost to
such holder (or, in
29
<PAGE>
the case of initial notes tendered by book-entry transfer, such initial notes
will be credited to an account maintained with the Book-Entry Transfer Facility
for the initial notes) as soon as practicable after withdrawal, rejection of
tender or termination of the exchange offer. Properly withdrawn initial notes
may be re-tendered by following one of the procedures descried under "--
Procedures for Tendering" and "--Book-Entry Transfer" above at any time on or
prior to the expiration date.
CONDITIONS
Notwithstanding any other term of the exchange offer, initial notes will not
be required to be accepted for exchange, nor will exchange notes be issued in
exchange for any initial notes, and the Company may terminate or amend the
exchange offer as provided herein before the acceptance of such initial notes,
if:
1. because of any change in law, or applicable interpretations thereof by
the SEC, the Company determines that it is not permitted to effect the
exchange offer;
2. an action is proceeding or threatened that would materially impair the
Company's ability to proceed with the exchange offer; or
3. not all government approvals that the Company deems necessary for the
consummation of the exchange offer have been received.
The Company has no obligation to, and will not knowingly, permit acceptance
of tenders of initial notes:
. from affiliates of the Company within the meaning of Rule 405 under the
Securities Act;
. from any other holder or holders who are not eligible to participate in
the exchange offer under applicable law or interpretations by the SEC; or
. if the exchange notes to be received by such holder or holders of initial
notes in the exchange offer, upon receipt, will not be tradable by such
holder without restriction under the Securities Act and the Exchange Act
and without material restrictions under the "blue sky" or securities laws
of substantially all of the states of the United States.
ACCOUNTING TREATMENT
The exchange notes will be recorded at the same carrying value as the initial
notes, as reflected in the Company's accounting records on the date of the
exchange. Accordingly, no gain or loss for accounting purposes will be
recognized by the Company. The costs of the exchange offer and the unamortized
expenses related to the issuance of the initial notes will be amortized over
the term of the exchange notes.
30
<PAGE>
EXCHANGE AGENT
LaSalle National Bank has been appointed as exchange agent for the exchange
offer. Questions and requests for assistance and requests for additional copies
of this prospectus or of the letter of transmittal should be directed to the
exchange agent addressed as follows:
By Mail, Overnight Mail or Courier:
LaSalle National Bank
135 South LaSalle Street
Suite 1960
Chicago, IL 60603
ATTN: Alvita Griffin
Facsimile Transmission: (312) 904-2236
Confirm by Telephone: (312) 904-2231
FEES AND EXPENSES
The Company will pay the expenses of soliciting tenders under the exchange
offer. The principal solicitation for tenders pursuant to the exchange offer is
being made by mail; however, additional solicitations may be made by telegraph,
telephone, telecopy or in person by officers and regular employees of the
Company.
The Company will not make any payments to brokers, dealers or other persons
soliciting acceptances of the exchange offer. The Company, however, will pay
the exchange agent reasonable and customary fees for its services and will
reimburse the exchange agent for its reasonable out-of-pocket expenses in
connection therewith. The Company may also pay brokerage houses and other
custodians, nominees and fiduciaries the reasonable out-of-pocket expenses
incurred by them in forwarding copies of the prospectus, letters of transmittal
and related documents to the beneficial owners of the initial notes, and in
handling or forwarding tenders for exchange.
The expenses to be incurred in connection with the exchange offer will be
paid by the Company, including fees and expenses of the exchange agent and
Trustee and accounting, legal, printing and related fees and expenses.
The Company will pay all transfer taxes, if any, applicable to the exchange
of initial notes pursuant to the exchange offer. If, however:
. certificates representing exchange notes or initial notes for principal
amounts not tendered or accepted for exchange are to be delivered to, or
are to be registered or issued in the name of, any person other than the
registered holder of the initial notes tendered, or
. if tendered initial 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
initial notes pursuant to the exchange offer,
then the amount of any such transfer taxes, whether imposed on the registered
holder or any other persons, will be payable by the tendering holder. If
satisfactory evidence of payment of such taxes or exemption therefrom is not
submitted with the letter of transmittal, the amount of the transfer taxes will
be billed directly to the tendering holder.
31
<PAGE>
USE OF PROCEEDS
There will be no cash proceeds payable to the Company from the issuance of
the exchange notes under the exchange offer. In consideration for issuing these
notes as contemplated in this prospectus, the Company will receive initial
notes in like principal amount, the terms of which are identical in all
material respects to the exchange notes. The initial notes surrendered in
exchange for the exchange notes will be retired and canceled and cannot be
reissued. Accordingly, the issuance of the exchange notes will not result in
any increase in the indebtedness of the Company. The proceeds received from the
sale of the initial notes were used to repay obligations under the Company's
then existing credit facilities.
SELECTED CONSOLIDATED HISTORICAL FINANCIAL DATA
The following table sets forth selected historical consolidated financial and
other data for the periods ended and as of the dates indicated. The summary
consolidated historical financial data as of, and for the periods ended, June
29, 1996, June 28, 1997 and June 27, 1998 have been derived from, and should be
reviewed in conjunction with, the Consolidated Financial Statements of the
Company, and the notes thereto, which have been audited by
PricewaterhouseCoopers LLP, independent accountants, and which are included
elsewhere in this prospectus. The financial data as of, and for the periods
ended, June 30, 1994, June 30, 1995, and September 24, 1995 have been derived
from the unaudited financial statements of Kraft's marshmallow and caramel
business. See "Risk Factors--Uncertainty of Financial Information Related to
the Kraft Business."
The unaudited financial data for the 13 weeks ended September 27, 1997 and
for the 13 weeks ended September 26, 1998 were derived from, and should be read
in conjunction with, interim consolidated financial information of the Company
as of such dates, which is included elsewhere in this prospectus. In our
opinion, such statements reflect all adjustments, consisting of only normal,
recurring adjustments, necessary for a fair presentation of such data.
Operating results for the 13 weeks ended September 26, 1998 are not necessarily
indicative of results to be expected for full fiscal 1999.
As a result of the significant number of acquisitions completed by the
Company during the periods presented below, the historical consolidated
financial information is not indicative of the results of operations, financial
position or cash flows of the Company for the historical periods presented had
the Company been organized and owned all of its current subsidiaries for such
periods. The following information should be read together with the
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," and the Company's Consolidated Financial Statements, and the notes
thereto, appearing elsewhere in this prospectus.
32
<PAGE>
SELECTED CONSOLIDATED HISTORICAL FINANCIAL DATA
<TABLE>
<CAPTION>
PREDECESSOR(1) COMPANY(2)
------------------------------- ---------------------------------------------------------
FISCAL FISCAL JULY 1,
YEAR YEAR 1995 40 WEEKS 52 WEEKS 52 WEEKS 13 WEEKS 13 WEEKS
ENDED ENDED THROUGH ENDED ENDED ENDED ENDED ENDED
JUNE 30, JUNE 30, SEPTEMBER 24, JUNE 29, JUNE 28, JUNE 27, SEPTEMBER 27, SEPTEMBER 26,
1994 1995 1995 1996 1997 1998 1997 1998
-------- -------- ------------- -------- -------- -------- ------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Net sales............... $144,881 $151,488 $36,133 $127,629 $652,538 $763,921 $203,570 $ 196,640
Costs and expenses:
Cost of sales........... 82,600 87,436 20,943 74,289 433,707 493,095 129,407 123,508
Selling, marketing and
administrative........ 44,376 46,439 10,897 38,110 176,506 237,147 53,827 69,004
Amortization of
intangible assets..... -- -- -- 7,454 9,540 13,670 3,061 3,004
Restructuring and
business integration
costs(3).............. -- -- -- -- -- 39,689 3,445 1,047
-------- -------- ------- -------- -------- -------- -------- ---------
126,976 133,875 31,840 119,853 619,753 783,601 189,740 196,563
-------- -------- ------- -------- -------- -------- -------- ---------
Income (loss) from oper-
ations................. 17,905 17,613 4,293 7,776 32,785 (19,680) 13,830 77
Interest expense(7).... -- -- -- 8,589 33,463 54,581 12,745 14,577
-------- -------- ------- -------- -------- -------- -------- ---------
Income (loss) before
income taxes,
extraordinary charge
and cumulative effect
of change in accounting
principle.............. 17,905 17,613 4,293 (813) (678) (74,261) 1,085 (14,500)
Provision (benefit) for
income taxes.......... 7,162 7,045 1,717 (305) 960 (27,419) 908 (5,356)
-------- -------- ------- -------- -------- -------- -------- ---------
Income (loss) before
extraordinary charge
and cumulative effect
of change in accounting
principle.............. 10,743 10,568 2,576 (508) (1,638) (46,842) 177 (9,144)
Extraordinary charge--
early debt
extinguishment, net of
income tax benefit(4).. -- -- -- -- -- 8,591 4,154 --
Cumulative effect of
change in accounting
principle, net of
income tax benefit(5).. -- -- -- -- -- -- -- 2,503
-------- -------- ------- -------- -------- -------- -------- ---------
Net income (loss)....... $ 10,743 $ 10,568 $ 2,576 $ (508) $ (1,638) $(55,433) $ (3,977) $ (11,647)
======== ======== ======= ======== ======== ======== ======== =========
OTHER FINANCIAL DATA:
Adjusted EBITDA(6)...... $ 20,055 $ 19,813 $ 4,801 $ 17,978 $ 61,874 $ 61,306 $ 27,062 $ 11,234
Net cash provided by
(used in) operating
activities............. N/A N/A N/A 22,480 32,550 12,559 (2,360) (30,741)
Net cash used in
investing activities... N/A N/A N/A (212,932) (367,209) (27,313) (4,662) (5,592)
Net cash provided by
financing activities... N/A N/A N/A 191,388 336,900 18,017 17,276 32,467
Depreciation and amorti-
zation................. 2,150 2,200 508 10,202 29,089 41,297 9,787 10,110
Capital expenditures.... 1,900 2,400 692 8,544 31,018 27,010 4,584 5,592
Ratio of earnings to
fixed charges(7)(8).... N/A N/A N/A -- -- -- -- --
BALANCE SHEET DATA (END
OF PERIOD):
Cash and cash equiva-
lents.................. $ -- $ -- $ -- $ 936 $ 3,177 $ 6,440 $ 13,431 $ 2,574
Total assets............ 32,500 37,301 26,529 208,692 807,053 809,556 841,946 829,776
Total debt, including
current portion........ -- -- -- 134,800 533,367 557,390 556,898 590,440
Divisional/stockholder's
equity................. 23,012 33,580 36,156 59,492 176,912 137,745 172,935 126,098
</TABLE>
- -------
N/A: Not available
(1) The periods ended and as of June 30, 1994, June 30, 1995 and September 24,
1995 reflect the unaudited results of the Predecessor. See "Risk Factors--
Uncertainty of Financial Information Related to the Kraft Business."
33
<PAGE>
(2) The Company's results of operations for the year ended June 28, 1997
include the results of Farley, Sathers and Kidd from the date of their
acquisition on August 30, 1996, the results of Dae Julie from the date of
its acquisition on January 27, 1997 and the results of Trolli from the date
of its acquisition on April 1, 1997.
(3) The Company recorded restructuring and business integration costs during
the year ended June 27, 1998 and the 13 weeks ended September 27, 1997 and
September 26, 1998. These include, among other things, charges for
impairment of property, plant and equipment, staff consolidation and
related costs, incremental freight, distribution and warehousing
consolidation expenses and manufacturing integration costs. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and Note 4 to the Company's Consolidated Financial Statements
included elsewhere in this prospectus.
(4) The extraordinary charge relates to the early extinguishment of debt. See
Note 10 to the Company's Consolidated Financial Statements included
elsewhere in this prospectus.
(5) The cumulative effect of change in accounting principle relates to the
Company's adoption of Statement of Position 98-5, "Reporting on the Costs
of Start-up Activities" during the first quarter of fiscal 1999. See Note
16 to the Company's Consolidated Financial Statements, included elsewhere
in this prospectus.
(6) Adjusted EBITDA is defined as income (loss) from operations before
depreciation, amortization of goodwill and other intangibles, and
restructuring and business integration costs. The Company believes that
Adjusted EBITDA provides useful information regarding the Company's ability
to service its debt, and the Company understands that such information is
considered by some investors to be an additional basis for evaluating the
Company's ability to pay interest and repay debt. Adjusted EBITDA does not,
however, represent cash flow from operations as defined by generally
accepted accounting principles and should not be considered as a substitute
for net income as an indicator of the Company's operating performance or
cash flow as a measure of liquidity. Because Adjusted EBITDA is not
calculated identically by all companies, the presentation herein may not be
comparable to other similarly titled measures of other companies. See the
Company's Consolidated Financial Statements, and related notes thereto,
included elsewhere in this prospectus.
(7) The Company's cash interest expense with respect to the Senior Subordinated
Notes increased by one percent per annum beginning on October 1, 1998. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
(8) The ratio of earnings to fixed charges has been calculated by dividing
income (loss) before income taxes, extraordinary charge and cumulative
effect of change in accounting principle and fixed charges by fixed
charges. Fixed charges for this purpose include interest expense,
amortization of deferred financing costs and the portion of rent expense
deemed to be representative of the interest factor. The earnings described
above were insufficient to cover fixed charges by $813 for the 40 weeks
ended June 29, 1996, by $678 for the 52 weeks ended June 28, 1997, by
$74,261 for the 52 weeks ended June 27, 1998 and by $14,500 for the 13
weeks ended September 26, 1998.
34
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of the Company's results of operations
and of its liquidity and capital resources should be read in conjunction with
the financial statements, and the related notes thereto, appearing elsewhere in
this prospectus. The Company's fiscal year ends on the Saturday immediately
preceding June 30 and generally includes 52 weeks of operations. The fiscal
year for the period from September 25, 1995 (the date of completion of the
Kraft acquisition) through June 29, 1996 included 40 weeks reflecting the first
full period in which the Company had operations.
GENERAL
The Company is the fourth largest confections company in the United States.
We compete primarily in the marshmallow, fruit snack and non-chocolate candy
categories of the confections market with a broad portfolio of products. The
Company's products are sold under proprietary brand names and private labels,
principally through the grocery, mass merchandiser, drugstore, convenience
store and club store channels.
A substantial portion of the Company's growth since August 1996 is the result
of the acquisitions of Kidd, Farley and Sathers in August 1996, Dae Julie in
January 1997 and Trolli in April 1997 (the "Acquisitions"). In connection with
these Acquisitions, the Company's goal was to integrate the various acquired
companies to realize efficiencies and reduce costs. The integration process to
date has included, among other things, the relocation of all marshmallow
production to the Kendallville, Indiana and Henderson, Nevada plants, the
closure of a Sathers general line candy facility, the consolidation of certain
distribution facilities and the reorganization of certain sales, marketing,
customer service and administrative functions. To complete this process,
further consolidation, reorganization and rationalization measures are planned.
FISCAL 1998 DIFFICULTIES
During fiscal 1998, the integration process proceeded more slowly and was
more difficult than we anticipated. These delays and difficulties, as well as a
significant increase in trade spending, caused a substantial deterioration in
the Company's results of operations beginning in fiscal 1998.
Trade Spending. Subsequent to the Acquisitions, certain of the Company's
sales, marketing and customer service functions (except Trolli's) were
consolidated and reorganized to accommodate all product lines across multiple
channels. Each of the acquired companies' trade spending programs was complex,
and the existing information systems of the Company and the acquired companies
were not designed to effectively plan, authorize and evaluate the effectiveness
of trade spending programs. The combined effect of the lack of effective
controls and information systems, certain competitive pressures (primarily in
fruit snacks) and ineffective execution of trade spending programs resulted in
increases in trade spending of approximately 40% in fiscal 1998 compared to pro
forma trade spending in fiscal 1997 (i.e., giving effect to full fiscal 1997
trade spending of the acquired companies). The Company has implemented new
reporting procedures designed to allow it to plan, monitor and evaluate trade
spending programs more effectively.
35
<PAGE>
Beginning in the third quarter of fiscal 1999, we intend to implement newly
designed trade spending programs for most of our products as well as additional
reporting mechanisms and controls. The goal of our new trade spending programs
is to reduce trade spending as a percentage of net sales and to more
effectively spend our trade dollars. Since the new programs are being
implemented in the third quarter, the Company does not anticipate that trade
spending for all of fiscal 1999 will be lower than in fiscal 1998. There are a
number of risks related to implementation of our new trade spending programs.
These risks include the possibility that lower levels of trade spending may
result in lower sales of our products. Therefore, we can give no assurance that
trade spending levels will decline or, if they do decline, that our sales will
not be adversely affected.
The Company's results of operations also have been adversely affected by the
issues discussed below relating to the integration of the various acquired
companies.
Distribution and Freight. The Company closed 12 distribution facilities as
part of the integration of its distribution network. In connection with the
closures, the Company incurred expenses to move inventories to remaining
distribution centers and to upgrade the remaining facilities to accommodate
increased inventory levels. In addition, a difficult consolidation process was
further complicated by decentralized sales forecasting and production planning
and limited capacity planning, inventory management and information systems
capabilities. These difficulties resulted in reduced levels of customer
service, including lower customer fill rates. In an effort to address these
issues and accommodate customer delivery requirements during the peak season,
the Company increased inventory (which further increased storage and handling
costs), incurred excessive freight costs and decided to forego third-party
trucking revenues.
Inventory Management. As discussed above in "--Distribution and Freight,"
inventory levels were increased to meet customer delivery requirements. These
increases, coupled with the short shelf life of some of the Company's products,
resulted in higher levels of inventory obsolescence.
Quality Control. The relocation of all marshmallow production to the
Kendallville and Henderson plants, coupled with an unsuccessful union
organizing effort at the Kendallville plant, resulted in production and
delivery of lower quality marshmallows during the summer of 1997 and
approximately $800,000 of marshmallow product returns in the second quarter of
fiscal 1998 that the Company can identify as being related to quality. Summer
and fall of each year are the seasons when marshmallow production normally
increases in anticipation of the holiday season, in which marshmallow sales are
at their highest. The Company subsequently made a number of changes in its
production and packaging processes to address these quality problems. The
Company anticipates that marshmallow product returns related to quality will be
lower in fiscal 1999 than those experienced in fiscal 1998.
During fiscal 1998 and fiscal 1999, the Company took a number of actions to
address the integration issues discussed above. The Company has made several
senior management changes, which include hiring a new Chief Executive Officer;
President, Chief Operating Officer and Chief Financial Officer; Vice President
of Supply Chain; Vice President of Sales; and Vice President of Information
Systems, as well as making several realignments of existing management.
Management has also implemented a new quality control and testing program for
marshmallow production that is designed to reduce the level of lower quality
marshmallows. For example, the Company is using
36
<PAGE>
thicker bags for its marshmallows, has improved its formulae, has increased the
use of refrigerated trucking and storage and has implemented on-line quality
testing procedures. The Company also has centralized certain of its sales
forecasting, production and capacity planning and inventory management
processes to facilitate managing the supply chain more efficiently. Since
implementing the supply chain management initiatives in the third quarter of
fiscal 1998, the Company has improved customer service levels.
Although we have implemented a number of initiatives to address certain of
our integration issues, we will be required to implement a number of additional
initiatives over the next several years in order to effectively integrate the
acquired companies. In fiscal 1998, the Company recorded $39.7 million in
restructuring and business integration costs. During the quarter ended
September 26, 1998, the Company incurred an additional $1 million of business
integration costs. While we cannot quantify the amount of business integration
costs that we will incur in fiscal 1999, we anticipate that such costs will
decline significantly as compared to the amounts recorded in fiscal 1998.
However, additional operating issues may arise in connection with integrating
the acquired companies and the measures that we have taken to date to address
the current integration issues may not adequately resolve these issues. We
expect integration difficulties to continue to adversely affect our results of
operations in fiscal 1999.
RESULTS OF OPERATIONS
Sales are recognized when products are shipped and are shown net of discounts
(other than trade spending), returns and unsalables.
The principal elements of the Company's cost of sales are raw materials and
packaging supplies, labor, manufacturing overhead and purchased product costs.
Raw materials consist primarily of sugar, corn products (dextrose, starch and
corn syrup) and gelatin. Packaging supplies include bag stock, film and
corrugated boxes. See "Risk Factors--We May Not Be Able to Pass Through
Increases in the Prices of Raw Materials to Our Customers."
Selling, marketing and administrative expenses include, but are not limited
to:
. selling costs, such as salaries and wages, utilities, transportation and
warehousing;
. marketing expenses such as trade spending, consumer promotions,
advertising, license fees and broker commissions; and
. general overhead expenses, which consist primarily of salaries and wages,
professional fees and office occupancy expenses.
Trade spending generally refers to promotional expenditures associated with
selling products to trade customers, such as retailers and other customers that
are not the end users of the products. Trade spending is intended to be used by
our trade customers for promotional activities, including advertising,
temporary price reductions and displays, and for securing shelf space.
Amortization of intangible assets consists principally of amortization of
goodwill related to the Acquisitions. The amortization period for goodwill was
increased from 15 years to 40 years effective August 30, 1996. See the notes to
the Company's Consolidated Financial Statements appearing elsewhere in this
prospectus.
37
<PAGE>
The following table sets forth, for the periods indicated, the percentage
relationship to net sales of certain items in the Company's consolidated
statements of operations for such periods.
<TABLE>
<CAPTION>
40 WEEKS 52 WEEKS ENDED 13 WEEKS ENDED
ENDED ------------------ ---------------------------
JUNE 29, JUNE 28, JUNE 27, SEPTEMBER 27, SEPTEMBER 26,
1996 1997 1998 1997 1998
-------- -------- -------- ------------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales by major
product category:
Marshmallows ......... 94.1% 23.6% 19.2% 17.0% 14.6%
Fruit snacks.......... -- 15.9 17.0 13.7 17.2
Trolli gummis......... -- 3.0 9.2 9.6 11.7
General line candy.... 5.9 55.6 53.2 58.3 55.4
Non-product
revenue(1)........... -- 1.9 1.4 1.4 1.1
----- ----- ----- ----- -----
Total net sales..... 100.0 100.0 100.0 100.0 100.0
Costs and expenses:
Cost of sales......... 58.2 66.5 64.5 63.6 62.8
Selling, marketing and
administrative....... 29.9 27.0 31.1 26.4 35.1
Amortization of
intangible assets.... 5.8 1.5 1.8 1.5 1.5
Restructuring and
business integration
costs................ -- -- 5.2 1.7 0.5
----- ----- ----- ----- -----
93.9 95.0 102.6 93.2 99.9
Income (loss) from
operations............. 6.1 5.0 (2.6) 6.8 0.1
Interest expense........ 6.7 5.1 7.1 6.3 7.4
----- ----- ----- ----- -----
(Loss) income before
income taxes,
extraordinary charge
and cumulative effect
of change in accounting
principle.............. (0.6) (0.1) (9.7) 0.5 (7.3)
(Benefit) provision for
income taxes........... (0.2) 0.1 (3.6) 0.4 (2.7)
----- ----- ----- ----- -----
(Loss) income before
extraordinary charge
and cumulative effect
of change in accounting
principle.............. (0.4) (0.2) (6.1) 0.1 (4.6)
Extraordinary charge,
net of income tax
benefit................ -- -- 1.1 2.0 --
Cumulative effect of
change in accounting
principle, net of
income tax benefit..... -- -- -- -- 1.3
----- ----- ----- ----- -----
Net loss................ (0.4)% (0.2)% (7.2)% (1.9)% (5.9)%
===== ===== ===== ===== =====
</TABLE>
- --------
(1) Non-product revenue primarily relates to Sather Trucking Corp.
THIRTEEN WEEKS ENDED SEPTEMBER 26, 1998 COMPARED TO THIRTEEN WEEKS ENDED
SEPTEMBER 27, 1997
Net Sales. Net sales were $196.6 million for the quarter ended September 26,
1998, compared to $203.6 million for the quarter ended September 27, 1997, a
decrease of $7.0 million. The decline was a result of lower sales of
marshmallow and general line candy products. These decreases were partially
offset by increases in sales of fruit snack and gummi products. The decline in
marshmallow sales coincided with an overall decline in sales in the retail
marshmallow category and the timing of certain seasonal sales. The Company
believes that the decline in marshmallow sales also related to the quality
problems and lower customer service levels that occurred in prior periods in
connection with integrating the acquired companies. The decline in general line
candy was partially due to a decline in branded caramel sales as well as
declines in a number of other product categories. Management attributes the
decline in branded caramel sales to the September 1997 expiration of the
38
<PAGE>
Company's interim license to use the Kraft brand name, which in turn resulted
in increased competitive activity.
Cost of Sales. Cost of sales was $123.5 million for the first quarter of
fiscal 1999, compared to $129.4 million for the first quarter of fiscal 1998, a
decrease of $5.9 million. Expressed as a percentage of net sales, cost of sales
was 62.8% for the first quarter of fiscal 1999 and 63.6% for the first quarter
of fiscal 1998, a slight improvement over the prior year period. Costs of sales
as a percentage of net sales may increase in future periods while we are
incuring costs related to planned plant expansions and productivity initiatives
that are part of the integration process.
Selling, Marketing and Administrative Expenses. Selling, marketing and
administrative expenses were $69.0 million for the first quarter of fiscal
1999, compared to $53.8 million for the first quarter of fiscal 1998, an
increase of $15.2 million. Expressed as a percentage of net sales, these
expenses were 35.1% for the first quarter of fiscal 1999 and 26.4% for the
first quarter of fiscal 1998. Over three-fourths of the increase was the result
of increased trade spending and planned increases in consumer promotions.
Increased administrative expenses relating to building infrastructure for the
integrated company also contributed to the increased expenses. The Company
expects to continue to experience increased administrative expenses as these
activities continue in fiscal 1999.
Amortization of Intangible Assets. Amortization of intangible assets was $3.0
million for the first quarter of fiscal 1999, compared to $3.1 million for the
first quarter of fiscal 1998.
Restructuring and Business Integration Costs. Restructuring and business
integration costs were $1.0 million for the first quarter of fiscal 1999,
compared to $3.4 million for the first quarter of fiscal 1998, a decrease of
$2.4 million. The fiscal 1999 charges reflect professional fees associated with
trade spending and integration initiatives and transportation costs associated
with opening the Company's new regional distribution centers, partially offset
by the resolution of a technology license dispute. The fiscal 1998 costs
primarily included freight, distribution and warehousing associated with the
consolidation of distribution centers and manufacturing integration.
Income from Operations. Income from operations was $0.1 million for the first
quarter of fiscal 1999, compared to operating income of $13.8 million for the
first quarter of fiscal 1998, a decrease of $13.7 million. This decline is a
result of the factors indicated above.
Interest Expense. Interest expense was $14.6 million for the first quarter of
fiscal 1999, compared to $12.7 million for the first quarter of fiscal 1998, an
increase of $1.9 million. This increase was primarily due to higher average
outstanding debt balances.
Provision (Benefit) for Income Taxes. The benefit for income taxes was $5.4
million for the first quarter of fiscal 1999 as a result of the current
quarter's pre-tax loss, as compared to a $0.9 million provision for the first
quarter of fiscal 1998.
Extraordinary Charge--Early Debt Extinguishment. During the first quarter of
fiscal 1998, the Company incurred a $4.2 million extraordinary charge, which is
net of $2.7 million in income tax benefits, related to the early extinguishment
of certain indebtedness. See Note 10 to the Company's Consolidated Financial
Statements contained elsewhere in this prospectus.
39
<PAGE>
Cumulative Effect of Change in Accounting Principle. During the first quarter
of fiscal 1999, the Company adopted the provisions of Statement of Position 98-
5 "Reporting on the Costs of Start-Up Activities", which required the Company
to write off unamortized start-up costs of $2.5 million, which amount is net of
$1.7 million in income tax benefits. See Note 16 to the Company's Consolidated
Financial Statements contained elsewhere in this prospectus.
Net Loss. As a result of the factors discussed above, the Company had a net
loss of $11.6 million for the first quarter of fiscal 1999, compared to a net
loss of $4.0 million for the first quarter of fiscal 1998.
FISCAL YEAR ENDED JUNE 27, 1998 COMPARED TO FISCAL YEAR ENDED JUNE 28, 1997
Net Sales. Net sales were $763.9 million in fiscal 1998, compared to $652.5
million in fiscal 1997, an increase of $111.4 million. The increase was
primarily due to the fact that fiscal 1998 includes the results of operations
of all acquired companies for the entire year, while fiscal 1997 only includes
results of operations of the acquired companies from their respective dates of
acquisition. On a comparable basis (i.e., giving effect to full fiscal 1997 net
sales of the acquired companies), sales were down 6% primarily due to:
. lower sales of private-label marshmallows,
. decreases in ingredient and branded caramel sales, and
. heavy promotional activity that shifted customer purchases from the first
quarter of fiscal 1998 to the fourth quarter of fiscal 1997.
The decline in sales of private label marshmallows resulted primarily from
the quality and service issues discussed above, while the decline in branded
caramel sales resulted primarily from the expiration in September 1997 of our
interim license of the Kraft brandname for caramels. These decreases were
partially offset by increases in sales of gummi and fruit snack products.
Cost of Sales. Cost of sales was $493.1 million for fiscal 1998, compared to
$433.7 million for fiscal 1997, an increase of $59.4 million. Expressed as a
percentage of net sales, cost of sales was 64.5% for fiscal 1998 and 66.5% for
fiscal 1997. Cost of sales for fiscal 1997 included $10.3 million related to
purchase accounting adjustments resulting from the Acquisitions. Adjusted for
the impact of these amounts, cost of sales as a percentage of net sales was
64.9% for fiscal 1997. The remaining margin improvement in fiscal 1998
primarily relates to reduced production costs generated from the integration of
the acquired companies, automation of fruit snack and hard candy manufacturing
and vendor consolidation, offset in part by increased fixed costs associated
with facility consolidation and charges associated with aged inventories.
Selling, Marketing and Administrative Expenses. Selling, marketing and
administrative expenses were $237.1 million for fiscal 1998, compared to $176.5
million for fiscal 1997, an increase of $60.6 million. Expressed as a
percentage of net sales, these expenses were 31.1% in fiscal 1998 and 27.0% in
fiscal 1997. The increase in these expenses was primarily the result of
increased trade and consumer spending.
Amortization of Intangible Assets. Amortization of intangible assets was
$13.7 million in fiscal 1998, compared to $9.5 million in fiscal 1997, an
increase of $4.2 million, primarily due to increased goodwill associated with
the Acquisitions.
40
<PAGE>
Restructuring and Business Integration Costs. The Company recorded a $39.7
million charge for restructuring and business integration costs during fiscal
1998. The nature of these costs is discussed below.
During fiscal 1998, the Company began to integrate the acquired companies
through various initiatives, including consolidation of production facilities,
reorganization of certain supply chain functions, integration of certain sales,
marketing and customer service functions, and integration of certain
information systems. As a result of these activities, the Company incurred the
following business integration charges during fiscal 1998, of which $13.6
million was paid as of fiscal year end (dollars in millions):
<TABLE>
<S> <C>
Staff consolidation and related costs.................................... $ 7.4
Manufacturing integration costs.......................................... 4.9
Distribution and warehouse consolidation costs........................... 6.6
Stock keeping unit rationalization costs................................. 1.8
Technology licensing costs............................................... 1.7
Strategic acquisitions not pursued....................................... 1.3
-----
$23.7
=====
</TABLE>
In addition to the integration activities discussed above, the Board of
Directors approved a restructuring of the Company's operations during fiscal
1998. The restructuring, which management expects to be completed by fiscal
2000, includes (i) rationalizing certain production facilities and outsourcing
production of certain candy products and (ii) further consolidating the
distribution network by reducing the number of distribution centers used by the
Company. In connection with these activities, the Company recorded the
following restructuring charges during fiscal 1998 (dollars in millions):
<TABLE>
<S> <C>
Loss on impairment of property, plant and equipment...................... $13.8
Termination benefits for approximately 500 plant employees............... 1.3
Plant closing costs...................................................... 0.9
-----
$16.0
=====
</TABLE>
The $13.8 million charge represented a non-cash write-down of the value of
certain assets.
Income (loss) from Operations. As a result of the factors outlined above, the
loss from operations was $19.7 million for fiscal 1998, compared to operating
income of $32.8 million for fiscal 1997, a decrease of $52.5 million.
Interest Expense. Interest expense was $54.6 million for fiscal 1998,
compared to $33.5 million for fiscal 1997, an increase of $21.1 million. This
increase was primarily due to higher average outstanding debt balances.
Provision (Benefit) for Income Taxes. The benefit for income taxes was $27.4
million for fiscal 1998, as a result of the current year's pre-tax loss, as
compared to a $1.0 million provision for fiscal 1997. See Note 11 to the
Company's Consolidated Financial Statements included elsewhere in this
prospectus.
41
<PAGE>
Extraordinary Charge--Early Debt Extinguishment. The Company incurred an $8.6
million extraordinary charge, net of $5.6 million in income tax benefits,
during fiscal 1998 related to the early extinguishment of the Company's prior
senior credit agreement and the senior subordinated notes that were outstanding
at that time. See Note 10 to the Company's Consolidated Financial Statements
included elsewhere in this prospectus.
Net Loss. As a result of the factors discussed above, the Company had a net
loss of $55.4 million for fiscal 1998, compared to a net loss of $1.6 million
for fiscal 1997.
FIFTY-TWO WEEKS ENDED JUNE 28, 1997 COMPARED TO FORTY WEEKS ENDED JUNE 29, 1996
Net Sales. Net sales were $652.5 million in fiscal 1997, compared to $127.6
million in fiscal 1996, an increase of $524.9 million. The increase was
primarily due to the Acquisitions.
Marshmallow product sales were $154.0 million in fiscal 1997, compared to
$120.1 million in fiscal 1996. Marshmallow revenues increased significantly as
a result of the Kidd acquisition, which was completed in August 1996. The
remaining sales increase from fiscal 1996 to fiscal 1997 was due to the Farley,
Trolli, Sathers and Dae Julie acquisitions. These acquisitions broadened the
Company's product portfolio to include fruit snacks, branded gummis and general
line candy.
Cost of Sales. Cost of sales was $433.7 million for fiscal 1997, compared to
$74.3 million for fiscal 1996, an increase of $359.4 million. The increase was
primarily related to the Acquisitions. Expressed as a percentage of net sales,
cost of sales was 66.5% for fiscal 1997 and 58.2% for fiscal 1996. Fiscal 1997
cost of sales included $10.3 million related to purchase accounting adjustments
resulting from the Acquisitions. Fiscal 1996 includes a similar $1.3 million
amount related to the Kraft acquisition. Adjusted for the impact of these
amounts, cost of sales as a percentage of net sales was 64.9% for fiscal 1997
and 57.2% for fiscal 1996. Although the Company was able to reduce production
costs by consolidating the production of six marshmallow manufacturing
facilities into two facilities and implementing productivity initiatives, the
cost savings from these initiatives were more than offset by significant
changes in sales mix in fiscal 1997 due to the Acquisitions (i.e., 1996 sales
consisted primarily of branded marshmallow and caramel sales, while 1997 sales
included lower margin general line candy and private label marshmallow sales).
Selling, Marketing, and Administrative Expenses. Selling, marketing and
administrative expenses were $176.5 million for fiscal 1997, compared to $38.1
million for fiscal 1996, an increase of $138.4 million. This increase was
primarily due to the Acquisitions. Expressed as a percentage of net sales,
these expenses were 27.0% in fiscal 1997 and 29.9% in fiscal 1996. The decrease
in these expenses as a percentage of net sales was primarily attributable to
the fixed administrative component being spread over a larger sales base.
Amortization of Intangible Assets. Amortization of intangible assets was $9.5
million for fiscal 1997, compared to $7.5 million for fiscal 1996, an increase
of $2.0 million. This increase was principally the result of increased
amortization of goodwill from the Acquisitions.
Income from Operations. As a result of the factors discussed above, income
from operations was $32.8 million for fiscal 1997, as compared to $7.8 million
for fiscal 1996, an increase of $25.0 million.
42
<PAGE>
Interest Expense. Interest expense was $33.5 million for fiscal 1997,
compared to $8.6 million for fiscal 1996, an increase of $24.9 million. This
increase was primarily attributable to additional borrowings incurred to fund
the Acquisitions and related working capital requirements.
Provision (Benefit) for Income Taxes. The provision for income taxes was $1.0
million for fiscal 1997, compared to a $0.3 million income tax benefit in
fiscal 1996, an increase of $1.3 million.
Net Loss. As a result of the factors discussed above, the Company had a net
loss of $1.6 million for fiscal 1997, compared to a net loss of $0.5 million
for fiscal 1996, a decrease of $1.1 million.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $22.5 million, $32.6 million,
$12.6 million in fiscal 1996, fiscal 1997 and fiscal 1998, respectively, and
net cash used in operating activities was $2.4 million and $30.7 million in the
first quarter of fiscal 1998 and the first quarter of fiscal 1999,
respectively. The increase in cash provided by operating activities from fiscal
1996 to fiscal 1997 is principally attributable to the Acquisitions. The
decline in cash provided by operations between fiscal 1997 and fiscal 1998
reflects an increased net loss and higher inventory levels in anticipation of
the implementation of the Company's new regional distribution centers, which
was partially offset by increased accounts receivable collections. The increase
in net cash used in operating activities during the first quarter of fiscal
1999 compared to the first quarter of fiscal 1998 reflects the increased net
loss in the first quarter of fiscal 1999 and a significant increase in accounts
payable and accrued expenses in the first quarter of fiscal 1998.
The Company's liquidity requirements have arisen principally from
acquisitions, capital expenditures, seasonal and general working capital
requirements and debt service obligations. In fiscal 1996 and fiscal 1997, the
Company spent $204.4 million and $336.2 million, respectively, in connection
with the Acquisitions. Capital expenditures in fiscal 1996, fiscal 1997, fiscal
1998 and the first quarter of fiscal 1999 were $8.5 million, $31.0 million,
$27.0 million and $5.6 million, respectively. These amounts were financed
principally with net cash provided by operating activities, proceeds from bank
borrowings or issuance of debt and equity securities.
Our earnings were insufficient to cover fixed charges by $74.3 million in
fiscal 1998 and by $14.5 million for the 13 weeks ended September 26, 1998.
During this period, fixed charges were funded by selling additional equity and
obtaining additional bank borrowings. It is not certain that the Company will
continue to have access to such additional funds in future periods. If the
Company is not able to access such funds or does not improve its operating
results and cash flow, the Company could be forced to reduce capital and other
controllable expenditures and may not be able to meet its debt service
obligations or comply with its debt covenants.
The Company received $90.0 million and $60.0 million of capital contributions
from Holdings in fiscal 1997 and fiscal 1996, respectively. The Company also
received net proceeds (after the repayment of certain outstanding debt) from
bank borrowings and the issuance of debt securities of $246.9 million and
$131.4 million in fiscal 1997 and fiscal 1996, respectively. These proceeds
were used primarily to fund the Acquisitions. The Company received net proceeds
from financing activities of $17.3 million and $32.5 million in the first
quarter of fiscal 1998 and the first quarter of fiscal 1999, respectively.
43
<PAGE>
As a result of the integration and trade spending issues discussed above, the
Company experienced liquidity problems in the third quarter of fiscal 1998 and
obtained a short-term liquidity facility from a commercial bank with credit
support provided by TPG, Holdings' controlling shareholder. Further, in May
1998, the Company completed a refinancing of all of its indebtedness other than
the Senior Subordinated Notes through the issuance of the initial notes and
borrowings under a term loan and a $75 million revolving credit facility from a
group of lenders (the "Bank Facilities"). In connection with the refinancing,
TPG made an additional $13.6 million equity investment in Holdings, which was
then contributed to the Company in May 1998.
An amendment to the Company's Bank Facility was approved on September 25,
1998 and became effective in October 1998. This amendment:
. reset certain financial covenants through fiscal 2001,
. deleted certain other financial covenants,
. changed certain definitions, and
. increased the borrowing spread by 0.25 percent.
This amendment was obtained to avoid a future default under the previous
covenants. In connection with the amendment:
. TPG agreed to loan the Company $17.0 million (the "Sponsor Loan"--terms
of which are further described below), and
. the Company paid an amendment fee. The Company used the proceeds of the
Sponsor Loan to repay borrowings under the Revolving Credit Facility.
The Sponsor Loan ranks senior unsecured and matures on November 20, 2005; the
Sponsor Loan accrues interest at 10% per annum which is payable on the maturity
date. In connection with the Sponsor Loan, Holdings' controlling stockholder
also received a ten-year warrant to purchase 77,500 shares of Holdings' Common
Stock at $0.01 per share. The Company has estimated the value of the warrants
issued in connection with the Sponsor Loan to be $3.9 million using the Black-
Scholes option valuation model. The Company intends to amortize this amount
over the remaining life of the Sponsor Loan as interest expense.
The Company remains highly leveraged. As of September 26, 1998, the Company's
total debt was $590.4 million. The following table shows the breakdown of our
total debt as of that date:
TOTAL DEBT AS OF SEPTEMBER 26, 1998
<TABLE>
<CAPTION>
AMOUNT
DESCRIPTION (IN MILLIONS)
----------- -------------
<S> <C>
Senior Secured:
Revolving credit facility................................. $ 45.0
Term B.................................................... 150.0
Initial Notes............................................... 200.0
Senior Subordinated Notes................................... 195.0
Other....................................................... .4
======
$590.4
</TABLE>
44
<PAGE>
At that date, the Company's stockholder's equity was $126.1 million. See "Risk
Factors" for a description of risks related to the Company's indebtedness level
and liquidity position.
The Company has two interest rate swap agreements that had a notional amount
of $82.0 million as of September 26, 1998. These agreements expire in December
1999, requiring the Company to pay a fixed interest rate of 6.26% per annum and
entitling the Company to receive variable interest based upon three month LIBOR
rates. These agreements are not expected to materially affect the Company's
results of operations or financial condition.
On October 1, 1998, the interest rate on the Company's $195 million Senior
Subordinated Notes increased by 1.0% (from 10.25% to 11.25%) because the
Company was unable to obtain a rating on such Notes of at least B- from
Standard & Poor's Ratings Service and B3 from Moody's Investors Service, Inc.
The Senior Subordinated Notes are rated CCC+ from Standard & Poor's Ratings
Service and Caa1 from Moody's Investors Service.
The Company's principal needs for liquidity are:
. to fund capital expenditures,
. for general working capital purposes and
. to fund continued restructuring and business integration costs.
The Company estimates that capital expenditures for fiscal 1999 will be
approximately $48 million. The Company's principal source of liquidity is
borrowings under its revolving credit facility. As of September 26, 1998, the
Company had $4.2 million of outstanding letters of credit and $25.8 million
available for borrowing under this facility. The proceeds of the $17.0 million
Sponsor Loan that were obtained in October 1998 were used to repay borrowings
under the Company's revolving credit facility.
SEASONALITY
The Company's sales and earnings are subject to a variety of seasonal
factors, which vary among the Company's product lines. The Company's cash needs
also vary based on seasonal factors, with the second and third fiscal quarters
ordinarily generating the most significant working capital requirements. In
light of the seasonality of the Company's business, results for any interim
period are not necessarily indicative of the results that may be realized for
the full year. The Company's working capital requirements fluctuate throughout
the year as a result of increased inventory levels produced in anticipation of
holiday sales and the Company offering extended terms on seasonal sales.
INFLATION
Inflationary factors such as increases in the costs of ingredients, packaging
materials, purchased product, labor and corporate overhead may adversely affect
the Company's operating results. Although the Company does not believe that
inflation has had a material impact on its financial position or results of
operations for the periods discussed above, there can be no assurance that a
high rate of inflation in the future would not have an adverse effect on the
Company and its operating results.
45
<PAGE>
YEAR 2000 COMPLIANCE
The Company has Year 2000 initiatives in three general areas: Information
Technology ("IT") business systems; IT infrastructure; and non-IT systems
(including embedded systems and exposure to third party systems).
IT Business Systems
The Company has completed the assessment of its IT business systems (i.e.,
manufacturing, distribution, financial software, etc.) and is testing most
systems that it has identified as not being Year 2000 compliant. The Company's
strategy is to remediate non-compliant systems in most cases through
modification or upgrade. In certain circumstances, replacement will be
necessary.
Most of the Company's IT business systems are scheduled to be fully Year 2000
compliant by the end of fiscal 1999. The cost yet to be incurred for these
projects, principally reflecting external labor and outside service provider
costs and limited hardware and software costs, is estimated to be approximately
$1.3 million. These costs will be expensed as incurred, with the exception of
the software and hardware acquisition costs, which will be capitalized.
IT Infrastructure
Since late 1995, the Company has significantly upgraded and continues to
upgrade its IT infrastructure. Personal computers and related software and
local and wide area networks have been upgraded. As a result, this part of the
IT infrastructure is substantially Year 2000 compliant.
The Company uses IBM mainframe and mid-range computers to run most of its
critical business systems. This hardware, and corresponding operating system
software, has been upgraded with Year 2000 compliant versions. The Company
expects to verify compliance by the end of the third quarter of fiscal 1999.
The Company estimates that the costs yet to be incurred for these projects,
which reflects external labor costs and limited additional hardware and
software costs, should not exceed $250,000. These costs will be expensed as
incurred, with the exception of the acquisition of new software and hardware,
which will be capitalized.
Non-IT Systems
Embedded Systems
These items include any systems that incorporate computing devices for
manufacturing, building and facility maintenance equipment. This includes
electronic manufacturing equipment, such as assembly line, robotics, elevators,
fire alarms, heating, ventilation and air conditioning systems (HVAC), building
and office space security, time collection and reporting devices and
interfaces. These systems are being assessed and updated on a facility by
facility basis with the help of third-party consultants, most of whom
specialize in Year 2000 compliance and remediation planning. All embedded
systems are scheduled to be compliant by the end of fiscal 1999.
46
<PAGE>
Based upon the assessments completed by the Company to date and certain
assumptions, the Company estimates that remediation costs for embedded systems
will be approximately $1.0 million. However, the Company has only completed a
limited assessment of these systems and as the Company continues to review
these systems, this estimate could change significantly.
Third Parties
The Company has sent Year 2000 compliance questionnaires to its major raw
material suppliers to determine if these suppliers are addressing and preparing
for the Year 2000 compliance with their systems. The Company is continuing to
work with these third parties and has initiated a tracking system to monitor
responses and to resolve issues as they arise.
The Company currently uses a number of third-party service vendors for many
of its functions, including, but not limited to, warehouse management, carriers
and pool distributors, automated payroll processing, insurance, banking
collections and disbursements and benefit programs. The Company is initiating
formal communications with these third-party providers to determine the extent
to which these third parties are moving toward Year 2000 compliance. A tracking
system will be used to monitor responses and resolve issues as they arise.
Many of the Company's customers currently place orders and receive
acknowledgements using EDI systems. The Company has developed a plan to make
its EDI systems Year 2000 compliant by the end of the third quarter of fiscal
1999.
Year 2000 Risks
The principal Year 2000 risks to the Company related to its IT business
systems and IT infrastructure are:
. the inability to recruit and/or retain key IT staff;
. the inability to locate and correct all relevant computer codes;
. the failure to complete, on a timely basis, the modifications and/or
release upgrades to, as well as the selected replacements of, the IT
business systems; and
. reliance on third parties' representations and ability to complete Year
2000 initiatives.
The principal risks to the Company with respect to its embedded systems is
the Company's failure to identify and replace all Year 2000 non-compliant
embedded systems. Until further assessments are completed in this area, the
Company may not be able to estimate accurately the remediation costs or
difficulties associated with these systems.
The principal risks to the Company with respect to its relationships with
third parties are:
. the failure of key third parties to identify and implement required Year
2000 compliance and/or the Company's failure to timely recognize these
third parties' non-compliance; and
. the failure to implement compliant EDI systems with key customers.
47
<PAGE>
Contingency Plans
Contingency plans, where necessary, are expected to be completed during the
third quarter of fiscal 1999 to address the risks discussed above. No assurance
can be given, however, that the Company will be able to address the Year 2000
issues for all of its software and applications in a timely manner or that it
will not encounter unexpected difficulties or significant expenses relating to
adequately addressing the Year 2000 issue. If the Company or its major
customers, suppliers or other third parties with whom the Company does business
fail to address adequately the Year 2000 issue, or the Company fails to
successfully integrate or convert its computer systems generally, the Company's
business or results of operations could be materially adversely affected. See
"Risk Factors--Failure of Year 2000 Compliance Initiatives Could Adversely
Affect Us."
RECENT ACCOUNTING PRONOUNCEMENTS
Segmental information
In 1997, the Financial Accounting Standards Board ("FASB") issued Statement
131, "Disclosure about segments of an enterprise and related information,"
which requires adoption in fiscal 1999. Statement 131 requires companies to
report segment information based on how management disaggregates its business
for evaluating performance and making operating decisions. The Company has
reviewed Statement 131 and anticipates that it will report as a single segment
after adopting that Statement.
Derivative instruments
In 1998, the FASB issued Statement 133, "Accounting for derivative
instruments and hedging activities," which requires adoption in fiscal 2000.
Statement 133 establishes accounting and reporting standards for derivative
instruments and for hedging activities. Management believes that the adoption
of Statement 133 will not have a material impact on its financial reporting.
48
<PAGE>
BUSINESS
OVERVIEW
The Company was formed in September 1995 to acquire Kraft's marshmallow and
caramel business and has grown primarily through five subsequent acquisitions.
Today, the Company is the fourth largest confections company in the United
States with a broad portfolio of marshmallow, fruit snack, branded gummi and
general line candy products. The Company has the number one market position in
branded and ingredient marshmallow products. The Company has the number two
market position in fruit snacks, branded gummis and general line candy. Through
its nationwide sales and distribution networks, the Company has achieved
significant penetration in all major domestic trade channels.
The Company is the largest United States manufacturer of marshmallow
products. We have the number one market position in branded and ingredient
marshmallow products. The Company's Jet-Puffed marshmallow brand, which was
developed by Kraft in the 1950's, has a 79% share of the branded marshmallow
market and a 47% share of the total marshmallow market. We are also the market
leader in the ingredient marshmallow category, which includes dehydrated
marshmallow bits that are used primarily in cereals and hot beverages. The
Company sells dehydrated marshmallow bits to every major cereal manufacturer in
the United States and believes it has a 98% share of the dehydrated marshmallow
bits market. The Company also manufactures private label marshmallow products.
The Company sells its fruit snack products under the Farley's brand name and
holds the number two market position with a 22% market share. The Company's
growth strategy for this category includes the use of exclusive licenses for
popular children's characters, such as Nickelodeon's Rugrats. The Company
markets a variety of gummi products under the Trolli brandname, including
BriteCrawlers, Gummi Beans, Trolli Squiggles and Apple O's. Trolli has the
number two market position in the gummi market with a 15% share.
The Company's general line candy is sold primarily under the Farley's and
Sathers brand names and under private labels. Our product line includes more
than 100 varieties of non-chocolate and chocolate candies, gummis, caramels,
nuts and snacks. The Company is the second largest general line candy supplier
in the United States and its Sathers line is the leading brand of general line
candy in the convenience store channel.
The Company's retail products are sold to grocery stores, mass merchandisers,
drugstores, convenience stores and club stores under branded and private
labels. The Company sells its products through a sales network consisting of
more than 25 independent food brokers supported by an internal sales
organization that focuses on large national accounts, distributors and
ingredients purchasers. The Company operates 13 manufacturing and packaging
facilities and a nationwide distribution network that delivers products to more
than 5,000 customers.
INDUSTRY OVERVIEW
The confections market consists of chocolate candy, non-chocolate candy,
marshmallow products and fruit snacks. The Company competes primarily in the
non-chocolate candy, fruit snack
49
<PAGE>
and marshmallow categories of the confections industry. Sales in the non-
chocolate candy category in 1997 were approximately $4.6 billion. The non-
chocolate candy category grew at a compound annual rate of approximately eight
percent from 1990 to 1997, while the chocolate candy category grew at a
compound annual rate of approximately four percent during the same period. The
Company believes that the more rapid growth in the non-chocolate candy category
is largely attributable to increased marketing efforts for non-chocolate candy
(which has historically been under-marketed as compared to chocolate candy) and
to continuing consumer concerns over the higher fat content associated with
chocolate. Overall, the market for candy is growing, with per capita
consumption of non-chocolate and chocolate candy in the United States
increasing from approximately 18 pounds in 1987 to approximately 24 pounds in
1996.
The retail marshmallow market grew at a compound annual rate of approximately
five percent from 1990 to 1997. The Company believes that this growth resulted
from extensive marketing and increased consumer use of marshmallow products as
an ingredient in such homemade snacks as marshmallow crispy treats. In the 52
weeks ended September 26, 1998, however, estimated sales in the retail
marshmallow industry declined approximately two percent over the equivalent
period ending in September 1997.
The fruit snack market (consisting of fruit rolls and fruit pieces) grew
approximately seven percent in 1997. The Company believes that this growth is
attributable to fruit snacks' image as a healthy and convenient snack, which
appeals to parents, and their flavor and colorful shapes and characters, which
appeal to children. In the 52 weeks ended September 26, 1998, the fruit snack
market grew approximately seven percent over the equivalent period ending in
September 1997.
The Company also competes in the non-chocolate candy category with its
general line candy and gummis. The gummi market, which includes products such
as Gummi Bears and Gummi Worms, grew approximately six percent in 1997. In the
52 weeks ended September 26, 1998, this market grew approximately eight percent
over the equivalent period ending in September 1997. Management attributes this
growth to the popularity of gummi products with children and new product
introductions.
COMPETITIVE STRENGTHS
Management believes that the following competitive strengths provide the
Company with a foundation to enhance growth and further strengthen its position
as an industry leader.
LEADING CONFECTIONS COMPANY. The Company is the fourth largest
confections company in the United States and is a leader in each of its
four product categories. Management believes that its leading market
position and size enable it to achieve extensive product distribution and
realize purchasing and production economies, as well as provide a strong
platform for new product introductions and line extensions.
BROAD ARRAY OF PRODUCTS. The Company offers an extensive range of
products, including branded, private label and ingredient items. This
enables our customers to satisfy many of their confections needs with a
single vendor. The Company's products represent a balance between long-
standing brands, such as Jet-Puffed marshmallows, and innovative
50
<PAGE>
products, such as Rugrats fruit snacks and Trolli gummis. These premium
brands are complemented by a broad array of products targeted to value-
conscious consumers. The Company's product offerings also enhance its
ability to develop special sales and marketing programs, such as seasonal
campaigns for Halloween and Easter.
EXTENSIVE SALES NETWORK AND TRADE PENETRATION. The Company has an
internal sales force of more than 50 representatives and a national network
of more than 25 independent brokers who sell products to more than 5,000
customers located throughout the United States. The Company's extensive
sales and distribution networks have contributed to its significant
penetration in all major domestic trade channels. The Company's presence in
these channels provides it with a significant opportunity to cross-sell
existing products and launch new products.
ADVANCED MANUFACTURING CAPABILITY AND PRODUCT INNOVATION. The Company's
advanced manufacturing capabilities, proprietary technology and research
and development efforts enable it to produce high-quality products and
provide a platform for product innovations. With its research and
development team, the Company has been a product development and
improvement innovator. For example, the Company was the first to add
vitamins to fruit snacks to increase their appeal as a healthy snack, and
Trolli's BriteCrawlers gummi was named the 1996 non-chocolate Product of
the Year by the Professional Candy Buyer trade magazine.
ACQUISITIONS AND BUSINESS INTEGRATION
ACQUISITIONS
The Company was formed in September 1995 to acquire Kraft's marshmallow and
caramel business. In August 1996, the Company acquired three companies,
including Kidd, a major competitor in the private label marshmallow market, and
Farley and Sathers, the country's second and third largest suppliers of general
line candy, respectively. Subsequently, the Company acquired Dae Julie in
January 1997 and Trolli in April 1997. Dae Julie and Trolli were both
manufacturers and marketers of gummi candy.
INTEGRATION OF THE ACQUIRED COMPANIES
We began to consolidate the acquired businesses in fiscal 1998. These
businesses consisted of 15 manufacturing and packaging facilities, more than 24
distribution facilities, two trucking fleets, six sales, marketing and customer
service organizations, more than 6,000 stock keeping units and disparate
information systems. Most of the integration initiatives discussed below have
not included Trolli. As part of the Trolli acquisition agreement, the Company
agreed to continue to operate Trolli as a separate subsidiary until December
31, 1998. Nevertheless, Trolli and Company operations are closely coordinated.
To date, the Company has completed a number of integration initiatives,
including closing production facilities, consolidating certain sales, marketing
and customer service functions, reducing the number of distribution facilities,
consolidating two separate trucking fleets, eliminating more than
51
<PAGE>
1,400 stock keeping units and consolidating certain management information
systems. More recently, at the end of fiscal 1998, we decided that we would
close our Melrose Park production facility in December 1998 and our Skokie
production facility in April 1999.
During fiscal 1998 the integration process proceeded more slowly and was more
difficult than we anticipated. These difficulties, as well as a significant
increase in trade spending, caused a substantial deterioration in our results
of operations commencing in fiscal 1998. During the year we took a number of
steps to address certain of our integration issues. We commenced a program at
that time designed to control trade spending more effectively and in May 1999
successfully completed a refinancing of much of the Company's indebtedness,
including the issuance of the initial notes.
Trade spending and integration problems continued, however, and are now
expected to continue into fiscal 1999. As a result, we recently took a number
of additional actions to address these issues and restructure our business. We
have hired a new Chief Executive Officer; a President, Chief Operating Officer
and Chief Financial Officer; and a number of other new key managers, including
a Vice President of Sales and a Vice President of Information Systems. We have
also implemented a number of additional procedures and controls to monitor
trade spending more effectively and are now planning to implement new trade
spending programs in the third quarter of fiscal 1999 for most of our products.
We have also pursued a new quality control and testing program for marshmallow
production, which is designed to reduce the level of lower quality
marshmallows. We have centralized certain of our sales forecasting, production
and capacity planning and inventory management functions in order to facilitate
managing the supply chain more efficiently.
By January 1998, the customer service, sales and distribution functions of
the Kraft, Kidd, Farley and Dae Julie operations and the Farley and Dae Julie
production operations were consolidated to a common management information
system. The Company continues to use a number of different management
information systems. The Company's long-term strategic objective is to be fully
integrated on an enterprise resource planning system. In the short term, the
Company is directing resources towards resolving the Year 2000 issue, which is
expected to be completed by the end of fiscal 1999. See "--Management
Information Systems."
Although we have implemented a number of initiatives to address certain of
our integration issues, it will be necessary to implement a number of
additional initiatives over the next several years in order to effectively
integrate the acquired companies. See "Risk Factors--Difficulty in Integrating
Acquired Businesses May Continue to Adversely Affect Our Operations".
BUSINESS STRATEGY
The Company's goal is to become the premier provider of high quality non-
chocolate confections. The Company intends to pursue this goal through the
implementation of the following business strategies:
COMPLETING INTEGRATION INITIATIVES. The Company will continue to focus
its efforts on completing the integration of the acquired companies.
Although the Company has accomplished a number of integration and
consolidation initiatives, the Company is in the process of completing a
number of other integration initiatives, including the implementation of
coordinated
52
<PAGE>
promotional programs for each of its product categories, quality control
procedures across all product areas, further systems consolidations,
additional supply chain procedures and functions and trade spending
controls. To implement these initiatives, the Company hired a new Chief
Executive Officer; President, Chief Operating Officer and Chief Financial
Officer; and a number of other new key managers including Vice President of
Sales, Vice President of Information Systems and a Vice President of Supply
Chain. Management believes that the completion of the integration process
will allow the Company to reduce costs and improve operating efficiencies.
IMPLEMENTING MARKETING INITIATIVES. The Company is in the process of
implementing a number of new marketing initiatives, which include the
following:
Increasing Brand Equity and Awareness. The Company intends to
reallocate its marketing expenditures to emphasize programs that
increase consumer awareness of its products and that build brand
equity. Such programs may include advertising, targeted couponing
programs and product tie-ins with other major manufacturers, such as
Nestle and Kellogg. The Company believes that a consumer-focused
strategy, which the acquired companies had not emphasized, will enhance
brand equity, increase sales across the Company's product lines and
support the introduction of new products.
Enhancing Trade Promotion Programs. The Company intends to focus on
trade promotions, such as in-store advertising and retail displays,
designed to improve trade spending efficiency. The acquired companies
had historically marketed their products primarily through aggressive
trade promotions that emphasized discounts from list prices to
retailers, and they generally lacked mechanisms to plan, control and
execute their trade spending programs effectively. Beginning in the
third quarter of fiscal 1999, the Company expects to implement new
trade spending programs for most of its products.
Launching Line Extensions and New Products. The Company intends to
leverage its existing brands, research, development and manufacturing
capabilities and extensive sales network to introduce new products and
extend its product lines. As part of these efforts, the Company has a
non-binding letter of intent with Nickelodeon to become the exclusive
licensee of Nickelodeon's Rugrats, Rugrats Movie and NickToons
characters for fruit snack products through 2001. The Company has also
introduced a number of new products in the last 12 months, including
five new fruit snack products, a line of flavored caramels, Trolli
Gummi Beans and Trolli Burger. The Company also has a number of new
fruit snack, marshmallow, gummi and candy products under development.
INCREASING TRADE CHANNEL PENETRATION. The Company plans to leverage its
existing trade channel penetration, broad product offerings and strong
brand names to cross-sell products and expand into additional trade
channels. The Company's marshmallow and fruit snack products each have an
ACV in the grocery channel in excess of 90%. Through its acquisition of
Sathers, the Company also acquired an extensive convenience store
distribution network. Specific opportunities being targeted by the Company
include:
. increasing the distribution of Trolli gummis (ACV of less than 50%)
and general line candy (ACV of less than 30%) in the grocery channel;
. further increasing distribution of the Company's products in
convenience stores and drugstores;
53
<PAGE>
. developing additional distribution channels, such as vending,
concessions and foodservice; and
. exploring international distribution opportunities.
CONTINUING TO REDUCE COSTS. Management believes that through continued
infrastructure investments, restructuring and cost reduction programs it
can increase its efficiencies and reduce its costs. These initiatives are
expected to include:
. completing the recently announced closure of two production
facilities and outsourcing production of certain related candy
products;
. further consolidating the distribution network by reducing the number
of distribution centers used by the Company; and
. continuing to automate production facilities and to invest in
advanced production equipment.
PRODUCTS AND MARKETS
The Company is the fourth largest confections company in the United States,
with a broad portfolio of marshmallow, fruit snack, branded gummi and general
line candy products. The Company's products are sold under proprietary brand
names and private labels principally through grocery, mass merchandiser,
drugstore, convenience store and club store channels. The marshmallow product
category consists of branded, private label and ingredient products. Branded
marshmallows and marshmallow creme are primarily sold under the Jet-Puffed
brand name. The Company markets fruit snacks under the Farley's brand name. The
Company markets gummis under the Trolli brand name and as part of its general
line candy offering. General line candy, which includes bulk candy, gummis,
caramels, nuts and snacks, is primarily sold under the Farley's and Sathers
names.
Marshmallows and Marshmallow Creme (19.2% of Fiscal 1998 Net Sales)
The Company is the largest manufacturer of marshmallow products in the United
States, with fiscal 1998 net sales of $147.0 million. The Company has the
number one market position in the branded and ingredient categories.
Jet-Puffed. The Company's Jet-Puffed brand is the leading marshmallow and
marshmallow creme brand. Jet-Puffed has a 79% share of the branded marshmallow
market and a 47% share of the total marshmallow market. Its products include
standard, miniature and fun-shaped marshmallows of varied colors and flavors,
and marshmallow creme. The Jet-Puffed brandname was developed in the 1950's.
The Company has implemented several initiatives to further strengthen brand
awareness, including television advertising, aggressive consumer couponing and
promotional tie-ins with leading consumer products manufacturers, including
Nestle and Kellogg. In addition, the Company is pursuing initiatives to
position Jet-Puffed as a snacking product, where management believes there is
opportunity for growth.
Private Label. The Company also manufactures private label marshmallow
products. Private label marshmallow products are sold primarily to grocery
stores and mass merchandisers. The Company has standardized its production
formulae and packaging and has implemented initiatives to eliminate lower
volume and less profitable customer accounts. For example, the Company has
increased the minimum production run for private label marshmallows and reduced
the number of
54
<PAGE>
private label marshmallow formulae from eight to one. By targeting high-volume
strategic accounts, management believes it can increase operating margins in
its private label business.
Ingredient. The Company's ingredient business includes the manufacture of
miniature marshmallows, dehydrated marshmallow bits and marshmallow creme, all
of which are sold to food processors. These products are primarily used in
popular children's cereals, hot beverage mixes (hot chocolate or cocoa), ice
cream and snacks (primarily granola bars). The Company supplies dehydrated
marshmallow bits to every major cereal manufacturer in the United States and
believes that it has a 98% share of the dehydrated marshmallow bits market.
Management believes that no other competitor currently has the technology to
manufacture the diverse marbit colors and shapes required by cereal
manufacturers. This advanced production and technical capability has made the
Company the leader in the ingredients category.
Fruit Snacks (17.0% of Fiscal 1998 Net Sales)
The Company is the second largest manufacturer and marketer of fruit snacks
in the United States, with a 22% market share. Fruit snacks, which are made in
various shapes, colors and flavors, are divided into two principal subgroups:
fruit snack shapes and fruit snack rolls. The Company primarily markets its
products through the grocery and mass merchandising channels.
The Company markets fruit snacks under the Farley's brand name. Some of the
Company's more popular products include Farley's Dinosaurs, Zoo Animals, The
Roll, Power Fruit and Troll, as well as licensed products such as Rugrats,
Creepy Crawlers, Street Sharks and Teenage Mutant Ninja Turtles. The Company
introduced two new fruit snack products, Rugrats Fruit Rolls and MegaMonster
Roll, in August 1997, three new fruit snack products, Shark Wave, Alien Fruit
Snacks and MVP Sports, in March 1998 and a new two-flavored fruitroll,
Sidewinder, in October 1998. The Company currently holds an exclusive license
to make Nickelodeon's Rugrats characters as fruit snacks through December 1998.
The Company has entered into a non-binding letter of intent with Nickelodeon to
be the exclusive licensee of the Rugrats, NickToons and Rugrats Movie
properties for the fruit snack market through December 2001. The Company has
sought to position its products with parents as healthy and convenient snacks
(including through the addition of vitamins), while enhancing their appeal to
children through the use of colorful shapes and popular children's characters.
Trolli Branded Gummi Products (9.2% of Fiscal 1998 Net Sales)
The Company's Trolli brand holds the number two position in the gummi market,
with a 15% market share. Trolli's market share has increased each year since
1994, when it held only three percent of the market and was ranked number seven
in the category. Trolli primarily markets its products through the mass
merchandiser, drugstore and grocery channels.
Trolli has established a reputation as an innovative manufacturer and
marketer of high quality gummis. Some products introduced by Trolli include
BriteCrawlers, Peachies, Apple O's, Trolli Squiggles, Super Bears, Gummi
Octopus, Strawberry Puffs and Gummi Beans. Trolli's BriteCrawlers product was
named the 1996 non-chocolate Product of the Year by the Professional Candy
Buyer, an
industry publication. In its 1997 acquisition of Trolli, the Company signed a
10-year product development agreement with Mederer GmbH, entitling Trolli to
sell under an exclusive license in the United States and other specified
countries any new Trolli products developed during the period.
55
<PAGE>
General Line Candy (53.2% of Fiscal 1998 Net Sales)
The Company is one of the two leading suppliers of general line candy in the
United States. The Company's general line candy products are primarily sold
under the Farley's and Sathers brand names, as well as under private labels.
The Company's product offerings in this category include more than 100
varieties of candy (primarily hard, jelly, gummi, panned and cremes), caramels,
nuts and snacks. The Company primarily markets its general line candy through
mass merchandisers and convenience stores. Sathers is the leading brand of
general line candy in the convenience store channel.
General line candy products are sold in a variety of weights and packages,
depending upon the product and distribution channel. Many of the Sathers brand
products are sold in two-for-$1 hanging bags, which are displayed on pegboards
in retail outlets. Farley's branded products are generally sold in larger two-
for-$3 hanging bags, "lay-down" bags (bags weighing one pound or more) and
plastic tubs. Private label products are sold in either bag format, as well as
in bulk. Except for seasonal varieties, such as candy corn, jelly beans and
conversation hearts, and certain other products that are sold on a product-by-
product basis, the Company generally markets its general line candy as a
complete portfolio.
The Company manufactures and markets caramel products for the retail market
under the Farley's brand name. The Company also produces a number of ingredient
caramel products, mainly for sale to food processors for use in candy, snacks
and as a dessert topping. Recently the Company launched a line of flavored
caramels, including caramel apple, cappuccino and fudge flavors.
The following table sets forth the principal categories of the Company's
general line candy and indicates representative products in each category.
<TABLE>
<CAPTION>
PRODUCT CATEGORY REPRESENTATIVE PRODUCTS
---------------- -----------------------
<C> <S>
Gummis(1)................ Bears, Worms, Dinosaurs, Peach Rings, Green Apple Rings
Jells.................... Spice Drops, Orange Slices, Fruit Slices, Spearmint Leaves
Cremes/Pans.............. Cremes: Candy Corn, Indian Corn, Pumpkins, Harvest Mix, Easter Mallowcreams and Heart Darts
Pans: Jelly Beans, Cinnamon Imperials, Marshmallow Eggs, French Burnt Peanuts, Boston Baked Beans,
Jawbreakers
Hard Candy............... Starlite Mints, Butterscotch Buttons, Lemon Drops, Cinnamon Discs, Butterscotch Discs, Butter
Toffee, Clearly Fruit
Chocolate................ Raisins, Peanut Clusters, Bridge Mix, Double Dipped Peanuts, Nonpareils, Malted Milk Balls
Nuts, Snacks & Naturals.. Yogurt Raisins, Sweet & Nutty Mix, Pineapple Wedges, Sunflower Seeds, California Mix, Really
Naturals
Caramels................. Branded, Ingredient
Kiddie Candy............. Combination of a variety of general line and rebagged candy
Other.................... Tang-a-roos, Sonic Boom bubble gum, Power Fruit
</TABLE>
- --------
(1) Gummis do not include Trolli brand gummis.
56
<PAGE>
MARKETING AND SALES
The Company markets its products through a mix of consumer promotions, trade
promotions and advertising. Consumer promotions include free-standing inserts,
other targeted coupons (such as Catalina Marketing coupons, which are generated
with consumers' sales receipts), product tie-ins with other major
manufacturers, such as Nestle and Kellogg, bonus bags, television marketing and
seasonal promotions. Trade promotions consist of temporary price reductions,
in-store advertising, coupons in retail flyers and retail displays. However,
Farley, Dae Julie and Kidd each historically relied heavily on trade promotions
with less emphasis on consumer promotions and advertising. The Company's
marketing strategy is to refocus its marketing efforts towards building brand
equity through consumer promotions and advertising rather than trade spending
and price discounting. In addition, the Company believes that it can implement
a more effective and efficient trade spending program by focusing on trade
performance that generates the greatest amount of consumer take-away. As part
of its new emphasis on consumer promotions, in the fourth quarter of calendar
1998, the Company launched a print advertising campaign for its Jet-Puffed
marshmallows. In addition, Trolli advertises its products in regional
television campaigns, and in November 1998, the Company began a television
campaign for its fruit snack product lines to coincide with the release of
Nickelodeon's Rugrats Movie.
The Company's sales organization consists of four groups:
. a retail broker network;
. a national accounts group;
. a distributor/national chain group; and
. an ingredients group.
The Company's retail broker network consists of more than 25 independent
brokers who are managed by the Company's internal sales force and present the
Company's products to a broad range of retailer accounts, primarily grocery
stores. The national account group consists of seven sales professionals who
maintain relationships with the corporate headquarters of key national accounts
such as Ahold (Stop & Shop, BI-LO), American Stores (Jewel, Lucky), Rite-Aid,
Kroger, Kmart, Sam's Clubs, Target, Wal-Mart, and Winn-Dixie. The
distributor/chain organization consists of 25 sales professionals who call
directly on distributors that supply convenience store chains. Ingredients
sales are managed through a separate direct sales force and broker network.
Trolli sells its products through its own sales organization, which consists of
a broker network managed by internal sales personnel.
In addition to marketing its existing product lines, the Company, through the
efforts of its research and development team, engages in ongoing research
activities to develop new products, improve the quality of existing products,
improve and modernize production processes and develop and implement new
technologies to enhance the quality and value of both current and proposed
product lines.
DISTRIBUTION
The Company currently distributes its marshmallow, fruit snack and general
line candy products in the United States through a number of distribution
centers. This distribution system uses a combination of common carrier
trucking, Company trucks and rail transport to deliver products to
57
<PAGE>
more than 5,000 customers. Trolli separately distributes its gummi products
through its own distribution network.
The Company has implemented several strategic initiatives designed to further
consolidate and enhance the cost-effectiveness of its distribution network. The
Company recently opened two new regional distribution centers in California and
Texas. These two centers are operated by a third-party service provider for the
Company and are strategically located to distribute certain of the Company's
marshmallow, fruit snack and general line candy products. The Company intends
to open additional regional distribution centers in order to consolidate
further its distribution centers. By consolidating its distribution centers,
the Company believes that it will be able to deliver products to its customers
on a more timely and cost-effective basis. The Company has also established a
"core carrier" trucking program to reduce its freight and distribution costs.
As a result of acquiring five different distribution systems, the Company
utilized more than 100 common carriers and more than 75 pooled distributors.
The Company's new core carrier program, which generally involves 25 common
carriers and 45 pooled distributors, should simplify the Company's operations
and should allow the Company to negotiate more favorable freight rates. See "--
Acquisitions and Business Integration."
CUSTOMERS
The Company's retail products are sold to grocery stores, mass merchandisers,
drugstores, convenience stores and club stores. The Company's ingredient
products are sold to a variety of major food company customers. Wal-Mart, Sam's
Clubs and McLane (affiliated entities) in the aggregate accounted for
approximately 17% of fiscal 1998 net sales. The Company's next largest customer
accounted for approximately three percent of fiscal 1998 net sales. The Company
has strong, long-standing relationships with many of its largest customers. As
is customary in the confections industry, the Company's retail products are
generally purchased by means of purchase orders. Continued consolidation in the
retail food industry is expected to result in an increasingly concentrated
customer base. See "Risk Factors--The Loss of Any of Our Major Customers Could
Adversely Affect Our Sales."
58
<PAGE>
PRODUCTION AND FACILITIES
Currently, the Company produces its products at 10 manufacturing facilities
and operates seven distribution centers, as set forth in the following table:
<TABLE>
<CAPTION>
FACILITY PRODUCTS PLANT SIZE (SQ. FT.) OWNED/LEASED
-------- -------- -------------------- ------------
<S> <C> <C> <C>
Kendallville, IN........... Marshmallows, 297,000 Owned
Marshmallow Creme,
Dehydrated
Marshmallow Bits,
Caramels
Henderson, NV.............. Marshmallows 115,000 Owned
Creston, IA................ Gummis 232,000 Owned
Des Plaines, IL............ Gummis, Jells 121,000 Leased
Melrose Park, IL(1)........ Hard Candy, Jells 142,000 Owned
Skokie, IL(1).............. Panned, Jells 68,000 Leased
31st St., Chicago, IL...... Fruit Snacks, Panned 276,000 Owned
Belmont Ave., Chicago, IL.. Cremes, Chocolate 121,000 Leased
New Orleans, LA............ Hard Candy 30,000 Owned (Land Lease)
Oklahoma City, OK.......... Cremes, Jells, Panned 160,000 Owned
Ligonier, IN............... Warehouse and 109,000 Owned
Distribution Center
Round Lake, MN............. Rebagging and 305,000 Owned
Distribution Center
Pittston, PA............... Rebagging and 259,000 Owned
Distribution Center
Chattanooga, TN............ Rebagging and 302,000 Owned
Distribution Center
43rd Street, Chicago, IL... Distribution Center 480,000 Leased
Fontana, CA................ Distribution Center 182,000 Leased(2)
Fort Worth, TX............. Distribution Center 161,000 Leased(2)
</TABLE>
- --------
(1) In fiscal 1998, the Company decided to close the Melrose Park and Skokie
manufacturing facilities in December 1998 and April 1999, respectively.
(2) These facilities are leased by third parties pursuant to warehouse
operating agreements.
To integrate the acquired companies, as well as to effect ongoing cost
savings, the Company has closed a number of facilities and has reallocated
products among its remaining facilities with the goal of manufacturing its
complete product line in its most efficient and cost-effective facilities. In
addition to production and distribution operations, the Company operates an
advanced research facility at Kendallville that is used in the development of
new products.
In addition to its manufacturing facilities and the distribution
center/rebagging facilities noted above, the Company operates temporary
warehouse facilities, sales offices and leased distribution centers in a number
of states. The Company's corporate headquarters and a management information
center are located in Lincolnshire, Illinois, and Trolli's headquarters are
located in Plantation,
59
<PAGE>
Florida. The Company leases most of its warehouse facilities and offices. In
connection with the rationalization of its manufacturing operations, the
Company is also integrating and rationalizing its distribution system,
including by consolidating its warehouse capacity. See "--Distribution."
RAW MATERIALS
The Company uses agricultural commodities, flavors, other raw materials and
packaging in the production of its products that are purchased from commodity
processors, importers, other food companies and packaging manufacturers. The
principal raw materials used in the Company's products are sugar, corn products
(dextrose, starch and corn syrup), gelatin and packaging. Although two of
Trolli's key ingredients are each available from only one domestic supplier,
alternative international sources are available. All of the other key raw
materials used by the Company are readily available from several sources. The
Company has not experienced difficulty in obtaining raw materials. In
accordance with standard industry practice, the Company obtains annual volume
and price commitments from its sugar suppliers for the twelve month period, or
"crop year," beginning each fall. Since January 1998, the Company has obtained
quarterly volume and price commitments from its corn product suppliers. The
Company does not otherwise hedge its raw material requirements. See "Risk
Factors--We May Not Be Able to Pass Through Increases in the Prices of Raw
Materials to Our Customers."
COMPETITION
The Company is the fourth largest confections company in the United States.
The four largest companies (Hershey, M&M/Mars, Nestle and the Company) account
for the majority of United States sales volume in chocolate and non-chocolate
candy. Smaller competitors include numerous national, regional and local
manufacturers of both branded and private label products. Among the Company's
significant competitors are General Mills and Brach's with respect to fruit
snacks, Brach's with respect to general line candy, Nabisco (Gummi Savers) and
Hershey (Amazin' Fruit) with respect to branded gummis and International Home
Foods (Campfire) with respect to marshmallows. In addition, the Company's
marshmallow products compete with private label products and the Company's
general line candy products compete with private label products as well as the
products of numerous regional "rebaggers." Competition in the Company's markets
is primarily based on establishing favorable brand recognition and loyalty;
developing products sought by consumers for their quality, convenience or
otherwise; implementing appropriate pricing; providing strong marketing support
and obtaining access to retail outlets and sufficient shelf space. Confections
products also compete with other snacking products such as cookies and salty
snacks. See "Risk Factors--The Confections Business is Very Competitive."
PATENTS AND TRADEMARKS
The Company owns a number of patents, licenses, trademarks and trade names.
Jet-Puffed,(R) Trolli,(R) Farley's,(R) Sathers,(R) Dae Julie,(R)
BriteCrawlers,(R) Gummi Bears,(TM) Gummi Beans,(TM) Trolli-Burger,(TM) Apple
O's,(R) Dinosaurs,(TM) Zoo Animals,(TM) Power Fruit(R), Peachies,(TM) Trolli
Squiggles,(R) Gummi Octopus,(R) Strawberry Puffs,(R) Sour BriteCrawlers,(TM)
Really Naturals,(R) The Roll,(R) Troll(R), Tang-a-roos,(R) MegaMonster
Roll,(TM) MVP Sports,(TM) Shark Wave(TM) and Sonic Boom(R) are trademarks of
our company. These trademarks and trade names are important in developing brand
recognition and building consumer loyalty. The Company holds patents relating
to ingredient products,
60
<PAGE>
formulations and production processes with respect to dehydrated marshmallow
bits and ingredient caramels. The Company also holds:
. licenses to market gummis under the Trolli brand name in certain
countries;
. a Product Development and License Agreement with Mederer GmbH that
expires in April 2007 and entitles the Company to obtain exclusive
licenses to market new Trolli products in the United States and certain
other countries; and
. licenses to manufacture and sell certain fruit snacks.
Creepy Crawlers,(R) Rugrats,(TM) Street Sharks,(TM) Teenage Mutant Ninja
Turtles(R) and Clearly Fruit(TM) are trademarks licensed to our company.
The Company has entered into a non-binding letter of intent to extend its
exclusive Rugrats license (which would otherwise expire in December 1998) and
to become the exclusive licensee of additional Nickelodeon characters for fruit
snacks through December 2001. Management is not aware of any fact that would
have an adverse effect on the use of any of its patents, licenses, trademarks
or trade names. See "--Certain Legal and Regulatory Matters" and "Risk
Factors--We May Not Be Able to Protect Adequately Our Trademarks and Other
Proprietary Rights."
EMPLOYEES
As of June 27, 1998, the Company employed approximately 4,800 full-time
employees. The number of employees can fluctuate throughout the year as a
result of the seasonality of the business. At its peak, the Company employs
approximately 5,200 workers, some of whom may be classified as temporary or
seasonal. Management considers its relations with its employees to be good.
Other than the employees at Trolli's Creston, Iowa facility, none of the
Company's current employees is employed pursuant to collective bargaining or
other union arrangements. At Creston, the contract with the Bakery,
Confectionery, and Tobacco Workers Union covers approximately 380 of the
approximately 460 employees employed there and expires on August 22, 2001. In
elections held in
October 1997 and May 1998, the workers at the Kendallville, Indiana plant
defeated the attempt of the United Food and Commercial Workers Union to
unionize that facility.
MANAGEMENT INFORMATION SYSTEMS
To facilitate the rapid communication of extensive information among its
corporate office, manufacturing facilities, distribution facilities and sales
force, the customer service, sales and distribution functions of the Kraft,
Kidd, Farley and Dae Julie operations and the Farley and Dae Julie production
operations were consolidated to the Company's existing management information
systems. However, the Company continues to use a number of different management
information systems. The Company's long-term strategic objective is to be fully
integrated on an enterprise resource planning system. In the short term, the
Company is directing resources towards resolving the Year 2000 issue which is
expected to be completed by the end of fiscal 1999. See "--Year 2000
Compliance."
CERTAIN LEGAL AND REGULATORY MATTERS
The Company is subject to extensive and increasingly stringent regulation by
a variety of federal, state and local agencies. Compliance with these laws and
regulations and future changes to
61
<PAGE>
them is material to the Company's business. Compliance with existing laws and
regulations is not expected to have a material adverse effect upon the earnings
or competitive position of the Company. The Company cannot predict the effect,
if any, of laws and regulations that may be enacted in the future or of changes
in the enforcement of existing laws and regulations that are subject to
extensive regulatory discretion.
Public Health. The Company is subject to the Food, Drug and Cosmetic Act and
regulations promulgated thereunder by the Food and Drug Administration. This
comprehensive regulatory program governs, among other things, the
manufacturing, composition and ingredients, labeling, packaging and safety of
food. In addition, the Nutrition Labeling and Education Act of 1990 prescribes
format and content of certain information required to appear on the labels of
food products. The Company is subject to regulation by certain other
governmental agencies, including the United States Department of Agriculture.
The operations and products of the Company are also subject to state and local
regulation through such measures as licensing of plants, enforcement by state
health agencies of various state standards and inspection of facilities.
Failure by the Company to comply with applicable laws and regulations could
subject the Company to civil remedies, including fines, injunctions, recalls or
seizures, as well as potential criminal sanctions, which could have a material
adverse effect on the Company. Management believes that the Company's
facilities and practices are sufficient to maintain compliance with applicable
governmental regulations, although there can be no assurances in this regard.
See "Risk Factors--Failure to Comply with the Laws and Regulations that Affect
Our Business Could Subject Us to Civil Penalties and Criminal Sanctions."
Federal Trade Commission. Advertising of the Company's products is subject to
regulation by the Federal Trade Commission pursuant to the Federal Trade
Commission Act and the regulations promulgated thereunder.
Employee Safety Regulations. The Company is subject to certain health and
safety regulations, including regulations issued pursuant to the Occupational
Safety and Health Act. These regulations require the Company to comply with
certain manufacturing, health and safety standards to protect its employees
from work-related illness and accidents.
Environmental. The Company is subject to various federal, state and local
laws and regulations related to the protection of the environment. Such laws
and regulations include those relating to emissions of air pollutants and
discharges of waste water, the remediation of contamination associated with
releases of hazardous substances and the disposal of waste material. The
Company believes it is in material compliance with environmental laws and
regulations and does not anticipate any material adverse effect on its earnings
or competitive position relating to environmental matters. However, it is
possible that future developments could lead to material costs of environmental
compliance by the Company.
Litigation. The Company is involved in routine litigation. Nabisco has filed
a claim in the United States District Court for the Southern District of New
York alleging, among other things, that Trolli infringed on Nabisco's trademark
for a round candy with a hole in the center represented by Life Savers and
Gummi Savers. Nabisco has requested unspecified damages and an injunction
prohibiting the Company from making certain round candies with a hole in the
center. The Company does not believe that this or any other pending or
threatened litigation would result in an outcome that would have a material
adverse effect on its results of operations or financial condition.
62
<PAGE>
INFORMATION REGARDING OUR MARKET AND INDUSTRY DATA
When determining our ranking among confections companies, we obtained sales
estimates from information in Wards Business Directory for 1997 and 1998, a
1996 interview in Confectioner Magazine, A.C. Nielsen data and the Company's
fiscal 1998 net sales. In determining the ranking, we did not include
manufacturers of chewing gum or breath mints or the non-confections business of
competitors.
Unless otherwise noted, all market share information presented is based on
A.C. Nielsen data (all U.S. outlets--mass merchandiser, drugstore and grocery--
combined) for the 52 weeks ended September 26, 1998. Market share information
for dehydrated marshmallow bits is based on management estimates.
Unless otherwise noted, all trade channel penetration data or ACV (All
Commodity Volume) presented is based on A.C. Nielsen data (total U.S. grocery)
for the 52 weeks ended September 26, 1998, with general line candy ACV based on
a weighted average of Sathers, Farley's and Dae Julie non-chocolate candy sales
for the period.
Market size, consumption and 1990-1997 growth data for chocolate and non-
chocolate candy are based on U.S. Department of Commerce data; 1998 growth-rate
data for gummis, fruit snacks, marshmallows and general line candy are based on
A.C. Nielsen data (all U.S. outlets combined) for the 52 weeks ended September
26, 1997 versus September 26, 1998.
Although we believe that the sources referred to above are reliable, we have
not independently verified the market and industry data presented in this
prospectus. Therefore, we cannot guarantee the accuracy and completeness of
this information.
63
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth the name, age and position of individuals who
serve as directors of the Company and Holdings and executive officers of the
Company, as indicated. Each director will hold office until the next annual
meeting of stockholders or until his successor has been elected and qualified
or until his earlier death, resignation or removal. Officers of the Company are
appointed by the Board of Directors and serve at the discretion of the Board.
<TABLE>
<CAPTION>
NAME AGE POSITIONS
- ---- --- ---------
<S> <C> <C>
Richard R. Harsh- 63 Chief Executive Officer and Director of Holdings
man...............
Steven F. Kaplan... 42 President, Chief Operating Officer, and Chief Financial
Officer of the Company and Holdings
Jose Minski........ 40 Executive Vice President and Chief Operating Officer of
Trolli and Director of Holdings
Dennis J. Nemeth... 48 Senior Vice President of Operations of the Company
H. Theodore 54 Vice President of Quality of the Company
Bertram...........
Dan Boekelheide.... 45 Vice President of Supply Chain of the Company
Sami El-Saden...... 36 Vice President--Business Manager of the Company
Brooks B. 33 Vice President of Administration and General Counsel of
Gruemmer.......... the Company and Vice President of Holdings
Paul Hervey........ 49 Vice President of Sales of the Company
James Jeffries..... 54 Vice President of Ingredient Sales, Marketing and
Technology of the Company
Pat McEvoy......... 35 Vice President of Engineering of the Company
John A. Niemzyk.... 47 Vice President of Information Technology and Chief
Information Officer of the Company
Richard W. Boyce... 43 Director of Holdings
James Andress...... 59 Director of Holdings
William H. Ellis... 74 Director of Holdings
William S. Price 42 Director of the Company and Holdings
III...............
Alexander M. 39 Director of the Company and Holdings
Seaver............
Jeffrey A. Shaw.... 33 Director of Holdings
</TABLE>
- --------
RICHARD R. HARSHMAN, CHIEF EXECUTIVE OFFICER OF THE COMPANY AND HOLDINGS AND
DIRECTOR OF HOLDINGS. Mr. Harshman joined the Company and Holdings in October
1998 as Chief Executive Officer. Prior to joining the Company, Mr. Harshman had
been President of Storck USA and Storck North America, which he founded in
1979. From 1975 to 1979 Mr. Harshman founded and served as President of Ragold,
Inc., the United States subsidiary of a German confections company. From 1970
to 1975 Mr. Harshman was with Tootsie Roll, Inc., most recently as its Vice
President of Sales and Marketing.
STEVEN F. KAPLAN, PRESIDENT, CHIEF OPERATING OFFICER AND CHIEF FINANCIAL
OFFICER OF THE COMPANY AND HOLDINGS. Mr. Kaplan joined the Company and Holdings
in May 1998 as Executive Vice President and Chief Financial Officer. In June,
Mr. Kaplan assumed the additional
64
<PAGE>
responsibilities of Chief Operating Officer and in October was promoted to the
position of President. From 1996 to 1997, Mr. Kaplan was Executive Vice
President and Chief Financial Officer of the Coleman Company, a $1.2 billion
international manufacturer of camping, outdoor recreation and hardware
equipment. From 1993 to 1996, Mr. Kaplan was a financial and strategy
consultant to venture capital and buy-out firms. During 1994 Mr. Kaplan served
as Chief Financial Officer of Marcam Corporation, a $200 million software
developer. Prior to that, Mr. Kaplan served as Executive Vice President and
Chief Financial Officer of AM International, President of Harris Graphics and a
Partner of Boston Consulting Group.
JOSE MINSKI, EXECUTIVE VICE PRESIDENT AND CHIEF OPERATING OFFICER OF TROLLI
AND DIRECTOR OF HOLDINGS. Mr. Minski, together with Herbert Mederer, opened
Trolli's U.S. manufacturing facilities in 1985. Prior to being an active
officer of Trolli, Mr. Minski established a vitamin manufacturing company in
1986, of which he remains a member of the Board of Directors. In addition, Mr.
Minski is a member of the Boards of Directors of Procaps S.A., a pharmaceutical
company, Gelatinas de Colombia, a gelatin company and Curtembres Bufalo, a
leather processing company.
DENNIS J. NEMETH, SENIOR VICE PRESIDENT OF OPERATIONS OF THE COMPANY. Mr.
Nemeth joined the Company in August 1996 as Senior Vice President of
Operations. From 1973 to 1996 Mr. Nemeth worked for Kraft as Vice President in
operations for various Kraft divisions. Mr. Nemeth's functional
responsibilities ranged from procurement to customer service and included
managing multi-location manufacturing and distribution networks.
H. THEODORE BERTRAM, VICE PRESIDENT OF QUALITY OF THE COMPANY. Mr. Bertram
joined the Company in July 1997 as Vice President of Quality. Prior to joining
the Company, Mr. Bertram worked for W.R. Grace for 15 years most recently as
Vice President of Operations for the Grace Cocoa Division. Other positions held
with Grace were Vice President of Technical Services and Vice President of
Operations, Chocolate Americas. Before working at Grace, Mr. Bertram was the
Vice President of Manufacturing and Technical Services for Ward Johnston, a
confectionery manufacturer.
DAN BOEKELHEIDE, VICE PRESIDENT OF SUPPLY CHAIN OF THE COMPANY. Mr.
Boekelheide joined the Company in November 1997 as Vice President of Supply
Chain. Prior to joining the Company, he worked for Quaker Oats for 16 years,
most recently as Director, Customer Services and earlier as Integrated
Logistics Manager for various divisions.
SAMI EL-SADEN, VICE PRESIDENT--BUSINESS MANAGER OF THE COMPANY. Mr. El-Saden
joined the Company in August 1997 as Vice President of Strategy and Business
Development and became Vice President of Trade Marketing in 1998. From 1991 to
1997, Mr. El-Saden worked at Nestle USA Inc. in the Culinary and Beverage
Groups, most recently as Director of Marketing. Mr. El-Saden also spent one
year in Nestle's Corporate Strategic Planning and Development Group, where he
was responsible for acquisitions, divestitures, financial planning, capital
budgeting and licensing. From 1988 to 1991, Mr. El-Saden was a corporate
finance associate at Bankers Trust Co.
BROOKS B. GRUEMMER, VICE PRESIDENT OF ADMINISTRATION AND GENERAL COUNSEL OF
THE COMPANY AND VICE PRESIDENT OF HOLDINGS. Mr. Gruemmer joined the Company in
December 1996 as its Vice President and General Counsel. In July 1998 Mr.
Gruemmer was promoted to Vice
65
<PAGE>
President of Administration and assumed responsibility for the human resources
function. Prior to joining the Company, Mr. Gruemmer was a partner at the law
firm of McDermott, Will & Emery, where he had practiced corporate, finance and
securities law since 1990.
PAUL HERVEY, VICE PRESIDENT OF SALES OF THE COMPANY. Mr. Hervey joined the
Company in May 1998 as Vice President of Sales. Prior to joining the Company,
Mr. Hervey worked at Nestle USA for nine years, most recently as Divisional
Vice President of Sales for Nestle's Chocolate and Confection Division. Prior
to joining Nestle, Mr. Hervey had spent five years with Coke Foods and five
years at Procter & Gamble where he held a variety of sales positions.
JAMES JEFFRIES, VICE PRESIDENT OF INGREDIENT SALES, MARKETING AND TECHNOLOGY
OF THE COMPANY. Mr. Jeffries joined the Company in September 1995 as Vice
President of Ingredient Sales, Marketing and Technology. Prior to joining the
Company, Mr. Jeffries spent more than 23 years with Kraft, in the industrial
sector. He held positions in sales management, operations and marketing
management with respect to various products, including, in his last 16 years
there, confections.
PAT MCEVOY, VICE PRESIDENT OF ENGINEERING OF THE COMPANY. Mr. McEvoy joined
the Company in September 1995 as a plant manager and was promoted to Vice
President of Engineering in December 1996. Prior to joining the Company, Mr.
McEvoy spent nine years at Philip Morris Companies, Inc. working with Kraft and
General Foods. During the three years prior to joining the Company, Mr. McEvoy
was employed at Kraft's Kendallville, Indiana confections facility as
Engineering and Maintenance Manager and Business Unit Manager. Before that time
he worked at the Kraft Corporate Engineering and General Foods plant in the
positions of Process Engineering and Operations Consultant, Manufacturing
Engineering Manager and Project Manager.
JOHN A. NIEMZYK, VICE PRESIDENT OF INFORMATION TECHNOLOGY AND CHIEF
INFORMATION OFFICER OF THE COMPANY. Mr. Niemzyk joined the Company in July 1998
as Vice President of Information Technology and Chief Information Officer.
Prior to joining the Company, Mr. Niemzyk spent six years at Norand
Corporation, first as Chief Information Officer, and then as Vice President of
Operations, Quality and Information Technology. From 1988 to 1991, Mr. Niemzyk
was employed by the Garrett Automotive Group of Allied-Signal, Inc. as Director
of Information Systems and Services. From 1983 to 1988, Mr. Niemzyk held
information systems and materials management positions at RTE Corporation.
Before that time, he was employed by Deloitte & Touche, LLP and American Motors
Corporation.
RICHARD W. BOYCE, DIRECTOR OF HOLDINGS. Mr. Boyce has been a Director of
Holdings since September 1995. Mr. Boyce is President of CAF, Inc., a
consulting firm that advises various companies controlled by TPG. Prior to
founding CAF, Inc. in 1997, he served as Senior Vice President of Operations
for Pepsi-Cola North America ("PCNA") from 1996 to 1997 and Chief Financial
Officer of PCNA from 1994 to 1996. From 1992 to 1994, Mr. Boyce served as
Senior Vice President-Strategic Planning for PepsiCo. Prior to joining PepsiCo,
Mr. Boyce was a director at the management consulting firm of Bain & Company,
where he was employed from 1980 to 1992. Mr. Boyce also serves on the Boards of
Directors of J. Crew Group, Inc., Del Monte Foods Company, and Del Monte
Corporation.
66
<PAGE>
JAMES ANDRESS, DIRECTOR OF HOLDINGS. Mr. Andress has been a Director of
Holdings since July 1996. Mr. Andress has served as the Chief Executive Officer
and a director of Warner Chilcott, plc. since November 1996. From 1989 to 1995,
he was President and Co-Chief Executive Officer of Information Resources, Inc.,
a publicly traded company, which is the largest provider of scanner-based
point-of-sale movement and promotion data for the consumer packaged goods
industry in the United States. Mr. Andress also serves on the Boards of
Directors of Allstate Insurance Company, Information Resources, Inc., Xoma
Corporation, Inc., The Liposome Company, Inc., NeoRx, Inc., Sepracor, Inc. and
Optioncare, Inc.
WILLIAM H. ELLIS, DIRECTOR OF HOLDINGS. Mr. Ellis has been a Director of
Holdings since September 1996. Prior to that time Mr. Ellis was the majority
stockholder and president of Farley, which he acquired in 1974.
WILLIAM S. PRICE III, DIRECTOR OF THE COMPANY AND HOLDINGS. Mr. Price has
been a Director of Holdings and the Company since 1995. From 1995 to March
1998, Mr. Price served as Chairman of the Board of Holdings. Mr. Price was a
founding partner of TPG in 1992. Prior to forming TPG, he was Vice President of
Strategic Planning and Business Development for G.E. Capital and from 1985 to
1991 he was employed by the management consulting firm of Bain & Company, where
he was a partner and co-head of the Financial Services Practice. Mr. Price also
serves on the Boards of Directors of Belden & Blake Corporation, Beringer Wine
Estates, Continental Airlines, Inc., Denbury Resource, Inc., Del Monte
Corporation, Del Monte Foods Company, Vivra Specialty Products, Inc. and Zilog,
Inc.
ALEXANDER M. SEAVER, DIRECTOR OF THE COMPANY AND HOLDINGS. Mr. Seaver has
been a Director of Holdings and the Company since September 1995. Mr. Seaver is
a Director and founder of Seaver Kent & Company, LLC, a private equity firm
that specializes in private, control investments in middle-market companies.
Prior to forming Seaver Kent & Company, LLC in October 1996, Mr. Seaver was a
general partner of InterWest for eight years, where he focused on non-
technology acquisitions, recapitalizations and late-stage venture capital
investments. Mr. Seaver remains a limited partner of InterWest. Mr. Seaver has
served on the Boards of Directors of a variety of companies, including
Bojangles' Restaurants, Inc., Cafe Valley Inc., Diamond Brands, Inc., Heidi's
Fine Desserts Inc., Cucina Holdings Inc., Pace Enterprises, and Pacific Grain
Products.
JEFFREY A. SHAW, DIRECTOR OF HOLDINGS. Mr. Shaw has been a Director of
Holdings since 1995. Mr. Shaw has been an executive of TPG since 1993. Prior to
joining TPG, Mr. Shaw was a principal of Acadia Partners, L.P., an investment
partnership, for three years. Mr. Shaw serves as a director of Del Monte Foods
Company, Del Monte Corporation, Ryanair PLC, Ducati Motors, S.p.A. and Ducati
North America, Inc.
67
<PAGE>
EMPLOYMENT AGREEMENTS AND OTHER COMPENSATION ARRANGEMENTS
The following table sets forth compensation paid by the Company to the
individual serving as Chief Executive Officer and to each of the four most
highly compensated executive officers of the Company during fiscal 1998 (the
"Named Executive Officers").
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
------------
SECURITIES ALL OTHER
SALARY BONUS OTHER ANNUAL UNDERLYING COMPENSATION(1)
NAME AND POSITION ($) ($) COMPENSATION OPTIONS ($)
- ----------------- -------- ------- ------------ ------------ ---------------
<S> <C> <C> <C> <C> <C>
Dennis J. Nemeth,....... $199,615 $20,000 -- 1,000 $ 13,557
Senior Vice President of
Operations
Alfred Multari,......... 180,000 18,000 -- -- 149,153
Vice President of
Marketing(2)
Jose Minski,............ 256,250 0 -- -- 5,125
Executive Vice President
and Chief Operating
Officer of Trolli
Al J. Bono,............. 384,327 0 -- -- 51,308
Chief Executive
Officer(2)
William S. Bradfield,... 199,903 0 -- -- 13,199
Senior Vice President &
Sathers
Divisional President(2)
</TABLE>
- --------
(1) Represents amounts contributed to the Company's Nonqualified Deferred
Compensation Plan. In the case of Messrs. Multari and Bono, these amounts
also include moving expenses of $137,607 and $24,654, respectively.
(2) Messrs. Multari, Bono and Bradfield terminated employment with the Company
on November 23, 1998, July 16, 1998 and July 3, 1998, respectively. Richard
Boyce served as interim Chief Executive Officer from July 1998 to October
1998. Since October 1998, Richard Harshman has been the new Chief Executive
Officer.
Directors who are not officers or employees of the Company, or of TPG,
InterWest or their affiliated partnerships, receive director's fees of $10,000
a year. All directors receive reimbursement of expenses.
Stock Option Plan. The Favorite Brands International Holding Corp. Stock
Option Plan (the "Option Plan"), as amended, provides to officers, directors
and executives, managerial or professional employees or consultants of Holdings
and its subsidiaries and other affiliated companies, including the Company, an
equity-based incentive intended to maintain and enhance the performance and
profitability of Holdings and the Company through grants of incentive stock
options and non-qualified stock options. The Option Plan provides for the grant
of both "incentive stock options" as defined in Section 422 of the Internal
Revenue Code and non-qualified stock options. As of any date, the aggregate
number of shares of common stock as to which options may be granted under the
Option Plan is 400,000. Options granted under the Option Plan become
exercisable based on various schedules provided in each individual's option
grant agreement; in addition, all options become 100% exercisable upon a
"Liquidity Event," defined as a merger or a stock sale after which the holders
of Holdings common stock prior to the event hold less than 50% of the
outstanding voting
68
<PAGE>
stock. The options terminate and expire immediately if the grantee is
terminated for "cause" or resigns without "good reason" (each as defined). If
the grantee is terminated without cause or resigns for good reason, the non-
vested portion of the grantee's option terminates but the vested portion
generally may be exercised until the earlier of:
. 90 days after termination of employment,
. the date on which the option terminates under the agreement, or
. the effectiveness of a Liquidity Event that occurs after the grantee is
terminated.
Stock Options. The following tables summarize stock option grants and
exercises during fiscal 1998 to or by the Named Executive Officers and the
value of options granted during fiscal 1998 and held by such persons at the end
of fiscal 1998.
OPTION GRANTS IN THE LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES
OF STOCK
PRICE APPRECIATION
INDIVIDUAL GRANTS FOR OPTION TERM
----------------------------------------------- -----------------------
PERCENT OF
NUMBER OF TOTAL
SECURITIES OPTIONS
UNDERLYING GRANTED TO EXERCISE OR
OPTION EMPLOYEES IN BASE PRICE EXPIRATION
NAME AND POSITION GRANTED (#) FISCAL YEAR ($/SH) DATE 5% ($) 10% ($)
(A) (B) (C) (D) (E) (F) (G)
------------------ ----------- ------------ ----------- ---------- --------- ------------
<S> <C> <C> <C> <C> <C> <C>
Dennis J. Nemeth, ...... 1,000 2% $105 7/30/07 $ 0 $ 25,000
Senior Vice President
of Operations
Alfred Multari,......... -- -- -- -- -- --
Vice President of
Marketing
Jose Minski,............ -- -- -- -- -- --
Executive Vice
President and Chief
Operating Officer of
Trolli
Al J. Bono, ............ -- -- -- -- -- --
Chief Executive Officer
William S. Bradfield, .. -- -- -- -- -- --
Senior Vice President &
Sathers Divisional
President
</TABLE>
The following table sets forth information regarding grants of options to
purchase stock of Holdings to the Named Executive Officers during fiscal 1998.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END VALUES
The following table sets forth on an aggregated basis, certain information
with respect to the value of unexercised options held by the Named Executive
Officers at the end of fiscal 1998. No options were exercised by the Named
Executive Officers in fiscal 1998.
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES VALUE OF
UNDERLYING UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS OPTIONS
AT FISCAL AT FISCAL
YEAR-END (#) YEAR-END ($)
------------- -------------
EXERCISABLE/ EXERCISABLE/
NAME AND POSITION UNEXERCISABLE UNEXERCISABLE
(A) (D) (E)
----------------- ------------- -------------
<S> <C> <C>
Dennis J. Nemeth, ................................. 2,396/3,604 0/0
Senior Vice President of Operations
Alfred Multari,.................................... 1,500/4,500 0/0
Vice President of Marketing
Jose Minski,....................................... 0/0 0/0
Executive Vice President and Chief Operating
Officer of Trolli
Al J. Bono, ....................................... 37,898/26,987 0/0
Chief Executive Officer
William S. Bradfield, ............................. 2,250/3,750 0/0
Senior Vice President & Sathers Divisional
President
</TABLE>
69
<PAGE>
Deferred Compensation Plan. The Company maintains the Favorite Brands
International Non-Qualified Deferred Compensation Plan. The plan permits
certain key employees determined by the Board of Directors (including the Named
Executive Officers) to defer up to 20% of their annual compensation into the
plan. With respect to each key employee who defers a portion of his annual
compensation under the plan, the Company contributes a matching contribution
equal to 50% of the first 6% of such employee's compensation contributed to the
plan for a maximum Company matching contribution of 3% of such employee's
annual compensation. The matching contribution is not subject to any vesting
requirements. In addition, the Company in its sole discretion may contribute an
additional amount to each employee's account. The aggregate amount of each
employee's account under the plan represents an asset and liability of the
Company and is reflected in the financial statements of the Company.
Employment Arrangements. The Company has a letter agreement with Mr. Nemeth
that describes his employment terms. The letter provides that Mr. Nemeth will
be entitled to participate in the Company's executive bonus plan and provides
certain customary fringe benefits. Mr. Nemeth's letter also provides for six
months' severance pay in the event his employment is terminated. In addition,
Mr. Nemeth has entered into a change of control agreement which provides that
upon a Change of Control (as defined) the Company will pay Mr. Nemeth a bonus
equal to his base salary. If, after a Change of Control, Mr. Nemeth is employed
for an additional year by the Company or its successor or if during this year
he is terminated "without cause" or resigns for "good reason," he will receive
an additional bonus equal to his base salary. The amount of both of these
bonuses will be increased by the amount of Mr. Nemeth's annual performance
bonus if certain internal rates of returns are earned by the stockholders of
Holding in connection with the Change of Control. See "Certain Relationships
and Related Transactions."
The Company has an Employment Agreement with Mr. Minski that expires on
December 31, 1998. The Agreement provides for a base salary of $262,500 in
calendar year 1998 and other fringe benefits. Mr. Minski has indicated to the
Company that he will not continue his employment with us after 1998. Mr. Minski
executed an agreement with the Company not to compete, which prohibits him from
developing, marketing, manufacturing or selling gummi products in the United
States, Mexico or Canada until April 2001.
70
<PAGE>
PRINCIPAL STOCKHOLDERS
All of the issued and outstanding voting securities of the Company are
beneficially owned by Holdings. Holdings has four classes of capital stock
authorized and outstanding:
. Series A common stock (the "Common Stock"), which has full voting rights;
(ii) Series B Common Stock, which has no voting rights;
. Series B Common Stock, which has no voting rights;
. Series A Cumulative Preferred Stock ("Series A Preferred Stock"), which
votes with the Common Stock in all matters and has certain limited
additional voting rights in the event of a default; and
. Series B Cumulative Preferred Stock ("Series B Preferred Stock"), which
has no voting rights except for certain voting rights in the event of a
default.
The following table sets forth as of October 30, 1998 certain information
regarding the beneficial ownership of Common Stock and Series A Preferred
Stock, as determined in accordance with Rule 13d-3 under the Securities
Exchange Act of 1934, as amended, with respect to:
. each person known by the Company to be the beneficial owner of more than
5% of any class of Holdings' voting securities,
. each of the directors and certain executive officers of the Company, and
. all directors and executive officers, as a group.
Except as otherwise noted, the persons named in the table have sole voting
and investment power with respect to all shares shown as beneficially owned by
them.
<TABLE>
<CAPTION>
COMMON STOCK SERIES A PREFERRED STOCK
------------------------------- ----------------------------
NAME AND ADDRESS OF NUMBER OF NUMBER OF
BENEFICIAL OWNER SHARES(1)(2) PERCENTAGE(1) SHARES PERCENTAGE
------------------- ------------ ------------- ------------- ------------
<S> <C> <C> <C> <C>
TPG Partners, L.P. ..... 1,441,704(2)(4) 61.7% -- --
201 Main Street, Suite
2420
Fort Worth, TX 76102
TPG Parallel I L.P. .... 120,821(4) 5.4% -- --
201 Main Street, Suite
2420
Fort Worth, TX 76102
InterWest Partners V, 285,235(5) 12.7% -- --
L.P....................
3000 Sand Hill Road
Building 3, Suite 255
Menlo Park, CA 94025
InterWest Investors V, 1,872(5) * -- --
L.P....................
3000 Sand Hill Road
Building 3, Suite 255
Menlo Park, CA 94025
Nassau Capital.......... 161,891(2) 7.1% 99,460 99.5%
22 Chambers Street
Princeton, NJ 08542
NAS Partners I, 1,114(2) * 540 --
L.L.C. ................
22 Chambers Street
Princeton, N.J. 08542
William S. Price III.... -- (4) -- -- --
Alexander M. Seaver..... 19,958(3)(5) * -- --
William H. Ellis........ 321,245 14.3% -- --
Dennis J. Nemeth........ 3,271(3) * -- --
Alfred Multari.......... 2,375(3) * -- --
Jose Minski............. -- -- -- --
Al J. Bono.............. 47,360(3) * -- --
William S. Bradfield.... -- * -- --
All directors and
executives officers as
a group (18 persons)... 1,752,016(6) 71.9%(6) --
</TABLE>
71
<PAGE>
- --------
* Less than 1% of the total voting power of the outstanding shares of Common
Stock.
(1) Calculated excluding all shares issuable pursuant to options or warrants
of Holdings except, as to each person, the shares issuable to such person
pursuant to options or warrants immediately exercisable or exercisable
within 60 days from April 15, 1998.
(2) Includes shares issuable on exercise of warrants as set forth below:
<TABLE>
<S> <C>
TPG Partners, L.P................... 92,493
TPG Parallel I, L.P................. 1,488
Nassau Capital...................... 46,553
NAS Partners I, L.L.C............... 254
</TABLE>
(3) Includes shares issuable on exercise of options as set forth below:
<TABLE>
<S> <C>
Al J. Bono.......................... 47,360
Alexander M. Seaver................. 19,958
Dennis J. Nemeth.................... 3,271
Alfred Multari...................... 2,375
</TABLE>
(4) TPG Partners, L.P. and TPG Parallel I, L.P. are entities affiliated with
William S. Price III. Mr. Price disclaims beneficial ownership of all
shares owned by such entities.
(5) InterWest Partners V, L.P. and InterWest Investors V, L.P. are entities
affiliated with Alexander M. Seaver. Mr. Seaver disclaims beneficial
ownership of all shares owned by such entities.
(6) Includes all shares held by entities affiliated with a director as
described in Notes (4) and (5) above and all shares issuable to such
entities on exercise of options and warrants.
TEXAS PACIFIC GROUP
TPG was founded by David Bonderman, James G. Coulter and William S. Price
III in 1993 to pursue public and private investment opportunities through a
variety of methods, including leveraged buyouts, joint ventures,
restructurings, bankruptcies and strategic public securities investments. The
principals of TPG operate TPG Partners, L.P. and TPG Partners II, L.P., both
Delaware limited partnerships, with aggregate committed capital of more than
$3.2 billion.
Prior to the formation of TPG, certain of its principals oversaw the
successful investment of more than $1 billion of equity capital from 1982 to
1992 on behalf of Keystone, Inc. (formerly the Robert M. Bass Group),
including in such transactions as the acquisition of American Savings Bank,
F.A., Wometco Cable, National Reinsurance Corp. and Bell & Howell. In
addition, TPG's principals led the $9 billion reorganization of Continental
Airlines in 1993. In addition to Favorite Brands International, TPG's
portfolio companies include America West Airlines, Belden & Blake, Beringer
Wine Estates, Del Monte Foods Company, Denbury Resources, Ducati Motor,
GlobeSpan Semiconductor, Genesis ElderCare, GT Com, J. Crew, Paradyne
Corporation, Virgin Entertainment, Vivra Specialty Products and Zilog.
The acquisition of the Company in September 1995 was TPG's first major
investment in the food and beverage industry. In April 1997, TPG acquired also
Del Monte Foods Company. In January 1996, TPG acquired from Nestle Holdings,
Inc. Beringer Wine Estates, which included Meridian Vineyards, Napa Ridge and
Chateau Soverain. Beringer Wine Estates Holdings, Inc. subsequently acquired
Chateau St. Jean and Stags' Leap Winery, giving Beringer one of the nation's
largest portfolios of premium wineries. Beringer completed an initial public
offering in October 1997.
72
<PAGE>
INTERWEST/SEAVER KENT & COMPANY, LLC
InterWest is one of the leading venture capital partnerships in the United
States. InterWest's food industry investments have included food processing
companies, such as Escalon Packers (acquired by H.J. Heinz Co.), Pacific Grain
Products and Heidi's Fine Desserts, Inc., and restaurants such as Il Fornaio,
Bojangles' Restaurants, Inc., Java City and La Salsa.
Seaver Kent & Company, LLC was founded in October 1996 by Alexander M. Seaver
and Bradley R. Kent, both of whom were formerly general partners of InterWest.
Seaver Kent specializes in private, control investments in middle-market
companies. The principals of Seaver Kent have successfully partnered with
management to build businesses through both internal growth and strategic
acquisitions, and in particular have extensive experience investing in consumer
and household products companies. In addition to the Company, portfolio
companies in which funds managed by the principals of Seaver Kent have made
investments include AMX Corporation, ArtcoBell Holding, Bojangles' Restaurants,
Inc., Cafe Valley, Inc., Diamond Brands, Inc., Heidi's Fine Desserts, Inc. and
MidWest Folding Products.
STOCKHOLDERS AGREEMENTS
Holdings entered into:
. an agreement dated September 25, 1995 (as amended August 28, 1996, the
"Stockholders Agreement") with TPG Partners, L.P. and TPG Parallel I,
L.P. (together, "TPG Partners"), InterWest Partners V, L.P. and InterWest
Investors V (together, "InterWest Partners"), Nassau Capital Partners
L.P. and NAS Partners I L.L.C. (together, "Nassau") and Al J. Bono
(collectively, the "Original Stockholders"), and Stephen I. Horowitz and
Richard Boyce;
. an agreement dated August 29, 1996 (the "New Equity Agreement") with the
Original Stockholders, New York Life Insurance Company ("NY Life") and
Wells Fargo & Company ("Wells Fargo"); and
. an agreement dated August 31, 1996 (the "Farley Stockholders Agreement")
with the Original Stockholders and William H. Ellis and Gary A. Ricco
individually and as trustees of certain trusts.
Taken together, these agreements provide for certain rights and obligations
with respect to constitution of the Holdings Board of Directors and the
issuance, voting and transfer of shares of Holdings Common Stock (as defined in
the respective agreements, the "Shares").
The Stockholders Agreement provides for a nine-person Board of Directors,
consisting of:
. five members designated by TPG Partners (two of whom are not Affiliates
(as defined) of TPG Partners and are reasonably acceptable to InterWest
Partners);
. two members designated by InterWest Partners (one of whom is not an
Affiliate of InterWest Partners and is reasonably acceptable to TPG
Partners); and
. two individuals jointly designated by TPG Partners and InterWest
Partners.
The number of Board designees for TPG Partners and InterWest Partners will
decrease as their Shares decrease. In addition, the New Equity Agreement
provides that so long as NY Life and Wells Fargo continue to hold a specified
amount of shares, they will be entitled to designate an observer to attend
board meetings (which individual will be a NY Life employee if Wells Fargo is a
lender to Holdings).
73
<PAGE>
The Stockholders Agreement provides that the Board of Directors will not
take, approve or ratify any of the following actions except by at least a two-
thirds vote of the entire Board:
1. merger, conveyance, transfer, consolidation, amalgamation,
recapitalization or other form of business combination;
2. sale, lease or other disposition of 50% or more of Holdings'
consolidated assets;
3. engagement in any transactions, or amendment of any existing
transactions, with TPG Partners, InterWest Partners or their respective
Affiliates or with officers, directors or members of management of
Holdings except on arm's length terms;
4. amendment, modification or restatement of Holdings' charter or bylaws;
5. filing of a registration statement under the Securities Act except as
contemplated in the agreement;
6. institution of proceedings in bankruptcy, liquidation or dissolution of
Holdings;
7. declaration or payment of dividend or other payment or distribution on
account of the Shares; or
8. issuance of or agreement to issue shares of capital stock of Holdings,
or securities convertible into or exchangeable for, or any option,
warrant or other subscription purchase right with respect to, capital
stock of Holdings.
The New Equity Agreement provides that the Board of Directors will not take
any of the following actions except with the consent of the holder of a
majority of the shares of the Series B Preferred Stock owned by NY Life (and,
as to 2 below, Wells Fargo) so long as NY Life (and as to 2 below, NY Life and
Wells Fargo) continue to own 60% of such shares:
1. engagement in any transactions or amendment of any existing transactions
with TPG Partners, InterWest Partners or their respective Affiliates or
with officers, directors or members of management of Holdings except on
arm's length terms; or
2. amendment, modification or restatement of the certificate of
incorporation of Holdings in a manner that would materially adversely
affect the right of the holders of the Series B Preferred Stock
(including increasing the number of shares of Series A Preferred Stock
or Series B Preferred Stock or authorizing another class of securities
senior to or pari passu with the Series B Preferred Stock).
The Stockholders Agreement, the New Equity Agreement and the Farley
Stockholders Agreement impose certain restrictions on transfers of Shares and
give certain holders of Shares registration rights in certain circumstances.
Holdings will bear the costs of preparing and filing any such registration
statement and has agreed to indemnify selling holders against certain
liabilities.
Employees of the Company who hold options to acquire Shares have agreed, upon
exercise of any such options, to enter into an agreement imposing certain
restrictions on transfers of such Shares.
74
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
As discussed in "Management's Discussion and Analysis of Financial Conditions
and Results of Operations":
. in February 1998, TPG, the Company's largest stockholder, provided credit
support to a commercial bank that provided a $15.0 million loan to the
Company (the loan was repaid and credit support terminated in May 1998);
. in May 1998, TPG made a $13.6 million equity investment in Holdings; and
. in October 1998, TPG loaned the Company on an unsecured basis $17.0
million; the loan matures on November 20, 2005 and bears interest,
payable at maturity, at a per annum rate of ten percent.
In connection with these transactions:
. Holdings issued to TPG in February 1998 a ten-year warrant to purchase
18,666 shares of Holdings' common stock at an exercise price of $89.57
per share (with an estimated value at that time of approximately $1
million);
. Holdings issued to TPG in May 1998 a warrant to purchase additional
shares of Holdings common stock at an exercise price of $0.01 per share
if certain dilution events occur by May 1999; and
. Holdings issued to TPG in October 1998 a ten-year warrant to purchase
77,500 shares of Holdings' common stock at an exercise price of $0.01 per
share (with an estimated value at that time of approximately $3.9
million).
In consideration for advisory services rendered in fiscal 1998 in connection
with acquisition, debt refinancing, executive management and other services,
CAF (an affiliate of Richard W. Boyce), TPG and Seaver Kent & Company, LLC
received fees totaling $1.0 million, $0.1 million and $0.2 million,
respectively. In management's opinion, the amounts paid to CAF, TPG, and Seaver
Kent reasonably reflect the benefits received by the Company.
William H. Ellis, who is currently a director of Holdings, owned 99% of the
stock of Farley at the time it was sold to the Company in August 1996. Mr.
Ellis and the other stockholders received an aggregate of $174.9 million (which
included assumed debt) and $29.1 million in Holdings common stock as
consideration for their interest in Farley. The stockholders of Farley placed
$10.0 million of cash in an escrow account to secure their indemnity
obligations to the Company under the Farley acquisition agreement. In June
1998, $3.6 million of such amount was released to the Company and the balance
was released to the former stockholders of Farley. Mr. Ellis became a director
of Holdings after the Company bought Farley.
The Company paid approximately $0.3 million in fiscal 1998 under a capital
lease on its manufacturing facility at Belmont Avenue in Chicago. The lessor is
a trust of which Mr. Ellis is the sole beneficiary. The Company paid
approximately $1.0 million in fiscal 1998 under a lease for its distribution
facility at 43rd Street in Chicago. That facility is leased from a limited
liability company owned by former officers of Farley, including Mr. Ellis.
75
<PAGE>
Parties related to Jose Minski, Executive Vice President and Chief Operating
Officer of Trolli, owned 32.9% of the stock of Trolli at the time it was sold
to the Company in April 1997. Parties related to Minski's have received to date
an aggregate of $29.1 million in cash with respect to stockholdings in Trolli
and will be entitled to not more than an additional $1.65 million in the first
quarter of calendar 1999 based on Trolli's results of operations for calendar
1998 (constituting 32.9% of the possible $5 million earn-out payment).
In connection with Mr. Bono's relocation to Chicago, the Company has extended
to Mr. Bono two loans in the aggregate principal amount of $0.5 million,
$250,000 of which is secured by a mortgage on Mr. Bono's residence. Mr. Bono is
required to pay annual interest payments to the Company on such loans on April
30 of each year at an annual rate of 5%. The principal amount is due April 30,
2001.
Certain stockholders of Holdings, including TPG Partners, InterWest Partners
and Mr. Bono, are parties to the Stockholders Agreement and other agreements
described in "Principal Stockholders."
We believe that the terms of each of the transactions discussed in this
section were at least as favorable to the Company as those that could have been
secured in arm's length transactions.
76
<PAGE>
DESCRIPTION OF BANK FACILITIES AND OTHER INDEBTEDNESS
BANK FACILITIES
The description set forth below does not purport to be complete and is
qualified in its entirety by reference to certain agreements setting forth the
principal terms of the Bank Facilities. Capitalized terms used and not defined
in this section have the meanings given to them in the relevant agreement.
The Bank Facilities consist of:
(1) a seven-year Senior Secured B Term Loan Facility in a principal amount
of $150 million (the "Term Loan"); and
(2) a revolving credit facility providing for revolving loans (including
swing line loans) to the Company and the issuance of letters of credit
for the account of the Company in an aggregate principal and stated
amount at any time not to exceed $75 million. Of the $75 million, not
more than $20 million may be represented by letters of credit and not
more than $8 million may be represented by swing line loans (the
"Revolving Credit Facility").
Amounts repaid or prepaid under the Term Loan may not be reborrowed. Loans
under the Revolving Credit Facility are available at any time prior to the date
which is six years after the Closing Date (the "Revolving Termination Date").
No letter of credit shall have an expiration date after the earlier of:
.one year from the date of its issuance; and
. five business days before the Revolving Termination Date.
Letters of credit may be renewed for one-year periods, provided that no
letter of credit shall extend beyond the time specified in clause (2) above.
The Term Loan amortizes over seven years in 28 quarterly installments in the
following amounts:
.$500,000 for the first twenty installments;
.$12.5 million for the next four installments; and
.$22.5 million for the remaining four installments.
The Company is required to make mandatory prepayments of the Term Loan:
(1) in respect of 50% of excess cash flow of the Company starting with
fiscal 1999 (such amount may be reduced to 25% of excess cash flow if
the Company's Total Debt to EBITDA Ratio is less than 5.0 to 1.00 but
greater than or equal to 4.0 to 1.00 at the end of the applicable
fiscal year and such amount may be reduced to 0% of excess cash flow if
the Company's Total Debt to EBITDA Ratio is less than 4.0 to 1.00 at
the end of the applicable fiscal year);
(2) in respect of 100% of the net cash proceeds of any sale or other
disposition (including as a result of casualty or condemnation) of any
assets by the Company or by any of its Subsidiaries (except for the
sale of inventory in the ordinary course of business and certain other
customary exceptions and reinvestment rights); and
77
<PAGE>
(3) 50% of the net proceeds of any sale or issuance of equity and 100% of
the net proceeds of any issuance or incurrence of certain Indebtedness
by the Company or by Holdings or by any of their Subsidiaries.
At the Company's option, loans may be prepaid, and revolving credit
commitments may be permanently reduced, in whole or in part, at any time in
certain minimum amounts.
The obligations of the Company under the Bank Facilities are unconditionally
and irrevocably guaranteed by Holdings and by each of the Company's direct and
indirect domestic subsidiaries (collectively, the "Bank Loan Subsidiary
Guarantors"). In addition, the Bank Facilities are secured by first priority or
equivalent security interests in:
. all the capital stock of, or other equity interests in, each direct or
indirect domestic subsidiary of the Company and up to two-thirds of the
issued and outstanding capital stock of, or other equity interests in,
each first-tier foreign subsidiary of the Company; and
. all other tangible and intangible assets (including, without limitation,
intellectual property and certain owned real property) of the Company,
Holdings and the Bank Loan Subsidiary Guarantors (subject to certain
exceptions and qualifications).
The sole recourse with respect to Holdings' guarantee obligations are the
assets pledged by it to secure such obligations.
At the Company's option, the interest rates per annum applicable to the Bank
Facilities are either the Base Rate (as defined) or the Offshore Rate plus
margins ranging from 1.75% to 2.25% (Base Rate term loans), .75% to 1.75% (Base
Rate revolving loans), 2.75% to 3.25% (Offshore Rate term loans) and 1.75% to
2.75% (Offshore Rate revolving loans) as amended. The Base Rate is the highest
of:
.Chase's Prime Rate;
.the Base CD Rate plus 1.00%; and
. the Federal Funds Effective Rate plus 0.50%.
The margin in respect of the Term Loan and the Revolving Credit Facility will
be subject to adjustment after the first anniversary of the Closing Date based
on the Company's Total Debt to EBITDA Ratio.
The Company pays a commission on the face amount of all outstanding letters
of credit at a per annum rate equal to the Applicable Margin then in effect
with respect to the Offshore Rate loans under the Revolving Credit Facility
minus 0.25% on the face amount of each such letter of credit. A fronting fee
equal to 0.25% per annum on the face amount of each letter of credit (the
"Fronting Fee") is payable quarterly in arrears to the issuing lender for its
own account. The Company also pays a per annum fee equal to 0.75% on the
undrawn portion of the commitments in respect of the Revolving Credit Facility
(the "Commitment Fee"). The Commitment Fee is subject to reduction after the
first anniversary of the Closing Date based on the Company's Total Debt to
EBITDA Ratio.
The Bank Facilities contain a number of significant covenants that, among
other things, restrict the ability of the Company to dispose of assets, incur
additional Indebtedness, repay other
78
<PAGE>
Indebtedness or amend other debt instruments, pay dividends, create liens on
assets, make investments or acquisitions, engage in mergers or consolidations,
make capital expenditures, or engage in certain transactions with affiliates
and otherwise restrict corporate activities. In addition, under the Bank
Facilities, the Company is required to comply with specified minimum interest
coverage and maximum senior secured leverage.
Events of Default under the Bank Facilities include, but are not limited to,
nonpayment of principal when due; nonpayment of interest, fees or other amounts
after a grace period of five days; material inaccuracy of representations and
warranties; violation of covenants (subject, in the case of certain covenants,
to customary grace periods); cross-default; bankruptcy events; certain ERISA
events; material judgments; actual or asserted invalidity of any material
provision of any guarantee or security document, any subordination provisions
or any security interest; and a Change of Control (as defined). Upon the
occurrence of an Event of Default, Chase may, in its capacity as administrative
agent, accelerate payments due under the Term Loan and the Revolving Credit
Facility.
THE SENIOR SUBORDINATED NOTES
In August and September 1997, the Company issued an aggregate of $195 million
principal amount of the Senior Subordinated Notes pursuant to the Note
Agreement. The Senior Subordinated Notes were sold pursuant to exemptions from,
or in transactions not subject to, the registration requirements of the
Securities Act and applicable state securities laws. The Company expects to
complete an exchange offer whereby the Senior Subordinated Notes will be
exchanged into new Senior Subordinated Notes due 2007, which will be registered
under the Securities Act with terms substantially identical to the Senior
Subordinated Notes (the "Exchange Senior Subordinated Notes"). Under the Note
Agreement, if the Company does not issue the Exchange Senior Subordinated Notes
in an exchange offer prior to September 30, 1999, it is required to pay
additional interest on the Senior Subordinated Notes. In the event that the
Company issues debt or equity in an offering registered under the Securities
Act, the Company is required to file a registration statement with respect to
the Senior Subordinated Notes on or prior to the earlier of a date that is 120
days after the effective date of such registered offering or December 31, 1999.
The exchange offer with respect to the Notes would give rise to the filing
requirement described in the preceding sentence.
The Senior Subordinated Notes will mature on August 20, 2007. Interest
accrues at the rate of 11.25% per annum and is payable semi-annually in arrears
on February 20 and August 20 in each year. Payment of principal, premium and
interest on the Senior Subordinated Notes is subordinated, as set forth in the
Note Agreement, to the prior payment in full of the Company's Senior Debt,
including the exchange notes.
At any time on or after August 20, 2002, the Company may prepay, on a pro
rata basis, the aggregate principal balance of the Senior Subordinated Notes in
whole or in part at a redemption price equal to 105.6250% of the principal
amount (plus in each case accrued interest and unpaid interest thereon to but
excluding the prepayment date) if paid in the 12-month period commencing August
20, 2002 and decreasing each year until it reaches 100% of the original
principal amount if paid in the 12-month period commencing August 20, 2005 or
thereafter.
79
<PAGE>
At any time on or prior to August 20, 2000, the Company may use the net cash
proceeds of one or more Public Equity Offerings to prepay on a pro rata basis
up to 35% of the original aggregate principal balance of the Senior
Subordinated Notes at a redemption price equal to 111.25% of the principal
balance thereof plus, in each case, accrued and unpaid interest thereon, if
any, to but excluding the prepayment date. Upon a Change of Control, the
Company will be obligated to offer to prepay all outstanding Senior
Subordinated Notes by payment of an amount equal to 101% of the aggregate
principal amount thereof, plus accrued interest to, but excluding the Change of
Control prepayment date.
The obligations of the Company pursuant to the Senior Subordinated Notes are
unconditionally guaranteed on a senior subordinated basis by those of the
Company's subsidiaries designated pursuant to procedures prescribed in the Note
Agreement. The Note Agreement contains various restrictive covenants that limit
the ability of the Company and its subsidiaries to, among other things, incur
additional Indebtedness, pay dividends or make certain other restricted
payments, consummate certain asset sales, enter into certain transactions with
affiliates, incur Indebtedness that is senior in right of payment to the Senior
Subordinated Notes and subordinate in right of payment to any other
Indebtedness of the Company, incur liens, impose restrictions on the ability of
a subsidiary to pay dividends or make certain payments to the Company and its
subsidiaries, merge or consolidate or sell, assign, transfer, lease, convey or
otherwise dispose of all or substantially all of the assets of the Company.
80
<PAGE>
DESCRIPTION OF THE EXCHANGE NOTES
GENERAL
The Company issued the initial notes and will issue the exchange notes under
an indenture, dated as of May 19, 1998 (the "Indenture"), among the Company,
the Subsidiary Guarantors and LaSalle National Bank, as Trustee (the
"Trustee"). The terms of the exchange notes include those stated in the
Indenture and those made part of the Indenture by reference to the Trust
Indenture Act of 1939. The following summary of material provisions of the
Indenture and the exchange notes does not restate those documents in their
entirety. The Indenture and the exchange notes have been filed as exhibits to
the registration statement and are available as set forth under the heading
"Prospectus Summary--Where You Can Find More Information." For definitions of
certain capitalized terms used in the following summary, see "--Certain
Definitions."
The exchange notes will be unsecured, senior obligations of the Company,
limited to $200 million aggregate principal amount, and will mature on May 15,
2006. Each exchange note will bear interest at 10 3/4% per annum from the date
of issuance, or from the most recent date to which interest has been paid or
provided for. The interest will be payable semi-annually on May 15 and November
15 of each year, to holders of record at the close of business on the May 1 or
November 1 immediately preceding the interest payment date.
Interest will be computed on the basis of a 360-day year comprised of twelve
30 day months. Principal of, premium, if any, and interest will be payable, and
the exchange notes may be exchanged or transferred, at the office or agency of
the Company in the Borough of Manhattan, The City of New York. This agency
initially will be the corporate trust office of the Trustee in New York, New
York. At the option of the Company, payment of interest may be made by check
mailed to the Holders' addresses listed in the Exchange Note Register. However,
if a Holder gives wire transfer instructions to the Company and its paying
agent before the applicable record date for the payment, the Company will make
payments by wire transfer of immediately available funds to the accounts
specified by the Holders. No service charge will be made for any registration
of transfer or exchange of exchange notes, but the Company may require payment
of a sum sufficient to cover any transfer tax or other similar governmental
charge payable in connection with the transfer or exchange.
The exchange notes will be issued in fully registered form without interest
coupons, in denominations of $1,000 and any integral multiple of $1,000. The
exchange notes will be represented by one or more registered notes in global
form and in certain circumstances may be represented by exchange notes in
definitive form. See "--Book Entry, Delivery and Form."
OPTIONAL REDEMPTION
Except as discussed below, the exchange notes will not be redeemable at the
option of the Company before May 15, 2003. On and after this date, the Company
can redeem all or a part of the exchange notes. The Company must give not less
than 30 nor more than 60 days prior notice by first-class mail to each Holder's
registered address . Upon redemption, the Company will pay the redemption
price, plus accrued and unpaid interest to the redemption date.
81
<PAGE>
The Company will pay the following redemption prices, expressed in
percentages of principal amount, if it redeems the exchange notes during the
12-month periods commencing on May 15, of the years set forth below:
<TABLE>
<CAPTION>
REDEMPTION
PERIOD PRICE
------ ----------
<S> <C>
2003........................................................... 105.375%
2004........................................................... 102.688%
2005 and thereafter............................................ 100.000%
</TABLE>
In addition, before May 15, 2001, the Company may redeem on one or more
occasions up to 35% of the original principal amount of the exchange notes with
the proceeds of one or more Public Equity Offerings at a redemption price of
110.75%, plus accrued and unpaid interest, if any, to the redemption date. At
least 65% of the original principal amount of the exchange notes must remain
outstanding after each such redemption, and the redemption must occur within 90
days of the date of closing of each such Public Equity Offering.
In the case of any partial redemption, the Trustee will select the exchange
notes for redemption on a pro rata basis, by lot or by any other method as the
Trustee in its sole discretion will deem to be fair and appropriate, although
no exchange note of $1,000 in original principal amount or less will be
redeemed in part. For any exchange note to be redeemed in part only:
1. the notice of redemption relating to such exchange note will state the
portion of the principal amount to be redeemed;
2. new exchange note in principal amount equal to the unredeemed portion
will be issued upon cancellation of the original exchange note;
3. on and after the redemption date, interest will cease to accrue on
exchange notes or on portions called for redemption as long as the Company
has deposited with the paying agent funds in satisfaction of the redemption
price.
RANKING
The exchange notes will be general unsecured obligations of the Company. They
will rank senior in right of payment to all existing and future Indebtedness of
the Company that is, by its terms or by the terms of the agreement or
instrument governing the Indebtedness, expressly subordinated in right of
payment to the exchange notes. They will be equal in right of payment with all
existing and future liabilities of the Company that are not so subordinated.
The payment of obligations on the exchange notes may be compromised in the
event of:
1. bankruptcy, liquidation, reorganization or other winding-up of the
Company or its Restricted Subsidiaries, or
2. upon a default in payment with respect to, or the acceleration of, any
Indebtedness under a Senior Credit Agreement or other Secured Indebtedness.
The assets of the Company and its Restricted Subsidiaries that secure Secured
Indebtedness will be available to pay obligations on the exchange notes and
Subsidiary Guarantees only after all Indebtedness under such Senior Credit
Agreement and other Secured Indebtedness has been paid in full from such
assets. There may not be sufficient assets remaining to pay amounts due on any
or all the exchange notes and the Subsidiary Guarantees then outstanding.
82
<PAGE>
As of September 26, 1998, the aggregate principal amount of the Company's
outstanding indebtedness was $590.4 million (excluding unused commitments and
letters of credit), $195.0 million of which was secured indebtedness and $195.0
million of which was subordinated indebtedness.
SUBSIDIARY GUARANTEES
Each Subsidiary Guarantor will unconditionally guarantee, jointly and
severally, to each Holder and the Trustee, on a senior basis, the full and
prompt payment of principal of, premium, if any, and interest on the exchange
notes, and of all other obligations under the Indenture.
The obligations of Subsidiary Guarantors under the Subsidiary Guarantee will
rank equal in right of payment with other Indebtedness of such Subsidiary
Guarantor, except to the extent this other Indebtedness is expressly
subordinate to the obligations arising under the Subsidiary Guarantee. Although
the Indenture contains limitations on the amount of additional Indebtedness
that the Company's Restricted Subsidiaries may incur, under certain
circumstances the amount of such Indebtedness could be substantial and such
Indebtedness could be secured. See "--Certain Covenants--Limitation on
Indebtedness" below.
The obligations of each Subsidiary Guarantor will be limited to the maximum
amount that will result in the obligations of such Subsidiary Guarantor under
its Subsidiary Guarantee not constituting a fraudulent conveyance or fraudulent
transfer under federal or state law. This maximum amount takes into account:
1. all other contingent and fixed liabilities of such Subsidiary Guarantor,
including any guarantees under a Senior Credit Agreement, and
2. any collections from or payments made by or on behalf of any other
Subsidiary Guarantor in respect of the obligations of such other
Subsidiary Guarantor under its Subsidiary Guarantee or pursuant to its
contribution obligations under the Indenture.
Each Subsidiary Guarantor may consolidate with or merge into or sell its
assets to the Company or another Subsidiary Guarantor without limitation. Each
Subsidiary Guarantor may consolidate with, merge into, sell all or sell
substantially all its assets to a corporation, partnership or trust other than
the Company or another Subsidiary Guarantor, whether or not affiliated with the
Subsidiary Guarantor, except that if the surviving corporation of any such
merger or consolidation is a Subsidiary of the Company, the merger,
consolidation or sale shall not be permitted unless:
. the Person existing after the consolidation or merger assumes all the
obligations of such Subsidiary under the Subsidiary Guarantee by entering
into a supplemental indenture in form and substance reasonably
satisfactory to the Trustee in respect of the exchange notes, the
Indenture and the Subsidiary Guarantee;
. immediately after giving effect to such transaction, no Default or Event
of Default exists; and
. the Company delivers to the Trustee an officers' certificate and an
opinion of counsel with respect to the foregoing matters.
A Subsidiary Guarantor will be deemed released from all its obligations under
the Indenture and its Subsidiary Guarantee and such Subsidiary Guarantee will
terminate upon its sale or disposition to
83
<PAGE>
a Person that is not a Subsidiary of the Company, if the sale or disposition
complies with the Indenture. The termination will occur only to the extent
that all of the following obligations of the Subsidiary Guarantor will also
terminate upon such release, sale or termination:
. obligations under a Senior Credit Agreement;
. guarantees of any other Indebtedness of the Company; and
. pledges of assets or other security interests that secure any other
indebtedness of the Company.
A Subsidiary Guarantor will be deemed released and relieved of its
obligations under the Indenture and its Subsidiary Guarantee without any
further action required by the Company or the Subsidiary Guarantor upon the
designation of such Subsidiary Guarantor as an Unrestricted Subsidiary in
accordance with the terms of the Indenture.
CHANGE OF CONTROL
Upon the occurrence of any of the following events (each, a "Change of
Control"), each Holder will have the right to require the Company to
repurchase all or any part, in denominations of $1,000, of his or her exchange
notes at a purchase price of 101% of the principal amount, plus accrued and
unpaid interest, if any, to the date of purchase:
1. (A) any "person" (as such term is used in Sections 13(d) and 14(d) of
the Exchange Act), other than one or more Permitted Holders or their
Related Parties, is or becomes the beneficial owner (as defined in Rules
13d-3 and 13d-5 under the Exchange Act), directly or indirectly, of more
than 40% of the total voting power of the Voting Stock of the Company or
Holdings, or its successor; for the purposes of this clause 1(A), such
person will be deemed to beneficially own any Voting Stock of the
Company or Holdings held by an entity, if such person "beneficially
owns", directly or indirectly, more than 40% of the voting power of the
voting Capital Stock of such entity; and
(B) the Permitted Holders or their Related Parties:
. ""beneficially own," directly or indirectly, in the aggregate a
lesser percentage of the total voting power of the Voting Stock
of the Company, Holdings or its successor, than such other
person, and
. do not have the right or ability by voting power, contract or
otherwise to elect or designate for election a majority of the
board of directors of the Company or Holdings or such successor;
for the purposes of this clause 1(B) such other person shall be deemed
to beneficially own any Voting Stock of a specified entity held by an
entity, if:
. such other person "beneficially owns," directly or indirectly,
more than 40% of the voting power of the Voting Stock of such
entity, and
. the Permitted Holders or their Related Parties "beneficially
own," directly or indirectly, in the aggregate a lesser
percentage of the voting power of the Voting Stock of such entity
and do not have the right or ability by voting power, contract or
otherwise to elect or designate for election a majority of the
board of directors of such entity;
84
<PAGE>
2. during any period of two consecutive years, individuals who at the
beginning of such period constituted the Board of Directors of the
Company or Holdings cease for any reason to constitute a majority of the
Board of Directors of the Company or Holdings then in office; provided,
however, that this clause shall not apply to the Board of Directors of
the Company so long as the Company is a wholly-owned Subsidiary of
Holdings;
3. 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" other
than a Permitted Holder or their Related Parties;
4. the adoption by the stockholders of the Company of a plan or proposal
for the liquidation or dissolution of the Company; and
5. the occurrence of a change of control as defined in the indenture
relating to the Senior Subordinated exchange notes.
Within 30 days following any Change of Control, the Company will mail a
notice (the "Change of Control Offer") to each Holder with a copy to the
Trustee stating:
. that a Change of Control has occurred and that the Holder has the right
to require the Company to purchase the Holder's exchange notes at a
purchase price of 101% of the principal amount plus accrued and unpaid
interest, if any, to the date of purchase (the "Change of Control
Payment");
. the repurchase date, which shall be no earlier than 30 days nor later
than 60 days from the date such notice is mailed (the "Change of Control
Payment Date"); and
. the procedures determined by the Company, consistent with the Indenture,
that the Holder must follow in order to have his or her exchange notes
purchased.
The Company will comply, to the extent applicable, with the requirements of
Section 14(e) of the Exchange Act and any other securities laws or regulations
in connection with the repurchase of exchange notes pursuant to this covenant.
To the extent that the provisions of any securities laws or regulations
conflict with provisions of the Indenture, the Company will comply with the
applicable securities laws and regulations and will not be deemed to have
breached its obligations described in the Indenture.
On the Change of Control Payment Date, the Company will, to the extent
lawful,
1. accept for payment all exchange notes, or portions of the notes in
denominations of $1,000, properly tendered pursuant to the Change of
Control Offer;
2. deposit with the paying agent an amount equal to the Change of Control
Payment for all exchange notes or portions tendered; and
3. deliver the exchange notes so accepted to the Trustee together with an
Officers' Certificate stating the aggregate principal amount of exchange
notes or portions of the notes being purchased by the Company.
The paying agent will promptly mail to each Holder of exchange notes so
tendered the Change of Control Payment for his or her exchange notes. The
Trustee will promptly authenticate and mail,
85
<PAGE>
or cause to be transferred by book entry, to each Holder a new Exchange Note
equal in principal amount to any unpurchased portion of the exchange notes
surrendered; provided that each such new Exchange Note will be in a principal
amount of $1,000 or an integral multiple thereof.
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 to require that the Company
repurchase or redeem the exchange notes in the event of a takeover,
recapitalization or similar transaction.
The Company will not be required to make a Change of Control Offer if a third
party:
. makes the Change of Control Offer in the manner, at the times and
otherwise in compliance with the requirements of the Indenture that apply
to a Change of Control Offer made by the Company, and
. purchases all exchange notes validly tendered and not withdrawn under
such Change of Control Offer.
The occurrence of certain of the events that would constitute a Change of
Control would constitute a default under a Senior Credit Agreement. Future
Indebtedness of the Company and its Subsidiaries may also contain prohibitions
of certain events that would constitute a Change of Control or require such
Indebtedness to be repurchased upon a Change of Control. Moreover, the holders'
exercise of their right to require the Company to repurchase the exchange notes
could cause a default under such Indebtedness, even if the Change of Control
itself does not, due to the financial effect of such repurchase on the Company.
Finally, the Company's ability to pay cash to the holders upon a repurchase may
be limited by the Company's then existing financial resources. There can be no
assurance that sufficient funds will be available when necessary to make any
required repurchases. Even if sufficient funds were otherwise available, the
terms of a Senior Credit Agreement will prohibit the Company's prepayment of
exchange notes prior to their scheduled maturity. Consequently, if the Company
is not able to prepay the Bank Indebtedness and any other senior Indebtedness
containing similar restrictions or obtain requisite consents, as described
above, the Company will be unable to fulfill its repurchase obligations if
holders of exchange notes exercise their repurchase rights following a Change
of Control, thereby resulting in a default under the Indenture.
The occurrence of certain of the events that would constitute a Change of
Control would require the Company to offer to repurchase the Senior
Subordinated Notes. The Indenture may prohibit the Company from doing so if any
of the exchange notes remain outstanding. The failure of the Company to offer
to repurchase the Senior Subordinated Notes when required to do so would
constitute an event of default with respect to the Senior Subordinated Notes.
The Company and its Restricted Subsidiaries covenant to not redeem any
Subordinated Obligations, including the Senior Subordinated Notes, in respect
of an Asset Sale or Change of Control until the prior payment of all amounts
due pursuant to any exercised right by any Holder under "--Change of Control"
and "--Certain Covenants--Limitation on Sales of Assets and Subsidiary Stock."
86
<PAGE>
The Change of Control provisions described above may deter certain mergers,
tender offers and other takeover attempts involving the Company by increasing
the capital required to effectuate such transactions. The definition of "Change
of Control" includes a disposition of all or substantially all of the property
and assets of the Company and its Restricted Subsidiaries taken as a whole to
any Person other than a Permitted Holder or any Related Party. With respect to
the disposition of property or assets, the phrase "all or substantially all" as
used in the Indenture varies according to the facts and circumstances of the
subject transaction, has no clearly established meaning under New York law
(which is the choice of law under the Indenture) and is subject to judicial
interpretation. Accordingly, in certain circumstances there may be a degree of
uncertainty in ascertaining whether a particular transaction would involve a
disposition of "all or substantially all" of the property or assets of a
Person, and therefore it may be unclear as to whether a Change of Control has
occurred and whether the Company is required to make an offer to repurchase the
exchange notes as described above.
CERTAIN COVENANTS
The Indenture contains certain covenants, including, among others, the
following:
Limitation on Indebtedness. (a) The Company will not, and will not permit any
of its Restricted Subsidiaries to, Incur any Indebtedness; provided, however,
that the Company and the Subsidiary Guarantors may Incur Indebtedness if the
Consolidated Coverage Ratio for the Company and its Restricted Subsidiaries 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
Indebtedness is Incurred (A) is at least 2.00 to 1.00 and (B) no Default or
Event of Default will have occurred or be continuing or would occur as a
consequence.
(b) The foregoing provisions will not apply to:
1. Indebtedness Incurred under a Senior Credit Agreement, together with
amounts outstanding under Qualified Receivables Transactions, in an
aggregate amount up to $250.0 million less the aggregate principal
amount of all scheduled principal repayments unless refinanced on the
date of such repayment under this clause (1) and all mandatory
prepayments of principal in excess of $25.0 million in the aggregate
from the proceeds of Asset Sales permanently reducing the commitments
thereunder;
2. the Subsidiary Guarantees and Guarantees of Indebtedness by the
Subsidiary Guarantors Incurred in accordance with the provisions of the
Indenture; provided that in the event the Indebtedness that is being
Guaranteed is subordinated in right of payment to any other
Indebtedness, the related Guarantee shall be subordinated in right of
payment to the Subsidiary Guarantee;
3. Indebtedness of the Company owing to and held by any Wholly-Owned
Subsidiary (other than a Receivables Entity), or Indebtedness of a
Restricted Subsidiary owing to and held by the Company or any Wholly-
Owned Subsidiary (other than a Receivables Entity); provided, however,
if the Company is the obligor on such Indebtedness, such Indebtedness is
expressly subordinated to the prior payment in full in cash of all
obligations with respect to the exchange notes; and provided further
that the following shall be deemed, in each case,
87
<PAGE>
to constitute an Incurrence of such Indebtedness by the Company or such
Subsidiary, as the case may be:
(A) any subsequent issuance or transfer of Capital Stock that results
in any such Indebtedness being beneficially held by a Person other
than the Company or a Wholly Owned Subsidiary (other than a
Receivables Entity) of the Company, and
(B) any sale or other transfer of any such Indebtedness to a Person
other than the Company or a Wholly Owned Subsidiary (other than a
Receivables Entity) of the Company.
4. Indebtedness represented by the exchange notes, any Indebtedness (other
than the Indebtedness described in clauses (1), (2) and (3)) outstanding
on the Issue Date, including the Senior Subordinated Exchange Notes and
the related Guarantees and any Refinancing Indebtedness Incurred in
respect of any Indebtedness described in this clause (4) or clause (5)
or Incurred pursuant to paragraph (a) above;
5. Indebtedness of a Restricted Subsidiary Incurred and outstanding on the
date on which such Restricted Subsidiary was acquired by the Company
(other than Indebtedness Incurred (A) to provide all or any portion of
the funds utilized to consummate the transaction or series of related
transactions pursuant to which such Restricted Subsidiary became a
Restricted Subsidiary or was otherwise acquired by the Company or (B)
otherwise in connection with, or in contemplation of, such acquisition)
in an aggregate principal amount not to exceed $20.0 million at any time
outstanding or, with respect to Indebtedness under this clause (5) in
excess thereof, only in the event that at the time such Restricted
Subsidiary is acquired by the Company, the Company would have been able
to Incur $1.00 of additional Indebtedness pursuant to paragraph (a)
above after giving effect to the Incurrence of such Indebtedness
pursuant to this clause (5);
6. Indebtedness under Currency Agreements and Interest Rate Agreements;
provided, however, that:
(A) in the case of Currency Agreements, such Currency Agreements are
related to business transactions of the Company or its Restricted
Subsidiaries entered into in the ordinary course of business, or
(B) in the case of Currency Agreements and Interest Rate Agreements
such Currency Agreements and Interest Rate Agreements are entered
into for bona fide hedging purposes of the Company or its
Restricted Subsidiaries and substantially correspond in terms of
notional amount, duration, currencies and interest rates, as
applicable, to Indebtedness of the Company or its Restricted
Subsidiaries Incurred without violation of the Indenture; whether
or not a purpose constitutes bona fide hedging shall be determined
in good faith by the Board of Directors or senior management of the
Company.
7. the incurrence by the Company or any of its Restricted Subsidiaries of
Indebtedness represented by Capitalized Lease Obligations, mortgage
financings or purchase money obligations with respect to assets other
than Capital Stock or other Investments, in each case incurred for the
purpose of financing all or any part of the purchase price or cost of
construction or improvements of property used in the business of the
Company or such
88
<PAGE>
Restricted Subsidiary, in an aggregate principal amount not to exceed
$10.0 million at any time outstanding;
8. Indebtedness incurred in respect of workers' compensation claims, self-
insurance obligations, performance, surety and similar bonds and
completion guarantees provided by the Company or a Restricted Subsidiary
in the ordinary course of business;
9. Indebtedness arising from agreements of the Company or a Restricted
Subsidiary providing for indemnification, adjustment of purchase price
or similar obligations, in each case, incurred or assumed in connection
with the disposition of any business, assets or Capital Stock of a
Restricted Subsidiary, provided that the maximum aggregate liability in
respect of all such Indebtedness shall at no time exceed the gross
proceeds actually received by the Company and its Restricted
Subsidiaries in connection with such disposition;
10. Indebtedness arising from the honoring by a bank or other financial
institution of a check, draft or similar instrument (except in the
case of daylight overdrafts) drawn against insufficient funds in the
ordinary course of business, provided, however, that such Indebtedness
is extinguished within five business days of Incurrence; and
11. Indebtedness (other than Indebtedness described in clauses (1)--(10))
in an aggregate outstanding principal amount which, when taken together
with the principal amount of all other Indebtedness Incurred pursuant
to this clause (11) and then outstanding, will not exceed $35.0
million.
(c) The Company will not Incur any Indebtedness under paragraph (b) above if
the proceeds are used, directly or indirectly, to refinance any Subordinated
Obligations of the Company unless such Indebtedness will be subordinated to
the exchange notes to at least the same extent as such Subordinated
Obligations. No Subsidiary Guarantor will incur any Indebtedness under
paragraph (b) above if the proceeds are used, directly or indirectly, to
refinance any Guarantor Subordinated Obligations of such Subsidiary Guarantor
unless such Indebtedness will be subordinated to the obligations of such
Subsidiary Guarantor under its Subsidiary Guarantee to at least the same
extent as such Guarantor Subordinated Obligations. No Restricted Subsidiary
will Incur any Indebtedness under paragraph (b) to refinance Indebtedness of
the Company.
(d) For purposes of determining compliance with, and the outstanding
principal amount of any particular Indebtedness incurred pursuant to and in
compliance with, this covenant:
. in the event that Indebtedness meets the criteria of more than one of the
types of Indebtedness described in paragraph (b) above, the Company, in
its sole discretion, will classify such item of Indebtedness on the date
of Incurrence and only be required to include the amount and type of such
Indebtedness in one of such clauses; and
. the amount of Indebtedness issued at a price that is less than its
principal amount will be equal to the amount of its liability determined
in accordance with GAAP.
If Indebtedness is issued at less than the principal amount thereof, the
amount of such Indebtedness for purposes of the above limitations shall equal
the amount of the liability as determined in accordance with GAAP. Accrual of
interest, the accretion of accreted value and the payment of interest in the
form of additional Indebtedness will not be deemed to be an incurrence of
Indebtedness for purposes of this covenant.
89
<PAGE>
(e) The Company will not permit any Unrestricted Subsidiary to incur any
Indebtedness other than Non-Recourse Debt; provided, however, if any such
Indebtedness ceases to be Non-Recourse Debt, such event will be deemed to
constitute an incurrence of Indebtedness by the Company or a Restricted
Subsidiary.
Limitation on Restricted Payments. (a) The Company will not, and will not
permit any of its Restricted Subsidiaries, directly or indirectly, to:
1. declare or pay any dividend, or make any distribution on or in respect
of its Capital Stock, including any payment in connection with any
merger or consolidation involving the Company or any of its Restricted
Subsidiaries, except:
(A) dividends or distributions payable in its Capital Stock,
other than Disqualified Stock, or in options, warrants or other
rights to purchase such Capital Stock, and
(B) dividends or distributions payable to the Company or a
Restricted Subsidiary of the Company, and if such Restricted
Subsidiary is not a Wholly-Owned Subsidiary, to its other holders
of Capital Stock on a pro rata basis;
2. purchase, redeem, retire or otherwise acquire for value:
(A) any Capital Stock of the Company held by Persons other than a
Restricted Subsidiary of the Company, or
(B) any Capital Stock of a Restricted Subsidiary of the Company
held by any Affiliate of the Company, other than a Restricted
Subsidiary; this limitation, however, does not apply to any
repurchase, redemption, retirement or other acquisition that is a
Permitted Investment that is made in exchange for the Company's
Capital Stock (other than Disqualified Stock);
3. purchase, repurchase, redeem, defease or otherwise acquire or retire for
value, prior to scheduled maturity, scheduled repayment or scheduled
sinking fund payment, any Subordinated Obligations; this clause (3)
shall not apply to the purchase, repurchase or other acquisition of
Subordinated Obligations purchased in anticipation of satisfying a
sinking fund obligation, principal installment or final maturity, in
each case due within one year of the date of purchase, repurchase or
acquisition; or
4. make any Investment (other than a Permitted Investment) in any Person
(any such dividend, distribution, purchase, redemption, repurchase,
defeasance, other acquisition, retirement or Investment being herein
referred to in clauses (1) through (4) as a "Restricted Payment"), if at
the time the Company or such Restricted Subsidiary makes such Restricted
Payment:
(1) a Default shall have occurred and be continuing (or would result
therefrom); or
(2) the Company is not able to incur an additional $1.00 of Indebtedness
under paragraph (a) of "--Limitation on Indebtedness"; or
(3) the aggregate amount of such Restricted Payment and all other
Restricted Payments declared or made subsequent to the Issue Date would
exceed the sum of:
(A) 50% of the Consolidated Net Income for the period, treated as
one accounting period, from the beginning of the first full fiscal
quarter commencing after the Issue Date to the end of the most
recent fiscal quarter ending prior to the date of
90
<PAGE>
such Restricted Payment as to which internal financial statements
are available or, in case such Consolidated Net Income is a
deficit, minus 100% of such deficit;
(B) the aggregate Net Cash Proceeds received by the Company from
the issue or sale of its Capital Stock (other than Disqualified
Stock) or other capital contributions subsequent to the Issue Date,
other than Net Cash Proceeds received from (x) an issuance or sale
of such Capital Stock to a Subsidiary of the Company or an employee
stock ownership plan or similar trust to the extent such sale is
financed by loans from or guaranteed by the Company or any
Restricted Subsidiary, unless such loans have been repaid with cash
on or prior to the date of determination, and (y) the sale of
Capital Stock of Holdings to employees or management of the Company
or any Subsidiary which are contributed to the Company after the
Issue Date to the extent such amounts have been applied to make
Restricted Payments in accordance with clause (5) below;
(C) the amount by which Indebtedness of the Company is reduced on
the Company's balance sheet upon the conversion or exchange (other
than by a Subsidiary of the Company) subsequent to the Issue Date
of any Indebtedness of the Company convertible or exchangeable for
Capital Stock (other than Disqualified Stock) of the Company, less
the amount of any cash, or other property, distributed by the
Company upon such conversion or exchange; and
(D) the amount equal to the net reduction in Restricted
Investments made by the Company or any of its Restricted
Subsidiaries in any Person resulting from:
. repurchases or redemptions of such Restricted Investments by
such Person, proceeds realized upon the sale of such
Restricted Investment, repayments of loans or advances or
other transfers of assets, including by way of dividend or
distribution, by such Person to the Company or any
Restricted Subsidiary of the Company, or
. the redesignation of Unrestricted Subsidiaries as Restricted
Subsidiaries, valued in each case as provided in the
definition of "Investment", not to exceed, in the case of any
Unrestricted Subsidiary, the amount of Investments previously
made by the Company or any Restricted Subsidiary in such
Unrestricted Subsidiary, which amount in each case under this
clause (D) was included in the calculation of the amount of
Restricted Payments;
provided, however, that no amount will be included under this
clause (D) to the extent it is already included in Consolidated Net
Income.
(b) The provisions of paragraph (a) will not prohibit:
1. any purchase or redemption of Capital Stock or Subordinated Obligations
of the Company made by exchange for, or out of the proceeds of the
substantially concurrent sale of, Capital Stock of the Company (other
than Disqualified Stock and other than Capital Stock issued or sold to a
Subsidiary or an employee stock ownership plan or similar trust to the
extent such sale is financed by loans from or guaranteed by the Company
or any Restricted Subsidiary unless such loans have been repaid with
cash on or prior to the date of determination); provided, however, that
(A) such purchase or redemption will be excluded in subsequent
calculations of the amount of Restricted Payments and (B) the Net Cash
Proceeds from such sale will be excluded from clause 4 (3) (B) of
paragraph (a);
91
<PAGE>
2. any purchase or redemption of Subordinated Obligations of the Company
made by exchange for, or out of the proceeds of the sale of,
Subordinated Obligations of the Company that qualifies as Refinancing
Indebtedness; provided, however, that such purchase or redemption will
be excluded in subsequent calculations of the amount of Restricted
Payments;
3. so long as no Default or Event of Default has occurred and is
continuing, any purchase or redemption of Subordinated Obligations from
Net Available Cash to the extent permitted under "--Limitation on Sales
of Assets and Subsidiary Stock" below; provided, however, that such
purchase or redemption will be excluded in subsequent calculations of
the amount of Restricted Payments;
4. dividends paid within 60 days after the date of declaration if at such
date of declaration such dividend would have complied with this
provision; provided, however, that such dividends will be included in
subsequent calculations of the amount of Restricted Payments;
5. so long as no Default or Event of Default has occurred and is
continuing, cash dividends to Holdings for the purpose of, and in
amounts equal to, amounts required to permit Holdings:
(A) to redeem or repurchase Capital Stock of Holdings from
existing or former employees or management of the Company or
Holdings or any Subsidiary of the Company or their assigns, estates
or heirs, in each case in connection with the repurchase provisions
under employee stock option or stock purchase agreements or other
agreements to compensate management employees; provided that the
aggregate of such redemptions or repurchases pursuant to this
clause will not exceed (x) in any calendar year $5.0 million in the
aggregate, with unused amounts in any calendar year being carried
over to succeeding calendar years, and (y) $12.5 million in the
aggregate; provided, further that such amount in the aggregate may
be increased by an amount not to exceed the cash proceeds from the
sale of Capital Stock of Holdings which is contributed to the
common equity of the Company to employees or management after the
Issue Date in the aggregate, to the extent the cash proceeds of
such transactions have not otherwise been applied to the payment of
Restricted Payments by virtue of the preceding paragraph (a), less
the amount of Restricted Payments made pursuant to this proviso;
provided, however, that such dividends will be included in the
calculation of the amount of Restricted Payments, and
(B) to make loans or advances to employees or directors of the
Company or Holdings or any Subsidiary of the Company the proceeds
of which are used to purchase Capital Stock of Holdings or the
Company, in an aggregate amount not in excess of $2.0 million at
any one time outstanding; provided, however, that such dividends
will be included in the calculation of the amount of Restricted
Payments;
6. cash dividends or loans to Holdings in amounts equal to (A) the amounts
required for Holdings to pay any Federal, state or local income taxes to
the extent that such income taxes are attributable to the income of the
Company and its Subsidiaries and (B) the amounts required for Holdings
to pay costs and expenses incurred by Holdings in its capacity as a
holding company or for services rendered by Holdings on behalf of the
92
<PAGE>
Company in an amount per annum not to exceed $500,000; provided,
however, that such dividends will be excluded from the calculation of
the amount of Restricted Payments;
7. repurchases of Capital Stock deemed to occur upon the exercise of stock
options if such Capital Stock represents a portion of the exercise
price; provided, however, that such repurchases will be excluded from
the calculation of the amount of Restricted Payments;
8. so long as no Default or Event of Default has occurred and is
continuing, the declaration and payment of dividends to holders of any
class or series of Disqualified Stock of the Company issued in
accordance with the terms of the Indenture; provided, however, that the
payment of such dividends will be excluded from the calculation of the
amount of Restricted Payments; and
9. Investments in Joint Ventures and Unrestricted Subsidiaries that are
made with Excluded Contributions.
The amount of all non-cash Restricted Payments shall be the fair market
value on the date of such Restricted Payment of the asset(s) or securities
proposed to be transferred or issued in connection with the Restricted
Payment. The Board of Directors shall determine the fair market value of any
non-cash Restricted Payment and shall deliver its resolution to the Trustee.
The Board of Directors will base its determination on an opinion or appraisal
issued by an accounting, appraisal or investment banking firm of national
standing if the fair market value is estimated to exceed $10.0 million. On or
before the date it makes any Restricted Payment, the Company shall deliver to
the Trustee an Officers' Certificate that states that the Restricted Payment
is permitted and that sets forth the basis upon which the calculations
required by this covenant "--Limitation on Restricted Payments" were computed,
together with a copy of any fairness opinion or appraisal required by the
Indenture.
Limitation on Liens. The Company will not, and will not permit any of its
Restricted Subsidiaries to, directly or indirectly, create, incur or suffer to
exist any Lien securing any Indebtedness, other than Permitted Liens, unless
the following are contemporaneously secured:
1. the Indebtedness due under the Indenture and the exchange notes, or,
2. in respect of Liens on any Restricted Subsidiary's property or assets,
any Subsidiary Guarantee of such Restricted Subsidiary.
These must be secured equally and ratably with the Indebtedness secured by
such Lien for so long as such Indebtedness is so secured or prior to this
Indebtedness in the case of Liens with respect to Subordinated Obligations or
Guarantor Subordinated Obligations.
Limitation on Sale/Leaseback Transactions. The Company will not, and will
not permit any of its Restricted Subsidiaries to, enter into any
Sale/Leaseback Transaction unless:
1. the Company or Restricted Subsidiary, as the case may be, receives
consideration at the time of such Sale/Leaseback Transaction at least
equal to the fair market value of the property subject to such
transaction as evidenced by a resolution of the Board of Directors
delivered to the Trustee,
2. the Company or Restricted Subsidiary is permitted to Incur Indebtedness
in an amount equal to the Attributable Indebtedness in respect of such
Sale/Leaseback Transaction pursuant to the covenant described under "--
Limitation on Indebtedness";
93
<PAGE>
3. the Company or Restricted Subsidiary is permitted to create a Lien on
the property subject to such Sale/Leaseback Transaction without securing
the exchange notes by the covenant described under "--Limitation on
Liens"; and
4. the Sale/Leaseback Transaction is treated as an Asset Disposition and
all of the conditions of the Indenture described under "--Limitation on
Sales of Assets and Subsidiary Stock", including the provisions
concerning the application of Net Available Cash, are satisfied with
respect to such Sale/Leaseback Transaction, treating all of the
consideration received in such Sale/Leaseback Transaction as Net
Available Cash for purposes of such covenant.
Limitation on Restrictions on Distributions from Restricted Subsidiaries. The
Company will not, and will not permit any Restricted Subsidiary to, create or
permit to exist or become effective any consensual encumbrance or consensual
restriction on the ability of any Restricted Subsidiary to:
1. pay dividends or make any other distributions on its Capital Stock or
pay any Indebtedness or other obligations owed to the Company or any
Restricted Subsidiary,
2. make any loans or advances to the Company or any Restricted Subsidiary
or
3. transfer any of its property or assets to the Company or any Restricted
Subsidiary,
except:
a. any encumbrance or restriction pursuant to an agreement in effect at or
entered into on the date of the Indenture, including, without
limitation, the Indenture and the Senior Credit Agreement in effect on
such date;
b. any encumbrance or restriction of a Restricted Subsidiary arising from
an agreement relating to any Indebtedness Incurred by a Restricted
Subsidiary on or prior to the date the Company acquired the Restricted
Subsidiary, and still outstanding on that date; this clause (b) shall
not include Indebtedness Incurred as consideration in, or to provide all
or any portion of the funds utilized to consummate, the transaction or
series of related transactions in which such Restricted Subsidiary
became a Restricted Subsidiary or was acquired by the Company or in
contemplation thereof);
c. any encumbrance or restriction with respect to a Restricted Subsidiary
under an agreement effecting a refinancing of Indebtedness Incurred
pursuant to an agreement referred to in clause (a) or (b) of this
covenant, or this clause (c), or contained in any amendment to an
agreement referred to in clause (a) or (b) of this covenant or this
clause (c); provided, however, that the encumbrances and restrictions
relating to the Restricted Subsidiary contained in any such agreement or
amendment are no less favorable in any material respect to the Holders
of the exchange notes than encumbrances and restrictions contained in
such agreements referred to in clauses (a) and (b);
d. in the case of clause (3) above, any encumbrance or restriction (A) that
restricts in a customary manner the subletting, assignment or transfer
of any property or asset that is subject to a lease, license or similar
contract, or the assignment or transfer of any such lease, license or
other contract, (B) contained in mortgages, pledges or other security
agreements securing Indebtedness of a Restricted Subsidiary to the
extent these encumbrances or restrictions restrict the transfer of the
property subject to such mortgages, pledges or other security agreements
as long as the mortgage, pledge or other security
94
<PAGE>
agreement is permitted under the Indenture, or (C) pursuant to customary
provisions restricting dispositions of real property interests set forth
in any reciprocal easement agreements of the Company or any Restricted
Subsidiary;
e. purchase money obligations for property acquired in the ordinary course
of business that impose restrictions of the nature described in clause
(3) above on the property so acquired;
f. any Purchase Money Note or other Indebtedness or contractual
requirements incurred with respect to a Qualified Receivables
Transaction relating exclusively to a Receivables Entity that, in the
good faith determination of the Board of Directors, are necessary to
effect such Qualified Receivables Transaction;
g. any restriction with respect to a Restricted Subsidiary imposed pursuant
to an agreement for the direct or indirect sale or disposition of all or
substantially all the Capital Stock or assets of the Restricted
Subsidiary pending the closing of such sale or disposition; and
h. encumbrances or restrictions arising or existing by reason of applicable
law or any applicable rule, regulation or order.
Limitation on Sales of Assets and Subsidiary Stock. (a) The Company will not,
and will not permit any of its Restricted Subsidiaries to, make any Asset
Disposition unless:
1. the Company or the Restricted Subsidiary receives consideration at least
equal to the fair market value, as determined in good faith by the Board
of Directors, of the shares and assets subject to such Asset
Disposition;
2. at least 75% of the consideration thereof received by the Company or the
Restricted Subsidiary is in the form of cash or Cash Equivalents or
Qualified Proceeds; provided that the aggregate fair market value of
Qualified Proceeds (other than cash or Cash Equivalents) which may be
received in consideration for Asset Dispositions pursuant to this clause
shall not exceed $7.5 million after the Issue Date; and
3. an amount equal to 100% of the Net Available Cash from such Asset
Disposition is applied by the Company or the Restricted Subsidiary, as
the case may be:
A. first, to the extent the Company or any Restricted Subsidiary,
as the case may be to prepay, repay or purchase certain
Indebtedness of a Wholly Owned Subsidiary that is a Subsidiary
Guarantor within one year from the later of the date of the Asset
Disposition or the receipt of the Net Available Cash;
B. second, to the extent of the balance of the Net Available Cash
after application in accordance with clause (A), at the Company's
election to invest in Additional Assets within one year from the
later of the date of the Asset Disposition or the receipt of the
Net Available Cash;
C. third, to the extent of the balance of such Net Available Cash
after application and in accordance with clauses (A) and (B) (the
"Excess Proceeds"), to make an offer to purchase the exchange notes
and other Pari Passu Indebtedness with similar provisions requiring
the Company to make an offer to purchase the Pari Passu
Indebtedness with the proceeds from any Asset Disposition ("Pari
Passu Notes") at
95
<PAGE>
100% of its principal amount (or 100% of the accreted value of the
Pari Passu Notes so tendered if the Pari Passu Notes were issued at
a discount) plus accrued and unpaid interest, if any, to the date
of purchase; and
D. fourth, to the extent of the balance of the Excess Proceeds,
after application in accordance with clause (C), to fund other
corporate purposes not prohibited by the Indenture; provided,
however, that, in connection with any prepayment, repayment or
purchase of Indebtedness under clause (A) above, the Company or the
Restricted Subsidiary will retire the Indebtedness and will cause
any related loan commitment to be permanently reduced in an amount
equal to the principal amount so prepaid, repaid or purchased.
Pending the final application of any Net Available Cash, the Company or its
Restricted Subsidiaries may temporarily reduce Indebtedness or otherwise invest
Net Available Cash in any manner that is not prohibited by the Indenture. Upon
completion of such Asset Sale Offer, the amount of Excess Proceeds shall be
reset at zero. Notwithstanding the foregoing provisions, the Company and its
Restricted Subsidiaries will not be required to apply any Net Available Cash in
accordance with this covenant except to the extent that the aggregate Net
Available Cash from all Asset Dispositions which have not been applied in
accordance with this covenant exceed $5.0 million.
For the purposes of this covenant, the following will be deemed to be cash:
. the assumption by the transferee of certain Indebtedness of the Company
or any Restricted Subsidiary of the Company, and the release of the
Company or such Restricted Subsidiary from all liability on such
Indebtedness in connection with such Asset Disposition (in which case the
Company will be deemed to have applied the assumed Indebtedness in
accordance with clause (A) above) and
. securities, notes or other obligations received by the Company or any
Restricted Subsidiary of the Company from the transferee that are
promptly converted by the Company or such Restricted Subsidiary into
cash.
(b) In the event of an Asset Disposition that requires the purchase of
exchange notes pursuant to clause (a)3.C., the Company will be required to
apply such Excess Proceeds to the repayment of the exchange notes and any Pari
Passu Notes as follows: (A) the Company will make an offer to purchase (an
"Offer") within ten days the maximum principal amount of exchange notes that
may be purchased out of an amount (the "Note Amount") equal to the product of
such Excess Proceeds multiplied by a fraction, the numerator of which is the
outstanding principal amount of the exchange notes and the denominator of which
is the sum of the outstanding principal amount of the exchange notes and the
outstanding principal amount (or accreted value, as the case may be) of the
Pari Passu Notes at a purchase price of 100% of its principal amount plus
accrued and unpaid interest, if any, to the date of purchase and (B) the
Company will make an offer to purchase any Pari Passu Notes (a "Pari Passu
Offer") in an amount equal to the excess of the Excess Proceeds over the Note
Amount in accordance with the documentation governing such Pari Passu Notes
with respect to the Pari Passu Offer. If the aggregate purchase price of the
exchange notes and Pari Passu Notes tendered pursuant to the Offer and the Pari
Passu Offer is less than the Excess Proceeds, the remaining Excess Proceeds
will be available to the Company for use in accordance with clause (a)3.D.
above. If the aggregate
96
<PAGE>
principal amount of exchange notes surrendered by Holders thereof exceeds the
Note Amount, the Trustee shall select the exchange notes to be purchased on a
pro rata basis. The Company will not be required to make an Offer for exchange
notes pursuant to this covenant if the Excess Proceeds available therefor are
less than $10.0 million; these lesser amounts will be carried forward for
purposes of determining whether an Offer is required with respect to the Excess
Proceeds from any subsequent Asset Disposition.
(c) The Company will comply, to the extent applicable, with the requirements
of Section 14(e) of the Exchange Act and any other securities laws or
regulations in connection with the repurchase of exchange notes pursuant to the
Indenture. To the extent that the provisions of any securities laws or
regulations conflict with provisions of this covenant, the Company will comply
with the applicable securities laws and regulations and will not be deemed to
have breached its obligations under the Indenture.
Limitation on Affiliate Transactions. (a) The Company will not, and will not
permit any of its Restricted Subsidiaries to, directly or indirectly, enter
into or conduct any transaction with any Affiliate of the Company (an
"Affiliate Transaction") unless:
1. the terms of such Affiliate Transaction are no less favorable to the
Company or the Restricted Subsidiary, than those that could be obtained
in a comparable transaction in arm's-length dealings with a Person who
is not such an Affiliate;
2. in the event the Affiliate Transaction involves an aggregate amount in
excess of $5.0 million, the terms of the transaction have been approved
by a majority of the members of the Board of Directors of the Company
and by a majority of the members of the Board having no personal stake
in such transaction, and the majority or majorities determines that the
Affiliate Transaction satisfies the criteria in (1) above; and
3. in the event the Affiliate Transaction involves an aggregate amount in
excess of $10.0 million, the Company has received an opinion of an
independent accounting, appraisal or investment banking firm of
nationally recognized standing that the Affiliate Transaction is fair
from a financial point of view.
(b) The foregoing paragraph (a) will not apply to:
1. any Restricted Payment (other than Restricted Investments) permitted to
be made pursuant to the covenant described under "--Limitation on
Restricted Payments";
2. any issuance of securities, or other payments, awards or grants in
cash, securities or otherwise pursuant to, or the funding of,
employment arrangements, stock options and stock ownership plans and
other reasonable fees, compensation, benefits and indemnities paid or
entered into by the Company or its Restricted Subsidiaries in the
ordinary course of business to or with consultants or with the
officers, directors or employees of Holdings or the Company and its
Restricted Subsidiaries;
3. loans or advances to employees in the ordinary course of business of
Holdings or the Company or any of its Restricted Subsidiaries;
4. any transaction between the Company and a Restricted Subsidiary or
between Restricted Subsidiaries so long as these transactions do not
involve a Receivables Entity;
97
<PAGE>
5. transactions with suppliers or other purchasers for the sale or
purchase of goods in the ordinary course of business and otherwise in
accordance with the terms of the Indenture which are fair to the
Company and its Restricted Subsidiaries, in the good faith
determination of the Board of Directors of the Company or the senior
management of the Company and are on terms at least as favorable as
might reasonably have been obtained at such time from an unaffiliated
party;
6. the issuance of Capital Stock of the Company, other than Disqualified
Stock, to any Permitted Holder or any Related Party;
7. any agreement in effect on the Issue Date;
8. sales or other transfers or dispositions of accounts receivable and
other related assets customarily transferred in an asset securitization
transaction involving accounts receivable to a Receivables Entity in a
Qualified Receivables Transaction, and acquisitions of Permitted
Investments in connection with a Qualified Receivables Transaction; and
9. the purchase by the Company or any of its Restricted Subsidiaries of
any assets from any of their respective Affiliates, previously
purchased by the Affiliate from a Person that is not an Affiliate, if
the amount paid therefor does not exceed the sum of the amount paid by
such Affiliate for such asset, plus recourse liabilities incurred by
such Affiliate in connection with such asset, and the cost of funds to
such Affiliate in connection with the purchase of such asset.
Limitation on Sales of Capital Stock of Restricted Subsidiaries. The Company
will not sell any shares of Capital Stock of a Restricted Subsidiary, and will
not permit any Restricted Subsidiary, directly or indirectly, to issue or sell
any shares of its Capital Stock except:
. to the Company or a Wholly-Owned Subsidiary (other than a Receivables
Entity); or
. in compliance with the covenant described under "--Limitation on Sales
of Assets and Subsidiary Stock" if, immediately after giving effect to
such issuance or sale, the Restricted Subsidiary would continue to be a
Restricted Subsidiary or if, immediately after giving effect to such
issuance or sale, the Restricted Subsidiary would no longer be a
Restricted Subsidiary, the Investment of the Company in such Person
after giving effect to such issuance or sale would have been permitted
to be made under the "--Limitation on Restricted Payments" covenant as
if made on the date of such issuance or sale.
Notwithstanding the foregoing, the Company may sell all the Capital Stock of
a Subsidiary as long as the Company is in compliance with the terms of the
covenant described under "--Limitation on Sales of Assets and Subsidiary
Stock."
SEC Reports. Even though the Company may not be subject to the reporting
requirements of the Exchange Act, the Company will file with the SEC the annual
reports and the information, documents and other reports specified in Sections
13 and 15(d) of the Exchange Act. The Company will provide copies to the
Trustee and the holders of exchange notes. In the event that the Company is not
permitted to file such reports, documents and information with the SEC under
the Exchange Act, the Company will nevertheless provide this information to the
Trustee and the holders of the exchange notes as if the Company were subject to
the reporting requirements of the Exchange Act within the time periods
98
<PAGE>
specified therein; provided that with respect to the periods ended March 28,
1998 and June 27, 1998, instead of Exchange Act information the Company will be
permitted to provide to the Trustee and Holders the information and reports
required to be delivered to the holders of the Senior Subordinated exchange
notes.
Merger and Consolidation. The Company will not consolidate with or merge with
or into, or convey, transfer or lease all or substantially all its assets to,
any Person, unless:
1. the resulting, surviving or transferee Person (the "Successor Company")
will be a corporation, partnership, trust or limited liability company
organized and existing under the laws of the United States of America,
any State or the District of Columbia, and the Successor Company (if not
the Company) will expressly assume all the obligations of the Company
under the exchange notes and the Indenture, by supplemental indenture,
executed and delivered to the Trustee, in form reasonably satisfactory
to the Trustee;
2. immediately after giving effect to such transaction, no Default or Event
of Default shall have occurred and be continuing;
3. immediately after giving effect to such transaction, the Successor
Company would be able to Incur at least an additional $1.00 of
Indebtedness pursuant to paragraph (a) of "--Limitation on
Indebtedness";
4. each Subsidiary Guarantor, unless it is the other party to the
transactions above, in which case clause 1 shall apply, shall have
confirmed by supplemental indenture that its Subsidiary Guarantee shall
apply for such Person's obligations in respect of the Indenture and the
exchange notes; and
5. the Company has delivered to the Trustee an Officers' Certificate and an
Opinion of Counsel, each stating that such consolidation, merger or
transfer and such supplemental indenture (if any) comply with the
Indenture.
For purposes of this covenant, the sale, lease, conveyance, assignment,
transfer, or other disposition of all or substantially all of the properties
and assets of one or more Subsidiaries of the Company, which properties and
assets, if held by the Company instead of such Subsidiaries, would constitute
all or substantially all of the properties and assets of the Company on a
consolidated basis, shall be deemed to be the transfer of all or substantially
all of the properties and assets of the Company.
The Successor Company will succeed to, be substituted for, and may exercise
every right and power of, the Company under the Indenture. In the case of a
lease of all or substantially all its assets, however, the Company will not be
released from the obligation to pay the principal of and interest on the
exchange notes.
Notwithstanding the foregoing clause 3;
. any Restricted Subsidiary of the Company other than a Receivables Entity
may consolidate with, merge into or transfer all or part of its
properties and assets to the Company;
. the Company may consolidate with or merge into a wholly owned subsidiary
of Holdings created exclusively for the purpose of holding the Capital
Stock of the Company; and
. the Company may merge with an Affiliate incorporated solely for the
purpose of reincorporating the Company in another jurisdiction to realize
tax or other benefits.
99
<PAGE>
Future Subsidiary Guarantors. After the Issue Date, the Company will cause
each Restricted Subsidiary, other than a Foreign Subsidiary or Receivables
Entity created or acquired by the Company or a Receivables Entity, to execute
and deliver to the Trustee a Subsidiary Guarantee. Under that guarantee, the
Subsidiary Guarantor will unconditionally Guarantee, on a joint and several
basis, the full and prompt payment of the principal of, premium, if any and
interest on the exchange notes on a senior basis.
The obligations of each Subsidiary Guarantor will be limited to the maximum
amount as will result in the obligations of such Subsidiary Guarantor under its
Subsidiary Guarantee not constituting a fraudulent conveyance or fraudulent
transfer under federal or state law. This maximum amount takes into account:
1. all other contingent and fixed liabilities of such Subsidiary Guarantor,
including any guarantees under a Senior Credit Agreement, and
2. collections from or payments made by or on behalf of any other
Subsidiary Guarantor in respect of the obligations of such other
Subsidiary Guarantor under its Subsidiary Guarantee or pursuant to its
contribution obligations under the Indenture.
Limitation on Lines of Business. The Company will not, and will not permit
any Restricted Subsidiary to, engage in any business other than a Related
Business.
EVENTS OF DEFAULT
Each of the following constitutes an Event of Default under the Indenture:
1. a default in any payment of interest on any Exchange Note when due,
continued for 30 days;
2. a default in the payment of principal of or premium, if any, on any
Exchange Note when due at its Stated Maturity, upon optional redemption,
upon required repurchase, upon declaration or otherwise;
3. the failure by the Company or any Subsidiary Guarantor to comply with
its obligations under "--Certain Covenants--Merger and Consolidation"
above;
4. failure by the Company to comply for 30 days after notice with any of
its obligations under the covenants described under "--Change of
Control" or under "--Certain Covenants" above other than a failure to
purchase exchange notes which will constitute an Event of Default under
clause 2 above;
5. the failure by the Company to comply for 60 days after notice with its
other agreements contained in the Indenture;
6. 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), other than Indebtedness owed to the
Company or a Wholly Owned Subsidiary, whether the Indebtedness or
guarantee now exists, or is created after the date of the Indenture, if
that default:
100
<PAGE>
(a) is caused by a failure to pay principal of or premium, if any, on
such Indebtedness prior to the expiration of the grace period provided
in the Indebtedness unless it is contested in good faith by appropriate
proceedings ("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 $10.0 million or more (the "cross
acceleration provision");
7. certain events of bankruptcy, insolvency or reorganization of the
Company or a Significant Subsidiary or group of Restricted Subsidiaries
that, taken together would constitute a Significant Subsidiary (the
"bankruptcy provisions");
8. failure by the Company or any Significant Subsidiary or group of
Restricted Subsidiaries that, taken together would constitute a
Significant Subsidiary to pay final judgments aggregating in excess of
$5.0 million, which judgments are not paid, discharged or stayed for a
period of 60 days (the "judgment default provision"); or
9. any Subsidiary Guarantee ceases to be in full force and effect, except
as contemplated by the terms of the Indenture, or is declared null and
void in a judicial proceeding, or any Subsidiary Guarantor denies or
disaffirms its obligations under the Indenture or its Subsidiary
Guarantee.
However, a default under clauses 4 and 5 will not constitute an Event of
Default until the Trustee or the holders of 25% in principal amount of the
outstanding exchange notes notify the Company of the default and the Company
does not cure such default within the time specified in clauses 4 and 5 hereof
after receiving this notice.
If an Event of Default occurs and is continuing, the Trustee or the Holders
of at least 25% in principal amount of the outstanding exchange notes by notice
to the Company and the Trustee may declare the principal of and accrued and
unpaid interest, if any, on all the exchange notes to be due and payable. Upon
this declaration, the principal and accrued and unpaid interest will be due and
payable immediately. If an Event of Default relating to certain events of
bankruptcy, insolvency or reorganization of the Company occurs and is
continuing, the principal of and accrued and unpaid interest on all the
exchange notes will become and be immediately due and payable without any
declaration or other act on the part of the Trustee or any holders. Under
certain circumstances, the Holders of a majority in principal amount of the
outstanding exchange notes may rescind any such acceleration with respect to
the exchange notes and its consequences. In the event of a declaration of
acceleration of the exchange notes because an Event of Default has occurred and
is continuing as a result of the acceleration of any Indebtedness described in
clause 6 above, the declaration of acceleration of the exchange notes shall be
automatically annulled if:
(a) the holders of any Indebtedness described in clause 6 above have
rescinded the declaration of acceleration in respect of such Indebtedness
within 20 days of the date of such declaration;
(b) the annulment of the acceleration of the exchange notes would not
conflict with any judgment or decree of a court of competent jurisdiction; and
101
<PAGE>
(c) all existing Events of Default, except nonpayment of principal, premium
or interest on the exchange notes that became due solely because of the
acceleration of the exchange notes, have been cured or waived.
Subject to the provisions of the Indenture relating to the duties of the
Trustee, if an Event of Default occurs and is continuing, the Trustee will be
under no obligation to exercise any of the rights or powers under the Indenture
at the request or direction of any of the Holders unless those Holders have
offered the Trustee reasonable indemnity or security against any loss,
liability or expense. Except to enforce the right to receive payment of
principal, premium, if any, or interest when due, no Holder may pursue any
remedy with respect to the Indenture or the exchange notes unless:
1. the Holder has previously given the Trustee notice that an Event of
Default is continuing;
2. Holders of at least 25% in principal amount of the outstanding exchange
notes have requested the Trustee to pursue the remedy;
3. those Holders have offered the Trustee reasonable security or indemnity
against any loss, liability or expense;
4. the Trustee has not complied with such request within 60 days after the
receipt of the request and the offer of security or indemnity; and
5. Holders of a majority in principal amount of the outstanding exchange
notes have not given the Trustee a direction that, in the opinion of the
Trustee, is inconsistent with such request within such 60-day period.
Subject to certain restrictions, the Holders of a majority in principal
amount of the outstanding exchange notes are given the right to direct the
time, method and place of conducting any proceeding for any remedy available to
the Trustee or of exercising any trust or power conferred on the Trustee. The
Trustee, however, may refuse to follow any direction that conflicts with law or
the Indenture or that the Trustee determines is unduly prejudicial to the
rights of any other Holder or that would involve the Trustee in personal
liability. Prior to taking any action under the Indenture, the Trustee will be
entitled to indemnification satisfactory to it in its sole discretion against
all losses and expenses caused by taking or not taking such action.
The Indenture provides that if a Default occurs and is continuing and is
known to the Trustee, the Trustee must mail to each Holder notice of the
Default within 90 days after it occurs. Except in the case of a Default in the
payment of principal of, premium, if any, or interest on any Exchange Note, the
Trustee may withhold notice if and so long as the Trustee in good faith
determines that withholding notice is in the interests of the Holders. In
addition, the Company is required to deliver to the Trustee, within 120 days
after the end of each fiscal year, a certificate indicating whether the signers
thereof know of any Default that occurred during the previous year. The Company
also is required to deliver to the Trustee, within 30 days, written notice of
any events which would constitute certain Defaults, their status and what
action the Company is taking or proposes to take in respect thereof.
AMENDMENTS AND WAIVERS
Subject to certain exceptions, the Indenture may be amended with the consent
of the Holders of a majority in principal amount of the exchange notes then
outstanding. Any past default or
102
<PAGE>
compliance with any provisions may be waived with the consent of the Holders of
a majority in principal amount of the exchange notes then outstanding. However,
without the consent of each Holder of an outstanding Exchange Note affected, no
amendment may, among other things:
1. reduce the amount of exchange notes whose Holders must consent to an
amendment;
2. reduce the stated rate of or extend the stated time for payment of
interest on any Note;
3. reduce the principal of or extend the Stated Maturity of any Note;
4. reduce the premium payable upon the redemption or repurchase of any Note
or change the time at which any Note may be redeemed as described under
"--Optional Redemption" above;
5. make any Note payable in money other than that stated in the Notel;
6. impair the right of any Holder to receive payment of principal of and
interest on that Holder's exchange notes on or after the due dates or to
institute suit for the enforcement of any payment on or with respect to
that Holder's exchange notes; or
7. make any change in the amendment provisions which require each Holder's
consent or in the waiver provisions.
Without the consent of any Holder, the Company and the Trustee may amend the
Indenture:
.to cure any ambiguity, omission, defect or inconsistency;
. to provide for the assumption by a successor corporation, partnership,
trust or limited liability company of the obligations of the Company
under the Indenture;
. to provide for uncertificated exchange notes in addition to or in place
of certificated exchange notes;
.to add Guarantees with respect to the exchange notes;
.to secure the exchange notes;
. to add to the covenants of the Company for the benefit of the Holders or
to surrender any right; or power conferred upon the Company;
. to provide for the issuance of exchange notes;
. to make any change that does not adversely affect the rights of any
Holder; or
. to comply with any requirement of the SEC in connection with the
qualification of the Indenture under the Trust Indenture Act.
The consent of the Holders is not necessary under the Indenture to approve
the particular form of any proposed amendment. It is sufficient if this consent
approves the substance of the proposed amendment. After an amendment under the
Indenture becomes effective, the Company is required to mail to the Holders a
notice briefly describing such amendment. However, the failure to give this
notice to all the Holders, or any defect in the notice, will not impair or
affect the validity of the amendment.
DEFEASANCE
The Company at any time may terminate all of its obligations under the
exchange notes and the Indenture ("legal defeasance"), except for certain
obligations, including those relating to the defeasance trust and obligations
to register the transfer or exchange of the exchange notes, to replace
103
<PAGE>
mutilated, destroyed, lost or stolen exchange notes and to maintain a registrar
and paying agent in respect of the exchange notes. If the Company exercises its
legal defeasance option, the Subsidiary Guarantees in effect at such time will
terminate. The Company at any time may terminate its obligations under
covenants described under "--Certain Covenants" (other than "Merger and
Consolidation"), the operation of the cross acceleration provision, the
bankruptcy provisions with respect to Significant Subsidiaries, the judgment
default provision and the Subsidiary Guarantee provision described under "--
Events of Default" above and the limitations contained in clause 3 under "--
Certain Covenants--Merger and Consolidation" above ("covenant defeasance").
The Company may exercise its legal defeasance option notwithstanding its
prior exercise of its covenant defeasance option. If the Company exercises its
legal defeasance option, payment of the exchange notes may not be accelerated
because of an Event of Default with respect thereto. If the Company exercises
its covenant defeasance option, payment of the exchange notes may not be
accelerated because of an Event of Default specified in clause 4, 6 or 7 with
respect only to Significant Subsidiaries, 8 or 9 under "--Events of Default"
above or because of the failure of the Company to comply with clause 3 under
"--Certain Covenants--Merger and Consolidation" above.
In order to exercise either defeasance option, the Company must irrevocably
deposit in trust (the "defeasance trust") with the Trustee money or U.S.
Government Obligations for the payment of principal, premium, if any, and
interest on the exchange notes to redemption or maturity, as the case may be.
The Company must comply with certain other conditions, including delivery to
the Trustee of an Opinion of Counsel to the effect that Holders of the exchange
notes will not recognize income, gain or loss for Federal income tax purposes
as a result of such deposit and defeasance and will be subject to Federal
income tax on the same amount and in the same manner and at the same times as
would have been the case if such deposit and defeasance had not occurred.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS
No director, officer, employee, incorporator or stockholder of Holdings or
the Company, as such, shall have any liability for any obligations of the
Company under the exchange notes, the Indenture or the Subsidiary Guarantees or
for any claim based on, in respect of, or by reason of, such obligations or
their creation. Each Holder by accepting a Note waives and releases all such
liability. The waiver and release are part of the consideration for issuance of
the exchange notes. Such waiver may not be effective to waive liabilities under
the federal securities laws and it is the view of the SEC that such a waiver is
against public policy.
CONCERNING THE TRUSTEE
LaSalle National Bank is the Trustee under the Indenture and has been
appointed by the Company as Registrar and Paying Agent with regard to the
exchange notes.
GOVERNING LAW
The Indenture provides that it and the exchange notes will be governed by,
and construed in accordance with, the laws of the State of New York without
giving effect to applicable principles of conflicts of law to the extent that
the application of the law of another jurisdiction would be required thereby.
104
<PAGE>
CERTAIN DEFINITIONS
"Additional Assets" means:
1. any property or assets (other than Indebtedness and Capital Stock) to be
used by the Company or a Restricted Subsidiary in a Related Business;
2. the Capital Stock of a Person that becomes a Restricted Subsidiary as a
result of the acquisition of such Capital Stock by the Company or a
Restricted Subsidiary of the Company; or
3. Capital Stock constituting a minority interest in any Person that at
such time is a Restricted Subsidiary of the Company; provided, however,
that, in the case of clauses 2 and 3, such Restricted Subsidiary is
primarily engaged in a Related Business.
"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 the purposes of this definition,
"control" when used with respect to any Person means the power to direct the
management and policies of such Person, directly or indirectly, whether through
the ownership of voting securities, by contract or otherwise; and the terms
"controlling" and "controlled" have meanings correlative to the foregoing;
provided that beneficial ownership of 10% or more of the voting securities of a
Person shall be deemed to be control.
"Asset Disposition" means any direct or indirect sale, lease other than an
operating lease entered into in the ordinary course of business, transfer,
issuance or other disposition, or series of related sales, leases, transfers,
issuances or dispositions that are part of a common plan, of shares of Capital
Stock of a Subsidiary, other than directors' qualifying shares, property or
other assets (each referred to for the purposes of this definition as a
"disposition") by the Company or any of its Restricted Subsidiaries, including
any disposition by means of a merger, consolidation or similar transaction,
other than:
1. a disposition by a Restricted Subsidiary to the Company or by the
Company or a Restricted Subsidiary to a Wholly-Owned Subsidiary other
than a Receivables Entity;
2. the sale of Cash Equivalents in the ordinary course of business;
3. a disposition of inventory in the ordinary course of business;
4. disposition of obsolete or worn out equipment or equipment that is no
longer useful in the conduct of the business of the Company and its
Restricted Subsidiaries;
5. transactions permitted under "--Certain Covenants--Merger and
Consolidation" above;
6. for purposes of "--Limitation on Sales of Assets and Subsidiary Stock"
only, the making of a Permitted Investment or a disposition subject to
"--Limitation on Restricted Payments";
7. an issuance of Capital Stock by a Restricted Subsidiary of the Company
to the Company or to a Wholly Owned Subsidiary other than a Receivables
Entity;
8. sales of accounts receivable and related assets of the type specified in
the definition of "Qualified Receivables Transaction" to a Receivables
Entity;
9. the licensing of intellectual property; and
105
<PAGE>
10. sales of assets in any fiscal year not to exceed a fair market value of
$1.0 million in the aggregate.
"Attributable Indebtedness" in respect of a Sale/Leaseback Transaction means,
as at the time of determination, the present value, discounted at the interest
rate borne by the exchange notes, compounded semi-annually, of the total
obligations of the lessee for rental payments during the remaining term of the
lease included in such Sale/Leaseback Transaction, including any period for
which such lease has been extended.
"Average Life" means, as of the date of determination, with respect to any
Indebtedness or Preferred Stock, the quotient obtained by dividing:
. the sum of the products of the numbers of years from the date of
determination to the dates of each successive scheduled principal payment
of such Indebtedness or redemption or similar payment with respect to
such Preferred Stock multiplied by the amount of such payment by
. the sum of all such payments.
"Bank Indebtedness" means any and all amounts, whether outstanding on the
Issue Date or thereafter incurred, payable by the Company under or in respect
of a Senior Credit Agreement and any related notes, collateral documents,
letters of credit and guarantees and any Interest Rate Agreement entered into
in connection with a Senior Credit Agreement, including principal, premium, if
any, interest, including interest accruing on or after the filing of any
petition in bankruptcy or for reorganization relating to the Company at the
rate specified therein whether or not a claim for post filing interest is
allowed in such proceedings, fees, charges, expenses, reimbursement
obligations, guarantees and all other amounts payable thereunder or in respect
thereof.
"Board of Directors" means, as to any Person, the board of directors of such
Person or any duly authorized committee thereof.
"Capital Stock" of any Person means any and all shares, interests, rights to
purchase, warrants, options, participations or other equivalents of or
interests in (however designated) equity of such Person, including any
Preferred Stock, but excluding any debt securities convertible into such
equity.
"Capitalized Lease Obligation" means an obligation that is required to be
classified and accounted for as a capitalized lease for financial reporting
purposes in accordance with GAAP, and the amount of Indebtedness represented by
such obligation will be the capitalized amount of such obligation at the time
any determination thereof is to be made determined in accordance with GAAP, and
the Stated Maturity thereof will be the date of the last payment of rent or any
other amount due under such lease prior to the first date such lease may be
terminated without penalty.
"Cash Equivalents" means:
1. securities issued or directly and fully guaranteed or insured by the
United States Government or any agency or instrumentality thereof,
having maturities of not more than one year from the date of
acquisition;
2. marketable general obligations issued by any state of the United States
of America or any political subdivision of any such state or any public
instrumentality thereof maturing within one year from the date of
acquisition thereof and, at the time of acquisition thereof, having a
credit rating of "A" or better from either Standard & Poor's Ratings
Group or Moody's Investors Service, Inc.;
106
<PAGE>
3. certificates of deposit or bankers' acceptances having maturities of not
more than one year from the date of acquisition thereof issued by any
commercial bank having combined capital and surplus in excess of $250
million;
4. repurchase obligations with a term of not more than seven days for
underlying securities of the types described in clauses 1, 2 and 3
entered into with any bank meeting the qualifications specified in
clause 3 above;
5. commercial paper rated at the time of acquisition thereof at least "A-1"
or the equivalent thereof by Standard & Poor's Rating Group or "P-1" or
the equivalent thereof by Moody's Investors Service, Inc., or carrying
an equivalent rating by a nationally recognized rating agency, if both
of the two named rating agencies cease publishing ratings of
investments, and in either case maturing within one year after the date
of acquisition thereof; and
6. interests in any money market fund which invests solely in instruments
of the type specified in clauses 1 through 5 above.
"Code" means the Internal Revenue Code of 1986, as amended.
"Consolidated Coverage Ratio" means as of any date of determination with
respect to any Person, the ratio of:
. the aggregate amount of Consolidated EBITDA of such Person for the period
of the most recent four consecutive fiscal quarters ending prior to the
date of such determination for which internal financial statements are in
existence to
. Consolidated Interest Expense for such four fiscal quarters;
provided, however, that:
1. if the Company or any Restricted Subsidiary:
a. has Incurred any Indebtedness since the beginning of such period
that remains outstanding on such date of determination or if the
transaction giving rise to the need to calculate the Consolidated
Coverage Ratio is an Incurrence of Indebtedness, Consolidated EBITDA
and Consolidated Interest Expense for such period will be calculated
after giving effect on a pro forma basis to such Indebtedness as if
such Indebtedness had been Incurred on the first day of such period
(except that in making such computation, the amount of Indebtedness
under any revolving credit facility outstanding on the date of such
calculation will be computed based on (A) the average daily balance
of such Indebtedness during such four fiscal quarters or such
shorter period for which such facility was outstanding or (B) if
such facility was created after the end of such four fiscal
quarters, the average daily balance of such Indebtedness during the
period from the date of creation of such facility to the date of
such calculation) and the discharge of any other Indebtedness
repaid, repurchased, defeased or otherwise discharged with the
proceeds of such new Indebtedness as if such discharge had occurred
on the first day of such period, or
b. has repaid, repurchased, defeased or otherwise discharged any
Indebtedness since the beginning of the period that is no longer
outstanding on such date of determination or if the transaction
giving rise to the need to calculate the Consolidated Coverage Ratio
107
<PAGE>
involves a discharge of Indebtedness (in each case other than
Indebtedness incurred under any revolving credit facility unless
such Indebtedness has been permanently repaid and the related
commitment terminated), Consolidated EBITDA and Consolidated
Interest Expense for such period will be calculated after giving
effect on a pro forma basis to such discharge of such Indebtedness,
including with the proceeds of such new Indebtedness, as if such
discharge had occurred on the first day of such period,
2. if since the beginning of such period the Company or any Restricted
Subsidiary will have made any Asset Disposition or if the transaction
giving rise to the need to calculate the Consolidated Coverage Ratio is
an Asset Disposition, the Consolidated EBITDA for such period will be
reduced by an amount equal to the Consolidated EBITDA, if positive,
directly attributable to the assets which are the subject of such Asset
Disposition for such period or increased by an amount equal to the
Consolidated EBITDA (if negative) directly attributable thereto for such
period and Consolidated Interest Expense for such period will be reduced
by an amount equal to the Consolidated Interest Expense directly
attributable to any Indebtedness of the Company or any Restricted
Subsidiary repaid, repurchased, defeased or otherwise discharged with
respect to the Company and its continuing Restricted Subsidiaries in
connection with such Asset Disposition for such period (or, if the
Capital Stock of any Restricted Subsidiary is sold, the Consolidated
Interest Expense for such period directly attributable to the
Indebtedness of such Restricted Subsidiary to the extent the Company and
its continuing Restricted Subsidiaries are no longer liable for such
Indebtedness after such sale),
3. if since the beginning of such period the Company or any Restricted
Subsidiary (by merger or otherwise) will have made an Investment in any
Restricted Subsidiary (or any Person which becomes a Restricted
Subsidiary or is merged with or into the Company) or an acquisition of
assets, including any acquisition of assets occurring in connection with
a transaction causing a calculation to be made hereunder, which
constitutes all or substantially all of an operating unit, division or
line of business, Consolidated EBITDA and Consolidated Interest Expense
for such period will be calculated after giving pro forma effect thereto
(including the Incurrence of any Indebtedness) as if such Investment or
acquisition occurred on the first day of such period, and
4. if since the beginning of such period any Person (that subsequently
became a Restricted Subsidiary or was merged with or into the Company or
any Restricted Subsidiary since the beginning of such period) will have
made any Asset Disposition or any Investment or acquisition of assets
that would have required an adjustment pursuant to clause (2) or (3)
above if made by the Company or a Restricted Subsidiary during such
period, Consolidated EBITDA and Consolidated Interest Expense for such
period will be calculated after giving pro forma effect thereto as if
such Asset Disposition or Investment occurred on the first day of such
period.
For purposes of this definition, whenever pro forma effect is to be given to
an Investment or acquisition of assets and the amount of income or earnings
relating thereto and the amount of Consolidated Interest Expense associated
with any Indebtedness Incurred in connection therewith, the
108
<PAGE>
pro forma calculations will be determined in good faith by a responsible
financial or accounting officer of the Company (including giving pro forma
effect to cost reductions that would be permitted by the SEC to be reflected in
pro forma financial statements included in a registration statement filed by
the SEC). If any Indebtedness bears a floating rate of interest and is being
given pro forma effect, the interest expense on such Indebtedness will be
calculated as if the rate in effect on the date of determination had been the
applicable rate for the entire period (taking into account any Interest Rate
Agreement applicable to such Indebtedness if such Interest Rate Agreement has a
remaining term in excess of 12 months).
"Consolidated EBITDA" for any period means, without duplication, the
Consolidated Net Income for such period, plus the following to the extent
deducted in calculating such Consolidated Net Income:
1. consolidated income taxes,
2. Consolidated Interest Expense,
3. consolidated depreciation expense,
4. consolidated amortization of intangibles and
5. other non-cash charges reducing Consolidated Net Income (excluding any
such non-cash charge to the extent 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 not included in the
calculation). Notwithstanding the foregoing, clause 1 and clauses 3
through 5 relating to amounts of a Restricted Subsidiary of a Person
will be added to Consolidated Net Income to compute Consolidated EBITDA
of such Person only to the extent and in the same proportion that the
net income or loss of such Subsidiary was included in calculating the
Consolidated Net Income of such Person and, to the extent the amounts
set forth in clause 1 and clauses 3 through 5 are in excess of those
necessary to offset a net loss of such Restricted Subsidiary or if such
Restricted Subsidiary has net income for such period, only if a
corresponding amount would be permitted at the date of determination to
be dividended to the Company by such Restricted Subsidiary without prior
approval that has not been obtained, 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 Interest Expense" means, for any period, the total interest
expense of the Company and its consolidated Restricted Subsidiaries, whether
paid or accrued plus, to the extent not included in such interest expense:
1. interest expense attributable to Capitalized Lease Obligations and the
interest portion of rent expense associated with Attributable
Indebtedness in respect of the relevant lease giving rise thereto,
determined as if such lease were a capitalized lease in accordance with
GAAP and the interest component of any deferred payment obligations,
2. amortization of debt discount and debt issuance cost,
3. capitalized interest and accrued interest,
4. non-cash interest expense,
5. commissions, discounts and other fees and charges owed with respect to
letters of credit and bankers' acceptance financing,
109
<PAGE>
6. interest actually paid by the Company or any such Subsidiary under any
Guarantee of Indebtedness or other obligation of any other Person,
7. the consolidated interest expense of such Person and its Restricted
Subsidiaries that was capitalized during such period,
8. the product of:
a. all dividends paid in cash, Cash Equivalents or Indebtedness or
accrued during such period on any series of Disqualified Stock of
such Person or on Preferred Stock of its Restricted Subsidiaries
payable to a party other than the Company or a Wholly-Owned
Subsidiary, times
b. a fraction, the numerator of which is one and the denominator of
which is one minus the then current combined federal, state,
provincial and local statutory tax rate of such Person, expressed as
a decimal, in each case, on a consolidated basis and in accordance
with GAAP and
9. the cash contributions to any employee stock ownership plan or similar
trust to the extent such contributions are used by such plan or trust
to pay interest or fees to any Person (other than the Company) in
connection with Indebtedness Incurred by such plan or trust;
provided, however, that there will be excluded therefrom any such interest
expense of any Unrestricted Subsidiary to the extent the related Indebtedness
is not Guaranteed or paid by the Company or any Restricted Subsidiary. For
purposes of the foregoing, total interest expense will be determined after
giving effect to any net payments made or received by the Company and its
Subsidiaries with respect to Interest Rate Agreements.
"Consolidated Net Income" means, for any period, the net income or loss of
the Company and its consolidated Restricted Subsidiaries, determined in
accordance with GAAP; provided, however, that there will not be included in
such Consolidated Net Income:
1. any net income loss of any Person if such Person is not a Restricted
Subsidiary, except that (A) subject to the limitations contained in 4
below, the Company's equity in the net income of any such Person for
such period will be included in such Consolidated Net Income up to the
aggregate amount of cash actually distributed by such Person during such
period to the Company or a Restricted Subsidiary as a dividend or other
distribution, subject, in the case of a dividend or other distribution
to a Restricted Subsidiary, to the limitations contained in clause 3
below, and (B) the Company's equity in a net loss of any such Person,
other than an Unrestricted Subsidiary, for such period will be included
in determining such Consolidated Net Income to the extent such loss has
been funded with cash from the Company or a Restricted Subsidiary;
2. any net income loss of any Person acquired by the Company or a
Subsidiary in a pooling of interests transaction for any period prior to
the date of such acquisition;
3. any net income of any Restricted Subsidiary if such Subsidiary is
subject to restrictions, directly or indirectly, on the payment of
dividends or the making of distributions by such Restricted Subsidiary,
directly or indirectly, to the Company, except that (A) subject to the
limitations contained in 4 below the Company's equity in the net income
of any such Restricted Subsidiary for such period will be included in
such Consolidated Net Income up
110
<PAGE>
to the aggregate amount of cash that could have been distributed by such
Restricted Subsidiary during such period to the Company or another
Restricted Subsidiary as a dividend, subject, in the case of a dividend
to another Restricted Subsidiary, to the limitation contained in this
clause, and (B) the Company's equity in a net loss of any such
Restricted Subsidiary for such period will be included in determining
such Consolidated Net Income;
4. any gain or loss realized upon the sale or other disposition of any
property, plant or equipment of the Company or its consolidated
Restricted Subsidiaries, including pursuant to any Sale/Leaseback
Transaction which is not sold or otherwise disposed of in the ordinary
course of business and any gain loss realized upon the sale or other
disposition of any Capital Stock of any Person;
5. any extraordinary gain or loss;
6. amortization of premiums, fees and expenses incurred on or prior to the
Issue Date in connection with the offering of the exchange notes and the
Senior Subordinated Exchange Notes and borrowings under the Senior
Credit Agreement; and
7. the cumulative effect of a change in accounting principles.
"Currency Agreement" means in respect of a Person any foreign exchange
contract, currency swap agreement or other similar agreement as to which such
Person is a party or a beneficiary.
"Default" means any event which is, or after notice or passage of time or
both would be, an Event of Default.
"Disqualified Stock" means, with respect to any Person, any Capital Stock of
such Person which by its terms, or by the terms of any security into which it
is convertible or for which it is exchangeable, or upon the happening of any
event:
1. matures or is mandatorily redeemable pursuant to a sinking fund
obligation or otherwise, other than in connection with a Change of
Control or Asset Sale,
2. is convertible or exchangeable for Indebtedness or Disqualified Stock,
excluding Capital Stock which is convertible or exchangeable solely at
the option of the Company or a Restricted Subsidiary or
3. is redeemable at the option of the holder thereof, in whole or in part,
in each case on or prior to the Stated Maturity of the exchange notes,
other than in connection with a Change of Control or Asset Sale, in each
case on or prior to the date that is 91 days after the date (x) on which
the exchange notes mature or (y) on which there are no exchange notes
outstanding,
provided, that only the portion of Capital Stock which so matures or is
mandatorily redeemable, is so convertible or exchangeable or is so redeemable
at the option of the holder thereof prior to such Stated Maturity will be
deemed to be Disqualified Stock; provided further, that Capital Stock issued to
any plan for the benefit of employees of the Company or its Subsidiaries or by
any such plan to such employees shall not constitute Disqualified Stock solely
because it may be required to be purchased by the Company in order to satisfy
applicable statutory or regulatory obligations.
111
<PAGE>
"Domestic Subsidiary" means any Restricted Subsidiary that is organized under
the laws of the United States of America or any state thereof or the District
of Columbia.
"Excluded Contribution" means Net Cash Proceeds or Qualified Proceeds, in
each case, received by the Company from contributions to its common equity
capital and the sale, other than to a Subsidiary or to any Company or
Subsidiary management equity plan or stock option plan or any other management
or employee benefit plan or agreement of Capital Stock, other than Disqualified
Stock, of the Company, in each case designated as Excluded Contributions
pursuant to an Officers' Certificate executed by the principal executive
officer and the principal financial officer of the Company on the date such
capital contributions are made or the date such Capital Stock is sold, as the
case may be, which are excluded from the calculation set forth in paragraph
(a)(3) of "--Limitation on Restricted Payments."
"Foreign Subsidiary" means any Restricted Subsidiary that is not organized
under the laws of the United States of America or any state thereof or the
District of Columbia.
"GAAP" means generally accepted accounting principles in the United States of
America as in effect as of the date of the Indenture, including those 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 approved by a significant segment of the
accounting profession; provided, however, that all reports and other financial
information provided by the Company to the holders, the Trustee and/or the SEC
shall be prepared in accordance with GAAP, as in effect on the date of such
report or other financial information. All ratios and computations based on
GAAP contained in the Indenture will be computed in conformity with GAAP.
"Guarantee" means any obligation, contingent or otherwise, of any Person
directly or indirectly guaranteeing any Indebtedness of any other Person and
any obligation, direct or indirect, contingent or otherwise, of such Person to
purchase or pay, or advance or supply funds for the purchase or payment of,
such Indebtedness of such other Person, whether arising by virtue of
partnership arrangements, or by agreement to keep-well, to purchase assets,
goods, securities or services, to take-or-pay, or to maintain financial
statement conditions or otherwise; provided, however, that the term "Guarantee"
will not include endorsements for collection or deposit in the ordinary course
of business. The term "Guarantee" used as a verb has a corresponding meaning.
"Guarantor Subordinated Obligation" means, with respect to a Subsidiary
Guarantor, any Indebtedness of such Subsidiary Guarantor, whether outstanding
on the Issue Date or thereafter Incurred, which is expressly subordinate in
right of payment to the obligations of such Subsidiary Guarantor under its
Subsidiary Guarantee pursuant to a written agreement, including without
limitation, Guarantees in respect of the Senior Subordinated Exchange Notes.
"Hedging Obligations" of any Person means the obligations of such Person
pursuant to any Interest Rate Agreement or Currency Agreement.
"Holdings" means Favorite Brands International Holding Corp., a Delaware
corporation.
112
<PAGE>
"Incur" means issue, create, assume, Guarantee, incur or otherwise become,
contingently or otherwise, liable for; provided, however, that any Indebtedness
or Capital Stock of a Person existing at the time such Person becomes a
Restricted Subsidiary, whether by merger, consolidation, acquisition or
otherwise, will be deemed to be incurred by such Restricted Subsidiary at the
time it becomes a Restricted Subsidiary; and the terms "Incurred" and
"Incurrence" have meanings correlative to the foregoing.
"Indebtedness" means, with respect to any Person on any date of
determination, without duplication:
1. the principal of and premium, if any, in respect of indebtedness of such
Person for borrowed money;
2. the principal of and premium, if any, in respect of obligations of such
Person evidenced by bonds, debentures, notes or other similar
instruments;
3. all obligations of such Person in respect of letters of credit, bankers'
acceptances or other similar instruments, including reimbursement
obligations with respect thereto;
4. all obligations of such Person to pay the deferred and unpaid purchase
price of property, except trade payables, which purchase price is due
more than six months after the date of placing such property in service
or taking delivery and title thereto;
5. all Capitalized Lease Obligations and all Attributable Indebtedness of
such Person;
6. the amount of all obligations of such Person with respect to the
redemption, repayment or other repurchase of any Disqualified Stock or,
with respect to any Subsidiary, any Preferred Stock, but excluding, in
each case, any accrued dividends;
7. all Indebtedness of other Persons secured by a Lien on any asset of such
Person, whether or not such Indebtedness is assumed by such Person;
provided, however, that the amount of such Indebtedness will be the
lesser of (A) the fair market value of such asset at such date of
determination and (B) the amount of such Indebtedness of such other
Persons;
8. all Indebtedness of other Persons to the extent Guaranteed by such
Person; and
9. to the extent not otherwise included in this definition, net obligations
of such Person under Currency Agreements and Interest Rate Agreements,
the amount of any such obligations to be equal at any time to the
termination value of such agreement or arrangement giving rise to such
obligation that would be payable by such Person at such time.
The amount of Indebtedness of any Person at any date will be the outstanding
balance at such date of all unconditional obligations as described above and
the maximum liability, upon the occurrence of the contingency giving rise to
the obligation, of any contingent obligations at such date.
In addition, "Indebtedness" of any Person shall include Indebtedness
described above that would not appear as a liability on the balance sheet of
such Person if:
1. such Indebtedness is the obligation of a partnership or joint venture
that is not a Restricted Subsidiary (a "Joint Venture"),
2. such Person or a Restricted Subsidiary is a general partner of the Joint
Venture (a "General Partner") and
113
<PAGE>
3. there is recourse, by contract or operation of law, with respect to the
payment of such Indebtedness to property or assets of such Person or a
Restricted Subsidiary of such Person;
and such Indebtedness shall be included in an amount not to exceed (x) the
greater of (A) the net assets of the General Partner and (B) the amount of such
obligations to the extent that there is recourse, by contract or operation of
law, to the property or assets of such Person or a Restricted Subsidiary of
such Person (other than the General Partner) or (y) if less than the amount
determined pursuant to clause (x) immediately above, the actual amount of such
Indebtedness that is recourse to such Person, if the Indebtedness is evidenced
by a writing and is for a determinable amount and the
related interest expense shall be included in Consolidated Interest Expense to
the extent paid by the Company or its Restricted Subsidiaries.
"Interest Rate Agreement" means with respect to any Person any interest rate
protection agreement, interest rate future agreement, interest rate option
agreement, interest rate swap agreement, interest rate cap agreement, interest
rate collar agreement, interest rate hedge agreement or other similar agreement
or arrangement as to which such Person is party or a beneficiary.
"Investment" means, with respect to any Person, all investments by such
Person in other Persons (including Affiliates) in the form of any direct or
indirect advance, loan (other than advances to customers in the ordinary course
of business) or other extension of credit (including by way of Guarantee or
similar arrangement, but excluding any debt or extension of credit represented
by a bank deposit other than a time deposit) or capital contribution to (by
means of any transfer of cash or other property to others or any payment for
property or services for the account or use of others), or any purchase or
acquisition of Capital Stock, Indebtedness or other similar instruments issued
by, such Person and all other items that are or would be classified as
investments on a balance sheet prepared in accordance with GAAP;
provided that:
1. Hedging Obligations entered into in the ordinary course of business and
in compliance with the Indenture,
2. endorsements of negotiable instruments and documents in the ordinary
course of business and
3. an acquisition of assets, Capital Stock or other securities by the
Company for consideration consisting exclusively of common equity
securities of the Company shall not be deemed to be an Investment.
For purposes of the "--Limitation on Restricted Payments" covenant,
1. "Investment" will include the portion (proportionate to the Company's
equity interest in a Restricted Subsidiary to be designated as an
Unrestricted Subsidiary) of the fair market value of the net assets of
such Restricted Subsidiary of the Company at the time that such
Restricted Subsidiary is designated an Unrestricted Subsidiary;
provided, however, that upon a redesignation of such Subsidiary as a
Restricted Subsidiary, the Company will be deemed to continue to have a
permanent "Investment" in an Unrestricted Subsidiary in an amount (if
positive) equal to (x) the Company's "Investment" in such Subsidiary at
the time of such redesignation less (y) the portion (proportionate to
the Company's equity interest in such Subsidiary) of the fair market
value of the net assets of such Subsidiary at the time that such
Subsidiary is so re-designated a Restricted Subsidiary; and
114
<PAGE>
2. any property transferred to or from an Unrestricted Subsidiary will be
valued at its fair market value at the time of such transfer, in each
case as determined in good faith by the Board of Directors of the
Company.
If the Company or any Restricted Subsidiary of the Company sells or otherwise
disposes of any Capital Stock of any Restricted Subsidiary of the Company such
that, after giving effect to any such sale or disposition, such entity 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 Capital Stock of such Subsidiary not sold or disposed of.
"Issue Date" means the date on which the exchange notes are originally
issued.
"Joint Venture" means:
1. any corporation, association, or other business entity, other than a
partnership, of which no less than 25% and no more than 50% of the total
voting power of shares of Capital Stock entitled to vote, without regard
to the occurrence of any contingency, in the election of directors,
managers or trustees thereof is at the time of determination owned or
controlled, directly or indirectly, by the Company or one or more
Restricted Subsidiaries or a combination thereof or
2. any partnership, joint venture, limited liability company or similar
entity of which (x) no less than 25% and no more than 50% of the capital
accounts, distribution rights, total equity and voting interests or
general or limited partnership interests, as applicable, are owned or
controlled, directly or indirectly, by the Company or one or more other
Restricted Subsidiaries or a combination thereof whether in the form of
membership, general, special or limited partnership interests or
otherwise and (y) the Company or any Restricted Subsidiary is a
controlling general partner or otherwise controls such entity, which in
the case of each of clauses 1 and 2 is engaged in a Related Business.
"Lien" means any mortgage, pledge, security interest, encumbrance, lien or
charge of any kind, including any conditional sale or other title retention
agreement or lease in the nature thereof.
"Net Available Cash" from an Asset Disposition means cash payments received
therefrom, including any cash payments received by way of deferred payment of
principal pursuant to a note or installment receivable or otherwise, but only
as and when received, but excluding any other consideration received in the
form of assumption by the acquiring person of Indebtedness or other obligations
relating to the properties or assets that are the subject of such Asset
Disposition or received in any other noncash form,
in each case net of:
1. all legal, accounting, investment banking, title and recording tax
expenses, commissions and other fees and expenses incurred, and all
Federal, state, provincial, foreign and local taxes required to be paid
or accrued as a liability under GAAP, after taking into account any
available tax credits or deductions and any tax sharing arrangements, as
a consequence of such Asset Disposition,
2. all payments made on any Indebtedness which is secured by any assets
subject to such Asset Disposition, in accordance with the terms of any
Lien upon such assets, or which must by its terms, or in order to obtain
a necessary consent to such Asset Disposition, or by applicable law be
repaid out of the proceeds from such Asset Disposition,
115
<PAGE>
3. all distributions and other payments required to be made to minority
interest holders in Subsidiaries or joint ventures as a result of such
Asset Disposition and
4. the deduction of appropriate amounts to be provided by the seller as a
reserve, in accordance with GAAP, against any liabilities associated
with the assets disposed of in such Asset Disposition and retained by
the Company or any Restricted Subsidiary after such Asset Disposition.
"Net Cash Proceeds" means, with respect to any issuance or sale of Capital
Stock, the cash proceeds of such issuance or sale net of attorneys' fees,
accountants' fees, underwriters' or placement agents' fees, discounts or
commissions and brokerage, consultant and other fees actually incurred in
connection with such issuance or sale and net of taxes paid or payable as a
result of such issuance or sale, after taking into account any available tax
credits or deductions and any tax sharing arrangements.
"Non-Recourse Debt" means Indebtedness:
1. as to which neither the Company nor any Restricted Subsidiary (a)
provides any guarantee or credit support of any kind, including any
undertaking, guarantee, indemnity, agreement or instrument that would
constitute Indebtedness, or (b) is directly or indirectly liable, as a
guarantor or otherwise;
2. no default with respect to which, including any rights that the holders
thereof may have to take enforcement action against an Unrestricted
Subsidiary, would permit, upon notice, lapse of time or both, any holder
of any other Indebtedness of the Company or any Restricted Subsidiary to
declare a default under such other Indebtedness or cause the payment
thereof to be accelerated or payable prior to its stated maturity; and
3. the explicit terms of which provide there is no recourse against any of
the assets of the Company or its Restricted Subsidiaries.
"Officer" means the Chairman of the Board, the President, any Vice President,
the Treasurer or the Secretary of the Company.
"Officers' Certificate" means a certificate signed by two Officers or by an
Officer and either an Assistant Treasurer or an Assistant Secretary of the
Company.
"Opinion of Counsel" means a written opinion from legal counsel who is
acceptable to the Trustee. The counsel may be an employee of or counsel to the
Company or the Trustee.
"Pari Passu Indebtedness" means Indebtedness that ranks pari passu in right
of payment to the exchange notes.
"Permitted Holders" means TPG Partners, L.P., TPG Parallel I L.P., InterWest
Partners V, L.P., InterWest Investors V, L.P., Nassau Capital Partners L.P.,
NAS Partners I, L.L.C. and Al J. Bono.
"Permitted Investment" means an Investment by the Company or any Restricted
Subsidiary in:
1. the Company, a Restricted Subsidiary other than a Receivables Entity or
a Person which will, upon the making of such Investment, become a
Restricted Subsidiary other than a Receivables Entity; provided,
however, that the primary business of such Restricted Subsidiary is a
Related Business;
116
<PAGE>
2. another Person if as a result of such Investment such other Person is
merged or consolidated with or into, or transfers or conveys all or
substantially all its assets to, the Company or a Restricted Subsidiary
other than a Receivables Entity; provided, however, that such Person's
primary business is a Related Business;
3. cash and Cash Equivalents;
4. receivables owing to the Company or any Restricted Subsidiary created or
acquired in the ordinary course of business and payable or dischargeable
in accordance with customary trade terms; provided, however, that such
trade terms may include such concessionary trade terms as the Company or
any such Restricted Subsidiary deems reasonable under the circumstances;
5. payroll, travel and similar advances to cover matters that are expected
at the time of such advances ultimately to be treated as expenses for
accounting purposes and that are made in the ordinary course of
business;
6. loans or advances to employees made in the ordinary course of business
consistent with past practices of the Company or such Restricted
Subsidiary;
7. stock, obligations or securities received in settlement of debts created
in the ordinary course of business and owing to the Company or any
Restricted Subsidiary or in satisfaction of judgments or pursuant to any
plan of reorganization or similar arrangement upon the bankruptcy or
insolvency of a debtor;
8. Investments 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 under "--Limitation on Sales of Assets and Subsidiary
Stock";
9. Investments in existence on the Issue Date;
10. Investments by the Company or any of its Restricted Subsidiaries in an
aggregate amount not to exceed $15.0 million outstanding at any one
time plus, to the extent not previously reinvested, any return of
capital not previously realized made pursuant to this clause 10;
11. Investments by the Company or a Restricted Subsidiary in a Receivables
Entity or any Investment by a Receivables Entity in any other Person,
in each case, in connection with a Qualified Receivables Transaction,
provided, that any Investment in any such Person is in the form of a
Purchase Money Note, or any equity interest or interests in accounts
receivable and related assets generated by the Company or a Restricted
Subsidiary and transferred to any Person in connection with a Qualified
Receivables Transaction or any such Person owning such accounts
receivable; and
12. any Investment received as consideration in a transaction not
constituting an Asset Disposition by reason of the $1.0 million
threshold contained in the definition thereof.
"Permitted Liens" means, with respect to any Person:
a. pledges or deposits by such Person under workmen's compensation laws,
unemployment insurance laws or similar legislation, or in connection
with bids, tenders, contracts other than for the payment of Indebtedness
or leases to which such Person is a party, or to secure public or
statutory obligations of such Person or deposits or cash or United
States
117
<PAGE>
government bonds to secure surety or appeal bonds to which such Person
is a party, or for contested taxes or import or custom duties or for the
payment of rent, in each case Incurred in the ordinary course of
business;
b. Liens imposed by law, including carriers', warehousemen's, mechanics'
supplies, materialmen and repairmen Liens, in each case for sums not yet
due or being contested in good faith by appropriate proceedings, if a
reserve or other appropriate provision, if any, as shall be required by
GAAP shall have been made in respect thereof;
c. Liens for taxes, assessments or other governmental charges not yet
subject to penalties for non-payment or which are being contested in
good faith by appropriate proceedings provided reserves required
pursuant to GAAP have been taken on the books of the Company or its
Restricted Subsidiaries, as the case may be;
d. Liens in favor of issuers of surety or performance bonds or bankers'
acceptance or letters of credit issued pursuant to the request of and
for the account of such Person in the ordinary course of its business;
provided, however, that such letters of credit do not constitute
Indebtedness;
e. encumbrances, easements or reservations of, or rights of others for,
licenses, rights of way, sewers, electric lines, telegraph and telephone
lines and other similar purposes, or zoning or other restrictions as to
the use of real properties or liens incidental to the conduct of the
business of such Person or to the ownership of its properties which do
not in the aggregate materially adversely affect the value of said
properties or materially impair their use in the operation of the
business of such Person;
f. Liens securing a Hedging Obligation, so long as the related Indebtedness
is, and is permitted to be under the Indenture, secured by a Lien on the
same property securing the Interest Rate Protection Agreement or
Currency Agreement, as the case may be;
g. leases and subleases of real property which do not materially interfere
with the ordinary conduct of the business of the Company or any of its
Restricted Subsidiaries;
h. judgement Liens not giving rise to an Event of Default so long as such
Lien is adequately bonded and any appropriate legal proceedings which
may have been duly initiated for the review of such judgment have not
been finally terminated or the period within which such proceedings may
be initiated has not expired;
i. Liens for the purpose of securing the payment, or the refinancing of the
payment, of all or a part of the purchase price of, or Capitalized Lease
Obligations with respect to, assets or property acquired or constructed
in the ordinary course of business provided that (x) the aggregate
principal amount of Indebtedness secured by such Liens is otherwise
permitted to be Incurred under the Indenture and does not exceed the
cost of the assets or property so acquired or constructed and (y) such
Liens are created within 90 days of construction or acquisition of such
assets or property and do not encumber any other assets or property of
the Company or any Restricted Subsidiary other than such assets or
property and assets affixed or appurtenant thereto;
j. Liens arising solely by virtue of any statutory or common law provision
relating to banker's Liens, rights of set-off or similar rights and
remedies as to deposit accounts or other funds maintained with a
depository institution; provided that such deposit account is not a
pledged cash collateral account;
118
<PAGE>
k. Liens arising from Uniform Commercial Code financing statement filings
regarding operating leases entered into by the Company and its
Restricted Subsidiaries in the ordinary course of business;
l. Liens existing on the Issue Date;
m. Liens on property or shares of stock of a Person at the time such Person
becomes a Subsidiary; provided, however, that such Liens are not
created, Incurred or assumed in connection with, or in contemplation of,
such other Person becoming a Subsidiary; provided further, however, that
any such Lien may not extend to any other property owned by the Company
or any Restricted Subsidiary;
n. Liens on property at the time the Company or a Subsidiary acquired the
property, including any acquisition by means of a merger or
consolidation with or into the Company or any Restricted Subsidiary;
provided, however, that such Liens are not created, Incurred or assumed
in connection with, or in contemplation of, such acquisition; provided
further, however, that such Liens may not extend to any other property
owned by the Company or any Restricted Subsidiary;
o. Liens securing Indebtedness or other obligations of a Subsidiary owing
to the Company or a Wholly-Owned Subsidiary other than a Receivables
Entity;
p. Liens securing the exchange notes and Subsidiary Guarantees;
q. Liens securing Refinancing Indebtedness Incurred to Refinance
Indebtedness that was previously so secured, provided that (A) such
Liens are not materially less favorable to the Holders and are not
materially more favorable to the lienholders with respect to such Liens
than the Liens in respect of the Indebtedness being refinanced and (B)
any such Lien is limited to all or part of the same property or assets,
plus improvements, accessions, proceeds or dividends or distributions in
respect thereof, that secured the obligations to which such Liens
relate, or under the written arrangements under which the original Lien
arose, could secure the obligations to which such Liens relate;
r. Liens on assets transferred to a Receivables Entity or on assets of a
Receivables Entity, in either case incurred in connection with a
Qualified Receivables Transaction;
s. Liens securing Indebtedness and other obligations under a Senior Credit
Agreement and related Interest Rate Agreements and Liens on assets of
Restricted Subsidiaries securing Guarantees of Indebtedness and other
obligations under a Senior Credit Agreement permitted to be incurred
under the Indenture;
t. Liens arising out of consignment or similar arrangements for the sale of
goods entered into by the Company or any Restricted Subsidiary in the
ordinary course of business; and
u. Liens securing Indebtedness permitted to be incurred pursuant to clause
11 of paragraph (b) of "--Limitation on Indebtedness".
"Person" means any individual, corporation, partnership, joint venture,
association, joint-stock company, trust, unincorporated organization, limited
liability company, government or any agency or political subdivision hereof or
any other entity.
119
<PAGE>
"Preferred Stock", as applied to the Capital Stock of any corporation, means
Capital Stock of any class or classes, however designated, which is preferred
as to the payment of dividends, or as to the distribution of assets upon any
voluntary or involuntary liquidation or dissolution of such corporation, over
shares of Capital Stock of any other class of such corporation.
"Public Equity Offering" means a public offering for cash by either of the
Company or Holdings of its respective common stock, or options, warrants or
rights with respect to its common stock, other than public offerings on Forms
S-4 or S-8.
"Purchase Money Note" means a promissory note of a Receivables Entity
evidencing a line of credit, which may be irrevocable, from the Company or any
Restricted Subsidiary of the Company in connection with a Qualified Receivables
Transaction to a Receivables Entity, which note is repayable from cash
available to the Receivables Entity, other than amounts required to be
established as reserves pursuant to agreements, amounts paid to investors in
respect of interest, principal and other amounts owing to such investors and
amounts owing to such investors and amounts paid in connection with the
purchase of newly generated accounts receivable.
"Qualified Proceeds" means any of the following or any combination of the
following:
1. cash,
2. Cash Equivalents,
3. long-term assets that are used or useful in a Related Business and
4. the Capital Stock of any Person engaged primarily in a Related
Business, if in connection with the receipt by the Company or any
Restricted Subsidiary of the Company of such Capital Stock (a) such
Person becomes a Wholly-Owned Subsidiary and Subsidiary Guarantor or
(b) such Person is merged, consolidated or amalgamated with or into, or
transfers or conveys substantially all of its assets to, or is
liquidated into, the Company or any Wholly-Owned Subsidiary that is a
Subsidiary Guarantor.
"Qualified Receivables Transaction" means any transaction or series of
transactions that may be entered into by the Company or any of its Restricted
Subsidiaries pursuant to which the Company or any of its Restricted
Subsidiaries may sell, convey or otherwise transfer to (a) a Receivables
Entity, in the case of a transfer by the Company or any of its Restricted
Subsidiaries and (b) any other Person, in the case of a transfer by a
Receivables Entity, or may grant a security interest in, any accounts
receivable of the Company or any of its Restricted Subsidiaries, whether now
existing or arising in the future and any assets related thereto including,
without limitation, all collateral securing such accounts receivable, all
contracts and all guarantees or other obligations in respect of such accounts
receivable, the proceeds of such receivables and other assets which are
customarily transferred, or in respect of which security interests are
customarily granted, in connection with asset securitizations involving
accounts receivables.
"Receivables Entity" means a Wholly-Owned Subsidiary of the Company which
engages in no activities other than in connection with the financing of
accounts receivable and which is designated by the Board of Directors of the
Company as provided below as a Receivables Entity:
a. no portion of the Indebtedness or any other obligations, contingent or
otherwise, of which
120
<PAGE>
1. is guaranteed by the Company or any Restricted Subsidiary of the
Company, excluding guarantees of obligations (other than the
principal of, and interest on, Indebtedness) pursuant to Standard
Securitization Undertakings,
2. is recourse to or obligates the Company or any Restricted
Subsidiary of the Company in any way other than pursuant to
Standard Securitization Undertakings or
3. subjects any property or asset of the Company or any Restricted
Subsidiary of the Company, directly or indirectly, contingently or
otherwise, to the satisfaction thereof, other than pursuant to
Standard Securitization Undertakings,
b. with which neither the Company nor any Restricted Subsidiary of the
Company has any material contract, agreement, arrangement or
understanding, except in connection with a Purchase Money Note or
Qualified Receivables Transaction, other than on terms no less
favorable to the Company or such Restricted Subsidiary than those that
might be obtained at the time from Persons that are not Affiliates of
the Company, other than fees payable in the ordinary course of business
in connection with servicing accounts receivable, and
c. to which neither the Company nor any Restricted Subsidiary of the
Company has any obligation to maintain or preserve such entity's
financial condition or cause such entity to achieve certain levels of
operating results. Any such designation by the Board of Directors of
the Company shall be evidenced to the Trustee by filing with the
Trustee a certified copy of the resolution of the Board of Directors of
the Company giving effect to such designation and an Officers'
Certificate certifying that such designation complied with the
foregoing conditions.
"Refinancing Indebtedness" means Indebtedness that is Incurred to refund,
refinance, replace, renew, repay or extend, including pursuant to any
defeasance or discharge mechanism, (collectively, "refinance", "refinances,"
and "refinanced" shall have a correlative meaning) any Indebtedness existing on
the date of the Indenture or Incurred in compliance with the Indenture,
including Indebtedness of the Company that refinances Indebtedness of any
Restricted Subsidiary and Indebtedness of any Restricted Subsidiary that
refinances Indebtedness of a Subsidiary Guarantor or Indebtedness of any
Foreign Subsidiary that refinances Indebtedness of another Foreign Subsidiary
and including Indebtedness that refinances Refinancing Indebtedness, provided,
however, that:
1. the Refinancing Indebtedness has a Stated Maturity no earlier than the
Stated Maturity of the Indebtedness being refinanced,
2. the Refinancing Indebtedness has an Average Life at the time such
Refinancing Indebtedness is Incurred that is equal to or greater than
the Average Life of the Indebtedness being refinanced,
3. such Refinancing Indebtedness is Incurred in an aggregate principal
amount, or if issued with original issue discount, an aggregate issue
price, that is equal to or less than the sum of the aggregate principal
amount, or if issued with original issue discount, the aggregate
accreted value, then outstanding, plus, without duplication, accrued
interest, fees and expenses, including any premium and defeasance
costs, of the Indebtedness being refinanced and
4. if the Indebtedness being extended, refinanced, replaced, defeased or
refunded is subordinated in right of payment to the exchange notes,
such Refinancing Indebtedness is
121
<PAGE>
subordinated in right of payment to the exchange notes on terms at least
as favorable to the Holders as those contained in the documentation
governing the Indebtedness being extended, refinanced, renewed,
replaced, defeased or refunded.
"Related Business" means any business which is the same as, similar to or
reasonably related, ancillary or complementary to any of the businesses of the
Company and its Restricted Subsidiaries on the date of the Indenture.
"Related Party" with respect to any Permitted Holder means:
a. any controlling stockholder or a majority owned Subsidiary of such
Permitted Holder or, in the case of an individual, any spouse or
immediate family member of such Permitted Holder, or
b. any trust, corporation, partnership or other entity, the beneficiaries,
stockholders, partners, owners or Persons beneficially holding a
majority (or more) controlling interest of which consist of such
Permitted Holder and/or such other Persons referred to in the
immediately preceding clause a.
Without limiting the generality of the foregoing, each of TPG Advisors,
Inc., TPG Advisors II, Inc. and SKC GenPar LLC and their respective Affiliates
shall be deemed Related Parties of the Permitted Holders.
"Restricted Subsidiary" means any Subsidiary of the Company other than an
Unrestricted Subsidiary.
"Sale/Leaseback Transaction" means an arrangement relating to property now
owned or hereafter acquired whereby the Company or a Restricted Subsidiary
transfers such property to a Person and the Company or a Subsidiary leases it
from such Person.
"Senior Credit Agreement" means, with respect to the Company, one or more
debt facilities, including, without limitation, the Senior Secured Credit
Agreement to be entered into among the Company, Chase, as Administrative
Agent, and the lenders parties thereto from time to time or commercial paper
facilities with banks or other institutional lenders providing for revolving
credit loans, term loans, receivables financing, including through the sale of
receivables to such lenders or to special purpose entities formed to borrow
from such lenders against such receivables, or letters of credit, in each
case, as amended, restated, modified, renewed, refunded, replaced or
refinanced in whole or in part from time to time, and whether or not with the
original administrative agent and lenders or another administrative agent or
agents or other lenders.
"Senior Subordinated Notes" means obligations issued under the Amended and
Restated Senior Subordinated Note Agreement, dated as of September 12, 1997,
as the same may be amended, supplemented or otherwise modified.
"Significant Subsidiary" means any Subsidiary that would be a "Significant
Subsidiary" of the Company within the meaning of Rule 1-02 under Regulation S-
X promulgated by the SEC.
"Standard Securitization Undertakings" means representations, warranties,
covenants and indemnities entered into by the Company or any Subsidiary of the
Company which are reasonably customary in securitization of accounts
receivable transactions.
122
<PAGE>
"Stated Maturity" means, with respect to any security, the date specified in
such security as the fixed date on which the payment of principal of such
security is due and payable, but shall not include any contingent obligations
to repay, redeem, or repurchase any such principal prior to the date originally
scheduled for the payment thereof.
"Subordinated Obligation" means any Indebtedness of the Company, whether
outstanding on the Issue Date or thereafter Incurred, which is subordinate or
junior in right of payment to the exchange notes pursuant to a written
agreement, including without limitation, Indebtedness in respect of the Senior
Subordinated exchange notes.
"Subsidiary" of any Person means any corporation, association, partnership or
other business entity of which more than 50% of the total voting power of
shares of Capital Stock or other interests, including partnership interests,
entitled to vote, without regard to the occurrence of any contingency, in the
election of directors, managers or trustees thereof is at the time owned or
controlled, directly or indirectly, by such Person, such Person and one or more
Subsidiaries of such Person, or one or more Subsidiaries of such Person. Unless
otherwise specified herein, each reference to a Subsidiary will refer to a
Subsidiary of the Company.
"Subsidiary Guarantee" means, individually, any Guarantee of payment of the
exchange notes by a Subsidiary Guarantor pursuant to the terms of the
Indenture, and, collectively, all such Guarantees. Each such Subsidiary
Guarantee will be in the form prescribed in the Indenture.
"Subsidiary Guarantor" means each Subsidiary of the Company in existence on
the Issue Date and any Restricted Subsidiary created or acquired by the Company
after the Issue Date, in each case other than a Foreign Subsidiary or a
Receivables Entity.
"Unrestricted Subsidiary" means:
1. any Subsidiary of the Company that at the time of determination shall be
designated an Unrestricted Subsidiary by the Board of Directors in the
manner provided below and:
2. any Subsidiary of an Unrestricted Subsidiary. The Board of Directors of
the Company may designate any Subsidiary of the Company, including any
newly acquired or newly formed Subsidiary or a Person becoming a
Subsidiary through merger or consolidation or Investment therein, to be
an Unrestricted Subsidiary only if:
a. such Subsidiary does not own any Capital Stock of, or own or hold
any Lien on any property of, any other Subsidiary of the Company
which is not a Subsidiary of the Subsidiary to be so designated or
otherwise an Unrestricted Subsidiary:
b. all the Indebtedness of such Subsidiary and its Subsidiaries shall,
at the date of designation, and will at all times thereafter,
consist of Non-Recourse Debt:
c. the Company certifies that such designation complies with the
limitations of the "--Restricted Payments" covenant:
d. such Subsidiary, either alone or in the aggregate with all other
Unrestricted Subsidiaries, does not operate, directly or indirectly,
all or substantially all of the business of the Company and its
Subsidiaries:
e. such Subsidiary does not, directly or indirectly, own any
Indebtedness of or Capital Stock of, and has no investments in, the
Company or any Restricted Subsidiary; and:
123
<PAGE>
f. such Subsidiary is a Person with respect to which neither the
Company nor any of its Restricted Subsidiaries has any direct or
indirect obligation (1) to subscribe for additional Capital Stock of
such Person or (2) to maintain or preserve such Person's financial
condition or to cause such Person to achieve any specified levels of
operating results.
Any such designation by the Board of Directors of the Company shall be
evidenced to the Trustee by filing with the Trustee a resolution of the Board
of Directors of the Company giving effect to such designation and an Officers'
Certificate certifying that such designation complied with the foregoing
conditions. 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 as of such date.
The Board of Directors of the Company may designate any Unrestricted Subsidiary
to be a Restricted Subsidiary; provided, that immediately after giving effect
to such designation, no Default or Event of Default shall have occurred and be
continuing or would occur as a consequence thereof and the Company could incur
at least $1.00 of additional Indebtedness under paragraph (a) of the "--
Limitation on Indebtedness" covenant on a pro forma basis taking into account
such designation.
"U.S. Government Obligations" means direct obligations or certificates
representing an ownership interest in such obligations of the United States of
America, including any agency or instrumentality thereof, for the payment of
which the full faith and credit of the United States of America is pledged and
which are not callable or redeemable at the issuer's option.
"Voting Stock" of a corporation means all classes of Capital Stock of such
corporation then outstanding and normally entitled to vote in the election of
directors.
"Wholly-Owned Subsidiary" means a Restricted Subsidiary of the Company, all
of the Capital Stock of which, other than directors' qualifying shares, is
owned by the Company or another Wholly-Owned Subsidiary.
124
<PAGE>
EXCHANGE AND REGISTRATION RIGHTS AGREEMENT
The Company, the Guarantors and the Initial Purchasers entered into the
Registration Rights Agreement concurrently with the issuance of the initial
notes.
Under the Registration Rights Agreement the Company and the Guarantors are
required to file not later than 180 days following the date of original
issuance of the initial notes (the "Issue Date") the registration statement of
which this prospectus is a part for a registered exchange offer with respect to
an issue of new notes identical in all material respects to the initial notes
except that the new notes shall contain no restrictive legend thereon. Under
the Registration Rights Agreement, the Company and the Guarantors are required
to:
. use their respective best efforts to cause the registration statement to
become effective no later than 240 days after the Issue Date,
. keep the Exchange Offer effective for not less than 20 business days (or
longer if required by applicable law) after the date that notice of the
Exchange Offer is mailed to holders of the initial notes and
. use their respective best efforts to consummate the Exchange Offer no
later than 270 days after the Issue Date.
The Exchange Offer being made hereby, if commenced and consummated within the
time periods described in this paragraph, will satisfy those requirements under
the Registration Rights Agreement.
In the event that:
1. because of any change in law or applicable interpretations thereof by
the SEC's staff, the Company and the Guarantors are not permitted to
effect the Exchange Offer, or
2. any initial notes validly tendered pursuant to the Exchange Offer are
not exchanged for exchange notes within 270 days after the Issue Date,
or
3. an Initial Purchaser so requests with respect to initial notes or
Private Exchange Securities (as defined in the Registration Rights
Agreement) not eligible to be exchanged for exchange notes in the
exchange offer and held by it following the consummation of the exchange
offer, or
4. any applicable law or interpretations do not permit a holder of initial
notes to participate in the exchange offer, or
5. any holder of initial notes that participates in the exchange offer does
not receive freely transferable exchange notes in exchange for tendered
initial notes (the obligation to comply with a prospectus delivery
requirement being understood not to constitute a restriction on
transferability),
then in the case of clauses 1 through 5 of this sentence, the Company
and the Guarantors shall at their sole expense:
a. as promptly as practicable, file with the SEC a shelf registration
statement (the "Shelf Registration Statement") covering resales of
the initial notes,
b. use their best efforts to cause the shelf registration statement to
be declared effective under the Securities Act and
125
<PAGE>
c. use their best efforts to keep effective the shelf registration
statement until the earlier of two years after Issue Date (or a
shorter period under certain circumstances) or such time as all of
the applicable initial notes have been sold thereunder.
The Company and the Guarantors will, in the event that a shelf registration
statement is filed, provide to each holder of the initial notes copies of the
prospectus that is a part of the shelf registration statement, notify each such
holder when the shelf registration statement has become effective and take
certain other actions as are required to permit unrestricted resales of the
exchange notes. A holder that sells initial notes pursuant to the shelf
registration statement will be required to be named as a selling security
holder in the related prospectus and to deliver a prospectus to purchasers,
will be subject to certain of the civil liability provisions under the
Securities Act in connection with such sales and will be bound by the
provisions of the Registration Rights Agreement that are applicable to such a
holder, including certain indemnification rights and obligations.
In the event that:
1. the registration statement or the shelf registration statement, as the
case may be, is not filed with the SEC on or prior to 180 days after the
Issue Date;
2. the registration statement or the shelf registration statement, as the
case may be, is not declared effective within 240 days after the Issue
Date;
3. the exchange offer is not consummated on or prior to 270 days after the
Issue Date, or
4. the shelf registration statement is filed and declared effective within
240 days after the Issue Date but shall thereafter cease to be effective
(at any time that the Company and the Guarantors are obligated to
maintain the effectiveness thereof) without being succeeded within 30
days by an additional registration statement filed and declared
effective (each such event referred to in clauses (1) through (4), a
"Registration Default"),
the Company and the Guarantors will be obligated to pay liquidated damages
to each holder of Transfer Restricted Securities (as defined in the
Registration Rights Agreement), during the period of one or more such
Registration Defaults, in an amount equal to $0.192 per week per $1,000
principal amount of Transfer Restricted Securities held by such holder
until:
1. the registration statement or shelf registration statement is filed;
2. the registration statement is declared effective and the exchange offer
is consummated;
3. the shelf registration statement is declared effective or
4. the shelf registration statement again becomes effective, as the case
may be.
Following the cure of all Registration Defaults, the accrual of liquidated
damages will cease.
The Registration Rights Agreement also provides that the Company and the
Guarantors:
1. shall make available for a period of 180 days after the consummation of
the exchange offer a prospectus meeting the requirements of the
Securities Act to any broker-dealer for use in connection with any
resale of any such exchange notes,
126
<PAGE>
2. shall pay all expenses incident to the exchange offer, including the
expense of one counsel to the holders of the Notes and shall indemnify
certain holders of the initial notes, including any broker-dealer,
against certain liabilities, including liabilities under the Securities
Act, and
3. shall use their respective best efforts to enable the registration,
qualification, offer and sale of the exchange notes under the securities
or blue sky laws of any jurisdictions reasonably requested by holders;
provided that the Company and the Guarantors shall not be required to
qualify generally to do business in those jurisdictions if they are not
already qualified to do business there.
A broker-dealer that delivers such a prospectus to purchasers in
connection with such resales will be subject to certain of the civil
liability provisions under the Securities Act and will be bound by the
provisions of the Registration Rights Agreement, including certain
indemnification rights and obligations.
Each holder of the initial notes who wishes to exchange such initial notes
for exchange notes in the exchange offer will be required to make certain
representations, including representations that:
1. any exchange notes to be received by it will be acquired in the ordinary
course of its business;
2. it has no arrangement or understanding with any person to participate in
the distribution of the exchange notes; and
3. it is not an "affiliate" (as defined in Rule 405 under the Securities
Act) of the Company or of the Guarantors, or if it is an affiliate, that
it will comply with the registration and prospectus delivery
requirements of the Securities Act to the extent applicable.
If the holder is not a broker-dealer, it will be required to represent that
it is not engaged in, and does not intend to engage in, the distribution of the
exchange notes. If the holder is a broker-dealer that will receive exchange
notes for its own account in exchange for initial notes that were acquired as a
result of market-making activities or other trading activities (an "Exchanging
Dealer"), it will be required to acknowledge that it will deliver a prospectus
in connection with any resale of such exchange notes.
Holders of the initial notes will be required to make certain representations
to the Company and the Guarantors (as described above) in order to participate
in the exchange offer and will be required to deliver information to be used in
connection with the shelf registration statement in order to have their initial
notes included in the shelf registration statement and benefit from the
provisions regarding liquidated damages set forth in the preceding paragraphs.
A holder who sells initial notes pursuant to the shelf registration statement
generally will be required to be named as a selling securityholder in the
related prospectus and to deliver a prospectus to purchasers, will be subject
to certain of the civil liability provisions under the Securities Act in
connection with such sales and will be bound by the provisions of the
Registration Rights Agreement which are applicable to such a holder (including
certain indemnification obligations).
For so long as the initial notes are outstanding, the Company and the
Guarantors will continue to provide to holders of the Notes and to prospective
purchasers of the Notes the information required by Rule 144A(d)(4) under the
Securities Act.
127
<PAGE>
The foregoing description of the Registration Rights Agreement is a summary
only, does not purport to be complete and is qualified in its entirety by
reference to all provisions of the Registration Rights Agreement. The Company
and the Guarantors are required to provide a copy of the Registration Rights
Agreement to prospective purchasers of initial notes identified to the Company
by the Initial Purchasers upon request.
128
<PAGE>
UNITED STATES INCOME TAX CONSIDERATIONS
The following summary describes the material U.S. federal income tax
consequences of the exchange of the initial notes for exchange notes (the
"Exchange") that may be relevant to a beneficial owner of Notes that is a
citizen or resident of the United States or a U.S. domestic corporation or that
otherwise is subject to United States federal income taxation on a net income
basis in respect of such Notes (a "U.S. holder"). This summary is based on
laws, regulations, rulings and decisions now in effect, all of which are
subject to change. This summary deals only with U.S. holders that hold the
initial notes as capital assets, and does not address tax considerations
applicable to investors that may be subject to special tax rules, such as, but
not limited to, banks, tax-exempt entities, insurance companies or dealers in
securities or currencies, traders in securities electing to mark to market,
persons that hold the initial notes as a position in a "straddle" or conversion
transaction, or as part of a "synthetic security" or other integrated financial
transaction or persons that have a "functional currency" other than the U.S.
dollar.
The Exchange pursuant to the exchange offer will not be a taxable event for
U.S. federal income tax purposes. As a result, a U.S. holder of an initial note
whose initial note is accepted in the exchange offer will not recognize gain or
loss on the Exchange. A tendering U.S. holder's tax basis in the exchange notes
will be the same as such U.S. holder's tax basis in its initial notes. A
tendering U.S. holder's holding period for the exchange notes received pursuant
to the exchange offer will include its holding period for the initial notes
surrendered therefor.
Investors should consult their own tax advisors in determining the tax
consequences to them, as a result of their individual circumstances, of the
exchange of the initial notes for the exchange notes and of the ownership and
disposition of exchange notes received in the exchange offer, including the
application of state, local, foreign or other tax laws.
129
<PAGE>
BOOK-ENTRY; DELIVERY AND FORM
The exchange notes will be issued in the form of a global note (the "Global
Note"). The Global Note will be deposited with, or on behalf of, DTC and
registered in the name of DTC or its nominee. Except as set forth below, the
Global Note may be transferred in whole and not in part, only to DTC or another
nominee of DTC. Investors may hold their beneficial interests for the Global
Note directly through DTC if they have an account with DTC or indirectly
through organizations which have accounts with DTC.
Exchange notes that are issued as described below under "--Certificated
Exchange Notes" will be issued in definitive form. Upon the transfer of an
Exchange Note in definitive form, such Exchange Note will, unless the Global
Note has previously been exchanged for exchange notes in definitive form, be
exchanged for an interest in the Global Note representing the principal amount
of exchange notes being transferred.
CERTAIN BOOK-ENTRY PROCEDURES FOR THE GLOBAL NOTE
The descriptions of the operations and procedures of DTC, Euroclear and Cedel
Bank set forth below 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 change by them from time to time. The
Company takes no responsibility for these operations or procedures, and
investors are urged to contact the relevant system or its participants directly
to discuss these matters.
DTC has advised the Company that it is:
. a limited purpose trust company organized under the laws of the State of
New York,
. a "banking organization" within the meaning of the New York Banking Law,
. a member of the Federal Reserve System,
. a "clearing corporation" within the meaning of the Uniform Commercial
Code, as amended and
. a "clearing agency" registered pursuant to Section 17A of the Exchange
Act.
DTC was created to hold securities for its participants (collectively, the
"Participants") and facilitates the clearance and settlement of securities
transactions between Participants through electronic book-entry changes to the
accounts of its Participants, thereby eliminating the need for physical
transfer and delivery of certificates. DTC's Participants include securities
brokers and dealers (including the Initial Purchasers), banks and trust
companies, clearing corporations and certain other organizations. Indirect
access to DTC's system is also available to other entities such as banks,
brokers, dealers and trust companies (collectively, the "Indirect
Participants") that clear through or maintain a custodial relationship with a
Participant, either directly or indirectly. Investors who are not Participants
may beneficially own securities held by or on behalf of DTC only through
Participants or Indirect Participants.
The Company expects that pursuant to procedures established by DTC
. upon deposit of the Global Note, DTC will credit the accounts of
Participants with an interest in the Global Note, and
130
<PAGE>
. ownership of the exchange notes will be shown on, and the transfer of
ownership thereof will be effected only through, records maintained by
DTC (with respect to the interests of Participants) and the records of
Participants and the Indirect Participants (with respect to the interests
of persons other than Participants).
The laws of some jurisdictions may require that certain purchasers of
securities take physical delivery of such securities in definitive form.
Accordingly, the ability to transfer interests in the Notes represented by a
Global Note to such persons may be limited. In addition, because DTC can act
only on behalf of its Participants, who in turn act on behalf of persons who
hold interests through Participants, the ability of a person having an interest
in exchange notes represented by a Global Note to pledge or transfer such
interest to persons or entities that do not participate in DTC's system, or to
otherwise take actions in respect of such interest, may be affected by the lack
of a physical definitive security in respect of such interest.
So long as DTC or its nominee is the registered owner of the Global Note, DTC
or such nominee, as the case may be, will be considered the sole owner or
holder of the exchange notes represented by the Global Note for all purposes
under the Indenture. Except as provided below, owners of beneficial interests
in the Global Note will not be entitled to have exchange notes represented by
such Global Note registered in their names, will not receive or be entitled to
receive physical delivery of certificated notes, and will not be considered the
owners or holders thereof under the Indenture for any purpose, including with
respect to the giving of any direction, instruction or approval to the Trustee
thereunder. Accordingly, each holder owning a beneficial interest in the Global
Note must rely on the procedures of DTC and, if such holder is not a
Participant or an Indirect Participant, on the procedures of the Participant
through which such holder owns its interest, to exercise any rights of a holder
of exchange notes under the Indenture or such Global Note. The Company
understands that under existing industry practice, in the event that the
Company requests any action of holders of exchange notes, or a holder that is
an owner of a beneficial interest in the Global Note desires to take any action
that DTC, as the holder of such Global Note, is entitled to take, DTC would
authorize the Participants to take such action and the Participants would
authorize holders owning through such Participants to take such action or would
otherwise act upon the instruction of such holders. Neither the Company nor the
Trustee will have any responsibility or liability for any aspect of the records
relating to or payments made on account of exchange notes by DTC, or for
maintaining, supervising or reviewing any records of DTC relating to such
exchange notes.
The Company expects that DTC or its nominee, upon receipt of any payment of
principal of or interest on the Global Note, will credit participants' accounts
with payments in amounts proportionate to their respective beneficial interests
in the principal amount of the Global Note as shown on the records of DTC or
its nominee. The Company also expects that payments by participants to owners
of beneficial interests in the Global Note held through such participants will
be governed by standing instructions and customary practices and will be the
responsibility of such participants. The Company will not have any
responsibility or liability for any aspect of the records relating to, or
payments made on account of, beneficial ownership interests in the Global Note
for any Note or for maintaining, supervising or reviewing any records relating
to such beneficial ownership interests or for any other aspect of the
relationship between DTC and its participants or
131
<PAGE>
the relationship between such participants and the owners of beneficial
interests in the Global Note owning through such participants.
Transfers between Participants in DTC will be effected in accordance with
DTC's procedures, and will be settled in same-day funds. Transfers between
participants in Euroclear or Cedel Bank 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 Bank participants, on the other hand, will be effected
through DTC in accordance with DTC's rules on behalf of Euroclear or Cedel
Bank, as the case may be, by its respective depositary; however, such cross-
market transactions will require delivery of instructions to Euroclear or Cedel
Bank, 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 Bank, 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 relevant Global Notes in DTC, and
making or receiving payment in accordance with normal procedures for same-day
funds settlement applicable to DTC. Euroclear participants and Cedel Bank
participants may not deliver instructions directly to the depositaries for
Euroclear or Cedel Bank.
Because of time zone differences, the securities account of a Euroclear or
Cedel Bank participant purchasing an interest in a Global Note from a
Participant in DTC will be credited, and any such crediting will be reported to
the relevant Euroclear or Cedel Bank participant, during the securities
settlement processing day (which must be a business day for Euroclear and Cedel
Bank) immediately following the settlement date of DTC. Cash received in
Euroclear or Cedel Bank as a result of sales of interest in a Global Security
by or through a Euroclear or Cedel Bank 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 Bank cash account only as of the business
day for Euroclear or Cedel Bank following DTC's settlement date.
Although DTC, Euroclear and Cedel Bank have agreed to the foregoing
procedures to facilitate transfers of interests in the Global Note among
participants in DTC, Euroclear and Cedel Bank, 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 will have any
responsibility for the performance by DTC, Euroclear or Cedel Bank or their
respective participants or indirect participants of their respective
obligations under the rules and procedures governing their operations.
CERTIFICATED EXCHANGE NOTES
If:
. the Company notifies the Trustee in writing that DTC is no longer willing
or able to act as a depositary or DTC ceases to be registered as a
clearing agency under the Exchange Act and a successor depositary is not
appointed within 90 days of such notice or cessation,
. the Company, at its option, notifies the Trustee in writing that it
elects to cause the issuance of exchange notes in definitive form under
the Indenture, or
132
<PAGE>
. upon the occurrence of certain other events as provided in the Indenture,
then, upon surrender by DTC of the Global Note, certificated exchange notes
in definitive form in denominations of U.S. $1,000 and integral multiples
thereof will be issued to each person that DTC identifies as the beneficial
owner of the Notes represented by the Global Note. Upon any such issuance,
the Trustee is required to register such certificated exchange notes in the
name of such person or persons (or the nominee of any thereof) and cause
the same to be delivered thereto. Subject to the foregoing, the Global Note
is not exchangeable, except for a Global Note of the same aggregate
denomination to be registered in the name of DTC or its nominee.
Neither the Company nor the Trustee shall be liable for any delay by DTC or
any Participant or Indirect Participant in identifying the beneficial owners of
the related exchange notes and each such person may conclusively rely on, and
shall be protected in relying on, instructions from DTC for all purposes,
including with respect to the registration and delivery, and the respective
principal amounts, of the exchange notes to be issued.
133
<PAGE>
PLAN OF DISTRIBUTION
Each broker-dealer that receives exchange notes for its own account in
exchange for initial notes pursuant to the exchange offer, where such initial
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 exchange notes. 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 exchange notes received in
exchange for initial notes where such initial notes were acquired as a result
of market-making activities or other trading activities. The Company and the
Guarantors have agreed that, for a period of 180 days after the expiration
date, they will make this prospectus, as amended or supplemented, available to
any broker-dealer for use in connection with any such resale. In addition,
until , 1999, all dealers effecting transactions in the exchange notes
may be required to deliver a prospectus.
Neither the Company nor the Guarantors will receive any proceeds from any
sale of exchange notes by broker-dealers. Exchange notes received by broker-
dealers for their own account 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 exchange notes
or a combination of such methods of resale, at market prices prevailing at the
time of resale, at prices related to such prevailing market prices or at
negotiated prices. Any such resale may be made directly to purchasers or to or
through brokers or dealers who may receive compensation in the form of
commissions or concessions from any such broker-dealer or the purchasers of any
such exchange notes. Any broker-dealer that resells exchange 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 exchange notes may
be deemed to be an "underwriter" within the meaning of the Securities Act and
any profit on any such resale of exchange notes and any commission 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.
For a period of 180 days after the expiration date, the Company and the
Guarantors will promptly send additional copies of this prospectus and any
amendment or supplement to this prospectus to any broker-dealer that requests
such documents in the letter of transmittal. The Company and the Guarantors
have agreed to pay all expenses incident to the exchange offer, including the
expenses of one counsel for the holders of the initial notes, other than
commissions or concessions of any broker-dealers. The Company and the
Guarantors will indemnify the Holders of the initial notes, including any
broker-dealers, against certain liabilities, including liabilities under the
Securities Act.
LEGAL MATTERS
The validity of the exchange notes offered hereby will be passed upon for the
Company by Cleary, Gottlieb, Steen & Hamilton, New York, New York.
134
<PAGE>
EXPERTS
The consolidated financial statements of the Company for the 40 weeks ended
June 29, 1996, and as of and for the 52 weeks ended June 28, 1997 and June 27,
1998, included in this prospectus have been so included in reliance on the
report of PricewaterhouseCoopers LLP, independent accountants, given on the
authority of said firm as experts in auditing and accounting.
The financial statements of Farley Candy Company as of August 30, 1996 and
for the 52 weeks then ended included in this prospectus have been so included
in reliance on the report of PricewaterhouseCoopers LLP, independent
accountants, given on the authority of said firm as experts in auditing and
accounting.
The combined financial statements of Sathers Inc. and Related Entities as of
December 30, 1995 and for the 52 weeks then ended appearing in this prospectus
have been so included in reliance on the report of Friedman Eisenstein Raemer
and Schwartz, LLP ("FERS"), independent auditors, given on the authority of
said firm as experts in auditing and accounting. The Company has agreed to
indemnify and hold FERS and each partner and employee harmless against and from
any and certain losses, claims, damages or liabilities to which FERS may become
subject in connection with its issuance of the consent letter relating to the
combined financial statements of Sathers Inc. and Related Entities as of
December 30, 1995 and for the 52 weeks then ended under any of the federal
securities laws.
The financial statements of Kidd & Company, Inc. as of December 31, 1995 and
for the year then ended appearing in this prospectus have been so included in
reliance on the report of McGladrey & Pullen, LLP, independent auditors, given
on the authority of said firm as experts in auditing and accounting.
The financial statements of Dae Julie, Inc. as of and for the years ended
December 31, 1995 and 1996 appearing in this prospectus have been so included
in reliance on the reports of Wolf, Grieco & Co., independent auditors, given
on the authority of said firm as experts in auditing and accounting.
The financial statements of Candyland Candies, Inc. as of December 31, 1995
and for the year then ended appearing in this prospectus have been so included
in reliance on the report of Wolf, Grieco & Co., independent auditors, given on
the authority of said firm as experts in auditing and accounting.
The combined component financial statements of Mederer Corporation's U.S.
Confectionary Operations as of and for the years ended December 31, 1995 and
1996 included in this prospectus have been so included in reliance on the
report of Deloitte & Touche LLP, independent auditors, given on the authority
of said firm as experts in auditing and accounting.
135
<PAGE>
FAVORITE BRANDS INTERNATIONAL, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
FAVORITE BRANDS INTERNATIONAL, INC.
Report of Independent Accountants....................................... F-3
Consolidated Balance Sheets as of June 28, 1997 and June 27, 1998 and
(unaudited) September 26, 1998 ........................................ F-5
Consolidated Statements of Operations for the 40 weeks ended June 29,
1996, the 52 weeks ended June 28, 1997 and June 27, 1998 and
(unaudited) the 13 weeks ended September 27, 1997 and September 26,
1998................................................................... F-7
Consolidated Statements of Changes in Stockholder's Equity for the 40
weeks ended June 29, 1996, the 52 weeks ended June 28, 1997 and June
27, 1998 and (unaudited) the 13 weeks ended September 26, 1998......... F-8
Consolidated Statements of Cash Flows for the 40 weeks ended June 29,
1996, the 52 weeks ended June 28, 1997 and June 27, 1998 and
(unaudited) the 13 weeks ended September 27, 1997 and September 26,
1998................................................................... F-9
Notes to Consolidated Financial Statements.............................. F-10
FARLEY CANDY COMPANY
Report of Independent Accountants....................................... F-23
Balance Sheet as of August 30, 1996..................................... F-24
Statement of Operations and Retained Earnings for the 52 weeks ended
August 30, 1996........................................................ F-25
Statement of Cash Flows for the 52 weeks ended August 30, 1996.......... F-26
Notes to Financial Statements........................................... F-27
SATHERS INC. AND RELATED ENTITIES
Independent Auditors' Report............................................ F-30
Combined Balance Sheets as of December 30, 1995 and (unaudited) June 22,
1996................................................................... F-31
Combined Statements of Income for the fifty-two weeks ended December 30,
1995 and (unaudited) for the twenty-five weeks ended June 24, 1995 and
June 22, 1996.......................................................... F-32
Combined Statements of Stockholders' Equity and Partners' Capital for
the fifty-two weeks ended December 30, 1995 and (unaudited) for the
twenty-five weeks ended June 22, 1996.................................. F-33
Combined Statements of Cash Flows for the fifty-two weeks ended December
30, 1995, and (unaudited) for the twenty-five weeks ended June 24, 1995
and June 22, 1996...................................................... F-34
Notes to Combined Financial Statements.................................. F-35
KIDD & COMPANY, INC.
Independent Auditors' Report............................................ F-43
Balance Sheet as of December 31, 1995................................... F-44
Statement of Income for the year ended December 31, 1995................ F-45
Statement of Retained Earnings for the year ended December 31, 1995..... F-46
Statement of Cash Flows for the year ended December 31, 1995............ F-47
Notes to Financial Statements........................................... F-48
DAE JULIE, INC.--1996
Independent Auditors' Report............................................ F-55
Balance Sheet as of December 31, 1996................................... F-56
Statement of Income and Retained Earnings for the year ended December
31, 1996............................................................... F-57
Statement of Cash Flows for the year ended December 31, 1996............ F-58
Notes to Financial Statements........................................... F-59
</TABLE>
F-1
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
DAE JULIE, INC.--1995
Independent Auditor's Report............................................ F-64
Balance Sheet as of December 31, 1995................................... F-65
Statement of Income for the year ended December 31, 1995................ F-66
Statement of Cash Flows for the year ended December 31, 1995............ F-67
Notes to Financial Statements........................................... F-68
CANDYLAND CANDIES, INC.
Independent Auditor's Report............................................ F-71
Balance Sheet as of December 31, 1995................................... F-72
Income Statement for the year ended December 31, 1995................... F-73
Statement of Cash Flows for the year ended December 31, 1995............ F-74
Notes to Financial Statements........................................... F-75
MEDERER CORPORATION'S U.S. CONFECTIONARY OPERATIONS (COMPONENT)
Independent Auditors' Report............................................ F-79
Combined Component Balance Sheets as of December 31, 1995 and 1996...... F-80
Combined Statements of Component Income and Equity for the years ended
December 31, 1995 and 1996............................................. F-81
Combined Statements of Component Cash Flows for the years ended December
31, 1995 and 1996...................................................... F-82
Notes to Combined Component Financial Statements........................ F-83
Combined Component Balance Sheet as of (unaudited) March 31, 1997....... F-90
Combined Statements of Component Income and Equity (unaudited) for the
three months ended March 31, 1996 and 1997............................. F-91
Combined Statements of Component Cash Flows (unaudited) for the three
months ended March 31, 1996 and 1997................................... F-92
Notes to Combined Component Financial Statements (unaudited) for the
three months ending March 31, 1996 and 1997............................ F-93
</TABLE>
F-2
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholder of Favorite Brands
International, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of changes in stockholder's equity and
of cash flows present fairly, in all material respects, the financial position
of Favorite Brands International, Inc. and its subsidiaries at June 27, 1998
and June 28, 1997, and the results of their operations and their cash flows for
the 52 weeks ended June 27, 1998 and June 28, 1997, and for the 40 weeks from
inception on September 25, 1995 to June 29, 1996, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Chicago, Illinois
August 21, 1998
F-3
<PAGE>
[PAGE INTENTIONALLY LEFT BLANK]
F-4
<PAGE>
FAVORITE BRANDS INTERNATIONAL, INC.
AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF FAVORITE BRANDS INTERNATIONAL HOLDING CORP.)
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
JUNE 28, JUNE 27, SEPTEMBER 26,
ASSETS 1997 1998 1998
------ -------- -------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Current Assets:
Cash and cash equivalents.................... $ 3,177 $ 6,440 $ 2,574
Accounts receivable, less allowances of
$7,650, $14,600 and $16,858 at June 28,
1997, June 27, 1998 and September 26, 1998,
respectively................................ 67,667 48,999 70,848
Inventories.................................. 87,710 98,232 101,983
Deferred income taxes........................ 18,944 17,846 17,846
Prepaid expenses and other current assets.... 5,426 3,363 2,798
-------- -------- --------
Total current assets....................... 182,924 174,880 196,049
-------- -------- --------
Property, Plant and Equipment, at Cost:
Land......................................... 3,962 5,200 5,200
Buildings.................................... 65,448 67,123 67,139
Machinery and equipment...................... 182,199 200,145 198,862
Construction in progress..................... 25,301 15,561 21,026
-------- -------- --------
276,910 288,029 292,227
Less accumulated depreciation................ 21,736 49,129 56,061
-------- -------- --------
255,174 238,900 236,166
-------- -------- --------
Other Assets:
Intangible assets, net....................... 367,367 366,775 361,455
Prepaid expenses and other assets............ 1,588 1,619 1,700
Deferred income taxes........................ -- 27,382 34,406
-------- -------- --------
368,955 395,776 397,561
-------- -------- --------
$807,053 $809,556 $829,776
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
FAVORITE BRANDS INTERNATIONAL, INC.
AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF FAVORITE BRANDS INTERNATIONAL HOLDING CORP.)
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
JUNE 28, JUNE 27, SEPTEMBER 26,
LIABILITIES AND STOCKHOLDER'S EQUITY 1997 1998 1998
------------------------------------ -------- -------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Current Liabilities:
Accounts payable and accrued liabilities... $ 85,331 $110,485 $108,902
Current portion of long-term debt.......... 22,266 2,440 2,440
Other current liabilities.................. 446 916 907
-------- -------- --------
Total current liabilities................ 108,043 113,841 112,249
-------- -------- --------
Noncurrent Liabilities:
Long-term debt............................. 511,101 554,950 588,000
Deferred income taxes...................... 8,982 -- --
Other long-term liabilities................ 2,015 3,020 3,429
-------- -------- --------
Total noncurrent liabilities............. 522,098 557,970 591,429
-------- -------- --------
Commitments and Contingencies................
Stockholder's Equity:
Common stock, $.01 par value; 1,000 shares
authorized, issued, and outstanding....... -- -- --
Additional paid-in capital................. 179,058 195,324 195,324
Accumulated deficit........................ (2,146) (57,579) (69,226)
-------- -------- --------
Total stockholder's equity............... 176,912 137,745 126,098
-------- -------- --------
$807,053 $809,556 $829,776
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE>
FAVORITE BRANDS INTERNATIONAL, INC.
AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF FAVORITE BRANDS INTERNATIONAL HOLDING CORP.)
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
40 WEEKS 52 WEEKS 52 WEEKS 13 WEEKS 13 WEEKS
ENDED ENDED ENDED ENDED ENDED
JUNE 29, JUNE 28, JUNE 27, SEPTEMBER 27, SEPTEMBER 26,
1996 1997 1998 1997 1998
-------- -------- -------- ------------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales............... $127,629 $652,538 $763,921 $ 203,570 $ 196,640
Costs and expenses:
Cost of sales......... 74,289 433,707 493,095 129,407 123,508
Selling, marketing and
administrative....... 38,110 176,506 237,147 53,827 69,004
Amortization of
intangible assets.... 7,454 9,540 13,670 3,061 3,004
Restructuring and
business integration
costs................ -- -- 39,689 3,445 1,047
-------- -------- -------- --------- ---------
119,853 619,753 783,601 189,740 196,563
Income (loss) from
operations......... 7,776 32,785 (19,680) 13,830 77
Nonoperating expenses:
Interest expense...... 8,589 33,463 54,581 12,745 14,577
-------- -------- -------- --------- ---------
(Loss) income before
income taxes,
extraordinary
charge and
cumulative effect
of change in
accounting
principle.......... (813) (678) (74,261) 1,085 (14,500)
(Benefit) provision for
income taxes........... (305) 960 (27,419) 908 (5,356)
-------- -------- -------- --------- ---------
(Loss) income before
extraordinary
charge and
cumulative effect
of change in
accounting
principle.......... (508) (1,638) (46,842) 177 (9,144)
Extraordinary charge--
early debt
extinguishment, net of
income tax benefit..... -- -- 8,591 4,154 --
Cumulative effect of
change in accounting
principle, net of
income tax benefit..... -- -- -- -- 2,503
-------- -------- -------- --------- ---------
Net loss................ $ (508) $ (1,638) $(55,433) $ (3,977) $ (11,647)
======== ======== ======== ========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
F-7
<PAGE>
FAVORITE BRANDS INTERNATIONAL, INC.
AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF FAVORITE BRANDS INTERNATIONAL HOLDING CORP.)
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK
-------------
NUMBER ADDITIONAL TOTAL
OF PAID-IN ACCUMULATED STOCKHOLDER'S
SHARES AMOUNT CAPITAL DEFICIT EQUITY
------ ------ ---------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Balance at September 25,
1995....................... -- $-- $ -- $ -- $ --
Capital contribution on
September 25, 1995....... 1,000 -- 60,000 -- 60,000
Net loss.................. -- -- -- (508) (508)
----- ---- -------- -------- --------
Balance at June 29, 1996.... 1,000 -- 60,000 (508) 59,492
Capital contribution...... -- -- 119,058 -- 119,058
Net loss.................. -- -- -- (1,638) (1,638)
----- ---- -------- -------- --------
Balance at June 28, 1997.... 1,000 -- 179,058 (2,146) 176,912
Capital contribution...... -- -- 16,266 -- 16,266
Net loss.................. -- -- -- (55,433) (55,433)
----- ---- -------- -------- --------
Balance at June 27, 1998.... 1,000 -- 195,324 (57,579) 137,745
Net loss (unaudited)...... -- -- -- (11,647) (11,647)
----- ---- -------- -------- --------
Balance at September 26,
1998 (unaudited)........... 1,000 $-- $195,324 $(69,226) $126,098
===== ==== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-8
<PAGE>
FAVORITE BRANDS INTERNATIONAL, INC.
AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF FAVORITE BRANDS INTERNATIONAL HOLDING CORP.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
40 WEEKS 52 WEEKS 52 WEEKS 13 WEEKS 13 WEEKS
ENDED ENDED ENDED ENDED ENDED
JUNE 29, JUNE 28, JUNE 27, SEPTEMBER 27, SEPTEMBER 26,
1996 1997 1998 1997 1998
--------- --------- --------- ------------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash Flows from
Operating Activities:
Net loss.............. $ (508) $ (1,638) $ (55,433) $ (3,977) $(11,647)
Adjustments:
Depreciation and
amortization....... 10,202 29,089 41,297 9,787 10,110
Deferred income
taxes.............. (676) (2,850) (28,039) 894 (5,356)
Non-cash
restructuring and
business
integration costs.. -- -- 13,847 -- --
Extraordinary
charge............. -- -- 8,591 4,154 --
Cumulative effect of
change in
accounting
principle.......... -- -- -- -- 2,503
Changes in operating
assets and
liabilities, net of
effects from
purchase of
confections
businesses:
Accounts
receivable....... (11,015) 9,316 18,631 (23,074) (21,849)
Inventories....... 5,863 8,876 (10,788) (144) (3,751)
Prepaid expenses
and other
assets........... 5,900 3,994 278 (2,545) 432
Accounts payable
and accrued
liabilities...... 12,342 (13,014) 23,144 12,778 (1,640)
Income taxes
payable.......... 372 (1,079) 564 (33) 39
Other
liabilities...... -- (144) 467 (200) 418
--------- --------- --------- --------- --------
Net cash
provided by
(used in)
operating
activities..... 22,480 32,550 12,559 (2,360) (30,741)
--------- --------- --------- --------- --------
Cash Flows from
Investing Activities:
Purchase of
confections
businesses, net of
cash acquired........ (204,388) (336,191) (303) (78) --
Capital expenditures.. (8,544) (31,018) (27,010) (4,584) (5,592)
--------- --------- --------- --------- --------
Net cash used in
investing
activities..... (212,932) (367,209) (27,313) (4,662) (5,592)
--------- --------- --------- --------- --------
Cash Flows from
Financing Activities:
Net borrowings
(repayments) on
revolving credit
loans................ 5,300 31,800 (25,150) 16,471 33,050
Proceeds from term
loans and senior
subordinated notes... 129,500 380,500 545,000 195,000 --
Repayments of term
loans and senior
subordinated notes... -- (14,613) (495,387) (187,500) --
Payments for debt
issuance costs....... (3,412) (11,330) (21,006) (6,255) (583)
Repayment of assumed
debt................. -- (139,457) -- -- --
Repayment of other
long-term debt....... -- -- (440) (440) --
Proceeds from capital
contribution......... 60,000 90,000 15,000 -- --
--------- --------- --------- --------- --------
Net cash
provided by
financing
activities..... 191,388 336,900 18,017 17,276 32,467
--------- --------- --------- --------- --------
Increase in cash and
cash equivalents....... 936 2,241 3,263 10,254 (3,866)
Cash and cash
equivalents, beginning
of period.............. -- 936 3,177 3,177 6,440
--------- --------- --------- --------- --------
Cash and cash
equivalents, end of
period................. $ 936 $ 3,177 $ 6,440 $ 13,431 $ 2,574
========= ========= ========= ========= ========
Supplemental Cash Flow
Information:
Income taxes paid..... $ -- $ 4,996 $ 493 $ 83 $ --
========= ========= ========= ========= ========
Interest paid......... $ 8,631 $ 31,585 $ 44,228 $ 4,800 $ 10,898
========= ========= ========= ========= ========
Purchase of
confections
businesses, net of
cash acquired
Assets acquired....... $(206,074) $(586,920) $ (1,447) $ (1,238) $ --
Liabilities assumed... 1,686 221,671 1,144 1,160 --
Capital contribution.. -- 29,058 -- -- --
--------- --------- --------- --------- --------
Cash consideration.... $(204,388) $(336,191) $ (303) $ (78) $ --
========= ========= ========= ========= ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-9
<PAGE>
FAVORITE BRANDS INTERNATIONAL, INC.
AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF FAVORITE BRANDS INTERNATIONAL HOLDING CORP.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Favorite Brands International, Inc. (Company), a wholly-owned subsidiary of
Favorite Brands International Holding Corp. (Holdings), manufactures and
distributes candy and confection products primarily in North America. The
Company was incorporated in Delaware on July 7, 1995, and commenced operations
on September 25, 1995, when it acquired certain tangible and intangible assets
of a confections manufacturer and distributor for approximately $200 million,
plus the assumption of certain liabilities.
2. ACQUISITIONS
During fiscal 1997, the Company made five acquisitions for a total purchase
price, including assumed debt, of approximately $500 million. A summary of
these acquisitions is as follows (dollars in millions):
<TABLE>
<CAPTION>
NAME ACQUISITION DATE PURCHASE PRICE
---- ---------------- --------------
<S> <C> <C>
Farley Candy Company August 30, 1996 $204
Sathers Inc. and Sather Trucking Corpora-
tion August 30, 1996 107
Kidd & Company, Inc. August 30, 1996 30
Dae Julie, Inc. January 27, 1997 42
Mederer Corporation April 1, 1997 117
</TABLE>
All acquisitions have been accounted for as purchases and, accordingly, the
purchase prices were allocated to the specific assets and liabilities based
upon their fair market values, except for the Kidd & Company, Inc. (Kidd)
acquisition. On June 16, 1996, Holdings' controlling stockholder acquired the
stock of Kidd for approximately $30 million. The Company acquired the stock of
Kidd from the controlling stockholder on August 30, 1996. Accordingly, Kidd's
net assets were recorded by the Company on August 30, 1996 at the controlling
stockholder's net book value of $30 million.
Unaudited pro forma information with respect to the Company as if the
acquisitions had occurred on September 25, 1995 is as follows (dollars in
thousands):
<TABLE>
<CAPTION>
(UNAUDITED) (UNAUDITED)
40 WEEKS ENDED 52 WEEKS ENDED
JUNE 29, 1996 JUNE 28, 1997
-------------- --------------
<S> <C> <C>
Net sales....... $555,404 $812,831
Net income...... 21,120 2,809
</TABLE>
Holdings contributed $119.1 million of additional capital during fiscal 1997
in conjunction with these acquisitions. This amount includes $29.1 million of
Holdings stock issued to the seller of Farley Candy Company.
F-10
<PAGE>
FAVORITE BRANDS INTERNATIONAL, INC.
AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF FAVORITE BRANDS INTERNATIONAL HOLDING CORP.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Effective at the close of business on the dates indicated below, the
following mergers took place:
<TABLE>
<CAPTION>
DATE COMPANY WAS MERGED WITH AND INTO SURVIVING CORPORATION
---- ------- ------------------------ ---------------------
<S> <C> <C> <C>
December 31, 1996 Kidd and Company, Inc. Favorite Brands International, Inc. Favorite Brands International, Inc.
December 31, 1997 Dae Julie, Inc. Farley Candy Company Farley Candy Company
December 31, 1997 Mederer Corporation Trolli Inc. Trolli Inc.
March 31, 1998 Farley Candy Company Favorite Brands International, Inc. Favorite Brands International, Inc.
March 31, 1998 Sathers Inc. Favorite Brands International, Inc. Favorite Brands International, Inc.
</TABLE>
3. SIGNIFICANT ACCOUNTING POLICIES
Fiscal Year End
The Company's fiscal year ends on the Saturday immediately preceding June 30
and generally includes 52 weeks of operations. The fiscal year for the period
from September 25, 1995 (inception of operations) through June 29, 1996
includes 40 weeks.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
all majority-owned subsidiaries. All intercompany accounts and transactions are
eliminated. Certain prior period amounts have been reclassified to conform to
fiscal 1998 presentation.
Revenue Recognition
Revenues are recognized when products are shipped, and are shown net of
discounts (other than trade spending), returns and unsalables.
Cash and Cash Equivalents
All highly liquid debt instruments purchased with an initial maturity of
three months or less are considered to be cash equivalents.
Inventories
Inventories are stated at the lower of cost, determined using the first in,
first out (FIFO) method, or market.
Property, Plant, and Equipment
Property, plant, and equipment are stated at cost. Depreciation is computed
using the straight-line method and the following estimated useful lives:
<TABLE>
<S> <C>
Buildings..................................................... 35-40 years
Machinery and equipment....................................... 3-20 years
</TABLE>
F-11
<PAGE>
FAVORITE BRANDS INTERNATIONAL, INC.
AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF FAVORITE BRANDS INTERNATIONAL HOLDING CORP.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Intangible Assets
Intangible assets, consisting primarily of goodwill and deferred financing
fees, are amortized on a straight-line basis over 40 years and the terms of the
related indebtedness which range from 7 to 10 years, respectively.
Long-Lived Assets
In the event that facts and circumstances indicate that the Company's long-
lived assets may be impaired, an evaluation of recoverability must be
performed. The Company makes such evaluations by comparing the estimated future
undiscounted cash flows associated with the asset to the asset's carrying
amount to determine if a write down to market value or discounted cash flow is
required.
Income Taxes
Deferred tax assets and liabilities are determined based on the difference
between the financial statement and tax basis of assets and liabilities using
enacted tax rates in effect for the year in which the differences are expected
to reverse. A valuation allowance is provided when it is more likely than not
that some portion of the deferred tax assets arising from temporary differences
and net operating losses will not be realized.
Risks and Uncertainties
The Company operates primarily in the United States and is subject to varying
degrees of risk and uncertainty. The Company insures its business and assets
against insurable risks in a manner that it deems appropriate. The Company
believes that the risk of loss from noninsurable events would not have a
material adverse effect on its operations as a whole.
Sugar, corn syrup, gelatin, and starch are the Company's principal raw
materials. The prices of these items vary and may influence the Company's
financial results.
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 amounts reported in the financial statements and accompanying
notes. Actual results could differ from those estimates.
Fair Value of Financial Instruments
The carrying amounts reported in the consolidated balance sheet for current
assets and liabilities approximate fair value due to the immediate or short-
term maturity of these financial instruments.
The recorded value of long-term debt and related interest rate contracts,
which were designated as hedges, approximated fair value as of June 28, 1997
when considering the then prevailing interest rate environment. The estimated
fair value of the Company's debt and related interest rate contracts at June
27, 1998 was $541.8 million, which differs from the carrying amount of $557.4
million.
F-12
<PAGE>
FAVORITE BRANDS INTERNATIONAL, INC.
AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF FAVORITE BRANDS INTERNATIONAL HOLDING CORP.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Interim Financial Information
Interim financial information for the 13 weeks ended September 27, 1997 and
September 26, 1998 included herein is unaudited; however, in the opinion of the
Company, the interim financial information includes all adjustments, consisting
of only normal recurring adjustments, necessary for a fair presentation of the
results for the interim periods. The results of operations for the 13 weeks
ended September 26, 1998 are not necessarily indicative of the results to be
expected for the year.
Recent Accounting Pronouncements
In 1997, the Financial Accounting Standards Board ("FASB") issued Statement
131, "Disclosure about segments of an enterprise and related information,"
which requires adoption in fiscal 1999. Statement 131 requires companies to
report segment information based on how management disaggregates its business
for evaluating performance and making operating decisions. The Company has
reviewed Statement 131 and anticipates that it will report as a single segment
after adoption of such statement.
In 1998, the FASB issued Statement 133, "Accounting for derivative
instruments and hedging activities," which requires adoption in fiscal 2000.
Statement 133 establishes accounting and reporting standards for derivative
instruments and for hedging activities. The Company believes that the adoption
of Statement 133 will not have a material impact on its financial reporting.
4. RESTRUCTURING AND BUSINESS INTEGRATION COSTS
The Company recorded a $39.7 million charge for restructuring and business
integration costs during the year ended June 27, 1998. The nature of these
costs is discussed below.
During fiscal 1998, the Company began to integrate the acquired companies
through various initiatives including consolidation of production facilities,
reorganization of certain supply chain functions, integration of certain sales,
marketing, and customer service functions, and integration of certain
information systems. As a result of these activities, the Company incurred the
following business integration charges during fiscal 1998, of which $13.6
million was paid as of fiscal year end (dollars in thousands):
<TABLE>
<S> <C>
Staff consolidation and related costs............................ $ 7,372
Manufacturing integration costs.................................. 4,902
Distribution and warehouse consolidation costs................... 6,594
SKU rationalization costs........................................ 1,858
Technology licensing costs....................................... 1,685
Strategic acquisitions not pursued............................... 1,284
-------
$23,695
=======
</TABLE>
F-13
<PAGE>
FAVORITE BRANDS INTERNATIONAL, INC.
AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF FAVORITE BRANDS INTERNATIONAL HOLDING CORP.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In addition to the integration activities discussed above, the Board of
Directors approved a restructuring of the Company's operations during fiscal
year 1998. The restructuring, which management expects to be completed by
fiscal 2000, includes (i) rationalizing certain production facilities and
outsourcing production of certain candy products and (ii) further consolidating
the distribution network by reducing the number of distribution centers used by
the Company. In connection with these activities, the Company recorded the
following restructuring charges during fiscal 1998 (dollars in thousands):
<TABLE>
<S> <C>
Loss on impairment of property, plant, and equipment.............. $13,847
Termination benefits for approximately 500 plant employees........ 1,250
Plant closing costs............................................... 897
-------
$15,994
=======
</TABLE>
5. INVENTORIES
Inventories consist of (dollars in thousands):
<TABLE>
<CAPTION>
JUNE JUNE
28, 27, SEPTEMBER 26,
1997 1998 1998
------- ------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Raw materials............................... $21,945 $22,748 $ 23,931
Work-in-process............................. 16,610 19,521 15,798
Finished goods.............................. 49,155 55,963 62,254
------- ------- --------
$87,710 $98,232 $101,983
======= ======= ========
</TABLE>
6. INTANGIBLE ASSETS
Intangible assets, which are shown net of accumulated amortization of $18.9
million and $29.0 million, respectively, consist of (dollars in thousands):
<TABLE>
<CAPTION>
JUNE 28, JUNE 27,
1997 1998
-------- --------
<S> <C> <C>
Goodwill............................................... $349,863 $342,511
Deferred financing fees................................ 12,951 19,824
Other.................................................. 4,553 4,440
-------- --------
$367,367 $366,775
======== ========
</TABLE>
In connection with the acquisitions made during fiscal 1997 and related
synergies, management revised its estimated useful life for goodwill from
fifteen years to forty years on August 30, 1996. This revision has been
accounted for prospectively and resulted in reduced amortization expense of
$4.9 million in the fiscal year ended June 28, 1997.
F-14
<PAGE>
FAVORITE BRANDS INTERNATIONAL, INC.
AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF FAVORITE BRANDS INTERNATIONAL HOLDING CORP.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
7. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities consist of (dollars in thousands):
<TABLE>
<CAPTION>
JUNE
28, JUNE 27,
1997 1998
------- --------
<S> <C> <C>
Accounts payable....................................... $43,645 $ 45,654
Accrued liabilities:
Restructuring termination benefits and plant closing
costs............................................... -- 2,147
Payroll and related taxes............................ 15,617 13,616
Trade promotions..................................... 11,577 17,958
Interest............................................. 1,850 10,749
Other................................................ 12,642 20,361
------- --------
$85,331 $110,485
======= ========
</TABLE>
8. COMMITMENTS AND CONTINGENCIES
Operating Leases
Certain land, buildings, and equipment are leased under noncancelable
operating leases. Certain leases for facilities contain renewal options and
require additional payments for maintenance charges and are subject to periodic
escalation charges.
Total minimum rental commitments under noncancelable operating leases at June
27, 1998 are: 1999--$5.5 million; 2000--$5.0 million; 2001--$4.1 million;
2002--$3.5 million; 2003--$3.1 million; and thereafter--$21.6 million.
Rental expense amounted to $0.2 million, $6.3 million and $6.6 million for
the fiscal years ended June 29, 1996, June 28, 1997 and June 27, 1998,
respectively.
Litigation
From time to time, the Company and its subsidiaries are named as defendants
in various lawsuits resulting from the ordinary course of business. Although
the outcome of any legal proceeding cannot be predicted with certainty, the
Company does not expect these lawsuits to materially impact its financial
condition.
9. BENEFIT PLANS
During fiscal 1996, the Company established a 401(k) defined-contribution
benefit plan (Plan) for salaried and hourly employees. In order to participate
in the Plan, employees must be at least 21 years old and have worked at least
1,000 hours during the first 12 months of employment. Each employee may
contribute from 1% to 15% of their eligible wages into the Plan. The Company
matches 50% of each employee's contributions to the Plan up to a maximum
matching contribution of 3% of the employee's eligible wages. In addition, the
Company may make a discretionary profit-sharing contribution to the Plan. Total
contributions to the Plan were $.6 million, $1.9 million and $3.2 million for
the fiscal years ended June 29, 1996, June 28, 1997 and June 27, 1998.
F-15
<PAGE>
FAVORITE BRANDS INTERNATIONAL, INC.
AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF FAVORITE BRANDS INTERNATIONAL HOLDING CORP.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
10. LONG-TERM DEBT
Long-term debt consists of (dollars in thousands):
<TABLE>
<CAPTION>
JUNE 28, JUNE 27,
1997 1998
-------- --------
<S> <C> <C>
Revolving Credit Loans...................................... $ 37,100 $ 11,950
Senior term loan payable ("Term B Loans"), principal due
quarterly through May 2005................................. -- 150,000
10.75% Senior notes payable, principal due May 2006......... -- 200,000
10.25% Senior subordinated notes payable, principal due
August 2007................................................ -- 195,000
Senior notes payable ("Old Term A Loans"), principal due
quarterly through August 2003.............................. 196,875 --
Senior notes payable ("Old Term B Loans"), principal due
quarterly through August 2004.............................. 193,637 --
Senior notes payable ("Old Term C Loans"), principal due
quarterly through February 2005............................ 59,875 --
11.125% Senior subordinated notes payable ("Old Senior
Subordinated Notes"), principal due April 2007............. 45,000 --
Other....................................................... 880 440
-------- --------
533,367 557,390
Less current portion........................................ 22,266 2,440
-------- --------
$511,101 $554,950
======== ========
</TABLE>
Aggregate maturities of long-term debt over the next five fiscal years are as
follows: 1999--$2.4 million; 2000--$2.0 million; 2001--$2.0 million; 2002--$2.0
million; and 2003--$2.0 million.
During fiscal year 1997, the Company entered into a credit agreement ("Old
Senior Credit Agreement") which provided for $200 million of Old Term A Loans,
$195 million of Old Term B Loans, $60 million of Old Term C Loans, and $60
million of Old Revolving Credit Loans. The Company also borrowed $45 million of
Old Senior Subordinated Notes pursuant to a senior subordinated note agreement.
In August 1997, the Company borrowed $150 million ("Senior Subordinated
Notes") pursuant to a second senior subordinated note agreement ("Senior
Subordinated Note Agreement"). Funds from the Senior Subordinated Notes were
used to prepay $142.5 million of term indebtedness outstanding under the Old
Senior Credit Agreement, plus loan fees and accrued interest. In September
1997, the Company amended its Senior Subordinated Note Agreement to increase
its borrowings under this agreement from $150 million to $195 million; the
amended Senior Subordinated Note Agreement retained substantially all of its
original terms. The $45 million in new borrowings were used to extinguish the
Old Senior Subordinated Notes. As a result of these early debt extinguishments,
the Company recorded a $4.2 million extraordinary charge, net of $2.7 million
in income tax benefits.
F-16
<PAGE>
FAVORITE BRANDS INTERNATIONAL, INC.
AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF FAVORITE BRANDS INTERNATIONAL HOLDING CORP.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Senior Subordinated Note Agreement, as amended, includes certain
restrictions including, but not limited to, further borrowings, capitalized
leases, certain asset dispositions, making certain loans and investments, and
the payment of dividends. The Senior Subordinated Note Agreement also contains
a provision that the Company expects will increase the per annum interest by
1.0% beginning on October 1, 1998.
In February 1998, the Company entered into a letter agreement ("Letter
Agreement") and a related promissory note ("Promissory Note") with a commercial
bank ("Bank") under which it could borrow up to $19 million. All amounts
outstanding on the Promissory Note, plus accrued interest, were repaid in
conjunction with the Refinancing discussed below. In connection with this loan,
Holdings' controlling stockholder entered into certain agreements with the
Bank. In consideration for these agreements, Holdings issued a ten year warrant
to purchase 18,666 shares of its common stock at a price of $89.57 per share to
the stockholder. The $1.0 million fair market value of the warrant was recorded
as expense and paid-in capital during the fiscal year ended June 27, 1998.
In May 1998, the Company entered into a credit agreement ("Senior Credit
Agreement") which provided for $150 million of Term B Loans and $75 million of
Revolving Credit Loans. The Company also borrowed $200 million ("Senior Notes")
pursuant to an indenture ("Indenture"). In addition, Holdings sold 166,667
shares of common stock for $15 million at the time of these borrowings and
contributed these proceeds to the Company. Collectively, these transactions are
referred to as the Refinancing. Funds from the Refinancing were used to prepay
all indebtedness outstanding under the Old Senior Credit Agreement, plus
accrued interest, repay the Promissory Note discussed above, and for general
corporate purposes. As a result of this early debt extinguishment, the Company
recorded a $4.4 million extraordinary charge, net of $2.9 million in income tax
benefits.
The Senior Credit Agreement contains covenants that require the Company to
comply with specified financial ratios and satisfy certain financial measures,
including minimum interest coverage, maximum leverage, and minimum fixed charge
coverage ratios. In addition, the Senior Credit Agreement and the Indenture
contain covenants relating to, among other things, (i) the incurrence of
additional indebtedness (subject to certain permitted indebtedness, as
defined), (ii) the payment of dividends on, and redemption of, capital stock of
the Company and its restricted subsidiaries (as defined) and the redemption of
certain subordinated obligations of the Company and its subsidiaries, (iii)
investments, (iv) sales of assets, (v) sales of subsidiary stock (as defined),
(vi) transactions with affiliates, (vii) sale-leaseback transactions, (viii)
liens, (ix), lines of business, (x) consolidations, mergers and transfers of
substantially all of its assets and (xi) distributions from restricted
subsidiaries (as defined).
Loans under the Senior Credit Agreement are periodically designated, at
management's election, as Prime Rate loans, payable quarterly, or London
Interbank Offering Rate ("LIBOR") loans,
F-17
<PAGE>
FAVORITE BRANDS INTERNATIONAL, INC.
AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF FAVORITE BRANDS INTERNATIONAL HOLDING CORP.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
payable in maturities of one, two, three, or six months. Each type of term loan
bears interest at the designated rate plus an applicable margin based on the
Company achieving defined financial ratios. The applicable interest rate was
8.19% on the Revolving Credit Loans and 8.69% on the Term B Loans as of June
27, 1998.
Revolving credit loans have been classified as long-term liabilities since
the Company has the ability, and the intent, to maintain these facilities for
longer than one year.
The Company terminated several existing interest rate swap agreements in
conjunction with the Refinancing. As a result, a $1.5 million termination
charge was recorded as interest expense during the fiscal year ended June 27,
1998. The remaining interest rate swap agreements were marked-to-market at the
time of the Refinancing and resulted in an additional $0.9 million charge to
interest expense during the year ended June 27, 1998. The two remaining
interest rate swap agreements are summarized below (dollars in thousands):
<TABLE>
<CAPTION>
FIXED VARIABLE
PRESENT INTEREST INTEREST
NOTIONAL RATE RATE
DATE TERM AMOUNT PAID RECEIVED
---- ------- -------- -------- --------
<S> <C> <C> <C> <C>
December 1996................................ 3 years $81,730 6.26% 5.69%
</TABLE>
The variable rate is adjusted quarterly based on 3-month LIBOR rates. The
Company anticipates the counterparties to the swap agreements will fully
perform on their obligations. The Company accounts for these agreements as
hedges.
11. INCOME TAXES
The provision for income taxes consists of the following (dollars in
thousands):
<TABLE>
<CAPTION>
40 WEEKS 52 WEEKS 52 WEEKS
ENDED ENDED ENDED
JUNE 29, JUNE 28, JUNE 27,
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
Current:
Federal.................................... $ 368 $(129) $ --
State...................................... 3 123 620
----- ----- --------
371 (6) 620
----- ----- --------
Deferred:
Federal.................................... (593) 845 (24,534)
State...................................... (83) 121 (3,505)
----- ----- --------
(676) 966 (28,039)
----- ----- --------
Total (benefit) provision for income
taxes................................... $(305) $ 960 $(27,419)
===== ===== ========
</TABLE>
F-18
<PAGE>
FAVORITE BRANDS INTERNATIONAL, INC.
AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF FAVORITE BRANDS INTERNATIONAL HOLDING CORP.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Deferred income taxes consist of (dollars in thousands):
<TABLE>
<CAPTION>
JUNE 28, JUNE 27,
1997 1998
-------- --------
<S> <C> <C>
Deferred tax assets:
Allowance for doubtful accounts....................... $ 1,477 $ 365
Accrued promotions.................................... 3,022 2,343
Accrued expenses...................................... 3,228 8,045
Restructuring reserves................................ -- 5,622
Net operating loss carryforwards...................... 13,595 43,176
Other................................................. 207 2,564
------- -------
Deferred tax assets................................. 21,529 62,115
------- -------
Deferred tax liabilities:
Accelerated depreciation.............................. 6,970 8,449
Goodwill amortization................................. 3,295 6,859
Other................................................. 1,302 1,579
------- -------
Deferred tax liabilities............................ 11,567 16,887
------- -------
Net deferred tax asset.............................. $ 9,962 $45,228
======= =======
</TABLE>
The Company is included in the consolidated income tax return filed by
Holdings. There is no tax sharing agreement between the Company and Holdings.
For financial reporting purposes, the Company has computed its provision for
income taxes on a separate return basis in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes."
The Company has a $43.2 million deferred tax asset recorded as of June 27,
1998, reflecting the benefit of $107.9 million in net operating loss
carryforwards which expire in varying amounts between 2011 and 2013. This
benefit will be realized to the extent the Company generates sufficient taxable
income prior to the expiration dates of the loss carryforwards. The Company
believes it is more likely than not that all of the deferred tax asset will be
realized based on estimated future taxable income.
The provision (benefit) for income taxes differs from the amount of income
tax provision (benefit) computed by applying the United States federal income
tax rate to income before income taxes. A reconciliation of the differences is
as follows (dollars in thousands):
<TABLE>
<CAPTION>
40 WEEKS ENDED 52 WEEKS ENDED 52 WEEKS ENDED
JUNE 29, 1996 JUNE 28, 1997 JUNE 27, 1998
-------------- -------------- --------------
<S> <C> <C> <C>
Computed statutory tax
provision................. $(285) $ (237) $(25,991)
Increase (decrease)
resulting from:
Nondeductible
depreciation and
amortization............ 8 1,006 47
State and local taxes.... (35) 112 (1,813)
Nondeductible meals and
entertainment........... 4 79 88
Other, net............... 3 -- 250
----- ------ --------
Provision (benefit) of
income taxes.......... $(305) $ 960 $(27,419)
===== ====== ========
</TABLE>
F-19
<PAGE>
FAVORITE BRANDS INTERNATIONAL, INC.
AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF FAVORITE BRANDS INTERNATIONAL HOLDING CORP.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
12. STOCK OPTION PLAN
Holdings has a stock option plan pursuant to which its Board of Directors is
authorized to grant options to employees to purchase up to 250,000 shares of
Holdings' common stock. These options generally expire 10 years from grant (5
years for stockholders with aggregate holdings of 10% or greater) and generally
vest ratably over four years. Options are granted at fair value, which has
historically been generally determined by the most recent purchase price of
Holdings' common stock prior to the date of grant.
Information with respect to options granted under this plan is as follows:
<TABLE>
<CAPTION>
OPTION PRICE PER NUMBER OF
SHARE SHARES
------------------ ---------
<S> <C> <C> <C> <C>
Balance at June 29, 1996........................... $ 50.25 71,500
-------
Granted.......................................... $89.57 to $105.00 108,736
Exercised........................................ $50.25 to $ 89.57 (5,186)
Forfeited........................................ $50.25 to $ 89.57 (9,814)
-------
Balance at June 28, 1997........................... $50.25 to $105.00 165,236
-------
Granted.......................................... $105.00 99,982
Exercised........................................ $50.25 to $ 89.57 (9,723)
Forfeited........................................ $50.25 to $105.00 (15,655)
-------
Balance at June 27, 1998........................... $50.25 to $105.00 239,840
=======
Exercisable at June 27, 1998..................... $50.25 to $105.00 103,715
=======
Weighted-Average Grant Date Minimum Value........ $13.25 to $ 26.44
</TABLE>
The minimum value of the options at the date-of-grant was estimated using the
Black-Scholes option pricing model with the following weighted-average
assumptions: expected life--5 years; interest rate--6.5% for 1997 and 1998; and
no dividend yield.
The Company applied Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees," and related interpretations, in accounting for
its stock option plan. No compensation expense has been recognized for all
options granted. If compensation cost for the stock plan had been determined
based on the fair value at the grant dates for awards under those plans
consistent with the method of Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation," the Company's net loss would
have been (dollars in thousands):
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
JUNE 29, 1996 JUNE 28, 1997 JUNE 27, 1998
------------- ------------- -------------
<S> <C> <C> <C>
Net loss--as reported.......... $(508) $(1,638) $(55,433)
Net loss--pro forma............ $(604) $(2,590) $(56,123)
</TABLE>
F-20
<PAGE>
FAVORITE BRANDS INTERNATIONAL, INC.
AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF FAVORITE BRANDS INTERNATIONAL HOLDING CORP.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
13. RELATED PARTY TRANSACTIONS
From time to time, the Company engages certain stockholders and other related
parties to provide acquisition, financing and other related services. During
fiscal years 1997 and 1998, such fees totaled approximately $4.8 million and
$6.6 million, respectively.
14. CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMER
Financial instruments which potentially subject the Company to concentration
of credit risk consist principally of cash and cash equivalents and accounts
receivable. The Company places cash and cash equivalents with high-quality
financial institutions which are federally insured up to prescribed limits. The
Company monitors the credit quality of its customers and maintains an allowance
for potential credit losses which, historically, has been adequate.
A single customer and its affiliates accounted for approximately 17% of net
sales for both the fiscal years ended June 28, 1997 and June 27, 1998. This
customer accounted for approximately 20% and 10% of accounts receivable at June
28, 1997 and June 27, 1998, respectively.
15. SUPPLEMENTAL GUARANTOR INFORMATION
Sather Trucking Corp. and Trolli, Inc. (collectively, the "Guarantors"),
wholly-owned subsidiaries of the Company, have unconditionally guaranteed,
jointly and severally, the payment of principal, interest, and premium, if any,
on the Senior Notes, Senior Subordinated Notes, and all other obligations under
the respective Indentures. Sather Trucking Corp. and Trolli, Inc. were acquired
on August 30, 1996 and April 1, 1997, respectively. The selected summarized
financial information for the Guarantors presented below reflects the fiscal
periods subsequent to the dates each guarantor was acquired.
<TABLE>
<CAPTION>
JUNE 28, JUNE 27,
1997 1998
-------- --------
<S> <C> <C>
Net sales............................................. $ 44,995 $106,922
Income from operations................................ 2,107 10,679
Net loss.............................................. (1,285) (2,648)
Current assets........................................ $ 21,453 $ 38,605
Property, plant and equipment, net.................... 35,004 38,289
Other assets.......................................... 88,119 85,888
-------- --------
Total assets.......................................... $144,576 $162,782
======== ========
Current liabilities................................... $ 20,801 $ 42,195
Noncurrent liabilities................................ 105,118 104,578
-------- --------
Total liabilities..................................... 125,919 146,773
Stockholder's equity.................................. 18,657 16,009
-------- --------
Total liabilities and stockholder's equity............ $144,576 $162,782
======== ========
</TABLE>
F-21
<PAGE>
FAVORITE BRANDS INTERNATIONAL, INC.
AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF FAVORITE BRANDS INTERNATIONAL HOLDING CORP.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
16. SUBSEQUENT EVENTS--(UNAUDITED)
Amendment of Senior Credit Agreement
An amendment to the Company's Senior Credit Agreement was approved on
September 25, 1998 and became effective in October 1998 this amendment (i)
reset certain financial covenants through fiscal 2001, (ii) deleted certain
other financial covenants, (iii) changed certain definitions, and (iv)
increased the borrowing spread by 0.25 percent. The amendment was sought to
avoid a potential future default under the covenants. In connection with the
amendment, (i) Holdings' controlling stockholder agreed to loan the Company
$17.0 million (the "Sponsor Loan"--terms of which are described further below),
and (ii) the Company paid an amendment fee.
The Sponsor Loan ranks senior unsecured and matures on November 20, 2005; the
Sponsor Loan accrues interest at a 10% rate per annum due and payable on the
maturity date. In connection with the Sponsor Loan, Holdings' controlling
stockholder also received a ten-year warrant ($3.9 million estimated fair
market value) to purchase 77,500 shares of Holdings' common stock at $0.01 per
share.
On October 1, 1998, the interest rate on the Company's $195 million Senior
Subordinated Notes increased by 1% (from 10.25% to 11.25%) because the Company
was unable to obtain a rating on such notes of at least B- from Standard &
Poor's Ratings Service and B3 from Moody's Investors Service, Inc. The Senior
Subordinated Notes are rated CCC+ from Standard & Poor's Rating Service and
Caa1 from Moody's Investors Service.
Cumulative effect of change in accounting principle
During the first quarter of fiscal 1999, the Company adopted the provisions
of Statement of Position 98-5 "Reporting on the Costs of Start-Up Activities"
which required the Company to write off unamortized start-up costs of $2.5
million, which amount is net of $1.7 million in income tax benefits.
F-22
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Shareholders of Farley Candy Company
In our opinion, the accompanying balance sheet and the related statements of
operations and retained earnings and of cash flows present fairly, in all
material respects, the financial position of Farley Candy Company at August 30,
1996, and the results of its operations and its cash flows for the 52 weeks
then ended, in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audit. We conducted our audit of these statements in accordance with
generally accepted auditing standards which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for the
opinion expressed above.
Price Waterhouse LLP
Chicago, Illinois
April 22, 1998
F-23
<PAGE>
FARLEY CANDY COMPANY
BALANCE SHEET
AUGUST 30, 1996
<TABLE>
<CAPTION>
ASSETS
------
<S> <C>
Current Assets:
Cash................................................................ $ 1,002,187
Trade receivables, less allowance of $7,812,683..................... 33,199,767
Inventories, less allowance of $831,123
Finished products................................................. 26,819,453
Raw materials and work in process................................. 13,652,389
Prepaid expenses and other current assets........................... 5,942,306
------------
Total current assets............................................ 80,616,102
------------
Property, plant, and equipment:
Land, buildings, and improvements................................... 21,358,484
Machinery and equipment............................................. 89,171,871
------------
Total property, plant, and equipment.................................. 110,530,355
Less: Accumulated depreciation...................................... (54,559,769)
------------
Property, plant, and equipment...................................... 55,970,586
------------
Other assets.......................................................... 1,687,215
------------
Total assets.......................................................... $138,273,903
============
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<S> <C>
Current Liabilities:
Accounts payable.................................................... $ 13,702,190
Accrued legal costs................................................. 11,050,000
Accrued compensation and employee benefits.......................... 7,168,500
Other accrued costs................................................. 6,276,292
Current portion of long-term debt................................... 18,671,908
Income taxes payable................................................ 402,139
------------
Total current liabilities....................................... 57,271,029
------------
Long-term debt, less current portion.................................. 57,565,355
------------
Total liabilities..................................................... 114,836,384
------------
Stockholders' equity..................................................
Common stock, Class A; par value, $50 per share; authorized 2,500
shares; issued, 100 shares......................................... 5,000
Common stock, Class B; par value, $1 per share; authorized 100
shares; issued, 2 shares........................................... 2
Additional paid-in capital.......................................... 487,452
Retained earnings................................................... 22,945,065
------------
Total stockholders' equity............................................ 23,437,519
------------
Total liabilities and stockholders' equity............................ $138,273,903
============
</TABLE>
The accompanying notes are an integral part of these statements.
F-24
<PAGE>
FARLEY CANDY COMPANY
STATEMENT OF OPERATIONS AND RETAINED EARNINGS
FOR THE 52 WEEKS ENDED AUGUST 30, 1996
<TABLE>
<S> <C>
Net sales........................................................ $283,834,275
Cost of product sales............................................ 204,950,289
------------
Gross profit..................................................... 78,883,986
Operating expenses:
Selling, marketing and administrative.......................... 82,572,255
------------
Operating loss................................................... (3,688,269)
Other expense:
Interest....................................................... 6,654,303
Other.......................................................... 108,270
------------
Loss before income taxes......................................... (10,450,842)
State income taxes............................................... 484,941
------------
Net loss......................................................... (10,935,783)
Retained earnings, beginning of period........................... 35,400,070
Distributions to stockholders.................................... (1,519,222)
------------
Retained earnings, end of period................................. $ 22,945,065
============
</TABLE>
The accompanying notes are an integral part of these statements.
F-25
<PAGE>
FARLEY CANDY COMPANY
STATEMENT OF CASH FLOWS
FOR THE 52 WEEKS ENDED AUGUST 30, 1996
<TABLE>
<S> <C>
Operating Activities:
Net loss....................................................... $(10,935,783)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization................................ 9,700,885
Changes in net operating assets and liabilities:
Trade accounts receivable.................................. 2,798,472
Inventories................................................ 582,574
Prepaid expenses and other assets.......................... 2,315,517
Accounts payable........................................... (2,827,520)
Accrued expenses........................................... 15,620,170
Income taxes payable....................................... 402,139
------------
Net cash flows provided by operating activities.......... 17,656,454
------------
Investing Activities:
Additions to property, plant, and equipment.................... (6,115,434)
------------
Financing Activities:
Payments of long-term debt..................................... (9,760,681)
Distributions to stockholders.................................. (1,519,222)
------------
Net cash flows used in financing activities.............. (11,279,903)
------------
Net increase in cash............................................. 261,117
Cash, beginning of period........................................ 741,070
------------
Cash, end of period.............................................. $ 1,002,187
============
Supplemental disclosure of cash flow information:
Cash paid during the period for interest....................... $ 6,699,866
============
Cash paid during the period for taxes.......................... $ 111,426
============
</TABLE>
The accompanying notes are an integral part of these statements.
F-26
<PAGE>
FARLEY CANDY COMPANY
NOTES TO FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
Farley Candy Company (the Company) is a manufacturer of general line
confections and snack products. The Company sells primarily to retail grocers,
mass merchandisers, club stores, and drug chains. Effective August 30, 1996,
the Company was acquired by Favorite Brands International, Inc. (FBI). Credit
is extended to customers based on management's evaluations of a customer's
financial condition.
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 amounts reported in the financial statements and accompanying
notes. Actual results could differ from those estimates.
Inventories
Inventories are stated at the lower of cost or market using the last in,
first out (LIFO) method. If the FIFO method of inventory valuation had been
used, inventories would not have differed materially from the amount reported
at August 30, 1996.
Property, Plant and Equipment
Property, plant, and equipment is recorded at cost. Depreciation and
amortization are computed using the straight-line method for financial
reporting purposes and accelerated methods for income tax purposes.
2. ACCOUNTS RECEIVABLE
Revenues from one major customer constituted approximately 15% of total sales
for the 52 weeks ended August 30, 1996, and represented approximately 16% of
accounts receivable at August 30, 1996.
3. DEBT
The Company's debt structure consisted of the following at August 30, 1996:
<TABLE>
<S> <C>
Various senior notes due through June 2003 in annual
installments, interest payable semiannually at rates ranging
from 8.01% to 9.62%............................................ $60,000,000
$15 million revolving credit facility expiring December 1996,
interest at prime + 0.5% or LIBOR + 2.25%...................... 6,150,000
Industrial revenue bonds 2019, due May 2019, redeemable at
holders' option; initial interest at 3.01%, adjusted weekly and
not to exceed 14%; secured by letter of credit................. 8,500,000
Other........................................................... 1,587,263
-----------
76,237,263
Less: current portion........................................... 18,671,908
-----------
Long-term portion of above obligations.......................... $57,565,355
===========
</TABLE>
F-27
<PAGE>
FARLEY CANDY COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The senior notes, revolving credit facility, equipment loan and letter of
credit are secured by substantially all assets of the Company and a second lien
on the Company's stock. Existing agreements place certain restrictions on
dividends, require the Company to maintain minimum levels of tangible net worth
and working capital, minimum ratios of trade payables to inventory and maximum
ratios of liabilities to tangible net worth. The Company was not in compliance
with certain financial covenants at August 30, 1996. Substantially all
indebtedness was repaid in connection with the Company's acquisition by FBI.
4. COMMITMENTS
The Company leases manufacturing, warehousing and distribution facilities and
equipment under various noncancelable operating lease agreements. Total rental
expense on operating leases was $1,970,000 for the 52 weeks ended August 30,
1996. Of this amount, $988,440 pertained to facilities leased either from the
Company's majority stockholder or from a group of Company officers. Minimum
lease payments under noncancelable operating leases at August 30, 1996 are:
1997--$1.9 million; 1998--$1.9 million; 1999--$1.8 million; 2000--$1.7 million;
and 2001--$1.7 million; and thereafter--$3.3 million.
5. INCOME TAXES
The stockholders have elected to be taxed under the provisions of Subchapter
S of the Internal Revenue Code for state and federal income tax purposes.
Pursuant to this election, the net income of the Company is generally
reportable on the stockholders' individual state and federal income tax
returns.
The provision for income taxes represents various state income taxes.
6. CLASS B COMMON STOCK AND STOCKHOLDER AGREEMENT
A stockholder agreement in effect for the Class B common shares, all of which
are held by Company employees, provides for various restrictions on the
purchase and sale of these shares.
7. RETIREMENT BENEFITS
The Company has a defined-contribution 401(k) plan which covers substantially
all employees. The Company matches employee contributions at 50% up to a
maximum of 6% of employee compensation. Total Company contributions for the 52
weeks ended August 30, 1996 were $614,000.
8. CONTINGENCIES
The Company is a defendant in various other legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
resolution of these matters will not have a material effect on the financial
position of the Company.
F-28
<PAGE>
FARLEY CANDY COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
In connection with the settlement of certain litigation, the Company recorded
approximately $12.2 million of litigation expense during the 52 weeks ended
August 30, 1996, which has been included in selling, marketing and
administrative expenses.
9. RELATED PARTY TRANSACTIONS
Pursuant to the Credit Agreement, as amended, governing the revolving
facility and equipment loan, a line of credit agreement for up to $5,000,000
with the majority stockholder is secured by a first line on the capital stock
of the Company and will be considered in determining the amount available under
the revolving credit facility.
Trade receivables include a $2,472,000 receivable from the Company's majority
stockholder. This receivable was repaid on September 6, 1996.
10. SUBSEQUENT EVENT
The Company was acquired by Favorite Brands International, Inc. effective
August 30, 1996.
F-29
<PAGE>
INDEPENDENT AUDITORS' REPORT
March 16, 1996
To The Board of Directors and Partners of
Sathers Inc. and Related Entities
Round Lake, Minnesota
We have audited the accompanying combined balance sheets of Sathers Inc. and
Related Entities as of December 30, 1995, and the related combined statements
of income, stockholders' equity and partners' capital and cash flows for the
fifty-two weeks then ended. These financial statements are the responsibility
of the Companies' management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principals used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the combined financial position of Sathers Inc. and
Related Entities as of December 30, 1995, and the combined results of their
operations and their combined cash flows for the fifty-two weeks then ended in
conformity with generally accepted accounting principles.
Friedman Eisenstein Raemer and Schwartz, LLP
Chicago, Illinois
F-30
<PAGE>
SATHERS INC. AND RELATED ENTITIES
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 30, JUNE 22,
1995 1996
------------ -----------
(UNAUDITED)
ASSETS
------
<S> <C> <C>
Current Assets
Cash.................................................. $ 232,413 $ 329,611
Accounts receivable, less allowance for uncollectible
accounts of $100,000................................. 8,391,675 12,372,930
Inventories........................................... 14,043,254 18,727,823
Prepaid expenses...................................... 1,215,339 1,540,209
----------- -----------
Total Current Assets.............................. 23,882,681 32,970,573
----------- -----------
Property, Plant and Equipment
Land.................................................. 1,838,134 1,838,134
Buildings and building improvements................... 18,177,519 18,447,385
Transportation equipment.............................. 4,114,237 3,851,367
Other equipment....................................... 40,363,581 43,926,582
----------- -----------
64,493,471 68,063,468
Less: Accumulated depreciation........................ 34,268,566 35,763,361
----------- -----------
Net Property, Plant and Equipment................. 30,224,905 32,300,107
----------- -----------
Other Assets............................................ 1,569,567 1,598,401
----------- -----------
$55,677,153 $66,869,081
=========== ===========
<CAPTION>
LIABILITIES, STOCKHOLDERS' EQUITY
AND PARTNERS' CAPITAL
---------------------------------
<S> <C> <C>
Current Liabilities
Bank overdrafts....................................... $ 2,169,526 $ 1,904,048
Notes Payable
Stockholders........................................ -- 1,335,000
Bank................................................ 965,194 9,259,317
Current maturities of long-term debt.................. 5,005,454 4,464,477
Accounts payable...................................... 3,974,415 8,000,327
Accrued expenses and distributions payable............ 10,471,193 11,113,517
State income taxes payable............................ 48,214 17,739
----------- -----------
Total Current Liabilities......................... 22,633,996 36,094,425
Noncurrent Liabilities
Long-term debt, less current maturities above......... 15,231,187 13,530,150
----------- -----------
Total Liabilities................................. 37,865,183 49,624,575
----------- -----------
Stockholders' Equity and Partners' Capital
Stockholders' equity
Common Stock........................................ 101,000 101,000
Paid-in capital..................................... 576,422 576,422
Retained earnings................................... 14,729,703 14,029,327
Partners' capital..................................... 2,404,845 2,537,757
----------- -----------
Total Stockholders' Equity and Partners' Capital.. 17,811,970 17,244,506
----------- -----------
$55,677,153 $66,869,081
=========== ===========
</TABLE>
The accompanying notes are an integral part of this statement.
F-31
<PAGE>
SATHERS INC. AND RELATED ENTITIES
COMBINED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
FIFTY-TWO TWENTY-FIVE TWENTY-FIVE
WEEKS ENDED WEEKS ENDED WEEKS ENDED
DECEMBER 30, JUNE 24, JUNE 22,
1995 1995 1996
------------ ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Net Sales................................. $166,730,263 $76,431,464 $78,660,849
Cost of Sales............................. 138,187,115 63,733,530 65,441,018
------------ ----------- -----------
Gross Profit.............................. 28,543,148 12,697,934 13,219,831
------------ ----------- -----------
Operating Expenses
Warehousing............................. 4,794,449 2,242,750 2,319,608
Selling................................. 5,998,589 3,125,552 3,101,319
Administrative and general.............. 9,652,084 4,829,380 4,825,197
Other, net.............................. 81,334 102,276 15,025
------------ ----------- -----------
Total Operating Expenses.............. 20,526,456 10,299,958 10,261,149
------------ ----------- -----------
Operating Income.......................... 8,016,692 2,397,976 2,958,682
Interest Expense.......................... 2,435,400 1,067,881 1,027,146
------------ ----------- -----------
Income before State Income Taxes.......... 5,581,292 1,330,095 1,931,536
State Income Taxes........................ 150,000 36,000 52,000
------------ ----------- -----------
Net Income................................ $ 5,431,292 $ 1,294,095 $ 1,879,536
============ =========== ===========
</TABLE>
The accompanying notes are an integral part of this statement.
F-32
<PAGE>
SATHERS INC. AND RELATED ENTITIES
COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY AND PARTNERS' CAPITAL
<TABLE>
<CAPTION>
STOCKHOLDER'S EQUITY TOTAL
----------------------------- STOCKHOLDERS'
COMMON PAID-IN RETAINED PARTNERS' EQUITY AND
STOCK CAPITAL EARNINGS CAPITAL PARTNERS' CAPITAL
-------- -------- ----------- ---------- -----------------
<S> <C> <C> <C> <C> <C>
BALANCE, January 1,
1995................... $101,000 $576,422 $13,119,979 $1,679,195 $15,476,596
ADD (DEDUCT)
Net income............ -- -- 4,305,312 1,125,980 5,431,292
Capital withdrawals
and S corporation
distributions........ -- -- (2,695,588) (400,330) (3,095,918)
-------- -------- ----------- ---------- -----------
BALANCE, December 30,
1995................... 101,000 576,422 14,729,703 2,404,845 17,811,970
ADD (DEDUCT)
Net income
(unaudited).......... -- -- 1,183,282 696,254 1,879,536
Capital withdrawals
and S corporation
distributions
(unaudited).......... -- -- (1,883,658) (563,342) (2,447,000)
-------- -------- ----------- ---------- -----------
BALANCE, June 22, 1996
(unaudited)............ $101,000 $576,422 $14,029,327 $2,537,757 $17,244,506
======== ======== =========== ========== ===========
</TABLE>
The accompanying notes are an integral part of this statement.
F-33
<PAGE>
SATHERS INC. AND RELATED ENTITIES
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FIFTY-TWO
WEEKS ENDED TWENTY-FIVE TWENTY-FIVE
DECEMBER 30, WEEKS ENDED WEEKS ENDED
1995 JUNE 24, 1995 JUNE 22, 1996
------------ ------------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net Income.......................... $ 5,431,292 $ 1,294,095 $ 1,879,536
Adjustments to reconcile net income
to net cash provided by (used for)
operating activities
Depreciation and amortization..... 5,649,065 2,601,265 2,366,134
Gain on disposition of property,
plant and equipment.............. (136,924) (18,736) (9,244)
Net (increase) decrease in assets
Accounts receivable............. 1,478,700 (2,006,418) (3,981,255)
Inventories..................... (262,231) (8,362,127) (4,684,569)
Prepaid expenses................ (509,454) (784,115) (324,870)
Net increase (decrease) in
liabilities
Accounts payable................ (917,325) 4,688,637 4,025,912
Accrued expenses, other than
distributions payable.......... 880,567 1,051,159 959,730
State income taxes payable...... (26,739) (86,521) (30,475)
----------- ----------- -----------
Net Cash Provided by (Used
for) Operating Activities.... 11,586,951 (1,622,761) 200,899
----------- ----------- -----------
Cash Flows from Investing Activities
Additions to property, plant and
equipment.......................... (4,977,904) (3,095,152) (4,330,306)
Proceeds from sale of property,
plant and equipment................ 471,923 31,793 8,975
Payment for stockholder life
insurance policy premiums.......... (213,170) (140,024) (139,595)
Additions to intangibles............ (120,951) (47,917) --
----------- ----------- -----------
Net Cash Used for Investing
Activities................... (4,840,102) (3,251,300) (4,460,926)
----------- ----------- -----------
Cash Flows from Financing Activities
Net payments of bank overdrafts..... (443,723) (1,138,159) (265,478)
Net borrowings under (payments of)
line of credit agreement........... (2,318,973) 5,547,012 8,294,123
Net borrowings under notes payable.. -- 1,125,000 1,335,000
Proceeds from issuance of long-term
debt............................... 4,226,000 4,226,000 --
Principal payments on long-term
debt............................... (4,775,897) (1,875,095) (2,242,014)
Partners' capital withdrawals....... (400,330) (350,330) (563,342)
S corporation distributions......... (3,025,817) (2,506,740) (2,201,064)
Deferred loan costs................. (7,673) (7,673) --
----------- ----------- -----------
Net Cash (Used for) Provided
by Financing Activities...... (6,746,413) 5,020,015 4,357,225
----------- ----------- -----------
Net Increase in Cash.................. 436 145,954 97,198
Cash
Beginning of period................. 231,977 231,977 232,413
----------- ----------- -----------
End of period....................... $ 232,413 $ 377,931 $ 329,611
=========== =========== ===========
Supplemental disclosures of cash flow
information
Cash paid during the year for
Interest.......................... $ 2,423,763 $ 934,913 $ 932,364
State income taxes, net of
refunds.......................... 176,739 122,521 82,474
Supplemental Disclosure of Noncash
Investing and Financing Activities
The Company declared dividends
(distributions) of which $344,324
were unpaid at December 30, 1995
</TABLE>
The accompanying notes are an integral part of this statement.
F-34
<PAGE>
SATHERS INC. AND RELATED ENTITIES
NOTES TO COMBINED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION
Principles of Combination
The unaudited combined financial statements for the twenty-five weeks ended
June 24, 1995 and June 22, 1996 have been prepared pursuant to the rules and
regulations of the SEC. In the opinion of management, all adjustments necessary
for a fair presentation for the periods presented have been reflected and are
of a normal recurring nature.
The unaudited results of operations for the twenty-five weeks ended June 24,
1995 and June 22, 1996 are not necessarily indicative of the results that may
be achieved for the entire fifty-two weeks ended December 30, 1995 and December
28, 1996, respectively. The Companies experience fluctuations in sales based on
seasonal demands for their food products. These variations affect interim
financial results as compared to the entire fiscal year.
The accompanying combined financial statements include:
<TABLE>
<CAPTION>
TYPE OF
NAME ENTITY PRINCIPAL BUSINESS ACTIVITY
---- ------- ---------------------------
<S> <C> <C>
Sathers Inc. A Delaware Manufactures, packages and distributes food
Corporation products at wholesale. Sales are nationwide
and are primarily made on credit.
Approximately 11% of sales and 12% of
accounts receivable are represented by one
customer in 1995.
Sather Trucking An Iowa Provides trucking service to Sathers Inc. and
Corporation Corporation other non-related companies.
Sather Realty A Minnesota Owns and leases land, buildings and equipment to
Company Partnership Sathers Inc. and Sather Trucking Corporation.
</TABLE>
<TABLE>
<CAPTION>
AMOUNT
--------
<S> <C>
Sathers Inc.
Class A voting, $1 par value, 1,000 shares authorized,
500 shares issued and outstanding.................................. $ 500
Class B nonvoting, $1 par value, 100,000 shares authorized, issued
and outstanding.................................................... 100,000
Sather Trucking Corporation
$1 par value, 10,000 shares authorized, 500 shares issued and
outstanding........................................................ 500
--------
Total............................................................. $101,000
========
</TABLE>
The above entities, referred to collectively as the Companies are under the
common ownership and management of the Sather Family; however, the interests of
the individual partners and stockholders may vary among the above entities. All
significant intercompany transactions and balances have been eliminated from
the combined financial statements. The Companies maintain a 52-53 week fiscal
year ending on the Saturday nearest to December 31.
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
F-35
<PAGE>
SATHERS INC. AND RELATED ENTITIES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from
those estimates.
Inventories
Inventories are valued using the last-in, first-out (LIFO) method of
determining inventory costs. Inventories are not priced in excess of market.
(See Note 3.)
Other Assets
A noncompete agreement, purchased at a cost of $800,000, is being amortized
by use of the straight-line method over a period of five years. The balance,
net of amortization, was $144,889 and $72,444 at December 30, 1995 and June 22,
1996 (unaudited), respectively.
In addition, other assets include premium advances collateralized by cash
surrender values of life insurance (see Note 8) and certain deferred costs.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost. Depreciation charges are
computed based on estimated useful lives using the straight-line method for
financial reporting purposes. The useful lives of the principal asset
categories are shown below:
<TABLE>
<CAPTION>
DESCRIPTION YEARS
----------- -----
<S> <C>
Buildings and building improvements................................. 10-40
Transportation equipment............................................ 3-7
Other equipment..................................................... 3-10
</TABLE>
Maintenance and repairs, which neither materially add to the value of the
property nor appreciably prolong its life, are charged to expense as incurred.
Gains or losses on dispositions of property, plant and equipment are included
in income.
Income Taxes
The Corporations have elected to be taxed under the Subchapter S provisions
of the Internal Revenue Code. As a result of the election, income taxes on the
net earnings of the Corporations are payable personally by the stockholders and
no provision is made for Federal income taxes in the accompanying financial
statements. The income tax provisions consist of State income taxes.
No provision for Federal and State income taxes has been made for the
Partnership's results of operations in the accompanying financial statements
since such tax liability or benefit accrues to the partners as individuals.
The Companies file separate Federal income tax returns.
F-36
<PAGE>
SATHERS INC. AND RELATED ENTITIES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
2. SALE OF ASSETS (UNAUDITED)
On August 15, 1996, Sathers Inc. and Sather Trucking Corporation adopted a
plan of complete liquidation and dissolution. On August 31, 1996, Sathers Inc.
and Related Entities sold substantially all their assets, net of liabilities
excluding bank indebtedness. Subsequently, the bank indebtedness was paid in
full.
Subsequent to the sale, the buyer of the assets will not be an S corporation.
Sathers Inc. and Sather Trucking Corporation changed their corporate names to
DJLR, Inc. and DJLR Trucking Corporation, respectively, in conjunction with the
sale of assets.
3. INVENTORIES
The inventories consist of the following:
<TABLE>
<CAPTION>
DECEMBER JUNE 22,
30, 1995 1996
----------- -----------
(UNAUDITED)
<S> <C> <C>
Raw materials...................................... $10,570,006 $13,415,409
Work in process.................................... 318,958 410,641
Finished goods..................................... 5,868,700 7,712,183
Total at first-in, first-out (FIFO) cost method.... 16,757,664 21,538,233
Less: Amount to reduce inventories to last-in,
first-out (LIFO) cost method...................... 2,714,410 2,810,410
----------- -----------
Total LIFO Cost................................ $14,043,254 $18,727,823
=========== ===========
</TABLE>
The amount to reduce inventories to the last-in, first-out (LIFO) cost method
increased by $258,730 for the year ended December 30, 1995.
4. BANK OVERDRAFTS AND NOTES PAYABLE
Notes payable at December 30, 1995 and June 22, 1996 (unaudited) were
$965,194 and $10,594,317, respectively. These notes bear interest at the bank's
prime rate of 8.5% and 8.25% at December 30, 1995 and June 22, 1996
(unaudited), respectively. Included in the notes payable at June 22, 1996
(unaudited) were $1,335,000 of notes payable to stockholders.
The notes payable to the bank represent borrowings under a $20,000,000 line
of credit (see Note 10) of which a maximum of $6,000,000 is available for
standby letters of credit. At December 30, 1995, letters of credit outstanding
were $3,750,000, and the amount available under the line of credit was
$15,284,806. At June 22, 1996 (unaudited), letters of credit outstanding were
$2,565,414, and the amount available under the line of credit was $8,175,270.
Under the terms of the line of credit, the maximum amount that may be borrowed
at any time is restricted to a level equal to 85% of current accounts
receivable plus 60% of eligible inventories. The notes are guaranteed by
certain of the stockholders/partners of the Companies, and collateralized by
accounts receivable and inventories.
F-37
<PAGE>
SATHERS INC. AND RELATED ENTITIES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
The Companies have arrangements with their principal bank whereby the bank
notifies the Companies whenever checks clearing exceed collected balances on
hand. The Companies cover the bank overdraft with a transfer of funds from
their lending bank, through advances under their line of credit.
5. LONG-TERM DEBT
Long-term debt at December 30, 1995 and June 22, 1996 (unaudited) consists of
the following:
<TABLE>
<CAPTION>
DECEMBER 30, JUNE 22,
1995 1996
------------ -----------
(UNAUDITED)
<S> <C> <C>
Industrial Development Revenue Refunding Bonds City
of Chattanooga, Tennessee. Payable in annual in-
stallments ranging from $350,000 to $400,000 of
principal plus monthly payments of interest at a
variable rate based on the prevailing bond market
rate, final payment due October, 1999; collateral-
ized by a letter of
credit.............................................. $1,500,000 $1,500,000
10.375% mortgage note payable, due in monthly in-
stallments of $40,271 including interest, final pay-
ment due August, 1997; collateralized by certain
land and
buildings and the assignment of future rents........ 736,714 528,859
9.89% note payable, due in monthly installments of
$16,131 including interest, final payment due Decem-
ber, 1996; collateralized by certain equipment...... 183,587 94,053
6.5% note payable, due in monthly installments of
$8,805 including interest, final payment due March,
1996; collateralized by certain equipment........... 26,138 --
Note payable, due in monthly installments of $20,233
including interest at 2% over the specified certifi-
cate of deposit rate, final payment due March, 1996;
collateralized by certain equipment................. 59,939 --
8.65% note payable, due in monthly installments of
$41,178 including interest, final payment due Octo-
ber, 1996; collateralized by certain equipment...... 395,913 201,510
Noninterest-bearing covenant not to compete payable
in monthly installments of $16,667 through November,
1996................................................ 183,333 83,333
10.41% mortgage note payable, due in monthly install-
ments of $54,991 including interest, final payment
due August, 2006; collateralized by a first mortgage
on certain real estate.............................. 4,222,571 4,129,162
5% mortgage note payable, due in monthly installments
of $15,816 including
interest, final payment due August, 2006; collater-
alized by a second mortgage on certain real es-
tate................................................ 1,557,254 1,510,227
8.55% note payable, due in monthly installments of
$12,336 including interest, final payment due July,
1996; collateralized by certain equipment........... 83,314 11,596
---------- ----------
Totals Carried Forward........................... $8,948,763 $8,058,740
---------- ----------
</TABLE>
F-38
<PAGE>
SATHERS INC. AND RELATED ENTITIES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
DECEMBER
30, JUNE 22,
1995 1996
----------- -----------
(UNAUDITED)
<S> <C> <C>
Totals Brought Forward.......................... $ 8,948,763 $ 8,058,740
8.35% note payable, due in monthly installments of
$81,777 including interest, final payment due May,
1997; collateralized by certain equipment.......... 1,306,859 863,100
9.625% mortgage note payable, due in monthly
installments of $18,143 including interest, final
payment due August, 2007; collateralized by a first
mortgage on certain real estate.................... 1,522,808 1,486,513
6.50% note payable, due in monthly installments of
$5,510 including interest, final payment due
February, 1997; collateralized by certain
equipment.......................................... 74,099 48,280
7.60% note payable, due in monthly installments of
$5,797 including interest, final payment due
February, 1997; collateralized by certain
equipment.......................................... 77,249 50,166
9.75% note payable, due in monthly installments of
$2,539 including interest, final payment due
February, 1997; collateralized by certain
equipment.......................................... 33,394 21,846
6.10% note payable, due in monthly installments of
$48,448 including interest, final payment due
November, 1998; collateralized by certain
equipment.......................................... 1,549,812 1,344,888
Note payable, due in monthly installments of $56,258
including interest at 1.8% over the 30-day LIBOR
rate, final payment due July, 1999; collateralized
by certain equipment............................... 2,055,648 1,835,836
Note payable, due with monthly principal payments
ranging from $59,000 to $85,000 plus interest at
the better of LIBOR plus 1.75% or commercial high
grade plus 1.75%; final payment due May, 2000;
collateralized by certain equipment................ 3,791,782 3,426,446
9.50% mortgage note payable, due in monthly
installments of $9,398 including interest, final
payment due January, 2010; collateralized by a
first mortgage on certain real estate.............. 873,983 858,812
Other............................................... 2,244 --
----------- -----------
20,236,641 17,994,627
Less: Amounts Due Within One Year .................. 5,005,454 4,464,477
----------- -----------
Amounts Due Subsequent to One Year.............. $15,231,187 $13,530,150
=========== ===========
</TABLE>
Maturities of long-term debt for years subsequent to December 30, 1995 are as
follows:
<TABLE>
<CAPTION>
FISCAL YEAR AMOUNT
----------- -----------
<S> <C>
1997............................. $ 3,521,164
1998............................. 2,953,058
1999............................. 2,234,351
2000............................. 1,061,660
2001 and thereafter.............. 5,460,954
-----------
$15,231,187
===========
</TABLE>
F-39
<PAGE>
SATHERS INC. AND RELATED ENTITIES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Maturities of long-term debt for years subsequent to June 22, 1997
(unaudited) are as follows:
<TABLE>
<CAPTION>
YEAR ENDING JUNE, AMOUNT
----------------- -----------
(UNAUDITED)
<S> <C>
1998............................. $ 2,948,118
1999............................. 2,799,235
2000............................. 1,936,999
2001............................. 670,178
2002 and thereafter.............. 5,175,620
-----------
$13,530,150
===========
</TABLE>
During 1989, Sather Realty Company refinanced its Industrial Development
Revenue Bonds through the issuance of Revenue Refunding Bonds by the City of
Chattanooga, Tennessee. As required by the refinancing, the Company maintains a
letter of credit of approximately $1,535,000 at December 30, 1995. This letter
of credit is collateralized by the land and building acquired with the original
bond proceeds.
Certain notes contain covenants which require specific financial performance
standards and are personally guaranteed by the owners of the Companies.
6. QUALIFIED PROFIT SHARING PLAN
The Companies have a qualified profit sharing and 401(k) plan covering all
eligible employees, as defined, with a specified period of service. The
contribution is discretionary with the Board of Directors and the plan may be
amended or terminated at any time. Contributions for the year ended December
30, 1995 and the twenty-five weeks ended June 24, 1995 (unaudited) and June 22,
1996 (unaudited) were $1,700,000, $850,000 and $900,000, respectively. The
Companies have a matching contribution feature as part of their plan and made
matching contributions for the year ended December 30, 1995 and the twenty-five
weeks ended June 24, 1995 (unaudited) and June 22, 1996 (unaudited) of
approximately $260,000, $126,000 and $147,000, respectively.
7. COMMITMENTS
The Companies have employment and wage agreements at December 30, 1995 and
June 22, 1996 (unaudited) with eight key employees requiring the payment of
salaries of approximately $1,165,000 annually, plus a bonus agreement with one
employee providing for an annual bonus based on the profitability of the
Companies. The Companies have agreements with the stockholders to make annual S
corporation dividend distributions of a base amount of $9.96 per share to each
of the stockholders, plus 48% of excess taxable income over the base dividend
distribution. The Companies declared dividends of $344,324 which were unpaid at
December 30, 1995.
At December 30, 1995 and June 22, 1996 (unaudited), the Companies have leased
one hundred tractors and thirty trailers, having an approximate original cost
to the owner-operators of approximately $6,600,000. All owner-operator leases
remain in effect until canceled by either party.
F-40
<PAGE>
SATHERS INC. AND RELATED ENTITIES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
8. LIFE INSURANCE
The Companies make payments on life insurance policies owned by life
insurance trusts set up by the stockholders, with a total face value of
approximately $24,000,000. The policies insure the lives of the Companies'
stockholders and partners. Premiums for these policies were recorded as a
receivable from the trusts of $1,071,404 and $1,210,999 at December 30, 1995
and June 22, 1996 (unaudited), respectively. The Companies hold a collateral
assignment on the life insurance policies.
9. LEASE AGREEMENTS
The Companies lease transportation and other equipment under the terms of
leases expiring through 2002. The leases provide that the Companies are
responsible for taxes, insurance and maintenance.
Minimum rental commitments under the noncancelable operating leases at
December 30, 1995 are as follows:
<TABLE>
<CAPTION>
MINIMUM
FISCAL YEAR RENTAL PAYMENTS
----------- ---------------
<S> <C>
1996..................... $1,736,148
1997..................... 1,713,196
1998..................... 1,469,653
1999..................... 890,198
2000..................... 403,640
2001 and thereafter...... 310,329
----------
$6,523,164
==========
</TABLE>
Minimum rental commitments under the noncancelable operating leases at June
22, 1996 (unaudited) are as follows:
<TABLE>
<CAPTION>
MINIMUM
FISCAL YEAR RENTAL PAYMENTS
----------- ---------------
(UNAUDITED)
<S> <C>
1997..................... $2,254,743
1998..................... 2,202,909
1999..................... 1,651,124
2000..................... 1,148,766
2001..................... 727,223
2002 and thereafter...... 667,931
----------
$8,652,696
==========
</TABLE>
Rent expense for operating leases was approximately $1,820,000, $864,000 and
$1,095,000 for the year ended December 30, 1995 and the twenty-five weeks ended
June 24, 1995 (unaudited) and June 22, 1996 (unaudited), respectively.
10. STOCK RESTRICTIONS
Under the covenants of the Companies' line of credit agreement, the Companies
may not declare or pay dividend distributions (except as indicated in Note 7),
purchase, redeem or retire any shares of stock or issue additional shares of
stock without prior notification and consent of the bank.
F-41
<PAGE>
SATHERS INC. AND RELATED ENTITIES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
In addition, under the terms of a buy/sell agreement between the Companies
and their stockholders, under certain circumstances, the Companies have the
option to repurchase shares from the estate of a deceased stockholder and have
the right of first refusal on any stock being presented for sale.
11. CONCENTRATIONS OF RISK
The Companies maintain cash balances at several financial institutions.
Accounts at each institution are insured by the Federal Deposit Insurance
Corporation up to $100,000.
F-42
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Kidd & Company, Inc.
Ligonier, Indiana
We have audited the accompanying balance sheet of Kidd & Company, Inc. as of
December 31, 1995, and the related statements of income, retained earnings, and
cash flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Kidd & Company, Inc. as of
December 31, 1995, and the results of its operations and its cash flows for the
year then ended, in conformity with generally accepted accounting principles.
McGladrey & Pullen, LLP
Goshen, Indiana
January 25, 1996
F-43
<PAGE>
KIDD & COMPANY, INC.
BALANCE SHEET
DECEMBER 31, 1995
<TABLE>
<CAPTION>
ASSETS
------
<S> <C>
Current Assets:
Cash............................................................. $ 18,515
Receivables...................................................... 2,731,383
Inventories...................................................... 1,921,391
Prepaid expenses................................................. 26,750
Deferred tax assets.............................................. 135,000
-----------
Total current assets........................................... 4,833,039
-----------
Leasehold improvements and equipment, at depreciated cost.......... 5,416,415
Other assets....................................................... 439,778
-----------
$10,689,232
===========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<S> <C>
Current Liabilities:
Note payable, bank............................................... $ 2,485,218
Current maturities of long-term debt............................. 1,343,494
Accounts payable................................................. 2,824,593
Accrued expenses................................................. 840,465
-----------
Total current liabilities...................................... 7,493,770
-----------
Long-term debt, less current maturities............................ 328,346
Deferred tax liabilities........................................... 419,000
Commitments and contingencies .....................................
Stockholders' equity
Common stock..................................................... 45,478
Additional paid-in capital....................................... 348,077
Retained earnings................................................ 2,054,561
-----------
2,448,116
-----------
$10,689,232
===========
</TABLE>
See Notes to Financial Statements.
F-44
<PAGE>
KIDD & COMPANY, INC.
STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER
31, 1995
-----------
<S> <C>
Net sales.......................................................... $32,506,108
Cost of goods sold................................................. 24,233,058
-----------
Gross profit....................................................... 8,273,050
-----------
Operating expenses:
Delivery, net.................................................... 3,749,338
Selling, general, and administrative............................. 3,397,608
Contribution to employee benefit trust........................... 68,803
-----------
7,215,749
-----------
Operating income................................................... 1,057,301
Interest expense................................................... 431,395
-----------
Income before income taxes......................................... 625,906
Federal and state income taxes..................................... 149,000
-----------
Net income......................................................... $ 476,906
===========
</TABLE>
See Notes to Financial Statements.
F-45
<PAGE>
KIDD & COMPANY, INC.
STATEMENT OF RETAINED EARNINGS
FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1995
------------
<S> <C>
Balance, beginning of period....................................... $1,577,655
Net income......................................................... 476,906
----------
Balance, end of period............................................. $2,054,561
==========
</TABLE>
See Notes to Financial Statements.
F-46
<PAGE>
KIDD & COMPANY, INC.
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1995
------------
<S> <C>
Cash Flows from Operating Activities:
Net income....................................................... $ 476,906
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation................................................... 499,893
Amortization................................................... 109,101
Loss on sale of equipment...................................... 1,388
Deferred income taxes.......................................... 39,000
Changes in assets and liabilities:
Decrease (increase) in:
Trade receivables.......................................... (876,473)
Income tax refund claim.................................... (98,386)
Inventories................................................ (237,486)
Prepaid expenses........................................... 24,202
Increase (decrease) in:
Accounts payable........................................... 521,589
Accrued expenses........................................... 193,567
-----------
Net cash provided by operating activities................ 653,301
-----------
Cash Flows from Investing Activities:
Purchase of leasehold improvements and equipment............... (1,365,379)
Increase in package design costs............................... (104,054)
Increase in cash value of life insurance....................... (52,421)
Increase in deposits........................................... (1,095)
-----------
Net cash used in investing activities.................... (1,522,949)
-----------
Cash Flows from Financing Activities:
Net borrowings on revolving credit agreement................... 1,253,348
Proceeds from life insurance policy loans...................... 162,170
Principal payments on long-term borrowings..................... (532,643)
-----------
Net cash provided by financing activities................ 882,875
-----------
Increase in cash......................................... 13,227
Cash, beginning of period...................................... 5,288
-----------
Cash, end of period............................................ $ 18,515
===========
</TABLE>
See Notes to Financial Statements.
F-47
<PAGE>
KIDD & COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1. NATURE OF BUSINESS, USE OF ESTIMATES, AND SIGNIFICANT ACCOUNTING
POLICIES
NATURE OF BUSINESS:
The Company is a manufacturer of marshmallows and marshmallow cream products,
with facilities in Ligonier, Indiana and Henderson, Nevada. The Company sells
its products primarily to customers throughout the United States and Canada,
generally on terms of 30 days.
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 as of the date of the financial statements
and the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
SIGNIFICANT ACCOUNTING POLICIES:
Cash
The Company has cash on deposit in a financial institution which, at times,
may be in excess of FDIC limits.
Inventories
Inventories are stated at the lower of cost (first-in, first-out method) or
market.
The Company purchases its raw materials, principally corn syrup, gelatin,
sugar, and coconut, under purchase agreements entered into at the beginning of
the calendar year. These agreements require minimum purchase quantities at a
predetermined price.
Leasehold Improvements and Equipment
Depreciation of leasehold improvements and equipment is computed principally
by the straight-line method over the following estimated useful lives:
<TABLE>
<CAPTION>
YEARS
-----
<S> <C>
Leasehold improvements............. 12-20
Machinery and equipment............ 12
Automobiles and trucks............. 5-7
Office equipment................... 5-12
</TABLE>
F-48
<PAGE>
KIDD & COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Amortization
Amortization of package design costs is computed by the straight-line method
over a 60-month period.
NOTE 2. RECEIVABLES
Receivables in the accompanying balance sheet at December 31, 1995 consist of
the following:
<TABLE>
<CAPTION>
1995
----------
<S> <C>
Trade, less allowance for doubtful accounts of $50,000........ $2,596,714
Income tax refund claim....................................... 134,669
----------
$2,731,383
==========
</TABLE>
NOTE 3. INVENTORIES
The composition of inventories at December 31, 1995 is as follows:
<TABLE>
<CAPTION>
1995
----------
<S> <C>
Raw materials.................................................. $ 261,992
Finished goods................................................. 480,132
Packaging supplies............................................. 1,099,414
Purchased for resale........................................... 79,853
----------
$1,921,391
==========
</TABLE>
NOTE 4. LEASEHOLD IMPROVEMENTS AND EQUIPMENT
The cost of leasehold improvements and equipment and the related accumulated
depreciation at December 31, 1995 is as follows:
<TABLE>
<CAPTION>
1995
----------
<S> <C>
Leasehold improvements........................................ $2,045,514
Machinery and equipment....................................... 6,620,243
Automobiles and trucks........................................ 123,195
Office equipment.............................................. 266,973
----------
9,055,925
Less accumulated depreciation................................. 3,639,510
----------
$5,416,415
==========
</TABLE>
NOTE 5. OTHER ASSETS
Other assets at December 31, 1995 consist of the following:
<TABLE>
<CAPTION>
1995
--------
<S> <C>
Cash value of life insurance, less policy loans of $391,351.... $ 74,920
Package design costs, at amortized cost........................ 313,663
Deposits....................................................... 51,195
--------
$439,778
========
</TABLE>
F-49
<PAGE>
KIDD & COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NOTE 6. PLEDGED ASSETS, NOTE PAYABLE, AND LONG-TERM DEBT
The Company has a loan agreement with a bank which permits it to borrow a
maximum of $3,000,000, of which $2,485,218 was outstanding at December 31,
1995. Borrowings under the agreement are due on demand, bear interest at prime
(8.5% at December 31, 1995) plus 1.25%, are collateralized by accounts
receivable, inventories, and equipment, and are personally guaranteed by a
stockholder and spouse. This agreement contains certain restrictive covenants
which were complied with at December 31, 1995. Long-term debt and related
collateral at December 31, 1995 consist of the following:
<TABLE>
<CAPTION>
1995
----------
<S> <C>
Note payable, bank, due in monthly installments of $17,718 plus
interest at prime (8.5% at December 31, 1995) plus 1.125%,
guaranteed by an officer-stockholder, his wife, and a related
partnership, collateralized by accounts receivable, inventories,
and machinery and equipment, final payment due July 1996........... $1,252,256
Note payable, bank, due in monthly installments of $10,947 including
interest at 10.6%, collateralized by inventories and equipment,
final payment due November 1999.................................... 419,584
----------
1,671,840
Less current maturities............................................. 1,343,494
----------
$ 328,346
==========
</TABLE>
Aggregate maturities of long-term debt for the years ending December 31, 1997
through 1999 are as follows: 1997 $101,393; 1998 $112,679; and 1999 $114,274.
Based on the borrowing rates currently available to the Company for bank
loans with similar terms and average maturities, the fair value of the debt
instruments approximates their carrying value as of December 31, 1995. In
addition, the Company believes it will be able to refinance its obligations
that will become due in 1996.
NOTE 7. ACCRUED EXPENSES
Accrued expenses at December 31, 1995 consist of the following:
<TABLE>
<CAPTION>
1995
--------
<S> <C>
Salaries and wages............................................... $187,984
Payroll taxes.................................................... 38,343
Property taxes................................................... 87,363
Brokerage fees................................................... 193,904
Group insurance.................................................. 72,000
Truck expense.................................................... 68,000
Other............................................................ 192,871
--------
$840,465
========
</TABLE>
NOTE 8. COMMON STOCK
At December 31, 1995, there were 200,000 shares of no par value common stock
authorized with a stated value of $1 per share, of which 45,478 shares were
issued.
F-50
<PAGE>
KIDD & COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NOTE 9. EMPLOYEE STOCK OWNERSHIP PLAN
In 1982, the Company established an Employee Stock Ownership Plan to provide
additional retirement benefits to substantially all employees. During the year
ended December 31, 1990, it obtained a bank loan which has been repaid as of
December 31, 1995, the proceeds of which were used to purchase 488 shares of
issued and outstanding common stock from two stockholders. The note was
collateralized by the stock which had not been allocated to individual
participant accounts. The Company committed to make cash payments to the plan
in annual amounts sufficient for it to meet the debt service requirements.
Accordingly, the debt was recorded with a corresponding deduction from
stockholders' equity. The debt and the deduction from stockholders' equity were
reduced as the plan made principal payments to the bank; the final $26,339
payment under this agreement was made during the year ended December 31, 1995.
In the event a plan participant desires to sell his or her shares of the
Company's stock, the Company may be required to purchase the shares from the
participant at their fair market value or make cash contributions to the ESOP
to enable the ESOP to purchase the shares. At December 31, 1995, approximately
12,500 shares of the Company's stock were held by the plan participants with a
fair market value of approximately $67.00 per share.
NOTE 10. INCOME TAXES
Deferred taxes are provided on a liability method whereby deferred income tax
assets and liabilities are computed annually for differences between the
financial statement and tax bases of assets and liabilities that will result in
taxable or deductible amounts in the future based on enacted tax laws and rates
applicable to the periods in which the differences are expected to affect
taxable income. Valuation allowances are established when necessary to reduce
deferred tax assets to the amount expected to be realized. Income tax expense
is the tax payable or refundable for the period plus or minus the change during
the period in deferred tax assets and liabilities.
The composition of the deferred tax assets and liabilities at December 31,
1995 is as follows:
<TABLE>
<CAPTION>
1995
---------
<S> <C>
Gross deferred tax liabilities, depreciation.................. $(696,000)
---------
Gross deferred tax assets:
Bad debt allowance.......................................... 19,000
Operating loss carryforwards................................ 93,000
Alternative minimum tax credit.............................. 277,000
Other....................................................... 23,000
---------
412,000
---------
Net deferred tax (liabilities).............................. $(284,000)
=========
Reflected in the accompanying balance sheet as follows:
Current assets.............................................. $ 135,000
Long-term liabilities....................................... (419,000)
---------
$(284,000)
=========
</TABLE>
F-51
<PAGE>
KIDD & COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
During the year ended December 31, 1994, the Company recorded a valuation
allowance of $110,000 against the deferred tax assets to reduce the total to an
amount that management believed would ultimately be realized. Realization of
deferred tax assets is dependent upon sufficient future taxable income during
the period that deductible temporary differences and carryforwards are expected
to be available to reduce taxable income. The elimination of this allowance
during the year ended December 31, 1995 reflected management's belief that the
assets were fully realizable.
Operating loss carryforwards for tax purposes totaling approximately $225,000
as of December 31, 1995 expire in 2009.
The alternative minimum tax (AMT) credit carryforward may be carried forward
indefinitely to reduce future regular federal income taxes payable.
The provision for federal and state income taxes for the year ended December
31, 1995 is as follows:
<TABLE>
<CAPTION>
FOR THE YEAR
ENDED
DECEMBER 31,
1995
------------
<S> <C>
Federal:
Current.................................................... $ 99,000
Deferred................................................... 26,000
---------
125,000
---------
State:
Current.................................................... 11,000
Deferred................................................... 13,000
---------
24,000
---------
$ 149,000
=========
Current tax expense.......................................... $ 110,000
Change in valuation allowance................................ (110,000)
Deferred tax expense......................................... 149,000
---------
$ 149,000
=========
</TABLE>
NOTE 11. LEASE COMMITMENTS AND TOTAL RENTAL EXPENSE
The Company leases its Ligonier facilities from related parties under
noncancellable agreements. The agreements expire at various dates through May
2015 and require minimum annual rentals of $279,600, plus the payment of
property taxes and insurance on the property. The total minimum rental
commitment under the agreements at December 31, 1995 is $3,946,000.
The Company leases its Nevada facilities from a related party under
noncancellable agreements. The agreements expire at various dates through
February 2009 and require minimum annual rentals totaling $356,400, plus the
payment of property taxes and insurance on the property. The total minimum
rental commitment under the agreements is $3,874,200 at December 31, 1995.
F-52
<PAGE>
KIDD & COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The Company also leases delivery equipment under noncancellable agreements
which expire at various dates through April 2005. The agreements require
monthly rentals totaling $87,150. The total minimum rental commitment at
December 31, 1995 under these agreements is $4,859,982. Included in the rental
expense for these leases for the year ended December 31, 1995 is approximately
$220,000 in additional rent based on a vehicle mileage charge. Included in
these agreements is delivery equipment under noncancellable agreements with two
stockholders and an employee which expire at various dates through December
1999. These agreements require monthly rentals of $8,190.
The total minimum rental commitment at December 31, 1995 under the lease
agreements in the preceding paragraphs is $12,680,182 which is due as follows:
<TABLE>
<CAPTION>
RELATED
PARTIES OTHER TOTAL
---------- ---------- -----------
<S> <C> <C> <C>
During the year ending December 31,
1996.................................... $ 748,960 $ 910,856 $ 1,659,816
1997.................................... 745,840 910,856 1,656,696
1998.................................... 717,280 857,384 1,574,664
1999.................................... 676,480 839,560 1,516,040
2000.................................... 549,600 642,957 1,192,557
Thereafter.............................. 4,741,000 339,409 5,080,409
---------- ---------- -----------
$8,179,160 $4,501,022 $12,680,182
========== ========== ===========
</TABLE>
The total rent expense included in the income statement for the year ended
December 31, 1995 is as follows:
<TABLE>
<CAPTION>
FOR THE YEAR
ENDED
DECEMBER 31,
1995
------------
<S> <C>
Ligonier facilities, related parties....................... $ 263,600
Henderson facilities, related party........................ 356,400
Delivery equipment, including $143,000 paid to related
parties................................................... 1,327,699
Miscellaneous rent paid on a month-to-month basis.......... 6,987
-----------
$ 1,954,686
===========
</TABLE>
NOTE 12. EMPLOYEE HEALTH PLAN
The Company has a self-insured health plan for its employees for up to
$50,000 per participant and approximately $700,000 in aggregate. The excess
loss portion of the employees' coverage has been reinsured with a commercial
carrier. The total amount of claims paid for the year ended December 31, 1995
was approximately $400,000. The total amount of premiums paid for excess loss
coverage for the year ended December 31, 1995 was approximately $143,000.
F-53
<PAGE>
KIDD & COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NOTE 13. CASH FLOWS INFORMATION
Supplemental information relative to the statements of cash flows for the
year ended December 31, 1995 is as follows:
<TABLE>
<CAPTION>
FOR THE YEAR
ENDED
DECEMBER 31,
1995
------------
<S> <C>
Supplemental disclosures of cash flows information:
Cash payments for:
Interest.................................................... $431,395
========
Income taxes................................................ $208,368
========
</TABLE>
NOTE 14. SUBSEQUENT EVENT (UNAUDITED)
On June 16,1996, the controlling shareholder of Favorite Brands
International, Inc., acquired all of the common stock of the Company and repaid
the notes payable to the bank.
F-54
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
Dae Julie, Inc.
Des Plaines, Illinois 60018
We have audited the accompanying balance sheet of Dae Julie, Inc. (an
Illinois S Corporation) as of December 31, 1996 and the related statements of
income and cash flows for the year then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Dae Julie, Inc., as of
December 31, 1996 and the results of its operations and its cash flows for the
year then ended in conformity with generally accepted accounting principles.
On January 27, 1997, the Company sold substantially all of their assets. The
results of this transaction are summarized in Note 6.
Respectfully submitted,
Wolf, Grieco & Co.
Chicago, Illinois
April 11, 1997
F-55
<PAGE>
DAE JULIE, INC.
BALANCE SHEET
DECEMBER 31, 1996
<TABLE>
<CAPTION>
DECEMBER
ASSETS 31, 1996
------ -----------
<S> <C>
Current Assets
Cash............................................................. $ --
Accounts Receivable--Trade (Net of Allowance of $163,396)........ 2,469,319
Accounts and Note Receivable--Other.............................. 149,317
Inventory........................................................ 6,139,743
Prepaid Expenses................................................. 179,382
-----------
Total Current Assets........................................... $ 8,937,761
Fixed Assets
Property, Plant, and Equipment at Cost (Net of Accumulated
Depreciation)................................................... 13,612,306
Other Assets
Cash Surrender Value, Life Insurance............................. 182,757
Unamortized Loan Acquisition Costs............................... 23,619
-----------
206,376
-----------
Total Assets................................................... $22,756,443
===========
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
<S> <C>
Current Liabilities
Accounts Payable................................................. $ 1,747,373
Cash Overdrafts.................................................. 95,802
Note Payable--Bank............................................... 2,591,000
Current Portion of Long-Term Debt................................ 2,665,239
Accrued Expenses................................................. 500,876
-----------
Total Current Liabilities...................................... $ 7,600,290
Long-Term Liabilities
Long-Term Debt................................................... $10,655,930
Accrued Rent--Maintenance Reserve................................ 213,808
-----------
Total Long-Term Liabilities.................................... 10,869,738
Shareholders' Equity
Common Stock, No Par Value, 1,000 Shares Authorized, Issued and
Outstanding..................................................... 51,000
Retained Earnings................................................ 4,235,415
-----------
Total Shareholders' Equity..................................... $ 4,286,415
-----------
Total Liabilities and Shareholders' Equity..................... $22,756,443
===========
</TABLE>
See Accompanying Notes and Independent Auditors' Report.
F-56
<PAGE>
DAE JULIE, INC.
STATEMENT OF INCOME AND RETAINED EARNINGS
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
FOR THE
YEAR ENDED
DECEMBER
31, 1996
-----------
<S> <C>
Sales (Net)........................................................ $33,621,596
Cost of Goods Sold................................................. 27,903,676
-----------
Gross Profit from Operations....................................... $ 5,717,920
Selling Expenses................................................... $ 2,490,513
Administrative Expenses............................................ 2,488,101
-----------
4,978,614
-----------
Income Before Other Income/(Expenses).............................. $ 739,306
Net Other Income (Expenses)........................................ (618,679)
-----------
Net Income Before Provision for Taxes.............................. $ 120,627
Provision for Taxes................................................ --
-----------
Net Income......................................................... $ 120,627
Retained Earnings--Beginning....................................... 4,309,769
Dividend Distributions............................................. 194,981
-----------
Retained Earnings--Ending.......................................... $ 4,235,415
===========
</TABLE>
See Accompanying Notes and Independent Auditors' Report.
F-57
<PAGE>
DAE JULIE, INC.
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
FOR THE
YEAR ENDED
DECEMBER
31, 1996
-----------
<S> <C>
Cash Flows from Operating Activities:
Net Income...................................................... $ 120,627
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and Amortization................................. $ 1,448,768
Increase in Life Insurance Cash Value......................... (12,875)
Provision for losses on Accounts Receivable...................
Changes in operating assets and liabilities:
Increase in receivables....................................... (249,066)
Increase in inventory......................................... (1,533,722)
Decrease in prepaid expenses.................................. 125,052
Increase in accounts payable.................................. 537,533
Decrease in cash overdraft.................................... (407,941)
Decrease in accrued expenses.................................. (17,747)
-----------
Total Adjustments........................................... (109,998)
-----------
Net Cash Provided by Operating Activities................... $ 10,629
Cash Flows from Investing Activities:
Purchases of fixed assets....................................... (7,426,197)
-----------
Net Cash Used in Investing Activities....................... (7,426,197)
Cash Flows from Financing Activities:
Proceeds from bank loans........................................ $10,563,476
Principal payments on bank loans................................ (2,828,289)
Principal payments on related party debt........................ (200,000)
Unpaid interest expense......................................... 50,124
Dividend distributions to shareholders.......................... (194,981)
-----------
Net Cash Provided from Financing Activities................. 7,390,330
-----------
Net Decrease in Cash.............................................. $ (25,238)
Cash--Beginning................................................... 25,238
-----------
Cash--Ending...................................................... $ -0-
-----------
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest........................................................ $ 838,049
===========
Income Taxes.................................................... 3,334
===========
</TABLE>
See Accompanying Notes and Independent Auditors' Report.
F-58
<PAGE>
DAE JULIE, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business
The Company's operations solely involve the production and sale of candy to
other manufacturers, wholesalers, distributors, and retailers.
Inventory
Inventory is valued at lower of cost or market. Cost which includes labor,
material and factory overhead is determined on the first-in, first-out ("FIFO")
basis: Inventory on hand at December 31, 1996 contained dated, stale, and
unusable finished goods and packaging material. Accordingly, at December 31,
1996, inventory of goods and packaging materials has been written down to its
estimated net realized value, and results of operations for 1996 include a
corresponding charge of $200,000.
The components of ending inventory are comprised of the following as of
December 31, 1996:
<TABLE>
<CAPTION>
<S> <C>
Finished Goods................................................ $3,919,123
Work in Process............................................... 47,215
Raw Materials and Supplies.................................... 2,173,405
----------
$6,139,743
==========
</TABLE>
Property, Plant and Equipment
The Company's policy is to depreciate plant and equipment over the estimated
useful lives of the assets as indicated in the following tabulation by use of
straight line and accelerated methods.
<TABLE>
<CAPTION>
YEARS
-----
<S> <C>
Leasehold Improvements............................................ 31.5-39
Office Equipment.................................................. 5-7
Machinery and Equipment........................................... 10
</TABLE>
The components of property, plant and equipment are as follows as of December
31, 1996:
<TABLE>
<CAPTION>
<S> <C>
Machinery and Equipment...................................... $19,050,133
Office Equipment............................................. 489,218
Leasehold Improvements....................................... 269,346
-----------
$19,808,697
Accumulated Depreciation..................................... 6,196,391
-----------
13,612,306
Production Facilities Currently Under Construction........... --
-----------
$13,612,306
===========
</TABLE>
F-59
<PAGE>
DAE JULIE, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Concentration of Credit Risk
The Company maintains substantially all of its cash balances at Firstar Bank
in Milwaukee, Wisconsin. The balances are insured by the Federal Deposit
Insurance Corporation up to $100,000. At December 31, 1996, the Company's
uninsured cash balances totaled $186,948.
Business Combination
On December 21, 1995, the Company and Candyland Candies, Inc. agreed in
principle to an Agreement and Plan of Merger, with the surviving corporation
being Dae Julie, Inc. The effective date of the merger was January 1, 1996. The
merger was accounted for as a pooling of interests and, accordingly, the
financial statements for the period presented have been restated to include the
accounts of Candyland Candies, Inc. The sole shareholder of each separate
company, David E. Babiarz, remained the sole shareholder of the surviving
corporation. Each of the 1,000 shares of Candyland Candies, Inc. issued and
outstanding stock on the effective date of the merger was cancelled and ceased
to exist. Each of the 100 shares of Dae Julie, Inc. issued and outstanding
stock on the effective date of the merger continued to be issued and
outstanding and represent 100 shares of common stock of the surviving
corporation. The net assets of Candyland Candies, Inc. on December 31, 1995
were $1,914,680.
The following schedule reflects the operating results as if the merger
occurred on January 1, 1995:
<TABLE>
<CAPTION>
DECEMBER
31, 1995
-----------
<S> <C>
Sales and Revenues
Dae Julie, Inc............................................. $12,582,207
Candyland Candies, Inc..................................... 27,040,422
Eliminations............................................... (4,615,609)
-----------
Total.................................................... $35,007,020
===========
Net Income
Dae Julie, Inc............................................. $ 237,251
Candyland Candies, Inc..................................... 1,115,326
Eliminations............................................... 2,567
-----------
Total.................................................... $ 1,355,144
===========
</TABLE>
The net income elimination represents Candyland Candies, Inc. profit within
Dae Julie, Inc.'s ending inventory.
Profit-Sharing Plan
The Company has a profit sharing plan and savings plan for all employees not
covered by a collective bargaining agreement who have been employed for the
full fiscal year and have completed at least 1,000 hours of service during the
fiscal year. The plan provides for contributions in such
F-60
<PAGE>
DAE JULIE, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
amounts as the board of directors may determine. For year 1996, the board has
determined that no contribution will be made.
Income Taxes
The Company has elected to be taxed as an S corporation under provisions of
the Internal Revenue Code. Accordingly, the accompanying financial statements
do not reflect income taxes, except for certain state taxes.
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 reported amounts
of revenues and expenses during the reporting period. Actual results could
differ from those estimates.
NOTE 2--SHORT-TERM BORROWINGS
The Company has an available line of credit totalling $4,000,000 with Firstar
Bank, Milwaukee N.A. The line of credit is secured by a blanket lien on all
corporate assets. The line bears interest at the rate of prime, 8.5% at
December 31, 1996 and is due on April 30, 1997. At December 31, 1996,
$2,591,000 of the line has been used. In addition, the Company has a foreign
exchange line of credit totalling $1,200,000 which is unused and unsecured.
NOTE 3--LONG-TERM DEBT
Long-term debt consists of the following at December 31, 1996:
<TABLE>
<S> <C>
Secured term bank note, payable in monthly installments of $66,667
plus interest through February, 1998 with a balloon payment of
$1,800,000 due on February 28, 1998, with interest payable at
prime, collateralized by a blanket lien on all corporate assets.. $ 2,733,319
Secured, multiple advance $8,000,000 term loan with advances
available through April 1, 1997. Payable in monthly installments
of $186,047 plus interest at .25% less than prime through June,
2000 assuming full use........................................... 7,316,093
Unsecured note, payable in annual installments of $200,000 due
each March 31, bearing interest at 6%............................ 600,000
Accrued interest on above, payable each March 31 at an amount
equal to the accrued interest on the date multiplied by a frac-
tion expressed as the lesser of $200,000 or unpaid principal over
the unpaid principal at the date................................. 341,004
Subordinated unsecured note due related parties, payable December
11, 2000, bearing simple interest at 7.11% due at maturity....... 1,628,578
Accrued interest due related parties payable December 11, 2000.... 702,175
-----------
Total long-term obligations................................... $13,321,169
Less--Current portion of long-term debt........................... 2,665,239
-----------
$10,655,930
===========
</TABLE>
F-61
<PAGE>
DAE JULIE, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
In accordance with terms of the bank loan agreements, the Company has agreed
to, among other things, restrict the incurrence of additional debt and limit
officers compensation and dividend distributions.
As of December 31, 1996, the maturities of the long-term obligations are as
follows:
<TABLE>
<S> <C>
1997......................... $ 3,346,236
1998......................... 4,479,547
1999......................... 2,546,232
2000......................... 2,949,154
-----------
$13,321,169
===========
</TABLE>
NOTE 4--OPERATING LEASES
On September 28, 1992, the Company entered into a lease for office and
warehouse space with an unrelated third party. The Company's commencement date
was December 1, 1992. The following is a schedule by year of future minimum
rental payments under the operating lease:
<TABLE>
<S> <C>
Year Ending December 31
1997.......................... $217,438
1998.......................... 223,961
1999.......................... 230,680
--------
$672,079
========
</TABLE>
The lease requires the payment of real estate taxes, insurance, and building
expenses. In addition, the lease stipulates that the termination date is
midnight, on the last day of the month in which the seventh anniversary of the
commencement date occurs with two five year options.
NOTE 5--RELATED PARTY TRANSACTIONS
The Company leases office, plant and warehouse space under an operating lease
from the sole shareholder through November 30, 1999. Total rental expense under
this lease was $685,021 for 1996. The following is a schedule of future minimum
lease payments required under the lease:
<TABLE>
<S> <C>
1997.......................... $ 685,021
1998.......................... 685,021
1999.......................... 641,069
----------
$2,011,111
==========
</TABLE>
The lease requires the payment of real estate taxes, in excess of those taxes
assessed for 1992, insurance, and building expenses.
F-62
<PAGE>
DAE JULIE, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NOTE 6--SUBSEQUENT EVENTS
On January 27, 1997, the Company sold substantially all its assets to
Favorite Brands International, Inc., who also assumed certain liabilities.
Effective as of the date of sale, the Company changed its name to Babiarz, Inc.
All liabilities, as described in Note 3, were paid as of the closing date. In
addition, as of the date of sale, the Company ceased operation and is in the
process of winding up its affairs.
NOTE 7--OFFICERS LIFE INSURANCE
A collateral assignment by David Babiarz, sole shareholder of Dae Julie, Inc.
and the insured, of a life insurance policy, was effective as of the policy
issue date, October 15, 1986. The assignment amounts to the total premiums
advanced by Dae Julie, Inc. The total premium advances to date are $79,220. As
of December 31, 1996, the cash surrender value of said policy is $92,789.
F-63
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
Dae-Julie, Inc.
Des Plaines, Illinois 60018
We have audited the accompanying balance sheet of Dae-Julie, Inc. (an
Illinois S Corporation) as of December 31, 1995 and the related statements of
income and cash flows for the year then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on the financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Dae-Julie, Inc., as of
December 31, 1995 and the results of its operations and its cash flows for the
year then ended in conformity with generally accepted accounting principles.
Respectfully submitted,
Wolf, Grieco & Co.
Chicago, Illinois
February 16, 1996
F-64
<PAGE>
EXHIBIT A
DAE-JULIE, INC.
BALANCE SHEET
DECEMBER 31, 1995
<TABLE>
<CAPTION>
ASSETS
------
<S> <C>
Current Assets
Cash in Banks and on Hand (Note 1)................................ $ 25,238
Accounts Receivable--Trade (Note 2) (Net of Allowance of
$42,407)......................................................... 934,307
Notes and Accounts Receivable--Other (Note 2)..................... 95,644
Loan to Employee.................................................. 1,450
Inventory (Notes 1 & 2)........................................... 1,738,427
Prepaid Expenses.................................................. 116,821
----------
Total Current Assets............................................ $2,911,887
Fixed Assets (Note 1)
(Net of Accumulated Depreciation).................................. 105,475
Other Assets
Cash Surrender Value, Life Insurance (Note 5)..................... $ 169,883
Note Receivable (Net of Current Portion) (Note 2)................. 35,519
----------
205,402
----------
Total Assets.................................................... $3,222,764
==========
<CAPTION>
LIABILITIES AND SHAREHOLDER'S EQUITY
------------------------------------
<S> <C>
Current Liabilities
Accounts Payable--Trade (Note 2).................................. $ 647,513
Refund Payable.................................................... 10,000
Accrued Expenses.................................................. 119,162
----------
Total Current Liabilities....................................... $ 776,675
Shareholder's Equity
Common Stock, No Par Value, 2,000 shares authorized, 100 shares
issued and outstanding........................................... $ 1,000
Retained Earnings................................................. 2,445,089
----------
Total Shareholders' Equity...................................... 2,446,089
----------
Total Liabilities and Shareholder's Equity...................... $3,222,764
==========
</TABLE>
See Accompanying Notes and Independent Auditors Report.
F-65
<PAGE>
EXHIBIT B
DAE-JULIE, INC.
STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<S> <C>
Sales (Net)....................................................... $12,582,207
Cost of Sales..................................................... 9,730,731
-----------
Gross Profit on Sales............................................. $ 2,851,476
Operating Expenses
Warehouse Expenses.............................................. $ 504,566
Selling Expenses................................................ 1,993,656
Administrative Expenses......................................... 980,300
-----------
3,478,522
-----------
Net Income (Loss) Before Other Income/(Expense)................... $ (627,046)
Other Income (Note 2)............................................. $ 959,035
Other Expense (Note 1)............................................ 90,966
-----------
Net Other Income/(Expense)...................................... 868,069
-----------
Net Income Before Provision for Taxes............................. $ 241,023
Provision for Taxes (Note 1)...................................... 3,772
-----------
Net Income........................................................ $ 237,251
Retained Earnings--Beginning.................................... 2,036,832
Accumulated Adjustments Account................................. 226,556
Distributions................................................... 55,550
-----------
Retained Earnings--Ending......................................... $ 2,445,089
===========
</TABLE>
See Accompanying Notes and Independent Auditors' Report.
F-66
<PAGE>
EXHIBIT C
DAE-JULIE, INC.
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<S> <C>
Cash Flows from Operating Activities:
Net Income...................................................... $ 237,251
Adjustments to reconcile net income to net cash provided by
operating activities:
Increase in Life Insurance Cash Value......................... $ (13,529)
Depreciation and Amortization................................. 34,602
Provision for Losses on Accounts Receivable................... 6,825
Changes in operating assets and liabilities:
Increase in receivables....................................... (12,870)
Decrease in inventory......................................... 305,786
Increase in prepaid expenses.................................. (53,343)
Increase in accounts payable.................................. 530,719
Decrease in accrued expenses.................................. (318,301)
-----------
Total Adjustments........................................... 479,889
-----------
Net Cash Provided by Operating Activities................... $ 717,140
Cash Flows from Investing Activities:
Purchases of fixed assets....................................... $ (26,334)
Note Receivable (Note 2)........................................ 25,073
-----------
Net Cash Used by Investing Activities....................... (1,261)
Cash Flows from Financing Activities:
Proceeds of secured debt (Note 3)............................... $ 4,989,500
Principal payments on secured debt (Note 3)..................... (5,964,500)
Income distribution to shareholder.............................. (55,550)
-----------
Net Cash used in Financing Activities....................... (1,030,550)
-----------
Net Decrease in Cash.............................................. $ (314,671)
Cash, January 1, 1995............................................. 339,909
-----------
Cash, December 31, 1995........................................... $ 25,238
===========
Supplemental disclosures of cash flow information:
Cash paid during this year for:
Income Taxes.................................................. $ 1,143
Interest...................................................... 40,795
</TABLE>
See Accompanying Notes and Independent Auditor's Report.
F-67
<PAGE>
DAE-JULIE, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business
The company operates principally as a distributor of specialty candies to
wholesalers and retailers.
Inventory
Inventory is valued at lower of cost or market. Cost which includes labor,
material and factory overhead is determined on the first-in, first-out ("FIFO")
basis. Inventory on hand at December 31, 1995 contained dated, stale, and
unuseable goods, packaging, and display material inventory. Accordingly, at
December 31, 1995, inventory of goods, packaging, and display material has been
written down to its estimated net realized value, and results of operations for
1995 include a corresponding charge of $163,431.
Property, Plant and Equipment
The company's policy is to depreciate plant and equipment over the estimated
useful lives of the assets as indicated in the following tabulation by use of
straight line method.
<TABLE>
<CAPTION>
YEARS
---------
<S> <C>
Leasehold Improvements.......................................... 31.5 - 39
Furniture, Fixtures and Office Equipment........................ 5
Vehicles........................................................ 5
Machinery....................................................... 7
</TABLE>
The components of property, plant, and equipment are as follows:
<TABLE>
<S> <C>
Vehicles........................................................ $ 8,075
Office Equipment................................................ 176,143
Leasehold Improvements.......................................... 11,183
Machinery....................................................... 7,279
--------
$202,680
Accumulated Depreciation........................................ 97,205
--------
Total Fixed Assets.............................................. $105,475
========
</TABLE>
Profit-Sharing Plan
The company has a profit sharing plan for all employees not covered by a
collective bargaining agreement who have been employed for the full fiscal year
and have completed at least 1,000 hours of service during the fiscal year. The
plan provides for contributions in such amounts as the board of directors may
determine. For year 1995, the board has determined that a $10,000 contribution
will be made.
F-68
<PAGE>
DAE-JULIE, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Income Taxes
The company has elected to be taxed as an S corporation under provisions of
the Internal Revenue Code. Accordingly, the accompanying financial statements
do not reflect income taxes, except for certain state taxes.
Concentration of Credit Risk
The Company maintains substantially all of its cash balances at Firstar Bank
in Milwaukee, Wisconsin. The balances are insured by the Federal Deposit
Insurance Corporation up to $100,000. At December 31, 1995, the company's
uninsured cash balances totaled $27,862.
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 reported amounts
of revenues and expenses during the reporting period. Actual results could
differ from those estimates.
Business Combination
On December 21, 1995, the Company and Candyland Candies, Inc. agreed in
principle to an Agreement and Plan of Merger, with the surviving corporation
being DAE-JULIE, INC. The effective date of the merger would be January 1,
1996. The merger would be accounted for as a pooling of interests. The sole
shareholder of each separate Company, David E. Babiarz, shall remain the sole
shareholder of the surviving corporation. Each of the 1,000 shares of Candyland
Candies, Inc. issued and outstanding stock on the effective date of the merger
shall be cancelled and cease to exist. Each of the 100 shares of Dae-Julie,
Inc. issued and outstanding stock on the effective date of the merger shall
continue to be issued and outstanding and represent 100 shares of common stock
of the surviving corporation. The following schedule reflects the operating
results as if the merger occurred on January 1, 1995.
<TABLE>
<CAPTION>
SALES AND REVENUES DECEMBER 31, 1995
------------------ -----------------
<S> <C>
Dae-Julie, Inc.......................................... $12,582,207
Candyland Candies, Inc.................................. 27,040,422
Eliminations............................................ (4,615,609)
-----------
Total............................................... $35,007,020
===========
<CAPTION>
NET INCOME
----------
<S> <C>
Dae-Julie, Inc.......................................... $ 237,251
Candyland Candies, Inc.................................. 1,115,326
Eliminations............................................ (15,402)
-----------
Total............................................... $ 1,337,175
===========
</TABLE>
The net income elimination represents Candyland Candies, Inc. profit within
Dae-Julie, Inc.'s ending inventory.
F-69
<PAGE>
DAE-JULIE, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NOTE 2--RELATED PARTY TRANSACTIONS
Various transactions were entered into with a company related through common
ownership, Candyland Candies, Inc. The following is a description of the major
transactions which occurred:
. Purchases of Candyland Candies, Inc. products amount to $4,615,609.
. SEC income received for sale of the company's products totalled $795,589
and is reflected in other income.
. Accounts Receivable as of December 31, 1995 amounted to $69,347.
. Accounts Payable as of December 31, 1995 amounted to $248,846.
. Notes Receivable is in respect to the sale of equipment during 1992.
Total receivable is $60,698 with $25,073 due currently.
NOTE 3--SHORT-TERM BORROWINGS
The company has an available line of credit totalling $2,000,000 with Firstar
Bank. The line of credit is secured by substantially all assets of the Company
and any borrowings under this line bear interest at prime as announced by the
Northern Trust Company of Chicago. In addition, the Company has a foreign
exchange line of credit totalling $150,000 with Firstar Bank. This line of
credit is unsecured.
NOTE 4--OPERATING LEASES
On September 28, 1992, the Company entered into a lease for office and
warehouse space with an unrelated third party. As per the lease, the Company's
commencement date was December 1, 1992. The following is a schedule by year of
future minimum rental payments under the operating lease:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
------------
<S> <C>
1996............................................................ $211,105
1997............................................................ 217,438
1998............................................................ 223,961
1999............................................................ 230,680
--------
$883,184
========
</TABLE>
The real estate lease is net, requiring the payment of real estate taxes,
insurance, and building expenses. In addition, the lease stipulates that the
termination date is midnight, on the last day of the month in which the seventh
anniversary of the commencement date occurs with two five year options.
NOTE 5--OFFICERS LIFE INSURANCE
A collateral assignment by David Babiarz, sole shareholder of Dae-Julie,
Inc., of the Valley Forge Life Insurance Co., Policy Number 84000806, was
effective as of the policy issue date, October 15, 1986. The assignment amounts
to the total premiums advanced by Dae-Julie, Inc. The total premium advances to
date are $91,862. As of December 31, 1995, the cash surrender value of said
policy is $82,193.
F-70
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
Candyland Candies, Inc.
Des Plaines, Illinois 60018
We have audited the accompanying balance sheet of Candyland Candies, Inc. as
of December 31, 1995 and the related statements of income and cash flows for
the year then ended. These financial statements are the responsibility of the
company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the account principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Candyland Candies, Inc. as of
December 31, 1995, and the results of its operations and cash flows for the
year then ended, in conformity with generally accepted accounting principles.
Respectfully submitted,
Wolf, Grieco & Co.
February 21, 1996
F-71
<PAGE>
EXHIBIT A
CANDYLAND CANDIES, INC.
BALANCE SHEET
DECEMBER 31, 1995
<TABLE>
<CAPTION>
ASSETS
------
<S> <C> <C>
Current Assets
Accounts Receivable--Trade (Note 4) (Net of Allowance
of $81,014).......................................... $1,673,893
Accounts Receivable--Other............................ 1,934
Notes Receivable--Employees........................... 5,608
Inventory (Note 1).................................... 2,867,594
Prepaid Expenses...................................... 187,613
----------
Total Current Assets................................ $ 4,736,642
Fixed Assets
Property, Plant, and Equipment at Cost (Notes 1 & 6)
(Net of Accumulated Depreciation).................... 7,515,870
Other Assets
Unamortized Loan Acquisition Costs.................... 37,150
-----------
Total Assets............................................ $12,289,662
===========
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
Current Liabilities
Accounts Payable (Note 4)............................. $ 880,520
Cash Overdrafts....................................... 1,121,000
Note Payable--Bank (Note 2)........................... 503,743
Current Portion of Long-Term Debt (Note 3)............ 1,129,784
Accrued Expenses...................................... 442,913
----------
Total Current Liabilities........................... $ 4,077,960
Long-Term Liabilities
Long-Term Debt (Note 3)............................... $6,136,666
Accrued Rent--Maintenance Reserve (Note 4)............ 160,356
----------
Total Long-Term Liabilities......................... 6,297,022
Shareholders' Equity
Common Stock, No Par Value, 1,000 Shares Authorized,
Issued and Outstanding............................... $ 50,000
Retained Earnings..................................... 1,864,680
----------
Total Shareholders' Equity.......................... 1,914,680
-----------
Total Liabilities and Shareholders' Equity.............. $12,289,662
===========
</TABLE>
See Accompanying Notes and Independent Auditors' Report.
F-72
<PAGE>
EXHIBIT B
CANDYLAND CANDIES, INC.
INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<S> <C> <C>
Sales (Net) (Notes 4 & 5)............................... $27,040,422
Cost of goods sold (Note 1)............................. 22,583,765
-----------
Gross profit from operations............................ $ 4,456,657
Selling expenses........................................ $1,577,874
Administrative expenses................................. 1,223,240
----------
2,801,114
-----------
Income before other income/(expenses) (Note 1).......... $ 1,655,543
Net other expenses...................................... 537,650
-----------
Net Income $ 1,117,893
Retained Earnings--Beginning.......................... 1,052,716
Dividend Distributions................................ (305,929)
-----------
Retained earnings--ending............................... $ 1,864,680
===========
</TABLE>
See Accompanying Notes and Independent Auditor's Report.
F-73
<PAGE>
EXHIBIT C
CANDYLAND CANDIES, INC.
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<S> <C> <C>
Cash Flows from Operating Activities:
Net Income......................................... $ 1,117,893
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and Amortization.................... $ 961,371
Changes in operating assets and liabilities:
Increase in receivables.......................... (22,591)
Increase in inventory............................ (901,213)
Increase in prepaid expenses..................... (66,213)
Decrease in accounts payable..................... (354,187)
Increase in cash overdraft....................... 503,743
Increase in accrued expenses..................... 158,647
-----------
Total Adjustments.............................. 279,557
-----------
Net Cash Provided by Operating Activities...... $ 1,397,450
Cash Flows from Investing Activities:
Purchases of fixed assets.......................... $ 1,610,337
-----------
Net Cash Used in Investing Activities.......... (1,610,337)
Cash Flows from Financing Activities:
Proceeds from bank loans........................... $ 1,871,795
Principal payments on bank loans................... (1,300,004)
Principal payments on related party debt........... (224,960)
Unpaid interest expense............................ 62,038
Income distributions to shareholders............... (305,929)
-----------
Net Cash Provided from Financing Activities.... 102,940
-----------
Net Decrease in Cash................................. $ 109,947
Cash, January 1, 1995................................ 109,947
-----------
Cash, December 31, 1995.............................. $ --
===========
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest......................................... $ 398,628
Income Taxes..................................... --
</TABLE>
See Accompanying Notes and Independent Auditors' Report.
F-74
<PAGE>
CANDYLAND CANDIES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business
The company's operations solely involve the production and sale of candy to
other manufacturers, wholesalers, distributors, and retailers.
Inventory
Inventory is valued at lower of cost or market. Cost which includes labor,
material and factory overhead is determined on the first-in, first-out ("FIFO")
basis. Inventory on hand at December 31, 1995 contained dated, stale, and
unuseable goods and packaging material. Accordingly, at December 31, 1995,
inventory of goods and packaging material has been written down to its
estimated net realized value, and results of operations for 1995 include a
corresponding charge of $82,515.
The components of ending inventory are comprised of the following:
<TABLE>
<S> <C>
Finished Goods................................................ $1,568,434
Work in Process............................................... 25,459
Raw Materials and Supplies.................................... 1,273,701
----------
$2,867,594
==========
</TABLE>
Property, Plant and Equipment
The Company's policy is to depreciate plant and equipment over the estimated
useful lives of the assets as indicated in the following tabulation by use of
straight line and accelerated methods.
<TABLE>
<CAPTION>
YEARS
-------
<S> <C>
Leasehold Improvements............................................ 31.5-39
Office Equipment.................................................. 5-7
Machinery and Equipment........................................... 10
</TABLE>
The components of property, plant, and equipment are as follows:
<TABLE>
<S> <C>
Machinery and Equipment...................................... $10,497,069
Office Equipment............................................. 172,719
Leasehold Improvements....................................... 258,504
-----------
$10,928,292
Accumulated Depreciation..................................... 4,638,342
-----------
$ 6,289,950
Production Facilities Currently Under Construction........... 1,225,920
-----------
$ 7,515,870
===========
</TABLE>
F-75
<PAGE>
CANDYLAND CANDIES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Profit-Sharing Plan
The company has a profit sharing plan for all employees not covered by a
collective bargaining agreement who have been employed for the full fiscal year
and have completed at least 1,000 hours of service during the fiscal year. The
plan provides for contributions in such amounts as the board of directors may
determine. For year 1995, the board has determined that a $15,000 contribution
will be made.
Income Taxes
The company has elected to be taxed as an S corporation under provisions of
the Internal Revenue Code. Accordingly, the accompanying financial statements
do not reflect income taxes, except for certain state taxes.
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 reported amounts
of revenues and expenses during the reporting period. Actual results could
differ from those estimates.
Business Combination
On December 21, 1995, the Company and Dae-Julie, Inc. agreed in principle to
an Agreement and Plan of Merger, with the surviving corporation being DAE-
JULIE, INC. The effective date of the merger is January 1, 1996. The merger
would be accounted for as a pooling of interests. The sole shareholder of each
separate company, David E. Babiarz, shall remain the sole shareholder of the
surviving corporation. Each of the 1,000 shares of Candyland Candies, Inc.
issued and outstanding stock on the effective date of the merger shall be
cancelled and cease to exist.
NOTE 2--SHORT-TERM BORROWINGS
The company has an available line of credit totalling $2,000,000 with Firstar
Bank, Milwaukee N.A. The line of credit is secured by a blanket lien on all
corporate assets. The line bears interest at the rate of prime, 8.5% at
December 31, 1995 and is due on April 30, 1996. At December 31, 1995,
$1,121,000 of the line has been used. In addition, the company has a foreign
exchange line of credit totalling $1,200,000 which is unused and unsecured.
F-76
<PAGE>
CANDYLAND CANDIES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NOTE 3--LONG-TERM DEBT
Long-term debt consists of the following at December 31, 1995:
<TABLE>
<S> <C>
Secured term bank note, payable in monthly installments of $66,667
plus interest through February, 1998 with a balloon payment of
$1,800,000 due on February 28, 1998, with interest payable at
prime, collateralized by a blanket lien on all corporate assets... $3,533,323
Multiple advance, $7,000,000 credit facility bearing interest at
prime. The facility is to be used for an ongoing plant expansion
with a start-up date expected to be in the second quarter, 1996.
Interest only, payable monthly through July, 1996 with
installments of $108,696, assuming full use, plus interest,
payable monthly from August, 1996 to May, 1999 with a balloon
payment of $2,000,0000 due June, 1999............................. 250,795
Unsecured note, payable n annual installments of $200,000 due each
March 31, bearing interest at 6%.................................. 800,000
Accrued interest on above, payable each March 31 at an amount equal
to the accrued interest on that date multiplied by a fraction
expressed at $200,000 or unpaid principal, if less, over the
unpaid principal at that date..................................... 406,671
Subordinated unsecured note due related parties, payable December
11, 2000, bearing simple interest at 7.11% due at maturity........ 1,628,578
Unsecured term note due Dae-Julie, Inc., a company related through
common ownership, payable in monthly installments of $2,090
through May, 1998................................................. 60,698
Accrued interest due related parties payable December 11, 2000..... 586,385
----------
Total long-term obligations.................................... $7,266,450
Less--Current portion of long-term debt............................ 1,129,784
----------
$6,136,666
==========
</TABLE>
In accordance with terms of the bank loan agreements, the company has agreed
to, among other things, restrict the incurrence of additional debt and limit
officers compensation and dividend distributions.
As of December 31, 1995, the maturities of the long-term obligations are as
follows:
<TABLE>
<S> <C>
1996........................................................... $1,129,784
1997........................................................... 1,116,585
1998........................................................... 2,250,604
1999........................................................... 306,752
Thereafter..................................................... 2,462,725
----------
$7,266,450
==========
</TABLE>
F-77
<PAGE>
CANDYLAND CANDIES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NOTE 4--RELATED PARTY TRANSACTIONS
The company leases office, plant, and warehouse space under an operating
lease from the sole shareholder through November 30, 1999. Total rental
expenses under this lease were $601,551. The following is a schedule of future
minimum lease payments required under the lease:
<TABLE>
<S> <C>
1996........................................................... $ 601,551
1997........................................................... 601,551
1998........................................................... 601,551
1999........................................................... 551,421
----------
$2,356,074
==========
</TABLE>
The lease requires the payment of real estate taxes, in excess of those taxes
assessed for 1992, insurance, and building expenses.
Various transactions were entered into with a company related through common
ownership, Dae-Julie, Inc. The following is a description of the major
transactions which occurred:
. Sales of Dae-Julie, Inc. accounted for approximately $4,615,609 of the
company's net sales.
. Commissions paid for sales of the company's product totalled $795,589.
Open balances in respect to Dae-Julie, Inc. are included as Accounts
Receivable and Accounts Payable as $248,846 and $69,347, respectively.
NOTE 5--MAJOR CUSTOMERS
One customer accounted for approximately 21% of the company's sales for the
year ended December 31, 1995.
NOTE 6--COMMITMENTS
The company has begun construction of a third production facility. As of
December 31, 1995, the company was committed to the estimated costs of
completion of approximately $6,800,000.
F-78
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Mederer Corporation:
We have audited the accompanying combined component balance sheets of Mederer
Corporation's U.S. Confectionary Operations (Component) as of December 31, 1996
and 1995, and the related combined statements of component income and equity,
and of component cash flows for the years then ended. These financial
statements are the responsibility of Mederer Corporation'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 combined financial statements present fairly, in all
material respects, the financial position of the Component as of December 31,
1996 and 1995, and the results of its operations and its cash flows for the
years then ended in conformity with generally accepted accounting principles.
As discussed in Note 8 to the financial statements, on February 24, 1997,
Favorite Brands International, Inc. entered into a Stock Purchase Agreement
with Mederer Corporation and its stockholders to acquire the Component.
Deloitte & Touche LLP
Des Moines, Iowa
March 3, 1997
F-79
<PAGE>
MEDERER CORPORATION'S U.S. CONFECTIONARY OPERATIONS (COMPONENT)
COMBINED COMPONENT BALANCE SHEETS
DECEMBER 31, 1995 AND 1996
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER
ASSETS 1995 31, 1996
------ ------------ -----------
<S> <C> <C>
Current Assets:
Cash................................................. $ -- $ 157,337
Accounts receivable:
Trade, net of allowance for doubtful accounts of
$33,000 and $64,884 at December 31, 1995 and
December 31, 1996, respectively................... 2,449,312 3,748,615
Related parties.................................... 263,822 273,218
Other.............................................. 364,248 152,945
Inventories:
Raw materials...................................... 1,830,576 3,010,763
Finished goods..................................... 2,936,232 2,354,167
Deferred income taxes................................ 29,000 62,000
Prepaid expenses....................................... 611,101 752,308
----------- -----------
Total current assets............................. 8,484,291 10,511,353
----------- -----------
Property and Equipment:
Building and leasehold improvements.................. 5,281,691 8,102,740
Machinery and equipment.............................. 21,535,686 27,837,602
----------- -----------
26,817,377 35,940,342
Less accumulated depreciation and amortization....... 11,195,212 13,829,029
----------- -----------
Property and equipment, net.......................... 15,622,165 22,111,313
----------- -----------
Other Assets........................................... 36,898 34,653
----------- -----------
Total Assets........................................... $24,143,354 $32,657,319
=========== ===========
<CAPTION>
LIABILITIES AND COMPONENT EQUITY
--------------------------------
<S> <C> <C>
Current Liabilities:
Checks written in excess of bank balances............ $ 199,453 $ --
Accounts payable:
Trade.............................................. 3,940,273 6,858,904
Related parties.................................... 532,623 181,218
Accrued expenses:
Payroll and related costs.......................... 297,955 643,997
Property taxes..................................... 177,608 289,533
Promotional programs............................... 379,938 493,265
Income taxes....................................... 427,488
Other.............................................. 1,640 237,347
Notes payable........................................ 1,319,000 2,834,000
Current maturities of long-term debt................. 1,280,000 1,280,000
Current portion of capital lease obligations......... 1,616,983 1,682,762
----------- -----------
Total current liabilities........................ 9,745,473 14,928,514
Long-Term Debt, less current maturities................ 4,430,000 3,150,000
Capital Lease Obligations, less current portion........ 4,904,572 4,072,498
Deferred Income Taxes.................................. 809,000 689,000
----------- -----------
Total liabilities................................ 19,889,045 22,840,012
----------- -----------
Commitments and Contingencies (Note 7)
Component Equity....................................... 4,254,309 9,817,307
----------- -----------
Total Liabilities and Component Equity........... $24,143,354 $32,657,319
=========== ===========
</TABLE>
See notes to combined financial statements.
F-80
<PAGE>
MEDERER CORPORATION'S U.S. CONFECTIONARY OPERATIONS (COMPONENT)
COMBINED STATEMENTS OF COMPONENT INCOME AND EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1996
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------
1995 1996
----------- -----------
<S> <C> <C>
Net Sales............................................ $49,400,861 $62,115,380
----------- -----------
Operating Costs and Expenses:
Cost of goods sold, excluding depreciation and
amortization...................................... 24,171,727 29,607,201
General and administrative, excluding depreciation
and amortization.................................. 10,033,647 11,878,213
Selling, excluding depreciation and amortization... 6,098,568 7,690,094
Depreciation and amortization...................... 2,721,613 2,632,178
----------- -----------
Total operating costs and expenses............... 43,025,555 51,807,686
----------- -----------
Income from Operations............................... 6,375,306 10,307,694
----------- -----------
Other Income (Expense):
Interest income.................................... 3,772 22,538
Interest expense................................... (1,062,595) (963,043)
Other.............................................. 49,394 38,046
----------- -----------
Total other expense.............................. (1,009,429) (902,459)
----------- -----------
Income before Income Taxes........................... 5,365,877 9,405,235
Income Tax Expense................................... 1,743,390 3,138,258
----------- -----------
Net Income........................................... 3,622,487 6,266,977
Component Equity, Beginning of Year.................. 6,494,718 4,254,309
Distributions to Fund Other Mederer Corporation
Activities.......................................... (5,862,896) (703,979)
----------- -----------
Component Equity, End of Year........................ $ 4,254,309 $ 9,817,307
=========== ===========
</TABLE>
See notes to combined financial statements.
F-81
<PAGE>
MEDERER CORPORATION'S U.S. CONFECTIONARY OPERATIONS (COMPONENT)
COMBINED STATEMENTS OF COMPONENT CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1996
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31
------------------------
1995 1996
----------- -----------
<S> <C> <C>
Cash Flows from Operating Activities:
Net income......................................... $ 3,622,487 $ 6,266,977
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization.................... 2,721,613 2,632,178
Loss on sale of property and equipment........... 14 --
Write-down of property and equipment............. -- 323,541
Deferred income taxes............................ (29,000) (153,000)
Changes in:
Accounts receivable............................ (395,124) (1,097,396)
Inventories.................................... (1,589,734) (598,122)
Prepaid expenses............................... (443,312) (141,207)
Other assets................................... (33,247) (1,922)
Accounts payable............................... 2,604,693 2,567,225
Accrued expenses............................... (22,891) 1,234,489
----------- -----------
Net cash from operating activities........... 6,435,499 11,032,763
----------- -----------
Cash Flows from Investing Activities:
Proceeds from sale of property and equipment....... 5,200 --
Purchases of property and equipment................ (1,904,608) (8,222,158)
----------- -----------
Net cash from investing activities........... (1,899,408) (8,222,158)
----------- -----------
Cash Flows from Financing Activities:
Net borrowings on notes payable.................... 1,180,100 1,515,000
Change in checks written in excess of bank
balances.......................................... (292,349) (199,453)
Proceeds from long-term debt....................... 2,620,000 --
Repayments of long-term debt....................... (2,099,528) (1,280,000)
Principal repayments on capital lease obligations.. (1,401,418) (1,984,836)
Distributions to fund other Mederer Corporation
activities, net................................... (4,542,896) (703,979)
----------- -----------
Net cash from financing activities........... (4,536,091) (2,653,268)
----------- -----------
Net Change in Cash................................... -- 157,337
Cash, Beginning of Period............................ -- --
----------- -----------
Cash, End of Period.................................. $ -- $ 157,337
=========== ===========
Supplemental Schedule of Noncash Investing and
Financing Activities:
Capital lease obligation incurred for new equipment
and leasehold improvements........................ $ 1,495,766 $ 1,218,541
Long-term debt incurred in connection with the
advance of funds used to retire stock of Mederer
Corporation....................................... 1,320,000 --
Cash Paid for:
Interest........................................... $ 1,021,411 $ 1,131,871
Income taxes....................................... 2,104,494 2,516,500
</TABLE>
See notes to combined financial statements.
F-82
<PAGE>
MEDERER CORPORATION'S U.S. CONFECTIONARY OPERATIONS (COMPONENT)
NOTES TO COMBINED COMPONENT FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1996
1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation--The combined financial statements of Mederer
Corporation's U.S. Confectionary Operations reflect the manufacturing and
distribution activities of Mederer Corporation (Mederer) and its wholly-owned
U.S. subsidiaries Trolli, Inc. (Trolli) and Gelex Corporation International,
Ltd. (Gelex) (a foreign sales corporation), collectively referred to as the
"Component." All significant intercompany accounts and transactions between
these entities have been eliminated. These combined financial statements do not
reflect Mederer Corporation's non-confectionary operations which include its
wholly-owned subsidiary Charqui Inc. (Charqui) or its foreign confectionary
operations which include its 90% ownership of Trolli Iberica S.A. (Iberica) and
its 99% owned subsidiary Trolli de Mexico S.A. de C.V. (Mexico), collectively
referred to as the "Excluded Operations." All significant accounts and
transactions between Mederer Corporation's U.S. Confectionary Operations and
the Excluded Operations are excluded from the combined balance sheets and net
income and are reflected as a change in Component equity.
Description of Component Business--Mederer manufactures and distributes candy
for human consumption. Mederer distributes its products through Trolli who
markets them primarily in the United States. Mederer also sells directly to
customers in other countries through Gelex. Sales to one customer, who
individually accounted for greater than 10% of total Component sales, were
approximately $7.8 million and $10.5 million in 1995 and 1996, respectively.
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,
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Fair Value of Financial Instruments--The fair value of amounts borrowed under
the Component's external credit facilities approximates the carrying value as
the terms and rates are similar to those currently available to the Component.
Cash Equivalents--All highly liquid investments with a maturity, at time of
purchase, of three months or less are considered to be cash equivalents.
Inventories--Inventories are stated at the lower of cost (first-in, first-out
method) or market.
Property and Equipment--Property and equipment are recorded at historical
cost. Depreciation and amortization of property and equipment is provided using
the straight-line method over the following estimated useful lives of the
assets.
<TABLE>
<S> <C>
Buildings and leasehold improvements........................... 7-40 years
Machinery and equipment........................................ 3-10 years
</TABLE>
F-83
<PAGE>
MEDERER CORPORATION'S U.S. CONFECTIONARY OPERATIONS (COMPONENT)
NOTES TO COMBINED COMPONENT FINANCIAL STATEMENTS--(CONTINUED)
Long-Lived Assets--The Component assesses at each balance sheet date whether
there has been a permanent impairment in the value of long-lived assets.
Income Taxes--The Component is included in the consolidated tax returns of
Mederer Corporation. For financial statement purposes, income taxes are
recorded as if the Component filed separate income tax returns. Deferred tax
assets or liabilities are computed based on the difference between the
financial statement and income tax bases of assets and liabilities using the
enacted marginal tax rate. Deferred income tax expense or benefit is based on
the changes in the deferred tax assets or liabilities from period to period.
2. LEASES
Mederer leases a building from an affiliated partnership, Mederer Associates,
and accounts for it as a capital lease. The lease expires in 2003. Mederer also
leases equipment from unrelated parties under capital leases which expire from
1997 through 2000.
Assets under capital leases consist of the following at December 31, 1995 and
1996:
<TABLE>
<CAPTION>
1995 1996
----------- ---------------------------------
RELATED
TOTAL PARTIES OTHER TOTAL
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Building..................... $ 2,712,547 $3,931,091 $ -- $ 3,931,091
Equipment.................... 9,358,612 1,086,386 8,272,225 9,358,611
----------- ---------- ---------- -----------
12,071,159 5,017,477 8,272,225 13,289,702
Less accumulated
amortization................ 4,459,220 1,451,024 4,285,770 5,736,794
----------- ---------- ---------- -----------
$ 7,611,939 $3,566,453 $3,986,455 $ 7,552,908
=========== ========== ========== ===========
</TABLE>
The following is a schedule of future minimum lease payments under capital
leases, together with the present value of those payments as of December 31,
1996:
<TABLE>
<CAPTION>
RELATED
PARTIES OTHER TOTAL
---------- ---------- ----------
<S> <C> <C> <C>
Year ended:
1997....................................... $ 580,671 $1,529,012 $2,109,683
1998....................................... 580,671 1,028,836 1,609,507
1999....................................... 580,671 454,065 1,034,736
2000....................................... 580,671 235,315 815,986
2001....................................... 580,671 -- 580,671
Thereafter................................. 879,615 -- 879,615
---------- ---------- ----------
Total minimum lease payments................. 3,782,970 3,247,228 7,030,198
Less amount representing interest............ 966,543 308,395 1,274,938
---------- ---------- ----------
Present value of net minimum lease payments.. 2,816,427 2,938,833 5,755,260
Amounts due within one year.................. 327,998 1,354,764 1,682,762
---------- ---------- ----------
Obligations under capital leases due after
one year.................................... $2,488,429 $1,584,069 $4,072,498
========== ========== ==========
</TABLE>
F-84
<PAGE>
MEDERER CORPORATION'S U.S. CONFECTIONARY OPERATIONS (COMPONENT)
NOTES TO COMBINED COMPONENT FINANCIAL STATEMENTS--(CONTINUED)
Under the terms of the leases, Mederer is responsible for maintenance,
insurance, taxes and licenses.
The Component leases equipment and office space under various operating
leases which expire through 2001. The following is a schedule of future minimum
rental payments applicable to operating leases at December 31, 1996:
<TABLE>
<S> <C>
1997............................ $165,909
1998............................ 133,842
1999............................ 107,813
2000............................ 109,775
2001............................ 94,045
--------
Total minimum rental payments
required....................... $611,384
========
</TABLE>
Total rent expense under operating leases was $199,244 and $246,633 for 1995
and 1996, respectively.
3. NOTES PAYABLE AND OTHER LONG-TERM DEBT
Notes Payable--Mederer has entered into a revolving line of credit agreement
with a bank with interest payable monthly at .5% above the bank's base rate
(8.75% at December 31, 1996). The balances outstanding on the line of credit
were $1,319,000 and $2,834,000 at December 31, 1995 and 1996, respectively.
Long-Term Debt--Mederer has entered into a revolving term loan note with a
bank with interest payable monthly at .75% above the bank's base rate (9.00% at
December 31, 1996). The initial amount of the available term loan was
$4,200,000. In October 1995, the loan agreement was amended, increasing the
available amount to $4,600,000. The available amount decreases quarterly by
$210,000 through December 31, 1999, and is limited to the most current
borrowing base (as defined by the agreement). The balances outstanding on this
reducing revolving term loan were $4,390,000 and $3,550,000 at December 31,
1995 and 1996, respectively.
Borrowings under the line of credit and long-term debt agreements are secured
by substantially all Mederer's assets not otherwise encumbered.
Mederer's credit agreements contain several covenants and require Mederer to
maintain certain financial ratios. The most restrictive covenants limit
payments of dividends, limit future loans and advances, require a minimum book
net worth (in total and in proportion to indebtedness), and requires a minimum
cash flow coverage ratio. Mederer was in compliance with such covenants as of
December 31, 1996.
In September 1995, Mederer entered into a $1,320,000 unsecured installment
note with a former stockholder in connection with the advance of $885,000 in
cash used to retire stock of Mederer. Interest is payable quarterly at 2% below
prime rate (6.25% at December 31, 1996). The balance of this note at December
31, 1996, $880,000, is due in annual payments of $440,000.
F-85
<PAGE>
MEDERER CORPORATION'S U.S. CONFECTIONARY OPERATIONS (COMPONENT)
NOTES TO COMBINED COMPONENT FINANCIAL STATEMENTS--(CONTINUED)
Future maturities of long-term debt at December 31, 1996 are as follows:
<TABLE>
<S> <C>
1997.......................... $1,280,000
1998.......................... 1,280,000
1999.......................... 1,870,000
----------
$4,430,000
==========
</TABLE>
4. INCOME TAXES
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and liabilities at December 31, 1995 and 1996
were as follows:
<TABLE>
<CAPTION>
1995 1996
--------- ---------
<S> <C> <C>
Current deferred taxes:
Allowance for doubtful accounts.................. $ 11,000 $ 24,000
Inventories...................................... (161,000) (49,000)
Accruals......................................... 179,000 87,000
--------- ---------
$ 29,000 $ 62,000
--------- ---------
Noncurrent deferred taxes:
Property and equipment........................... $(774,000) $(623,000)
Capital leases................................... (37,000) (70,000)
Other............................................ 2,000 4,000
--------- ---------
$(809,000) $(689,000)
========= =========
</TABLE>
The components of income tax expense are as follows:
<TABLE>
<CAPTION>
1995 1996
---------- ----------
<S> <C> <C>
Current........................................... $1,772,390 $3,291,258
Deferred.......................................... (29,000) (153,000)
---------- ----------
Total........................................... $1,743,390 $3,138,258
========== ==========
</TABLE>
There are no individual items which cause the effective tax rate to
materially differ from the federal statutory rate.
5. RELATED PARTY TRANSACTIONS
The Component entered into various transactions with related parties during
1995 and 1996. A description of those related party transactions are as
follows:
. The Component pays fees and enters into various other transactions with
officers or other individuals having indirect ownership in Mederer.
. In accordance with a technology and assistance agreement, the Component
paid Mederer GmbH (owner of 67.10% of Mederer at December 31, 1996)
royalties representing 2% of net sales for the year ended December 31,
1995 and 3.5% of net branded sales for the year ended December 31, 1996.
. Mederer Associates is a partnership affiliated through common ownership.
Mederer leases its U.S. manufacturing facilities from Mederer Associates
under an agreement accounted for as a capital lease. See Note 2.
F-86
<PAGE>
MEDERER CORPORATION'S U.S. CONFECTIONARY OPERATIONS (COMPONENT)
NOTES TO COMBINED COMPONENT FINANCIAL STATEMENTS--(CONTINUED)
. The Component incurred legal fees with a law firm, Foley & Lardner, in
which a member of Mederer's Board of Directors was a partner in 1995.
. The Component sells product to two outlet stores, Gummi Bear Paradise and
United Gummi Bears, Inc., which are owned by an individual related to a
stockholder.
. Mederer sells product to PT Yupi Jelly Gum, an affiliate of Mederer GmbH.
. Mederer buys raw materials from GMI Products, Inc., which has common
ownership with Mederer.
. The Component sells product under a distribution agreement to Trolli de
Colombia, which has common ownership with Mederer. The agreement has an
initial five year term, expiring in 2001, and contains annual minimum
purchase requirements.
As of December 31:
<TABLE>
<CAPTION>
1995 1996
-------------------- --------------------
RECEIVABLES PAYABLES RECEIVABLES PAYABLES
----------- -------- ----------- --------
<S> <C> <C> <C> <C>
Officers and other individuals with
indirect ownership................. $ 43,912 $ 20,400 $ 87,398 $ 24,000
Mederer GmbH........................ 1,600 475,036 -- 54,319
Mederer Associates.................. 88,274 -- 58,274 --
Foley & Lardner..................... -- 35,324 -- --
Trolli de Colombia.................. 126,555 -- 114,237 --
GMI Products, Inc................... 3,481 1,863 3,080 102,899
United Gummi Bears, Inc............. -- -- 10,229 --
-------- -------- -------- --------
Total............................. $263,822 $532,623 $273,218 $181,218
======== ======== ======== ========
</TABLE>
For the year ended December 31, 1995:
<TABLE>
<CAPTION>
ROYALTIES LEGAL RENT EQUIPMENT ADMINISTRATIVE
SALES PURCHASES PAID FEES PAID PURCHASED FEES
-------- --------- --------- ------- -------- --------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Officers and other
individuals with
indirect ownership..... $ -- $ -- $ -- $ -- $ -- $ -- $144,000
Mederer GmbH............ 1,575 17,000 745,574 -- 71,600 22,000 18,000
Mederer Associates...... -- -- -- -- 314,400 -- --
Foley & Lardner......... -- -- -- 85,375 -- -- --
Trolli de Colombia...... 631,844 -- -- -- -- -- --
GMI Products, Inc....... -- 452,336 -- -- -- -- 45,188
-------- -------- -------- ------- -------- ------- --------
Totals................. $633,419 $469,336 $745,574 $85,375 $386,000 $22,000 $207,188
======== ======== ======== ======= ======== ======= ========
</TABLE>
F-87
<PAGE>
MEDERER CORPORATION'S U.S. CONFECTIONARY OPERATIONS (COMPONENT)
NOTES TO COMBINED COMPONENT FINANCIAL STATEMENTS--(CONTINUED)
For the year ended December 31, 1996:
<TABLE>
<CAPTION>
HANDLING ADMINIS-
ROYALTIES INTEREST CHARGES RENT EQUIPMENT TRATIVE
SALES PURCHASES PAID PAID PAID PAID PURCHASED FEES MISCELLANEOUS
-------- --------- --------- -------- -------- -------- --------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Officers and other
individuals with
indirect ownership..... $ -- $ -- $ -- $ -- $ -- $ -- $ -- $144,000 $ --
Mederer GmbH............ 4,152 -- 764,419 100,252 47,616 -- 68,394 18,000 23,194
Mederer Associates...... -- -- -- -- -- 470,480 -- -- --
Trolli de Colombia...... 710,683 -- -- -- -- -- -- -- --
GMI Products, Inc....... 1,914 489,100 -- -- -- -- -- -- --
United Gummi Bears,
Inc.................... 25,548 -- -- -- -- -- -- -- --
Gummi Bear Paradise..... 63,173 -- -- -- -- -- -- -- --
PT Yupi Jelly Gum....... 67,357 -- -- -- -- -- -- -- --
-------- -------- -------- -------- ------- -------- ------- -------- -------
Totals................. $872,827 $489,100 $764,419 $100,252 $47,616 $470,480 $68,394 $162,000 $23,194
======== ======== ======== ======== ======= ======== ======= ======== =======
</TABLE>
6. EMPLOYEE RETIREMENT PLAN
Mederer has a 401(k) plan which covers substantially all employees of the
Component who meet minimum age and service requirements. Mederer is required to
match one-half of the employee's contributions up to a maximum Mederer
contribution of 2% of employee compensation. Plan expense for 1995 and 1996,
was $46,140 and $60,229, respectively.
7. COMMITMENTS AND CONTINGENCIES
Under an agreement with a bank, Mederer has guaranteed a term loan of Mederer
Associates. At December 31, 1996, the approximate amount guaranteed by Mederer
under this term loan aggregated $2,816,427.
In the normal course of business the Component enters into forward purchase
contracts at prevailing market prices for certain raw materials used in the
manufacturing process. All such contracts are scheduled for fulfillment within
one year. Additionally, in the normal course of business the Component has
entered into various manufacturing and contract packaging agreements with
customers. Management does not anticipate any loss to be sustained from the
fulfillment of or inability to fulfill these contracts and agreements.
The Component is subject to various claims and legal matters arising in the
normal course of business. The Component believes that the outcome of all such
matters will not have a material effect on the financial statements of the
Component.
8. SUBSEQUENT EVENT
On February 24, 1997, Favorite Brands International, Inc. (FBI) entered into
a Stock Purchase Agreement with Mederer and its stockholders to acquire all the
issued and outstanding capital stock of Mederer. At or prior to the closing,
which is anticipated to occur on or around April 1, 1997, all
F-88
<PAGE>
MEDERER CORPORATION'S U.S. CONFECTIONARY OPERATIONS (COMPONENT)
NOTES TO COMBINED COMPONENT FINANCIAL STATEMENTS--(CONTINUED)
investments in and advances to Charqui and Iberica and related liabilities will
be sold to or assumed by the Mederer stockholders, directly or indirectly. In
connection with the disposition of Iberica the stockholders will assume a long-
term obligation to Mederer GmbH. Additionally, at or prior to closing, the
stockholders shall cause the underlying real property assets of Mederer
Associates to be conveyed to Mederer for (1) approximately $400,000; plus (2)
assumption of an existing mortgage for the real property approximating
$2,800,000; and (3) the discharge of a receivable due from Mederer Associates
of approximately $58,000.
F-89
<PAGE>
MEDERER CORPORATION'S U.S. CONFECTIONARY OPERATIONS (COMPONENT)
COMBINED COMPONENT BALANCE SHEET
(UNAUDITED) MARCH 31, 1997
<TABLE>
<CAPTION>
MARCH 31,
ASSETS 1997
------ ------------
<S> <C>
Current Assets:
Cash............................................................. $ 1,082,900
Accounts receivable:
Trade, net of allowance for doubtful accounts of $73,354....... 5,472,178
Related parties................................................ 335,031
Other.......................................................... 153,396
Inventories:
Raw materials.................................................. 4,034,846
Finished goods................................................. 2,921,872
Deferred income taxes............................................ --
Prepaid expenses................................................... 840,317
------------
Total current assets......................................... 14,840,540
------------
Property and Equipment:
Building and leasehold improvements.............................. 8,102,740
Machinery and equipment.......................................... 33,180,270
------------
41,283,010
Less accumulated depreciation and amortization................... (14,569,997)
------------
Property and equipment, net...................................... 26,713,013
------------
Other Assets....................................................... 72,099
------------
Total Assets....................................................... $ 41,625,652
============
<CAPTION>
LIABILITIES AND COMPONENT EQUITY
--------------------------------
<S> <C>
Current Liabilities:
Checks written in excess of bank balances........................ $ --
Accounts payable:
Trade.......................................................... 7,622,075
Related parties................................................ --
Accrued expenses:
Payroll and related costs...................................... 1,037,057
Property taxes................................................. 258,553
Promotional programs........................................... 547,425
Income taxes................................................... 1,335,938
Other.......................................................... 155,661
Notes payable.................................................... 3,622,000
Current maturities of long-term debt............................. 1,280,000
Current portion of capital lease obligations..................... 1,659,577
------------
Total current liabilities.................................... 17,518,286
Long-Term Debt, less current maturities............................ 3,150,000
Capital Lease Obligations, less current portion.................... 8,557,547
Deferred Income Taxes.............................................. 689,000
------------
Total liabilities............................................ 29,914,833
------------
Component Equity................................................... 11,710,819
------------
Total Liabilities and Component Equity....................... $ 41,625,652
============
</TABLE>
See notes to combined financial statements.
F-90
<PAGE>
MEDERER CORPORATION'S U.S. CONFECTIONARY OPERATIONS (COMPONENT)
COMBINED STATEMENTS OF COMPONENT INCOME AND EQUITY
(UNAUDITED) FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1997
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31
------------------------
1996 1997
----------- -----------
<S> <C> <C>
Net Sales............................................ $19,492,268 $18,415,967
----------- -----------
Operating Costs and Expenses:
Cost of goods sold, excluding depreciation and
amortization...................................... 11,830,018 9,921,447
General and administrative, excluding depreciation
and amortization.................................. 2,609,113 2,620,589
Selling, excluding depreciation and amortization... 1,926,763 1,822,989
Depreciation and amortization...................... 673,412 745,241
----------- -----------
Total operating costs and expenses............... 17,039,306 15,110,266
----------- -----------
Income from Operations............................... 2,452,962 3,305,701
----------- -----------
Other Income (Expense):
Interest income.................................... -- --
Interest expense................................... (323,652) (364,540)
Other.............................................. 23,284 --
----------- -----------
Total other expense.............................. (300,368) (364,540)
----------- -----------
Income before Income Taxes........................... 2,152,594 2,941,161
Income Tax Expense................................... 735,729 1,016,027
----------- -----------
Net Income........................................... 1,416,865 1,925,134
Component Equity, Beginning of Period................ 4,254,309 9,817,307
Distributions to Fund Other Mederer Corporation
Activities.......................................... -- (31,622)
----------- -----------
Component Equity, End of Period...................... $ 5,671,174 $11,710,819
=========== ===========
</TABLE>
See notes to combined financial statements.
F-91
<PAGE>
MEDERER CORPORATION'S U.S. CONFECTIONARY OPERATIONS (COMPONENT)
COMBINED STATEMENTS OF COMPONENT CASH FLOWS
(UNAUDITED) FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1997
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31
----------------------
1996 1997
---------- ----------
<S> <C> <C>
Cash Flows from Operating Activities:
Net income........................................... $1,416,865 $1,925,134
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization...................... 673,412 745,241
Loss on sale of property and equipment............. -- --
Write-down of property and equipment............... -- --
Deferred income taxes.............................. 29,000 62,000
Changes in:
Accounts receivable.............................. (2,263,585) (1,785,827)
Inventories...................................... (252,040) (1,591,788)
Prepaid expenses................................. (81,791) (88,009)
Other assets..................................... (19,557) (41,719)
Accounts payable................................. 331,943 391,552
Accrued expenses................................. 1,128,381 1,433,405
---------- ----------
Net cash from operating activities............. 962,628 1,049,989
---------- ----------
Cash Flows from Investing Activities:
Proceeds from sale of property and equipment.........
Purchases of property and equipment.................. (452,395) (5,342,668)
---------- ----------
Net cash from investing activities............. (452,395) (5,342,668)
---------- ----------
Cash Flows from Financing Activities:
Net borrowings on notes payable...................... 1,370,000 788,000
Change in checks written in excess of bank balances.. -- --
Proceeds from long-term debt......................... -- --
Repayments of long-term debt......................... (2,635,482) --
Principal repayments on capital lease obligations. 1,019,282 4,461,864
Distributions to fund other Mederer Corporation
activities, net..................................... -- (31,622)
---------- ----------
Net cash from financing activities............. (246,200) 5,218,242
---------- ----------
Net Change in Cash..................................... 264,033 925,563
Cash, Beginning of Period.............................. -- 157,337
---------- ----------
Cash, End of Period.................................... $ 264,033 $1,082,900
========== ==========
Cash Paid for:
Interest............................................. $ 255,353 $ 282,968
Income taxes......................................... 319,400 107,577
</TABLE>
See notes to combined financial statements.
F-92
<PAGE>
MEDERER CORPORATION'S U.S. CONFECTIONARY OPERATIONS (COMPONENT)
NOTES TO COMBINED COMPONENT FINANCIAL STATEMENTS
(UNAUDITED) FOR THE THREE MONTHS ENDING MARCH 31, 1996 AND 1997
1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation--The combined financial statements of Mederer
Corporation's U.S. Confectionary Operations reflect the manufacturing and
distribution activities of Mederer Corporation (Mederer) and its wholly-owned
U.S. subsidiaries Trolli, Inc. (Trolli) and Gelex Corporation International,
Ltd. (Gelex) (a foreign sales corporation), collectively referred to as the
"Component." All significant intercompany accounts and transactions between
these entities have been eliminated. These combined financial statements do not
reflect Mederer Corporation's non-confectionary operations which include its
wholly-owned subsidiary Charqui Inc. (Charqui) or its foreign confectionary
operations which include its 90% ownership of Trolli Iberica S.A. (Iberica) and
its 99% owned subsidiary Trolli de Mexico S.A. de C.V. (Mexico), collectively
referred to as the "Excluded Operations." All significant accounts and
transactions between Mederer Corporation's U.S. Confectionary Operations and
the Excluded Operations are excluded from the combined balance sheets and net
income and are reflected as a change in Component equity.
Description of Component Business--Mederer manufactures and distributes candy
for human consumption. Mederer distributes its products through Trolli who
markets them primarily in the United States. Mederer also sells directly to
customers in other countries through Gelex.
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,
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Fair Value of Financial Instruments--The fair value of amounts borrowed under
the Component's external credit facilities approximates the carrying value as
the terms and rates are similar to those currently available to the Component.
Cash Equivalents--All highly liquid investments with a maturity, at time of
purchase, of three months or less are considered to be cash equivalents.
Inventories--Inventories are stated at the lower of cost (first-in, first-out
method) or market.
Property and Equipment--Property and equipment are recorded at historical
cost. Depreciation and amortization of property and equipment is provided using
the straight-line method over the following estimated useful lives of the
assets.
<TABLE>
<S> <C>
Buildings and leasehold improvements........................... 7-40 years
Machinery and equipment........................................ 3-10 years
</TABLE>
Long-Lived Assets--The Component assesses at each balance sheet date whether
there has been a permanent impairment in the value of long-lived assets.
F-93
<PAGE>
MEDERER CORPORATION'S U.S. CONFECTIONARY OPERATIONS (COMPONENT)
NOTES TO COMBINED COMPONENT FINANCIAL STATEMENTS--(CONTINUED)
Income Taxes--The Component is included in the consolidated tax returns of
Mederer Corporation. For financial statement purposes, income taxes are
recorded as if the Component filed separate income tax returns. Deferred tax
assets or liabilities are computed based on the difference between the
financial statement and income tax bases of assets and liabilities using the
enacted marginal tax rate. Deferred income tax expense or benefit is based on
the changes in the deferred tax assets or liabilities from period to period.
INTERIM FINANCIAL INFORMATION
Interim financial information for the three months ended March 31, 1996 and
1997 included herein is unaudited; however, in the opinion of management, the
interim financial information includes all adjustments, consisting of only
normal recurring adjustments, necessary for a fair presentation of the results
for the interim periods. The results of operations for the three months ended
March 31, 1996 and 1997 are not necessarily indicative of the results to be
expected for the years ended December 31, 1997 and 1998, due to the seasonal
nature of the Company's operations. These financial statements should be read
in conjunction with the Component financial statements as of and for the year
ended December 31, 1996.
2. STOCK PURCHASE
On February 24, 1997, Favorite Brands International, Inc. (FBI) entered into
a Stock Purchase Agreement with Mederer and its stockholders to acquire all the
issued and outstanding capital stock of Mederer. At or prior to the closing,
which is anticipated to occur on or around April 1, 1997, all investments in
and advances to Charqui and Iberica and related liabilities will be sold to or
assumed by the Mederer stockholders, directly or indirectly. In connection with
the disposition of Iberica the stockholders will assume a long-term obligation
to Mederer GmbH. Additionally, at or prior to closing, the stockholders shall
cause the underlying real property assets of Mederer Associates to be conveyed
to Mederer for (1) approximately $400,000; plus (2) assumption of an existing
mortgage for the real property approximating $2,800,000; and (3) the discharge
of a receivable due from Mederer Associates of approximately $58,000.
F-94
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR
TO REPRESENT ANYTHING NOT CONTAINED IN THIS PROSPECTUS OR IN THE ACCOMPANYING
LETTER OF TRANSMITTAL. YOU MUST NOT RELY ON ANY UNAUTHORIZED INFORMATION OR
REPRESENTATIONS. THIS PROSPECTUS AND THE ACCOMPANYING LETTER OF TRANSMITTAL ARE
AN OFFER TO SELL OR TO BUY ONLY THE SECURITIES OFFERED HEREBY, BUT ONLY UNDER
CIRCUMSTANCES AND IN JURISDICTIONS WHERE IT IS LAWFUL TO DO SO. THE INFORMATION
CONTAINED IN THIS PROSPECTUS AND IN THE ACCOMPANYING LETTER OF TRANSMITTAL ARE
CURRENT ONLY AS OF THEIR RESPECTIVE DATES.
- --------------------------------------------------------------------------------
THROUGH AND INCLUDING , 1999 (THE 90TH DAY AFTER THE DATE OF THIS
PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THESE SECURITIES, WHETHER OR
NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE DEALERS' OBLIGATION TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Certificate of Incorporation of the Registrant provides that the
Registrant will indemnify each of its directors and officers to the fullest
extent permitted by the General Corporation Law of the State of Delaware (the
"DGCL") and may indemnify certain other persons as authorized by the DGCL.
Section 145 of the DGCL provides as follows:
145 INDEMNIFICATION OF OFFICERS, DIRECTORS, EMPLOYEES AND AGENTS; INSURANCE--
(a) A corporation shall have power to indemnify any person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative
or investigative (other than an action by or in the right of the corporation)
by reason of the fact that the person is or was a director, officer, employee
or agent of the corporation, or is or was serving at the request of the
corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, against expenses
(including attorney's fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by the person in connection with such action,
suit or proceeding if the person acted in good faith and in a manner the person
reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe the person's conduct was unlawful. The termination
of any action, suit or proceeding by judgment, order, settlement, conviction,
or upon a plea of nolo contendere or its equivalent, shall not, of itself,
create a presumption that the person did not act in good faith and in a manner
which the person reasonably believed to be in or not opposed to the best
interests of the corporation, and, with respect to any criminal action or
proceeding, had reasonable cause to believe that the person's conduct was
unlawful.
(b) A corporation shall have power to indemnify any person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action or suit by or in the right of the corporation to procure a
judgment in its favor by reason of the fact that the person is or was a
director, officer, employee or agent of the corporation, or is or was serving
at the request of the corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise
against expenses (including attorneys' fees) actually and reasonably incurred
by the person in connection with the defense or settlement of such action or
suit if the person acted in good faith and in a manner the person reasonably
believed to be in or not opposed to the best interests of the corporation and
except that no indemnification shall be made in respect of any claim, issue or
matter as to which such person shall have been adjudged to be liable to the
corporation unless and only to the extent that the court of Chancery or the
court in which such action or suit was brought shall determine upon application
that, despite the adjudication of liability but in view of all the
circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such expenses which the Court of Chancery or such other court
shall deem proper.
II-1
<PAGE>
(c) To the extent that a present or former director or officer of a
corporation has been successful on the merits or otherwise in defense of any
action, suit or proceeding referred to in subsections (a) and (b) of this
section, or in defense of any claim, issue or matter therein, such person shall
be indemnified against expenses (including attorneys' fees) actually and
reasonably incurred by such person in connection therewith.
(d) Any Indemnification under subsections (a) and (b) of this section (unless
ordered by a court) shall be made by the corporation only as authorized in the
specific case upon a determination that indemnification of the present or
former director, officer, employee or agent is proper in the circumstances
because the person has met the applicable standard of conduct set forth in
subsections (a) and (b) of this section. Such determination shall be made, with
respect to a person who is a director or officer at the time of such
determination, (1) by a majority vote of the directors who are not parties to
such action, suit or proceeding, even though less than a quorum, or (2) by a
committee of such directors designated by majority vote of such directors, even
though less than a quorum, or (3) if there are no such directors, or if such
directors so direct, by independent legal counsel in a written opinion, or (4)
by the stockholders.
(e) Expenses (including attorneys' fees) incurred by an officer or director
in defending any civil, criminal, administrative or investigative action, suit
or proceeding may be paid by the corporation in advance of the final
disposition of such action, suit or proceeding upon receipt of an undertaking
by or on behalf of such director or officer to repay such amount if it shall
ultimately be determined that such person is not entitled to be indemnified by
the corporation as authorized in this section. Such expenses (including
attorneys' fees) incurred by former directors and officers or other employees
and agents may be so paid upon such terms and conditions, if any, as the
corporation deems appropriate.
(f) The indemnification and advancement of expenses provided by, or granted
pursuant to, the other subsections of this section shall not be deemed
exclusive of any other rights to which those seeking indemnification or
advancement of expenses may be entitled under any bylaw, agreement, vote of
stockholders or disinterested directors or otherwise, both as to action in such
person's official capacity and as to action in another capacity while holding
such office.
(g) A corporation shall have power to purchase and maintain insurance on
behalf of any person who is or was a director, officer, employee or agent of
the corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise against any liability asserted against such
person in any such capacity or arising out of such person's status as such
whether or not the corporation would have the power to indemnify such person
against such liability under this section.
(h) For purposes of this section, references to "the corporation" shall
include, in addition to the resulting corporation, any constituent corporation
(including any constituent of a constituent) absorbed in a consolidation or
merger which, if its separate existence had continued, would have had power and
authority to indemnify its directors, officers, and employees or agents, so
that any person who is or was a director, officer, employee or agent of such
constituent corporation, or is or was serving at the request of such
constituent corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise, shall stand
in the same
II-2
<PAGE>
position under this section with respect to the resulting or surviving
corporation as such person would have with respect to such constituent
corporation if its separate existence had continued.
(i) For purposes of this section, references to "other enterprises" shall
include employee benefit plans; references to "fines" shall include any excise
taxes assessed on a person with respect to any employee benefit plan; and
references to "serving at the request of the corporation" shall include any
service as a director, officer, employee or agent of the corporation which
imposes duties on, or involves services by, such director, officer, employee,
or agent with respect to an employee benefit plan, its participants or
beneficiaries; and a person who acted in good faith and in a manner such person
reasonably believed to be in the interest of the participants and beneficiaries
of an employee benefit plan shall be deemed to have acted in a manner "not
opposed to the best interests of the corporation" as referred to in this
section.
(j) The indemnification and advancement of expenses provided by, or granted
pursuant to, this section shall, unless otherwise provided when authorized or
ratified, continue as to a person who has ceased to be a director, officer,
employee or agent and shall inure to the benefit of the heirs, executors and
administrators of such a person.
(k) The Court of Chancery is hereby vested with exclusive jurisdiction to
hear and determine all actions for advancement of expenses or indemnification
brought under this section or under any bylaw, agreement, vote of stockholders
or disinterested directors, or otherwise. The Court of Chancery may summarily
determine a corporation's obligation to advance expenses (including attorneys'
fees).
The Registrant also carries liability insurance covering officers and
directors.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) EXHIBITS. A list of exhibits included as part of this Registration
Statement is set forth in the Exhibit Index which immediately precedes such
exhibits and is hereby incorporated by reference herein.
(b) FINANCIAL STATEMENT SCHEDULES. A schedule of valuation and qualifying
accounts is included as Schedule I. Other financial statement schedules have
been omitted since the required information is not present, or not present in
amounts sufficient to require submission of the schedule, or because the
information is included in the financial statements or notes thereto.
ITEM 22. UNDERTAKINGS.
(a) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 (and, where applicable, each filing of an employee benefit
plans annual report pursuant to Section 15(d) of the Securities Exchange Act of
1934) that is incorporated by reference in the registration statement shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
II-3
<PAGE>
(b) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the SEC such indemnification
is against public policy as expressed in the Securities Act of 1933 and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by any such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question of whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
(c) The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Item 4, 10(b), 11, or 13 of this Form S-4, within one business day of receipt
of such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through
the date of responding to the request.
(d) The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-4
<PAGE>
FAVORITE BRANDS INTERNATIONAL, INC.
AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF FAVORITE BRANDS
INTERNATIONAL HOLDING CORP.)
SCHEDULE I--VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
ADDITIONS
BALANCE CHARGED
AT TO BALANCE
BEGINNING COSTS AND AT END
CLASSIFICATION OF YEAR EXPENSES DEDUCTIONS OF YEAR
- -------------- --------- --------- ---------- -------
<S> <C> <C> <C> <C>
1998:
Reserve for bad debts.................. $7,650 $18,356 $(11,406) $14,600
------ ------- -------- -------
1997:
Reserve for bad debts.................. $ 500 $ 7,268 $ (118) $ 7,650
------ ------- -------- -------
1996:
Reserve for bad debts.................. $ -- $ 500 $ -- $ 500
------ ------- -------- -------
</TABLE>
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, each registrant
has duly caused this amendment to the registration statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Lincolnshire, State of Illinois, on December 28, 1998.
Favorite Brands International, Inc.
/s/ Richard R. Harshman
By: _________________________________
Title: Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this registration
statement has been signed by the following persons in the capacities indicated,
on December 28, 1998.
<TABLE>
<S> <C>
/s/ Richard R. Harshman
- -------------------------------------------
Richard R. Harshman Chief Executive Officer
/s/ Steven F. Kaplan
- -------------------------------------------
Steven F. Kaplan President, Chief Financial Officer and
Chief Operating Officer
/s/ Ann Hughes
- -------------------------------------------
Ann Hughes Interim Assistant Controller
(Chief Accountant)
/s/ Alexander Seaver
- -------------------------------------------
Alexander Seaver Director
/s/ William S. Price III
- -------------------------------------------
William S. Price III Director
</TABLE>
S-1
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, each registrant
has duly caused this amendment to the registration statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Lincolnshire, State of Illinois, on December 28, 1998.
Trolli Inc.
/s/ Richard R. Harshman
By: _________________________________
Title: Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this registration
statement has been signed by the following persons in the capacities indicated,
on December 28, 1998.
<TABLE>
<S> <C>
/s/ Richard R. Harshman
- -------------------------------------------
Richard R. Harshman Chief Executive Officer
/s/ Steven F. Kaplan
- -------------------------------------------
Steven F. Kaplan Chief Financial Officer and Chief Operating
Officer
/s/ Ann Hughes
- -------------------------------------------
Ann Hughes Interim Assistant Controller
(Chief Accountant)
/s/ Alexander Seaver
- -------------------------------------------
Alexander Seaver Director
/s/ William S. Price III
- -------------------------------------------
William S. Price III Director
</TABLE>
S-2
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, each registrant
has duly caused this amendment to the registration statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Lincolnshire, State of Illinois, on December 28, 1998.
Sather Trucking Corporation
/s/ Richard R. Harshman
By: _________________________________
Title: Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this registration
statement has been signed by the following persons in the capacities indicated,
on December 28, 1998.
<TABLE>
<S> <C>
/s/ Richard R. Harshman
- -------------------------------------------
Richard R. Harshman Chief Executive Officer
/s/ Steven F. Kaplan
- -------------------------------------------
Steven F. Kaplan President, Chief Financial Officer and
Chief Operating Officer
/s/ Ann Hughes
- -------------------------------------------
Ann Hughes Interim Assistant Controller
(Chief Accountant)
/s/ Alexander Seaver
- -------------------------------------------
Alexander Seaver Director
/s/ William S. Price III
- -------------------------------------------
William S. Price III Director
</TABLE>
S-3
<PAGE>
EXHIBIT INDEX
<TABLE>
<C> <S>
3.1 Certificate of Incorporation of Favorite Brands International, Inc.**
3.2 Bylaws of Favorite Brands International, Inc.**
4.1 Indenture, dated as of May 19, 1998, among Favorite Brands International,
Inc., as issuer, the Subsidiary Guarantors party thereto and LaSalle
National Bank, as trustee, relating to the 10 3/4% Senior Notes due 2006
(the "Indenture")**
4.2 Form of 10 3/4% Senior Notes due 2006 of Favorite Brands International,
Inc. (the "Initial Notes") (included as Exhibit A to the Indenture filed
as Exhibit 4.1)
4.3 Form of 10 3/4% Senior Notes due 2006 of Favorite Brands International,
Inc. (the "Exchange Notes") (included as Exhibit B to the Indenture filed
as Exhibit 4.1)
4.4 Form of Subsidiary Guarantee among Favorite Brands International, Inc.,
the subsidiary guarantors of Favorite Brands International, Inc. that are
signatories thereto and LaSalle National Bank, as trustee (included as
Exhibit C to the Indenture filed as Exhibit 4.1)
4.5 Registration Rights Agreement, dated as of May 13 1998, by and among
Favorite Brands International, Inc., Trolli Inc. and Sather Trucking
Corp., as Guarantors, and the Initial Purchasers named therein relating
to $200,000,000 aggregate principal amount of the Initial Notes*
4.6 Credit Agreement, dated as of May 19, 1998, among Favorite Brands
International, Inc., Favorite Brands International Holding Corp., The
Chase Manhattan Bank, as Administrative Agent, Swingline Lender and Co-
Syndication Agent, Bank of America National Trust and Savings
Association, as Documentation Agent and Co-Syndication Agent, and the
other financial institutions party thereto (the "Credit Agreement")**
4.7 First Amendment and Waiver to the Credit Agreement, dated as of August
26, 1998**
4.8 Second Amendment and Waiver to the Credit Agreement, dated as of
September 25, 1998**
4.9 10% Senior Note Due 2005 payable to TPG Partners, L.P.*
4.10 Amended and Restated Senior Subordinated Note Agreement, dated as of
September 12, 1997 related to Series A Senior Subordinated Notes due
August 20, 2007 of Favorite Brands International, Inc. ("Amended and
Restated Senior Subordinated Note Agreement")**
4.11 Form of Series A Senior Subordinated Note due August 20, 2007 (included
as Exhibit I to Amended and Restated Senior Subordinated Note Agreement
filed as Exhibit 4.10)
4.12 Form of Indenture among Favorite Brands International, Inc., the
restricted subsidiaries of Favorite Brands International, Inc., as
Guarantors, and the trustee party thereto, relating to Senior
Subordinated Notes due August 20, 2007 (included as Exhibit V to Amended
and Restated Senior Subordinated Note Agreement filed as Exhibit 4.10)
4.13 Amendment No. 1 to the Amended and Restated Senior Subordinated Note
Agreement, dated as of March 20, 1998**
4.14 Amendment No. 2 to the Amended and Restated Senior Subordinated Note
Agreement, dated as of June 19, 1998**
5.1 Opinion of Cleary, Gottlieb, Steen & Hamilton regarding legality of the
Exchange Notes**
10.1 Operating Services Agreement, dated as of July 13, 1998, by and between
Favorite Brands International, Inc. and Exel Logistics, Inc.**
10.2 Operating Services Agreement, dated as of July 27, 1998, by and between
Favorite Brands International, Inc. and Exel Logistics, Inc.**
</TABLE>
<PAGE>
<TABLE>
<C> <S>
10.3 Lease Agreement, dated as of September 26, 1994, between FLLC, L.L.C.,
as Landlord, and Farley Candy Company, d/b/a Farley Foods, U.S.A., as
Tenant**
10.4 Lease Agreement, dated as of December 23, 1996, between David E.
Babiarz, as Lessor, and D.J. Acquisition Corp., as Lessee**
10.5 Lease Agreement, dated as of May 12, 1994, between American National
Bank and Trust Company Land Trust 65387, as Landlord, and Farley Candy
Company, as Tenant, and addendum thereto*
10.6 Transition Agreement, dated April 1, 1997, by and among Mederer
Corporation, Favorite Brands International, Inc. and Jose Minski**
10.7 The Merrill Lynch Special Non-Qualified Deferred Compensation Plan,
effective as of January 1, 1997**
10.8 Stock Option Agreement, dated as of August 31, 1996 between Favorite
Brands International Holding Corp. and Alexander M. Seaver**
10.9 Favorite Brands International Holding Corp. Stock Option Plan, effective
as of September 25, 1995**
10.10 Employment Agreement, dated as of May 5, 1997, between Favorite Brands
International, Inc. and Al Multari, and amendment thereto, dated as of
May 15, 1997**
10.11 Employment Agreement, dated as of August 15, 1996, between Favorite
Brands International, Inc. and Dennis J. Nemeth**
10.12 Form of Change of Control Agreement**
12.1 Calculation of Ratio of Earnings to Fixed Charges**
21.1 Subsidiaries of Favorite Brands International, Inc.**
23.1 Consent of PricewaterhouseCoopers LLP, independent accountants*
23.2 Consent of Friedman Eisenstein Raemer and Schwartz, LLP, independent
accountants*
23.3 Consent of McGladrey & Pullen, independent accountants*
23.4 Consent of Wolf, Grieco & Co., independent accountants*
23.5 Consent of Deloitte & Touche LLP, independent accountants*
23.6 Consent of Cleary, Gottlieb, Steen & Hamilton (included in its opinion
filed as Exhibit 5.1)
25.1 Form T-1 with respect to the eligibility of LaSalle National Bank with
respect to the Indenture**
27.1 Financial Data Schedule**
99.1 Form of Letter of Transmittal**
99.2 Form of Notice of Guaranteed Delivery**
99.3 Form of Letter to Brokers, Dealers, Commercial Banks, Trust Companies
and Other Nominees**
99.4 Form of Letter to Clients**
</TABLE>
- --------
*Filed Herewith.
**Previously filed.
2
<PAGE>
EXHIBIT 4.5
Execution Copy
FAVORITE BRANDS INTERNATIONAL, INC.
$200,000,000
10-3/4% Senior Notes due 2006
EXCHANGE AND REGISTRATION RIGHTS AGREEMENT
------------------------------------------
May 19, 1998
CHASE SECURITIES INC.
BANCAMERICA ROBERTSON STEPHENS
c/o Chase Securities Inc.
270 Park Avenue, 4th floor
New York, New York 10017
Ladies and Gentlemen:
Favorite Brands International, Inc., a Delaware corporation (the
"Company"), proposes to issue and sell, Trolli Inc., a Delaware corporation and
Sather Trucking Corporation, a Delaware corporation (the "Guarantors") propose
to guarantee, and Chase Securities Inc. and BancAmerica Robertson Stephens (the
"Initial Purchasers"), propose to buy, upon the terms and subject to the
conditions set forth in a purchase agreement dated May 14, 1998 (the "Purchase
Agreement"), $200,000,000 aggregate principal amount of the Company's __% Senior
Notes due 2006 (the "Securities"). Capitalized terms used but not defined
herein shall have the meanings given to such terms in the Purchase Agreement.
In satisfaction of a condition to the obligations of the Initial
Purchasers to purchase the Securities under the Purchase Agreement, the Company
and the Guarantors agree with the Initial Purchasers, for the benefit of the
holders (including the Initial Purchasers) of the Transfer Restricted Securities
(as defined below) and the Exchange Securities (as defined herein)
(collectively, the "Holders"), as follows:
l. Registered Exchange Offer. The Company and the Guarantors shall
(i) prepare and, not later than 180 days following the date of original issuance
of the Securities (the "Issue Date"), file with the Securities and Exchange
Commission (the "Commission") a registration statement (the "Exchange Offer
Registration Statement") on an appropriate form under the Securities Act of
1933, as amended (the "Securities Act"), with respect to a proposed offer to the
Holders of the Transfer Restricted Securities (the "Registered Exchange Offer")
to issue and deliver to such Holders, in exchange for the Transfer Restricted
Securities, a like aggregate principal amount of debt securities of the Company
(the "Exchange Securities") that are identical in all material respects to the
Transfer Restricted Securities, except for the transfer restrictions relating to
the Securities, (ii) use their respective reasonable best efforts to cause the
Exchange Offer Registration Statement to become effective under the Securities
Act no later than
<PAGE>
240 days after the Issue Date and the Registered Exchange Offer to be
consummated no later than 270 days after the Issue Date and (iii) keep the
Exchange Offer Registration Statement effective for not less than 20 business
days (or longer, if required by applicable law) after the date on which notice
of the Registered Exchange Offer is first mailed to the Holders (such period
being called the "Exchange Offer Registration Period"). The Exchange Securities
and the Private Exchange Securities (as defined below, if any) will be issued
under the Indenture or an indenture (the "Exchange Securities Indenture") among
the Company, the Guarantors and the Trustee or such other bank or trust company
that is reasonably satisfactory to the Initial Purchasers, as trustee (the
"Exchange Securities Trustee"), such indenture to be identical in all material
respects to the Indenture, except for the transfer restrictions relating to the
Transfer Restricted Securities. References herein to Securities, Exchange
Securities, Transfer Restricted Securities and Private Exchange Securities (as
defined herein) shall be deemed to include the guarantees relating thereto.
Upon the effectiveness of the Exchange Offer Registration Statement,
the Company and the Guarantors shall promptly commence the Registered Exchange
Offer, it being the objective of such Registered Exchange Offer to enable each
Holder electing to exchange Transfer Restricted Securities for Exchange
Securities (assuming that such Holder (a) is not an affiliate of the Company or
the Guarantors or an Exchanging Dealer (as defined herein) not complying with
the requirements of the next sentence, (b) is not an Initial Purchaser with
Securities that have the status of an unsold allotment in an initial
distribution, (c) acquires the Exchange Securities in the ordinary course of
such Holder's business and (d) has no arrangements or understandings with any
person to participate in the distribution of the Exchange Securities) and to
trade such Exchange Securities from and after their receipt without any
limitations or restrictions under the Securities Act and without material
restrictions under the securities laws of the several states of the United
States. The Company, the Guarantors, the Initial Purchasers and each Exchanging
Dealer acknowledge that, pursuant to current interpretations by the Commission's
staff of Section 5 of the Securities Act, (i) each Holder that is a broker-
dealer electing to exchange Securities, acquired for its own account as a result
of market-making activities or other trading activities, for Exchange Securities
(an "Exchanging Dealer"), is required to deliver a prospectus containing
substantially the information set forth in Annex A hereto on the cover, in Annex
B hereto in the "Exchange Offer Procedures" section and the "Purpose of the
Exchange Offer" section and in Annex C hereto in the "Plan of Distribution"
section of such prospectus in connection with a sale of any such Exchange
Securities received by such Exchanging Dealer pursuant to the Registered
Exchange Offer and (ii) if any Initial Purchaser elects to sell Private Exchange
Securities acquired in exchange for Securities constituting any portion of an
unsold allotment, it is required to deliver a prospectus containing the
information required by Items 507 or 508 of Regulation S-K under the Securities
Act and the Exchange Act ("Regulation S-K").
If, prior to the consummation of the Registered Exchange Offer, any
Holder holds any Securities acquired by it that have, or that are reasonably
likely to be determined to have, the status of an unsold allotment in the
initial distribution of the Securities, or any Holder is not entitled to
participate in the Registered Exchange Offer, the Company and the Guarantors
shall, upon the request of any such Holder, simultaneously with the delivery of
the Exchange Securities
2
<PAGE>
in the Registered Exchange Offer, issue and deliver to any such Holder, in
exchange for the Securities held by such Holder (the "Private Exchange"), a like
aggregate principal amount of debt securities of the Company (the "Private
Exchange Securities") that are identical in all material respects to the
Exchange Securities, except for the transfer restrictions relating to such
Private Exchange Securities. The Private Exchange Securities will be issued
under the same indenture as the Exchange Securities, and the Company and the
Guarantors shall use their reasonable best efforts to cause the Private Exchange
Securities to bear the same CUSIP number as the Exchange Securities.
In connection with the Registered Exchange Offer, the Company and the
Guarantors shall:
(a) mail to each Holder a copy of the prospectus forming part of the
Exchange Offer Registration Statement, together with an appropriate letter
of transmittal and related documents;
(b) keep the Registered Exchange Offer open for not less than 20
business days (or longer, if required by applicable law) after the date on
which notice of the Registered Exchange Offer is first mailed to the
Holders;
(c) utilize the services of a depositary for the Registered Exchange
Offer with an address in the Borough of Manhattan, The City of New York;
(d) permit Holders to withdraw tendered Securities at any time prior
to the close of business, New York City time, on the last business day on
which the Registered Exchange Offer shall remain open; and
(e) otherwise comply in all respects with all laws that are applicable
to the Registered Exchange Offer.
As soon as practicable after the close of the Registered Exchange
Offer and any Private Exchange, as the case may be, the Company and the
Guarantors shall:
(a) accept for exchange all Securities tendered and not validly
withdrawn pursuant to the Registered Exchange Offer and the Private
Exchange;
(b) deliver to the Trustee for cancellation all Securities so accepted
for exchange; and
(c) cause the Trustee or the Exchange Securities Trustee, as the case
may be, promptly to authenticate and deliver to each Holder, Exchange
Securities or Private Exchange Securities, as the case may be, equal in
principal amount to the Securities of such Holder so accepted for exchange.
The Company and the Guarantors shall use their respective reasonable
best efforts to keep the Exchange Offer Registration Statement effective and to
amend and supplement the
3
<PAGE>
prospectus contained therein in order to permit such prospectus to be used by
all persons subject to the prospectus delivery requirements of the Securities
Act for such period of time as such persons must comply with such requirements
in order to resell the Exchange Securities; provided that the Company and the
Guarantors shall make such prospectus and any amendment or supplement thereto
available to any broker-dealer for use in connection with any resale of any
Exchange Securities for a period of not less than 180 days after the
consummation of the Registered Exchange Offer.
The Indenture or the Exchange Securities Indenture, as the case may
be, shall provide that the Transfer Restricted Securities, the Exchange
Securities and the Private Exchange Securities shall vote and consent together
on all matters as one class and that none of the Transfer Restricted Securities
or the Exchange Securities will have the right to vote or consent as a separate
class on any matter.
Interest on each Exchange Security and Private Exchange Security
issued pursuant to the Registered Exchange Offer and in the Private Exchange
will accrue from the last interest payment date on which interest was paid on
the Securities surrendered in exchange therefor or, if no interest has been paid
on the Securities, from the Issue Date.
Each Holder participating in the Registered Exchange Offer shall be
required to represent to the Company and the Guarantors that at the time of the
consummation of the Registered Exchange Offer (i) any Exchange Securities to be
received pursuant to the Registered Exchange Offer are being acquired in the
ordinary course of the business of the person receiving such Exchange
Securities, whether or not such person is the Holder, (ii) neither the Holder
nor any such other person has any arrangement or understanding with any person
to participate in the distribution of the Securities or the Exchange Securities
within the meaning of the Securities Act, (iii) neither the Holder nor any such
other person is an affiliate of the Company or of the Guarantors or, if it is
such an affiliate, such Holder or such other person will comply with the
registration and prospectus delivery requirements of the Securities Act to the
extent applicable, (iv) if the Holder is not a broker-dealer, it is not engaged
in, and does not intend to engage in, the distribution of the Exchange
Securities and (v) if such person is an Exchanging Dealer, such person shall
comply with the prospectus delivery requirements of the Securities Act.
Notwithstanding any other provisions hereof, the Company and the
Guarantors will ensure that (i) any Exchange Offer Registration Statement and
any amendment thereto and any prospectus forming part thereof and any supplement
thereto complies in all material respects with the Securities Act and the rules
and regulations of the Commission thereunder, (ii) any Exchange Offer
Registration Statement and any amendment thereto does not, when it becomes
effective, contain an untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading and (iii) any prospectus forming part of any Exchange
Offer Registration Statement, and any supplement to such prospectus, does not,
as of the consummation of the Registered Exchange Offer, include 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.
4
<PAGE>
2. Shelf Registration. If (i) because of any change in law or
applicable interpretations thereof by the Commission's staff, the Company and
the Guarantors are not permitted to effect the Registered Exchange Offer as
contemplated by Section 1 hereof, or (ii) any Securities validly tendered
pursuant to the Registered Exchange Offer are not exchanged for Exchange
Securities within 270 days after the Issue Date, or (iii) an Initial Purchaser
so requests with respect to Securities or Private Exchange Securities not
eligible to be exchanged for Exchange Securities in the Registered Exchange
Offer and held by it following the consummation of the Registered Exchange
Offer, or (iv) any applicable law or interpretations do not permit Holder to
participate in the Registered Exchange Offer, or (v) any Holder that
participates in the Registered Exchange Offer does not receive freely
transferable Exchange Securities in exchange for tendered Securities (the
obligation to comply with a prospectus delivery requirement being understood not
to constitute a restriction on transferability), then the following provisions
shall apply:
(a) The Company and the Guarantors shall use their respective
reasonable best efforts to file as promptly as practicable with the Commission,
and thereafter shall use their respective reasonable best efforts to cause to be
declared effective, a shelf registration statement on an appropriate form under
the Securities Act relating to the offer and sale of the Transfer Restricted
Securities by the Holders thereof from time to time in accordance with the
methods of distribution set forth in such registration statement (hereafter, a
"Shelf Registration Statement" and, together with any Exchange Offer
Registration Statement, a "Registration Statement"); provided however, that no
Holder of Transfer Restricted Securities (other than the Initial Purchasers)
shall be entitled to have Transfer Restricted Securities held by it covered by
such Shelf Registration Statement unless such Holder agrees in writing to be
bound by all the provisions of this Agreement applicable to such Holder.
(b) The Company and the Guarantors shall use their respective
reasonable best efforts to keep the Shelf Registration Statement continuously
effective in order to permit the prospectus forming part thereof to be used by
Holders of Transfer Restricted Securities for a period ending on the earlier of
(i) two years from the Issue Date or such shorter period that will terminate
when all the Transfer Restricted Securities covered by the Shelf Registration
Statement have been sold pursuant thereto and (ii) the date all of the Transfer
Restricted Securities become eligible for resale without volume restrictions
pursuant to Rule 144 under the Securities Act (in any such case, such period
being called the "Shelf Registration Period"). The Company and the Guarantors
shall be deemed not to have used their respective reasonable best efforts to
keep the Shelf Registration Statement effective during the requisite period if
they voluntarily take any action that would result in Holders of Transfer
Restricted Securities covered thereby not being able to offer and sell such
Transfer Restricted Securities during that period, unless such action is
required by applicable law; provided however, that the foregoing shall not apply
to actions taken by the Company and the Guarantors in good faith and for valid
business reasons (not including avoidance of their obligations hereunder),
including, without limitation, the acquisition or divestiture of assets, so long
as the Company and the Guarantors within 30 days thereafter comply with the
requirements of Section 4(j) hereof. Any such period during which the Company
and the Guarantors fail to keep the Shelf Registration Statement effective and
usable for offers and sales of Transfer Restricted Securities is referred to as
a "Suspension Period." A
5
<PAGE>
Suspension Period shall commence on and include the date that the Company and
the Guarantors give notice that the Shelf Registration Statement is no longer
effective or the prospectus included therein is no longer usable for offers and
sales of Transfer Restricted Securities and shall end on the date when each
Holder of Transfer Restricted Securities covered by such registration statement
either receives the copies of the supplemented or amended prospectus
contemplated by Section 4(j) hereof or is advised in writing by the Company and
the Guarantors that use of the prospectus may be resumed. If one or more
Suspension Periods occur, the two-year time period referenced above shall be
extended by the aggregate of the number of days included in each such Suspension
Period.
(c) Notwithstanding any other provisions hereof, the Company and the
Guarantors will ensure that (i) any Shelf Registration Statement and any
amendment thereto and any prospectus forming part thereof and any supplement
thereto complies in all material respects with the Securities Act and the rules
and regulations of the Commission thereunder, (ii) any Shelf Registration
Statement and any amendment thereto (in either case, other than with respect to
information included therein in reliance upon or in conformity with written
information furnished to the Company and the Guarantors by or on behalf of any
Holder specifically for use therein (the "Holders' Information")) does not
contain an untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein not
misleading and (iii) any prospectus forming part of any Shelf Registration
Statement, and any supplement to such prospectus (in either case, other than
with respect to Holders' Information), does not include 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.
3. Liquidated Damages. (a) The parties hereto agree that the
Holders of Transfer Restricted Securities will suffer damages if the Company or
the Guarantors fail to fulfill their obligations under Section 1 or Section 2,
as applicable, and that it would not be feasible to ascertain the extent of such
damages. Accordingly, if (i) the applicable Registration Statement is not filed
with the Commission on or prior to 180 days after the Issue Date, (ii) the
Exchange Offer Registration Statement or the Shelf Registration Statement, as
the case may be, is not declared effective within 240 days after the Issue Date,
(iii) the Registered Exchange Offer is not consummated on or prior to 270 days
after the Issue Date, or (iv) the Shelf Registration Statement is filed and
declared effective within 240 days after the Issue Date but shall thereafter
cease to be effective (at any time that the Company and the Guarantors are
obligated to maintain the effectiveness thereof) without being succeeded within
30 days by an additional Registration Statement filed and declared effective
(each such event referred to in clauses (i) through (iv), a "Registration
Default"), the Company and the Guarantors will be obligated to pay liquidated
damages to each Holder of Transfer Restricted Securities, during the period of
one or more such Registration Defaults, in an amount equal to $0.192 per week
per $1,000 principal amount of Transfer Restricted Securities held by such
Holder until (i) the applicable Registration Statement is filed, (ii) the
Exchange Offer Registration Statement is declared effective and the Registered
Exchange Offer is consummated, (iii) the Shelf Registration Statement is
declared effective or (iv) the Shelf Registration Statement again becomes
effective, as the case may be. Following the cure of all Registration Defaults,
the accrual of liquidated damages will cease. As used herein,
6
<PAGE>
the term "Transfer Restricted Securities" means (i) each Security until the date
on which such Security has been exchanged for a freely transferable Exchange
Security (the obligation to comply with a prospectus delivery requirement being
understood not to constitute a restriction on transferability) in the Registered
Exchange Offer, (ii) each Security or Private Exchange Security until the date
on which it has been effectively registered under the Securities Act and
disposed of in accordance with the Shelf Registration Statement or (iii) each
Security or Private Exchange Security until the date on which it is distributed
to the public pursuant to Rule 144 under the Securities Act or is saleable
pursuant to Rule l44(k) under the Securities Act. Notwithstanding anything to
the contrary in this Section 3(a), the Company and the Guarantors shall not be
required to pay liquidated damages to a Holder of Transfer Restricted Securities
if such Holder failed to comply with its obligations to make the representations
set forth in the next to last paragraph of Section 1 or failed to provide the
information required to be provided by it, if any, pursuant to Section 4(n).
(b) The Company and the Guarantors shall notify the Trustee and the
Paying Agent under the Indenture immediately upon the happening of each and
every Registration Default. The Company and the Guarantors shall pay the
liquidated damages due on the Transfer Restricted Securities by depositing with
the Paying Agent (which may not be the Company for these purposes), in trust,
for the benefit of the Holders thereof, prior to 10:00 a.m. New York City time,
on the next interest payment date specified by the Indenture and the Securities,
sums sufficient to pay the liquidated damages then due. The liquidated damages
due shall be payable on each interest payment date specified by the Indenture
and the Securities to the record holder of the Transfer Restricted Securities
entitled to receive the interest payment to be made on such date. Each
obligation to pay liquidated damages shall be deemed to accrue from and
including the date of the applicable Registration Default.
(c) The parties hereto agree that the liquidated damages provided for
in this Section 3 constitute a reasonable estimate of and are intended to
constitute the sole damages that will be suffered by Holders of Transfer
Restricted Securities by reason of the failure of (i) the Shelf Registration
Statement or the Exchange Offer Registration Statement to be filed, (ii) the
Shelf Registration Statement to remain effective or (iii) the Exchange Offer
Registration Statement to be declared effective and the Registered Exchange
Offer to be consummated, in each case, to the extent required by this Agreement.
4. Registration Procedures. In connection with any Registration
Statement, the following provisions shall apply:
(a) The Company and the Guarantors shall (i) furnish to the Initial
Purchasers, prior to the filing thereof with the Commission, a copy of the
Registration Statement and each amendment thereof and each supplement, if any,
to the prospectus included therein and shall use its reasonable best efforts to
reflect in each such document, when so filed with the Commission, such comments
as the Initial Purchasers may reasonably propose; (ii) include the information
set forth in Annex A hereto on the cover, in Annex B hereto in the "Exchange
Offer Procedures" section and the "Purpose of the Exchange Offer" section and in
Annex C hereto in the "Plan of Distribution" section of the prospectus forming a
part of the Exchange Offer Registration
7
<PAGE>
Statement, and include the information set forth in Annex D hereto in the Letter
of Transmittal delivered pursuant to the Registered Exchange Offer; and (iii) if
requested by the Initial Purchasers, include the information required by Items
507 or 508 of Regulation S-K, as applicable, in the prospectus forming a part of
the Exchange Offer Registration Statement.
(b) The Company and the Guarantors shall advise the Initial
Purchasers, each Exchanging Dealer and the Holders (if applicable) and, if
requested by any such person, confirm such advice in writing (which advice
pursuant to clauses (ii)-(v) hereof shall be accompanied by an instruction to
suspend the use of the prospectus until the requisite changes have been made):
(i) when any Registration Statement and any amendment thereto has been
filed with the Commission and when such Registration Statement or any post-
effective amendment thereto has become effective;
(ii) of any request by the Commission for amendments or supplements to
any Registration Statement or the prospectus included therein or for
additional information;
(iii) of the issuance by the Commission of any stop order suspending
the effectiveness of any Registration Statement or the initiation of any
proceedings for that purpose;
(iv) of the receipt by the Company or the Guarantors of any
notification with respect to the suspension of the qualification of the
Securities or the Exchange Securities for sale in any jurisdiction or the
initiation or threatening of any proceeding for such purpose; and
(v) of the happening of any event that requires the making of any
changes in any Registration Statement or the prospectus included therein in
order that the statements therein (in light of the circumstances in which
made, in the case of the prospectus) are not misleading and do not omit to
state a material fact required to be stated therein or necessary to make
the statements therein not misleading.
(c) The Company and the Guarantors will make every reasonable effort
to obtain the withdrawal at the earliest possible time of any order suspending
the effectiveness of any Registration Statement.
(d) The Company and the Guarantors will furnish to each Holder of
Transfer Restricted Securities included within the coverage of any Shelf
Registration Statement, without charge, at least one conformed copy of such
Shelf Registration Statement and any post-effective amendment thereto, including
financial statements and schedules and, if any such Holder so requests in
writing, all exhibits thereto (including those, if any, incorporated by
reference).
(e) The Company and the Guarantors will, during the Shelf Registration
Period, promptly deliver to each Holder of Transfer Restricted Securities
included within the coverage of any Shelf Registration Statement, without
charge, as many copies of the prospectus (including each preliminary prospectus)
included in such Shelf Registration Statement and any amendment or supplement
thereto as such Holder may reasonably and timely request; and the Company and
the Guarantors consent to the use of such prospectus or any amendment or
8
<PAGE>
supplement thereto by each of the selling Holders of Transfer Restricted
Securities in connection with the offer and sale of the Transfer Restricted
Securities covered by such prospectus or any amendment or supplement thereto.
(f) The Company and the Guarantors will furnish to the Initial
Purchasers and each Exchanging Dealer, and to any other Holder who so requests,
without charge, at least one conformed copy of the Exchange Offer Registration
Statement and any post-effective amendment thereto, including financial
statements and schedules and, if an Initial Purchaser or Exchanging Dealer or
any such Holder so requests in writing, all exhibits thereto (including those,
if any, incorporated by reference).
(g) The Company and the Guarantors will, during the Exchange Offer
Registration Period or the Shelf Registration Period, as applicable, promptly
deliver to the Initial Purchasers, each Exchanging Dealer and any such other
persons that are required to deliver a prospectus following the Registered
Exchange Offer, without charge, as many copies of the final prospectus included
in the Exchange Offer Registration Statement or the Shelf Registration Statement
and any amendment or supplement thereto as an Initial Purchaser, Exchanging
Dealer or such other persons may reasonably and timely request; and the Company
and the Guarantors consent to the use of such prospectus or any amendment or
supplement thereto by the Initial Purchasers, Exchanging Dealer or other
persons, as applicable, as aforesaid.
(h) Prior to the effective date of any Registration Statement required
to be filed hereunder, the Company and the Guarantors will use their respective
reasonable best efforts to register or qualify, or cooperate with the Holders of
Securities, Exchange Securities or Private Exchange Securities included therein
and their respective counsel in connection with the registration or
qualification of, such Securities, Exchange Securities or Private Exchange
Securities for offer and sale under the securities or blue sky laws of such
jurisdictions as any such Holder reasonably requests in writing and do any and
all other acts or things necessary or advisable to enable the offer and sale in
such jurisdictions of the Securities, Exchange Securities or Private Exchange
Securities covered by such Registration Statement; provided that the Company and
the Guarantors will not be required to qualify generally to do business in any
jurisdiction where they are not then so qualified or to take any action which
would subject them to general service of process or to taxation in any such
jurisdiction where it is not then so subject.
(i) The Company and the Guarantors will cooperate with the Holders of
Securities, Exchange Securities or Private Exchange Securities to facilitate the
timely preparation and delivery of appropriate certificates representing
Securities, Exchange Securities or Private Exchange Securities to be sold
pursuant to any Registration Statement required to be filed hereunder free of
any restrictive legends and in such authorized denominations and registered in
such names as the Holders thereof may request in writing prior to sales of
Securities, Exchange Securities or Private Exchange Securities pursuant to such
Registration Statement.
(j) If (i) any event contemplated by Section 4(b)(ii) through (v)
occurs during the period for which the Company and the Guarantors are required
to maintain an effective Registration Statement or (ii) any Suspension Period
remains in effect more than 30 days after
9
<PAGE>
the occurrence thereof, the Company and the Guarantors will promptly prepare and
file with the Commission a post-effective amendment to the Registration
Statement or a supplement to the related prospectus or file any other required
document so that, as thereafter delivered to purchasers of the Securities,
Exchange Securities or Private Exchange Securities from a Holder, the prospectus
will not include 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.
(k) Not later than the effective date of the applicable Registration
Statement, the Company and the Guarantors will provide a CUSIP number for the
Securities, Exchange Securities and Private Exchange Securities, as the case may
be, and provide the applicable trustee with certificates for the Securities,
Exchange Securities or Private Exchange Securities, as the case may be, in a
form eligible for deposit with The Depository Trust Company.
(l) The Company and the Guarantors will comply with all applicable
rules and regulations of the Commission and will make generally available to
their security holders as soon as practicable after the effective date of the
applicable Registration Statement an earning statement of the Company satisfying
the provisions of Section 11(a) of the Securities Act; provided that in no event
shall such earning statement be made generally available to their security
holders later than 45 days after the end of a 12-month period (or 90 days, if
such period is a fiscal year) beginning with the first month of the Company's or
the Guarantors' first fiscal quarter commencing after the effective date of the
applicable Registration Statement, which statement shall cover such 12-month
period.
(m) The Company and the Guarantors will cause the Indenture or the
Exchange Securities Indenture, as the case may be, to be qualified under the
Trust Indenture Act as required by applicable law in a timely manner.
(n) The Company and the Guarantors may require each Holder of Transfer
Restricted Securities to be registered pursuant to any Shelf Registration
Statement to furnish to the Company and the Guarantors such information
concerning the Holder and the distribution of such Transfer Restricted
Securities as the Company and the Guarantors may from time to time reasonably
require for inclusion in such Shelf Registration Statement, and the Company and
the Guarantors may exclude from such registration the Transfer Restricted
Securities of any Holder that fails to furnish such information within a
reasonable time after receiving such request.
(o) In the case of a Shelf Registration Statement, each Holder of
Transfer Restricted Securities to be registered pursuant thereto agrees by
acquisition of such Transfer Restricted Securities that, upon receipt of any
notice from the Company or the Guarantors pursuant to Section 4(b)(ii) through
(v), such Holder will discontinue disposition of such Transfer Restricted
Securities until such Holder's receipt of copies of the supplemental or amended
prospectus contemplated by Section 4(j) or until advised in writing (the
"Advice") by the Company and the Guarantors that the use of the applicable
prospectus may be resumed. If the Company or the Guarantors shall give any
notice under Section 4(b)(ii) through (v) during the period that the Company and
the Guarantors are required to maintain an effective
10
<PAGE>
Registration Statement (the "Effectiveness Period"), such Effectiveness Period
shall be extended by the number of days during such period from and including
the date of the giving of such notice to and including the date when each seller
of Transfer Restricted Securities covered by such Registration Statement shall
have received (x) the copies of the supplemental or amended prospectus
contemplated by Section 4(j) (if an amended or supplemental prospectus is
required) or (y) the Advice (if no amended or supplemental prospectus is
required).
(p) In the case of a Shelf Registration Statement, the Company and the
Guarantors shall enter into such customary agreements (including, if requested,
an underwriting agreement in customary form) and take all such other action, if
any, as Holders of a majority in aggregate principal amount of the Securities,
Exchange Securities and Private Exchange Securities being sold or the managing
underwriters (if any) shall reasonably request in order to facilitate any
disposition of such Securities, Exchange Securities or Private Exchange
Securities pursuant to such Shelf Registration Statement.
(q) In the case of a Shelf Registration Statement, the Company and the
Guarantors shall (i) make reasonably available for inspection by a
representative of, and Special Counsel (as defined herein) acting for, Holders
of a majority in aggregate principal amount of the Securities, Exchange
Securities and Private Exchange Securities being sold and any underwriter
participating in any disposition of Securities, Exchange Securities or Private
Exchange Securities pursuant to such Shelf Registration Statement, at the
offices where normally kept, during reasonable business hours, all relevant
financial and other records, pertinent corporate documents and properties of the
Company and its subsidiaries and the Guarantors and (ii) use their respective
reasonable best efforts to have their officers, directors, employees,
accountants and counsel supply all relevant information reasonably requested by
such representative, Special Counsel or any such underwriter in connection with
such Shelf Registration Statement; provided, however, that such persons shall
first agree in writing with the Company and the Guarantors that any information
that is in good faith designated by the Company and the Guarantors in writing as
confidential at the time of delivery of such information shall be kept
confidential by such persons, unless (i) disclosure of such information is
required by court or administrative order or is necessary to respond to
inquiries of regulatory authorities, (ii) disclosure of such information is
required by law (including any disclosure requirements pursuant to federal
securities laws in connection with the filing of such Shelf Registration
Statement or the use of any Prospectus), (iii) such information becomes
generally available to the public other than as a result of a disclosure or
failure to safeguard such information by such person or (iv) such information
becomes available to such person from a source other than the Company and its
subsidiaries and the Guarantors and such source is not bound by a
confidentiality agreement; and provided further each such person will also be
required to further agree in writing that (i) it will, upon learning that
disclosure of such information is sought in a court of competent jurisdiction,
if legally permitted, give notice to the Company and the Guarantors and allow
the Company and the Guarantors at their expense to undertake appropriate action
to prevent disclosure of such information deemed confidential and (ii) it will
not use such information in violation of any securities laws.
11
<PAGE>
(r) In the case of a Shelf Registration Statement, the Company and the
Guarantors shall, if requested by Holders of a majority in aggregate principal
amount of the Securities, Exchange Securities and Private Exchange Securities
being sold, their Special Counsel or the managing underwriters (if any) in
connection with such Shelf Registration Statement, use their respective
reasonable best efforts to cause (i) their counsel, who may be inside counsel,
to deliver an opinion relating to the Shelf Registration Statement and the
Securities or Exchange Securities, as applicable, in customary form, (ii) their
officers to execute and deliver all customary documents and certificates
requested by such Holders of a majority in aggregate principal amount of the
Securities, Exchange Securities and Private Exchange Securities being sold,
their Special Counsel or the managing underwriters (if any) and (iii) their
respective independent public accountants to provide a comfort letter or letters
in customary form, subject to receipt of appropriate documentation as
contemplated, and only if permitted, by Statement of Auditing Standards No. 72.
5. Registration Expenses. The Company and the Guarantors will bear
all expenses incurred in connection with the performance of their respective
obligations under Sections 1, 2, 3 and 4 and the Company and the Guarantors
will reimburse the Initial Purchasers and the Holders for the reasonable fees
and disbursements of one firm of attorneys or counsel, reasonably satisfactory
to the Company and the Guarantors (in addition to not more than one local
counsel) chosen by the Holders of a majority in aggregate principal amount of
the Securities and the Exchange Securities to be sold pursuant to each
Registration Statement (the "Special Counsel") acting for the Initial Purchasers
or Holders in connection therewith.
6. Indemnification. (a) In the event of a Shelf Registration
Statement or in connection with any prospectus delivery pursuant to an Exchange
Offer Registration Statement by the Initial Purchasers or an Exchanging Dealer,
as applicable, the Company and the Guarantors shall, jointly and severally,
indemnify and hold harmless each Holder (including, without limitation, the
Initial Purchasers or any such Exchanging Dealer), its affiliates, their
respective officers, directors, employees, representatives and agents, and each
person, if any, who controls such Holder within the meaning of Section 15 of the
Securities Act or Section 20 of the Exchange Act (collectively referred to for
purposes of this Section 6 and Section 7 as a Holder) from and against any loss,
claim, damage or liability, joint or several, or any action in respect thereof
(including, without limitation, any loss, claim, damage, liability or action
relating to purchases and sales of Securities, Exchange Securities or Private
Exchange Securities), to which that Holder may become subject, whether commenced
or threatened, under the Securities Act, the Exchange Act, any other federal or
state statutory law or regulation, at common law or otherwise, insofar as such
loss, claim, damage, liability or action arises out of, or is based upon, (i)
any untrue statement or alleged untrue statement of a material fact contained in
any such Registration Statement or any prospectus forming part thereof or in any
amendment or supplement thereto or (ii) the omission or alleged omission to
state therein a material fact required to be stated therein or necessary in
order to make the statements therein, in the light of the circumstances under
which they were made, not misleading, and shall reimburse each Holder promptly
upon demand for any legal or other expenses reasonably incurred by that Holder
in connection with investigating or defending or preparing to defend against or
appearing as a third party witness in connection with any such loss, claim,
damage, liability or action as such
12
<PAGE>
expenses are incurred; provided, however, that the Company and the Guarantors
shall not be liable in any such case to the extent that any such loss, claim,
damage, liability or action arises out of, or is based upon, an untrue statement
or alleged untrue statement in or omission or alleged omission from any of such
documents in reliance upon and in conformity with any Holders' Information; and
provided, further, that with respect to any such untrue statement in or omission
from any related preliminary prospectus, the indemnity agreement contained in
this Section 6(a) shall not inure to the benefit of any Holder from whom the
person asserting any such loss, claim, damage, liability or action received
Securities, Exchange Securities or Private Exchange Securities to the extent
that such loss, claim, damage, liability or action of or with respect to such
Holder results from the fact that both (A) a copy of the final prospectus was
not sent or given to such person at or prior to the written confirmation of the
sale of such Securities, Exchange Securities or Private Exchange Securities to
such person and (B) the untrue statement in or omission from the related
preliminary prospectus was corrected in the final prospectus unless, in either
case, such failure to deliver the final prospectus was a result of non-
compliance by the Company or the Guarantors with Section 4(d), 4(e), 4(f) or
4(g).
(b) In the event of a Shelf Registration Statement, each Holder,
severally and not jointly, shall indemnify and hold harmless the Company, the
Guarantors, their affiliates, their respective officers, directors, employees,
representatives and agents, and each person, if any, who controls the Company
and the Guarantors within the meaning of Section 15 of the Securities Act or
Section 20 of the Exchange Act (collectively referred to for purposes of this
Section 6(b) and Section 7 as the Company and the Guarantors), from and against
any loss, claim, damage or liability, joint or several, or any action in respect
thereof, to which the Company and the Guarantors may become subject, whether
commenced or threatened, under the Securities Act, the Exchange Act, any other
federal or state statutory law or regulation, at common law or otherwise,
insofar as such loss, claim, damage, liability or action arises out of, or is
based upon, (i) any untrue statement or alleged untrue statement of a material
fact contained in any such Registration Statement or any prospectus forming part
thereof or in any amendment or supplement thereto or (ii) the omission or
alleged omission to state therein a material fact required to be stated therein
or necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading, but in each case, only
to the extent that the untrue statement or alleged untrue statement or omission
or alleged omission was made in reliance upon and in conformity with any
Holders' Information, and shall reimburse the Company and the Guarantors for any
legal or other expenses reasonably incurred by the Company and the Guarantors in
connection with investigating or defending or preparing to defend against or
appearing as a third party witness in connection with any such loss, claim,
damage, liability or action as such expenses are incurred; provided, however,
that no such Holder shall be liable for any indemnity claims hereunder in excess
of the amount of net proceeds received by such Holder from the sale of
Securities, Exchange Securities or Private Exchange Securities pursuant to such
Shelf Registration Statement.
(c) Promptly after receipt by an indemnified party under this Section
6 of notice of any claim or the commencement of any action, the indemnified
party shall, if a claim in respect thereof is to be made against the
indemnifying party pursuant to Section 6(a) or 6(b), notify the indemnifying
party in writing of the claim or the commencement of that action;
13
<PAGE>
provided, however, that the failure to notify the indemnifying party shall not
relieve it from any liability which it may have under this Section 6 except to
the extent that it has been materially prejudiced (through the forfeiture of
substantive rights or defenses) by such failure; and provided, further, that the
failure to notify the indemnifying party shall not relieve it from any liability
which it may have to an indemnified party otherwise than under this Section 6.
If any such claim or action shall be brought against an indemnified party, and
it shall notify the indemnifying party thereof, the indemnifying party shall be
entitled to participate therein and, to the extent that it wishes, jointly with
any other similarly notified indemnifying party, to assume the defense thereof
with counsel reasonably satisfactory to the indemnified party. After notice
from the indemnifying party to the indemnified party of its election to assume
the defense of such claim or action, the indemnifying party shall not be liable
to the indemnified party under this Section 6 for any legal or other expenses
subsequently incurred by the indemnified party in connection with the defense
thereof other than the reasonable costs of investigation; provided, however,
that an indemnified party shall have the right to employ its own counsel in any
such action, but the fees, expenses and other charges of such counsel for the
indemnified party will be at the expense of such indemnified party unless (1)
the employment of counsel by the indemnified party has been authorized in
writing by the indemnifying party, (2) the indemnified party has reasonably
concluded (based upon advice of counsel to the indemnified party) that there may
be legal defenses to it or to other indemnified parties that are different from
or in addition to those available to the indemnifying party, (3) a conflict or
potential conflict exists (based upon advice of counsel to the indemnified
party) between the indemnified party and the indemnifying party (in which case
the indemnifying party will not have the right to direct the defense of such
action on behalf of the indemnified party) or (4) the indemnifying party has not
in fact employed counsel reasonably satisfactory to the indemnified party to
assume the defense of such action within a reasonable time after receiving
notice of the commencement of the action, in each of which cases the reasonable
fees, disbursements and other charges of counsel will be at the expense of the
indemnifying party or parties. It is understood that the indemnifying party or
parties shall not, in connection with any proceeding or related proceedings in
the same jurisdiction, be liable for the reasonable fees, disbursements and
other charges of more than one separate firm of attorneys (in addition to any
local counsel) at any one time for all such indemnified party or parties. Each
indemnified party, as a condition of the indemnity agreements contained in
Sections 6(a) and 6(b), shall use all reasonable efforts to cooperate with the
indemnifying party in the defense of any such action or claim. No indemnifying
party shall be liable for any settlement of any such action effected without its
written consent (which consent shall not be unreasonably withheld), but if
settled with its written consent or if there be a final judgment for the
plaintiff in any such action, the indemnifying party agrees to indemnify and
hold harmless any indemnified party from and against any loss or liability by
reason of such settlement or judgment. No indemnifying party shall, without the
prior written consent of the indemnified party (which consent shall not be
unreasonably withheld), effect any settlement of any pending or threatened
proceeding in respect of which any indemnified party is or could have been a
party and indemnity could have been sought hereunder by such indemnified party,
unless such settlement (i) does not contain an admission of fault or wrongdoing
and (ii) includes an unconditional release of such indemnified party from all
liability on claims that are the subject matter of such proceeding.
14
<PAGE>
7. Contribution. If the indemnification provided for in Section 6 is
unavailable or insufficient to hold harmless an indemnified party under Section
6(a) or 6(b), then each indemnifying party shall, in lieu of indemnifying such
indemnified party, contribute to the amount paid or payable by such indemnified
party as a result of such loss, claim, damage or liability, or action in respect
thereof, (i) in such proportion as shall be appropriate to reflect the relative
benefits received by the Company and the Guarantors from the offering and sale
of the Securities, on the one hand, and a Holder with respect to the sale by
such Holder of Securities, Exchange Securities or Private Exchange Securities,
on the other, or (ii) if the allocation provided by clause (i) above is not
permitted by applicable law, in such proportion as is appropriate to reflect not
only the relative benefits referred to in clause (i) above but also the relative
fault of the Company and the Guarantors on the one hand and such Holder on the
other with respect to the statements or omissions that resulted in such loss,
claim, damage or liability, or action in respect thereof, as well as any other
relevant equitable considerations. The relative benefits received by the
Company and the Guarantors on the one hand and a Holder on the other with
respect to such offering and such sale shall be deemed to be in the same
proportion as the total net proceeds from the offering of the Securities (before
deducting expenses) received by or on behalf of the Company and the Guarantors
as set forth in the table on the cover of the Offering Memorandum, on the one
hand, bear to the total proceeds received by such Holder with respect to its
sale of Securities, Exchange Securities or Private Exchange Securities, on the
other. The relative fault shall be determined by reference to, among other
things, whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to the Company and
the Guarantors or information supplied by the Company and the Guarantors on the
one hand or to any Holders' Information on the other, the intent of the parties
and their relative knowledge, access to information and opportunity to correct
or prevent such untrue statement or omission. The parties hereto agree that it
would not be just and equitable if contributions pursuant to this Section 7 were
to be determined by pro rata allocation (even if the Holders were treated as one
entity for such purpose) or by any other method of allocation that does not take
into account the equitable considerations referred to herein. The amount paid
or payable by an indemnified party as a result of the loss, claim, damage or
liability, or action in respect thereof, referred to above in this Section 7
shall be deemed to include, for purposes of this Section 7, any legal or other
expenses reasonably incurred by such indemnified party in connection with
investigating or defending any such action or claim. Notwithstanding the
provisions of this Section 7, an indemnifying party that is a Holder of
Securities, Exchange Securities or Private Exchange Securities shall not be
required to contribute any amount in excess of the amount by which the total
price at which the Securities, Exchange Securities or Private Exchange
Securities sold by such indemnifying party to any purchaser exceeds the amount
of any damages which such indemnifying party has otherwise paid or become liable
to pay by reason of any untrue or alleged untrue statement or omission or
alleged omission. No person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation. The Holders' obligations to contribute as provided in this
Section 7 are several in proportion to their respective obligations and not
joint.
8. Rules 144 and 144A. The Company and the Guarantors shall use
their respective reasonable best efforts to file the reports required to be
filed by them under the
15
<PAGE>
Securities Act and the Exchange Act in a timely manner and, if at any time the
Company and the Guarantors are not required to file such reports, they will,
upon the written request of any Holder of Transfer Restricted Securities, make
publicly available other information so long as necessary to permit sales of
such Holder's securities pursuant to Rules 144 and 144A. The Company and the
Guarantors covenant that they will take such further action as any Holder of
Transfer Restricted Securities may reasonably request, all to the extent
required from time to time to enable such Holder to sell Transfer Restricted
Securities without registration under the Securities Act within the limitation
of the exemptions provided by Rules 144 and 144A (including, without limitation,
the requirements of Rule 144A(d)(4)). Upon the written request of any Holder of
Transfer Restricted Securities, the Company and the Guarantors shall deliver to
such Holder a written statement as to whether it has complied with such
requirements. Notwithstanding the foregoing, nothing in this Section 8 shall be
deemed to require the Company and the Guarantors to register any of their
securities pursuant to the Exchange Act nor shall it be deemed to require any
Guarantor to file reports with the Commission or make public any information
that it would not be required by law to file or make available.
9. Underwritten Registrations. If any of the Transfer Restricted
Securities covered by any Shelf Registration Statement are to be sold in an
underwritten offering, the investment banker or investment bankers and manager
or managers that will administer the offering will be selected by the Holders of
a majority in aggregate principal amount of such Transfer Restricted Securities
included in such offering, subject to the consent of the Company (which shall
not be unreasonably withheld or delayed), and such Holders shall be responsible
for all underwriting commissions and discounts in connection therewith.
No person may participate in any underwritten registration hereunder
unless such person (i) agrees to sell such person's Transfer Restricted
Securities on the basis reasonably provided in any underwriting arrangements
approved by the persons entitled hereunder to approve such arrangements and (II)
completes and executes all questionnaires, powers of attorney, indemnities,
underwriting agreements and other documents reasonably required under the terms
of such underwriting arrangements.
10. Miscellaneous. (a) Amendments and Waivers. The provisions of
this Agreement may not be amended, modified or supplemented, and waivers or
consents to departures from the provisions hereof may not be given, unless the
Company has obtained the written consent of Holders of a majority in aggregate
principal amount of the Securities, Exchange Securities and Private Exchange
Securities, taken as a single class. Notwithstanding the foregoing, a waiver or
consent to depart from the provisions hereof with respect to a matter that
relates exclusively to the rights of Holders whose Securities, Exchange
Securities or Private Exchange Securities are being sold pursuant to a
Registration Statement and that does not directly or indirectly affect the
rights of other Holders may be given by Holders of a majority in aggregate
principal amount of the Securities, Exchange Securities and the Private Exchange
Securities being sold by such Holders pursuant to such Registration Statement.
16
<PAGE>
(b) Notices. All notices and other communications provided for or
permitted hereunder shall be made in writing by hand-delivery, first-class mail,
telecopier or air courier guaranteeing next-day delivery:
(1) if to a Holder, at the most current address given by such Holder
to the Company in accordance with the provisions of this Section 10(b),
which address initially is, with respect to each Holder, the address of
such Holder maintained by the Registrar under the Indenture, with a copy in
like manner to Chase Securities Inc.;
(2) if to the Initial Purchasers, initially at their addresses set
forth in the Purchase Agreement; and
(3) if to the Company or the Guarantors, initially at the address of
the Company and the Guarantors set forth in the Purchase Agreement.
All such notices and communications shall be deemed to have been duly
given: when delivered by hand, if personally delivered; one business day after
being delivered to a next-day air courier; five business days after being
deposited in the mail; and when receipt is acknowledged by the recipient's
telecopier machine, if sent by telecopier.
The Initial Purchasers, the Company and the Guarantors, by notice to
the other, may designate additional or different addresses or telecopy numbers
for subsequent notices or communications.
(c) Successors and Assigns. This Agreement shall inure to the benefit
of and be binding upon the successors and assigns of each of the parties,
including, without the need for an express assignment or any consent by the
Company or the Guarantors thereto, subsequent Holders of Securities, Exchange
Securities or Private Exchange Securities.
(d) Counterparts. This Agreement may be executed in any number of
counterparts (which may be delivered in original form or by telecopier) and by
the parties hereto in separate counterparts, each of which when so executed
shall be deemed to be an original and all of which taken together shall
constitute one and the same agreement.
(e) Definition of Terms. For purposes of this Agreement, (a) the term
"business day" means any day on which the New York Stock Exchange, Inc. is open
for trading, (b) the term "subsidiary" has the meaning set forth in Rule 405
under the Securities Act and (c) except where otherwise expressly provided, the
term "affiliate" has the meaning set forth in Rule 405 under the Securities Act.
(f) Headings. The headings in this Agreement are for convenience of
reference only and shall not limit or otherwise affect the meaning hereof.
(g) Governing Law. This Agreement shall be governed by and construed
in accordance with the laws of the State of New York.
17
<PAGE>
(h) Remedies. In the event of a breach by the Company, and/or the
Guarantors, on the one hand, or by any Holder of Transfer Restricted Securities,
on the other hand, of any of their obligations under this Agreement, each Holder
of Transfer Restricted Securities or the Company or the Guarantors, as the case
may be, in addition to being entitled to exercise all rights granted by law,
including recovery of damages (other than the recovery of damages for a breach
by the Company and/or the Guarantors of their obligations under Sections 1 or 2
hereof for which liquidated damages have been paid pursuant to Section 3
hereof), will be entitled to specific performance of its rights under this
Agreement. The Company, the Guarantors and each Holder agree that monetary
damages would not be adequate compensation for any loss incurred by reason of a
breach by it of any of the provisions of this Agreement and hereby further agree
that, in the event of any action for specific performance in respect of such
breach, it shall waive the defense that a remedy at law would be adequate.
(i) No Inconsistent Agreements. The Company and each of the
Guarantors represents, warrants and agrees that (i) it has not entered into,
shall not, on or after the date of this Agreement, enter into any agreement that
is inconsistent with the rights granted to the Holders of Transfer Restricted
Securities in this Agreement or otherwise conflicts with the provisions hereof,
(ii) except with respect to registration rights granted to holders of the
Company's 10-1/4% Series A Senior Subordinated Notes due August 20, 2007, it has
not previously entered into any agreement which remains in effect granting any
registration rights with respect to any of its debt securities to any person and
(iii) without limiting the generality of the foregoing, without the written
consent of the Holders of a majority in aggregate principal amount of the then
outstanding Transfer Restricted Securities, it shall not grant to any person the
right to request it to register any of its securities under the Securities Act
unless the rights so granted are not in conflict or inconsistent with the
provisions of this Agreement.
(j) No Piggyback on Registrations. Neither the Company, the
Guarantors nor any of their security holders (other than the Holders of Transfer
Restricted Securities in such capacity) shall have the right to include any
securities of the Company and the Guarantors in any Shelf Registration or
Registered Exchange Offer other than Transfer Restricted Securities.
(k) Severability. The remedies provided herein are cumulative and not
exclusive of any remedies provided by law. If any term, provision, covenant or
restriction of this Agreement is held by a court of competent jurisdiction to be
invalid, illegal, void or unenforceable, the remainder of the terms, provisions,
covenants and restrictions set forth herein shall remain in full force and
effect and shall in no way be affected, impaired or invalidated, and the parties
hereto shall use their reasonable best efforts to find and employ an alternative
means to achieve the same or substantially the same result as that contemplated
by such term, provision, covenant or restriction. It is hereby stipulated and
declared to be the intention of the parties that they would have executed the
remaining terms, provisions, covenants and restrictions without including any of
such that may be hereafter declared invalid, illegal, void or unenforceable.
18
<PAGE>
Please confirm that the foregoing correctly sets forth the agreement
between the Company, the Guarantors and each Initial Purchaser
Very truly yours,
FAVORITE BRANDS INTERNATIONAL, INC.
By________________________________
Name:
Title:
TROLLI INC.
By________________________________
Name:
Title:
SATHER TRUCKING CORPORATION
By________________________________
Name:
Title:
Accepted:
CHASE SECURITIES INC.
By__________________________
Authorized Signatory
BANCAMERICA ROBERTSON STEPHENS
By__________________________
Authorized Signatory
19
<PAGE>
ANNEX A
Each broker-dealer that receives Exchange Securities for its own
account in exchange for Securities pursuant to the Registered Exchange Offer,
where such Securities 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 Exchange Securities.
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 Exchange Securities received in exchange for
Securities where such Securities were acquired by such broker-dealer as a result
of market-making activities or other trading activities. The Company and the
Guarantors have agreed that, for a period of 180 days after the Expiration Date
(as defined herein), it will make this prospectus available to any broker-dealer
for use in connection with any such resale. See "Plan of Distribution."
<PAGE>
ANNEX B
Each broker-dealer that receives Exchange Securities for its own
account in exchange for Securities, where such Securities 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 Exchange Securities. See "Plan of Distribution."
<PAGE>
ANNEX C
PLAN OF DISTRIBUTION
Each broker-dealer that receives Exchange Securities for its own
account in exchange for Securities pursuant to the Registered Exchange Offer,
where such Securities 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 Exchange Securities.
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 Exchange Securities
received in exchange for Securities where such Securities were acquired as a
result of market-making activities or other trading activities. The Company and
the Guarantors have agreed that, for a period of 180 days after the Expiration
Date, they will make this prospectus, as amended or supplemented, available to
any broker-dealer for use in connection with any such resale. In, addition,
until _____________, 1998, all dealers effecting transactions in the Exchange
Securities may be required to deliver a prospectus./1/
Neither the Company nor the Guarantors will receive any proceeds from
any sale of Exchange Securities by broker-dealers. Exchange Securities received
by broker-dealers for their own account pursuant to the Registered 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 Exchange Securities or a combination of such methods of resale, at market
prices prevailing at the time of resale, at prices related to such prevailing
market prices or at negotiated prices. Any such resale may be made directly to
purchasers or to or through brokers or dealers who may receive compensation in
the form of commissions or concessions from any such broker-dealer or the
purchasers of any such Exchange Securities. Any broker-dealer that resells
Exchange Securities that were received by it for its own account pursuant to the
Registered Exchange Offer and any broker or dealer that participates in a
distribution of such Exchange Securities may be deemed to be an "underwriter"
within the meaning of the Securities Act and any profit on any such resale of
Exchange Securities and any commission 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.
For a period of 180 days after the Expiration Date the Company and the
Guarantors will promptly send additional copies of this prospectus and any
amendment or supplement to this prospectus to any broker-dealer that requests
such documents in the Letter of Transmittal. The Company and the Guarantors
have agreed to pay all expenses incident to the Registered Exchange Offer
(including the expenses of one counsel for the Holders of the Securities) other
than commissions or concessions of any broker-dealers and will indemnify the
- ------------------------
/1/ In addition, the legend required by Item 502(e) of Regulation S-K will
appear on the back cover page of the Registered Exchange Offer prospectus.
<PAGE>
Holders of the Securities (including any broker-dealers) against certain
liabilities, including liabilities under the Securities Act.
2
<PAGE>
ANNEX D
[_] CHECK HERE IF YOU ARE A BROKER-DEALER AND WISH TO RECEIVE 10
ADDITIONAL COPIES OF THE PROSPECTUS AND 10 COPIES OF ANY AMENDMENTS OR
SUPPLEMENTS THERETO.
Name:____________________________________________
Address:_________________________________________
If the undersigned is not a broker-dealer, the undersigned represents that it is
not engaged in, and does not intend to engage in, a distribution of Exchange
Securities. If the undersigned is a broker-dealer that will receive Exchange
Securities for its own account, in exchange for Securities that it represents
and warrants were acquired as a result of market-making activities or other
trading activities, it acknowledges that it will deliver a prospectus in
connection with any resale of such Exchange Securities; however, by so
acknowledging and by delivering a prospectus, the undersigned will not be deemed
to admit that it is an "underwriter" within the meaning of the Securities Act.
<PAGE>
EXHIBIT 4.9
THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED,
OR UNDER ANY APPLICABLE STATE SECURITIES LAW. IT MAY NOT BE OFFERED FOR SALE OR
SOLD IN THE ABSENCE OF: (1) REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, AND ANY APPLICABLE STATE SECURITIES LAWS, OR (2) APPLICABLE EXEMPTIONS
FROM SUCH REGISTRATION REQUIREMENTS.
FAVORITE BRANDS INTERNATIONAL, INC.
10% SENIOR NOTE DUE 2005
------------------------
$17,000,000.00 October 22, 1998
FOR VALUE RECEIVED, Favorite Brands International, Inc., a Delaware
corporation ("Maker"), whose address is 25 Tri State International, Suite 400,
Lincolnshire, Illinois 60069, promises to pay to TPG Partners, L.P., a Delaware
limited partnership ("Payee"), at 201 Main Street, Suite 2420, Fort Worth, Texas
76102, the aggregate principal sum of SEVENTEEN MILLION AND NO/100 DOLLARS
($17,000,000.00), together with interest thereon at the rates hereinafter
provided.
Section 1. Interest. Interest on the principal amount of this Note shall
be payable in cash at the rate of ten percent (10.00%) per annum (the "Interest
Rate").
Section 2. Payment. Principal of, and interest on, this Note shall be due
and payable on November 20, 2005.
Section 3. Method of Payment. Cash payments of principal, interest and
other amounts due hereunder shall be made in lawful money of the United States
of America by wire transfer of immediately available funds to the account of
Payee designated in the records maintained by Maker (which account designation
may be changed from time to time by Payee by written notice to Maker).
Section 4. Default Interest. If any principal or interest is not paid
within fifteen (15) days after the due date thereof, interest shall accrue on
such unpaid amount at a default rate equal to the lesser of (a) five percent
(5%) per annum above the Interest Rate or (b) the highest rate permitted under
applicable law, until such amount is paid in full (the "Default Rate").
Section 5. Prepayment. This Note may be prepaid by Maker in whole or in
part at any time without prepayment premium or penalty. Any prepayment shall
be credited first to accrued but unpaid interest and then to principal.
<PAGE>
Section 6. Defaults and Remedies.
6.1 Events of Default. Any one or more of the following shall
constitute an Event of Default hereunder: (a) default shall be made in the
payment of the principal of, or interest on, this Note when and as the same
shall become due and payable, whether at stated maturity, by acceleration, or
otherwise; (b) Maker shall commence a voluntary case or other proceeding seeking
liquidation, reorganization or other relief with respect to itself or its debts
under any bankruptcy, insolvency or other similar law now or hereafter in effect
or seeking the appointment of a trustee, receiver, liquidator, custodian or
other similar official of it or any substantial part of its property, or shall
consent to any such relief or to the appointment of or taking possession by any
such official in an involuntary case or other proceeding commenced against it,
or shall make a general assignment for the benefit of creditors, or be generally
unable to pay its debts as such debts become due; (c) an involuntary case or
other proceeding shall be commenced against Maker seeking liquidation,
reorganization or other relief with respect to it or its debts under any
bankruptcy, insolvency or other similar law now or hereafter in effect or
seeking the appointment of a trustee, receiver, liquidator, custodian or other
similar official of it or any substantial part of its property or an order for
relief shall be entered against Maker under the federal bankruptcy laws or the
laws of the jurisdiction of organization of Maker as now or hereafter in effect,
and such involuntary case or other proceeding or order shall remain undismissed
or unstayed for a period of sixty (60) days, and if stayed, such involuntary
case or other proceeding or order shall be dismissed upon termination of such
stay; (d) default shall be made in the performance or observance of any other
covenant, agreement or condition contained herein and such default shall have
continued for a period of thirty (30) days after such default shall first have
become known to Maker; or (e) a default shall occur that results in acceleration
under the terms and provisions of that certain Credit Agreement, dated as of May
19, 1998, by and among Maker, Favorite Brands International Holding Corp., Bank
of America National Trust and Savings Association, as documentation and co-
syndication agent, The Chase Manhattan Bank, as letter of credit issuing bank,
swingline lender, administrative agent (including any successors thereto, the
"Administrative Agent") and co-syndication agent, and the several banks and
other financial institutions party thereto, as amended (the "Credit Agreement").
6.2 Acceleration. If (a) an Event of Default shall occur pursuant to
Sections 6.1(b) or (c), the principal of, and accrued interest on, and all other
amounts due under this Note shall become immediately due and payable, and (b)
any other Event of Default shall occur, the principal of, and accrued interest
on, and all other amounts due under, this Note shall become immediately due and
payable upon notice by Payee to Maker. Notwithstanding the foregoing, (y)
principal of, interest on and other amounts due under this Note may not be
accelerated as a result of the Event of Default described in Section 6.1(d)
unless the Administrative Agent under the Credit Agreement has received at least
five business days' actual notice thereof, and (z) no remedies may be exercised
by Payee after acceleration of the amounts due under this Note as a result of an
Event of Default described in Sections 6.1(b) or (c) unless the Administrative
Agent under the Credit Agreement has received at least five business days'
actual notice thereof.
6.3 Waiver of Presentment, Etc. Maker hereby waives presentment,
demand, protest or notice of any kind (including, without limitation, demands
for payment, notice of intention to accelerate maturity and presentment for
acceleration of maturity, notice of
2
<PAGE>
acceleration, protest, notice of protest and nonpayment or dishonor, diligence
in collection, and grace) in connection with this Note, and consents to all
extensions without notice for any periods of time and partial payments, before
or after maturity, without prejudice to Payee.
Section 7. Covenants. Maker covenants and agrees that on and after the
date hereof, so long as this Note shall be outstanding:
7.1 Payment of Note. Maker shall pay the principal of and interest
on this Note on the dates and in the manner provided herein.
7.2 Legal Existence. Maker shall do or cause to be done all things
necessary to preserve and keep in full force and effect its legal existence.
Section 8. Miscellaneous.
8.1 No Waiver. It is expressly agreed that any waiver by Payee of
any item or provision hereof or of any right, remedy or option under this Note
shall not be controlling, nor shall it prevent or estop Payee from thereafter
enforcing such term, provision, right, remedy or option in any other instance,
and neither the failure or refusal of Payee to insist in any one or more
instances upon the strict performance of this Note, nor the acceptance by Payee
of any payment less than the amount then due hereunder, shall be construed as a
waiver or relinquishment for the future of any such term or provision or the
amount remaining due, but the same shall continue in full force and effect, it
being understood and agreed that Payee's rights, remedies and options under this
Note are and shall be cumulative and are in addition to all of the rights,
remedies and options of Payee in law or in equity, or under any other agreement.
8.2 Savings Clause. If at any time the Interest Rate or Default
Rate, together with all fees and charges, if any, contracted for, charged,
received, taken or reserved by Payee in connection with this Note that may be
treated as interest under applicable law (collectively, the "Charges"), computed
over the full term of this Note, exceeds the maximum lawful rate (the "Maximum
Rate") which may be contracted for, charged, taken, received or reserved by
Payee in accordance with the laws of the State of Texas from time to time in
effect, except to the extent federal law permits Payee to contract for, charge
or receive a greater amount of interest, due credit being given for all charges
made in connection with this Note that may be treated as interest under
applicable law, the rate of interest payable hereunder, together with all
Charges, shall be limited to the Maximum Rate; provided, however, that upon any
subsequent increase in the Maximum Rate from time to time, the interest charged
on the unpaid principal amount of this Note shall remain equal to the Maximum
Rate, and any subsequent reduction in the Interest Rate shall not reduce the
rate borne by this Note, until the total amount of interest earned hereunder,
together with all Charges, equals the total amount of interest which would have
accrued at the Interest Rate if the Interest Rate had at all times been in
effect; and provided, further, that if at maturity or final payment of this Note
the total amount of interest paid or accrued under the foregoing provisions is
less than the total amount of interest which would have accrued if the Interest
Rate had at all times been in effect, Maker agrees to pay Payee, to the extent
allowed by the then applicable law, an amount equal to the difference between
(a) the lesser of (i) the amount of interest which would have been accrued on
this Note if the Maximum Rate had at all times been in effect, and (ii) the
3
<PAGE>
amount of interest which would have accrued if the Interest Rate had at all
times been in effect, and (b) the amount of interest actually accrued in
accordance with the provisions of this Note.
8.3 Representation. Maker represents and warrants to Payee that the
sole shareholder of Maker is Favorite Brands International Holding Corp., a
Delaware corporation.
8.4 Amendments; Binding Effect. Subject to, for so long as the
Credit Agreement remains in effect, the provisions of Section 8.26 of the Credit
Agreement, this Note may not be amended except by an instrument in writing
signed on behalf of each of the parties hereto. This Note shall be binding upon
the successors, permitted assigns and legal representatives of Maker.
8.5 Assignment; Entire Agreement. Neither Maker nor Payee may assign
its rights under this Note or any interest therein without the prior written
consent of the other party, except that Payee shall be permitted to assign its
rights hereunder, in whole or in part, to any of its partners or affiliates and
Payee may grant participations in all or any portion of its rights and
obligations under this Note to one or more of the shareholders of Maker. This
Note constitutes the entire agreement and supersedes all prior agreements and
understandings, both written and oral, among the parties with respect to the
subject matter hereof.
8.6 Notices. All notices hereunder shall be in writing (including
prepaid overnight courier, facsimile transmission or similar writing) and shall
be delivered to Maker at its address set forth in the first paragraph of this
Note and to Payee at its address set forth in the first paragraph of this Note
or at such other address as shall be specified by like notice to Payee or Maker
as applicable. All notices shall be deemed given as of the date when such
notice is first delivered by hand or sent by telecopier (receipt confirmed, with
a copy simultaneously mailed registered mail), one day after depositing for
delivery, fee prepaid, with a Federal Express or similar overnight deliver
service and five days after mailing, postage prepaid and properly addressed in
the U.S. mails.
8.7 Governing Law. This Note shall be governed by, and the terms and
provisions hereof and the rights and duties created hereby shall be interpreted,
construed and enforced in accordance with, the laws of the State of Texas,
without giving effect to conflicts of law provisions.
8.8 WAIVER OF JURY TRIAL. THE MAKER AND PAYEE HEREBY IRREVOCABLY
WAIVE ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF
OR RELATING TO THIS NOTE OR THE TRANSACTIONS CONTEMPLATED HEREBY.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
4
<PAGE>
IN WITNESS WHEREOF, Maker has caused this 10% Senior Note Due 2005 to be
executed and delivered by its duly authorized officer, as of the day and year
and at the place first above written.
FAVORITE BRANDS INTERNATIONAL, INC.
By: __________________________________
Name: ________________________________
Title: _______________________________
5
<PAGE>
EXHIBIT 10.5
________________________________________________________________________________
LEASE AGREEMENT
Between
AMERICAN NATIONAL BANK AND TRUST COMPANY
LAND TRUST 65387
----------------------------------------
as Landlord
and
FARLEY CANDY COMPANY
----------------------------------------
as Tenant
Dated as of May 12, 1994
________________________________________________________________________________
This instrument prepared by:
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
SECTION HEADING PAGE
<S> <C> <C>
Parties..................................................................... 1
SECTION 1. LEASE OF PREMISES; TITLE AND CONDITION....................... 1
SECTION 2. USE.......................................................... 2
SECTION 3. TERMS........................................................ 2
SECTION 4. RENT......................................................... 2
SECTION 5. NET LEASE.................................................... 2
SECTION 6. TAXES AND ASSESSMENTS........................................ 3
SECTION 7. LIENS........................................................ 4
SECTION 8. INDEMNIFICATION.............................................. 5
SECTION 9. MAINTENANCE AND REPAIR....................................... 5
SECTION 10. ALTERATIONS.................................................. 6
SECTION 11. CONDEMNATION AND CASUALTY.................................... 6
SECTION 12. INSURANCE.................................................... 8
SECTION 13. ASSIGNMENT AND SUBLETTING.................................... 11
SECTION 14. PERMITTED CONTESTS........................................... 11
SECTION 15. CONDITIONAL LIMITATIONS; DEFAULT PROVISIONS.................. 12
SECTION 16. ADDITIONAL RIGHTS OF LANDLORD................................ 15
SECTION 17. NOTICES, DEMANDS AND OTHER INSTRUMENTS....................... 16
SECTION 18. ESTOPPEL CERTIFICATES........................................ 16
SECTION 19. NO MERGER.................................................... 16
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
SECTION 20. SURRENDER.................................................... 16
SECTION 21. SEPARABILITY; BINDING EFFECT................................. 16
SECTION 22. RECORDING OF LEASE........................................... 17
SECTION 23. LESSOR'S RIGHT TO CURE LESSEE'S DEFAULT...................... 17
SECTION 24. EXPENSES..................................................... 17
SECTION 25. COUNTERPARTS................................................. 17
SECTION 26. HEADINGS..................................................... 17
SECTION 27. SCHEDULES.................................................... 17
Signatures.................................................................. 18
</TABLE>
ATTACHMENTS TO LEASE AGREEMENT:
Schedule A -- Description of the Premises
Schedule B -- Terms and Basic Rent Payments
Schedule C -- Payments Upon Purchase
ADDENDUM
<PAGE>
LEASE AGREEMENT dated as of May 12, 1994 (this "Lease"), between American
National Bank & Trust Company Land Trust 65387, a ____________ corporation
(herein, together with any corporation succeeding thereto by consolidation,
merger or acquisition of its assets substantially as an entirety, called
"Landlord") having an address at 33 N. LaSalle St., Chicago, IL 60690,
__________________________ and Farley Candy Company, a Delaware corporation
(herein, together with any corporation succeeding thereto by consolidation,
merger or acquisition of its assets substantially as an entirety, called
"Tenant"), having an address at 2945 West 31st Street, Chicago, Illinois 60623.
Section 1. Lease of Premises; Title and Condition. (a) In consideration of
the rents and covenants herein stipulated to be paid and performed by Tenant and
upon the terms and conditions herein specified, Landlord hereby leases to
Tenant, and Tenant hereby leases from Landlord, the premises (the "Premises")
consisting of (i) the land (the "Land") described in Schedule A, (ii) all
buildings and other improvements (including the attachments and other affixed
property), now or hereafter located on the Land (the "Improvements"), and (iii)
the respective easements, rights and appurtenances relating to the Land and the
Improvements. The interests of Landlord in the Premises is herein called
"Landlord's Estate". The Premises are leased to Tenant in their present
condition without representation or warranty by Landlord and subject to the
rights of parties in possession, to the existing state of title and to all
applicable legal requirements now or hereafter in effect. Tenant has examined
the Premises and title thereto, and has found all of the same satisfactory for
all purposes.
(b) LANDLORD HAS NOT MADE AN INSPECTION OF THE PREMISES OR OF ANY PROPERTY
OR FIXTURE OR OTHER ITEM CONSTITUTING A PORTION THEREOF, AND TENANT EXPRESSLY
AGREES TO LEASE THE PREMISES AND EACH PART THEREOF "AS IS" AND "WHERE IS".
LANDLORD SHALL NOT BE DEEMED TO HAVE MADE, AND LANDLORD HEREBY DISCLAIMS, ANY
WARRANTY OR REPRESENTATION, EXPRESS OR IMPLIED OR OTHERWISE, WITH RESPECT TO THE
SAME OR THE LOCATION, USE, DESCRIPTION, DESIGN, MERCHANTABILITY, FITNESS FOR USE
FOR ANY PARTICULAR PURPOSES, CONDITION OR DURABILITY THEREOF, OR AS TO THE
QUALITY OF THE MATERIAL OR WORKMANSHIP THEREIN, OR AS TO LANDLORD'S TITLE
THERETO OR OWNERSHIP THEREOF OR OTHERWISE, IT BEING AGREED THAT ALL RISKS
INCIDENT THERETO ARE TO BE BORNE BY TENANT. IN THE EVENT OF ANY DEFECT OR
DEFICIENCY OF ANY NATURE IN THE PREMISES OR ANY PROPERTY OR FIXTURE OR OTHER
ITEM CONSTITUTING A PORTION THEREOF, WHETHER PATENT OR LATENT, LANDLORD SHALL
HAVE NO RESPONSIBILITY OR LIABILITY WITH RESPECT THERETO. THE PROVISIONS OF THIS
SECTION 1(b) HAVE BEEN NEGOTIATED AND ARE INTENDED TO BE A COMPLETE EXCLUSION
AND NEGATION OF ANY WARRANTIES BY LANDLORD, EXPRESS OR IMPLIED, WITH RESPECT TO
THE PREMISES OR ANY PROPERTY OR FIXTURE OR OTHER ITEM CONSTITUTING A PORTION
THEREOF, WHETHER ARISING PURSUANT TO THE UNIFORM COMMERCIAL CODE OR ANOTHER LAW
NOW OR HEREAFTER IN EFFECT OR OTHERWISE.
-1-
<PAGE>
Section 2. Use. Tenant will only use the Premises for a manufacturing plan.
Landlord agrees that without the prior content of Tenant (which consent shall
not be unreasonably withheld) it shall not seek any change in the zoning
ordinances or land use category applicable to the Premises and Landlord agrees
to cooperate with Tenant, at Tenant's expense, in any effort by Tenant to oppose
any changes in the present zoning ordinances or land use category applicable to
the Premises.
Section 3. Terms. The Premises are leased for (a) an initial term (the
"Initial Term"), unless and until the term of this Lease shall expire or be
terminated pursuant to any provision hereof. The Initial Term shall commence and
expire on the dates set forth in Schedule B. Tenant shall exercise its option to
extend the term of this Lease for one or more Extended Terms by giving notice
thereof to Landlord not less than six months prior to the expiration of the then
existing term.
Section 4. Rent. (a) Tenant shall pay to Landlord in lawful money of the
United States as fixed rent for the Premises, the amounts set forth in Schedule
B (collectively, "Basic Rent") on the dates set forth therein (individually a
"Payment Date" and collectively the "Payment Dates"), at Landlord's address as
set forth above, or at such other address or to such other Person as Landlord
from time to time may designate.
(b) All amounts which Tenant is required to pay pursuant to this Lease
(other than Basic Rent, amounts payable upon purchase of the Landlord's Estate
and amounts payable as liquidated damages pursuant to Section 18), together with
every fine, penalty, interest and cost which may be added for non-payment or
late payment thereof, shall constitute additional rent. If Tenant shall fail to
pay any such additional rent when the same shall become due, Landlord shall have
all rights, powers and remedies with respect thereto as are provided herein or
by law in the case of nonpayment of Basic Rent and shall, except as expressly
provided herein, have the right to pay the same on behalf of Tenant. Tenant
shall pay to Landlord interest at the rate of 5% per annum on all overdue Basic
Rent from the due date thereof until paid, and on all overdue additional rent
paid by Landlord on behalf of Tenant from the date of payment by Landlord until
repaid by Tenant. Tenant shall perform all its obligations under this Lease at
its sole cost and expense, and shall pay all Basic Rent and additional rent when
due, without notice or demand.
Section 5. Net Lease. (a) This Lease is a net lease and any present or
future law to the contrary notwithstanding, shall not terminate except as
provided in Sections 11(b), 13, 14 and 18(b), nor shall Tenant be entitled to
any abatement or reduction (except as provided in Section 11(c)), set-off,
counterclaim, defense or deduction with respect to any Basic Rent, additional
rent or other sum payable hereunder, nor shall the obligations of Tenant
hereunder be affected, by reason of: any damage to or destruction of the
Premises; any taking of the Premises or any part thereof or of the Landlord's
Estate by condemnation or otherwise; any prohibition, limitation, restriction or
prevention of Tenant's use, occupancy or enjoyment of the Premises, or any
interference with such use, occupancy or enjoyment by any Person; any eviction
by paramount title or otherwise; any default by Landlord hereunder or under any
other agreement; the impossibility or illegality of performance by Landlord,
Tenant or both; any action of any governmental authority; or any other cause
whether similar or dissimilar to the foregoing. The
-2-
<PAGE>
parties intend that the obligations of Tenant hereunder shall be separate and
independent covenants and agreements and shall continue unaffected unless such
obligations shall have been modified or terminated pursuant to an express
provision of this Lease.
(b) Tenant shall remain obligated under this Lease in accordance with its
terms and shall not take any action to terminate, rescind or avoid this Lease,
notwithstanding any bankruptcy, insolvency, reorganization, liquidation,
dissolution or other proceeding affecting Landlord or any assignee of Landlord,
or any action with respect to this lease which may be taken by any trustee,
receiver or liquidator or by any court. Except as otherwise expressly provided
in this Lease, Tenant waives all rights now or hereafter confirmed by statute or
otherwise to quit, to terminate or surrender this Lease, or to any abatement or
deferment of Basic Rent, additional rent or other sums payable hereunder.
Section 6. Taxes and Assessments; Compliance with Law. (a) Tenant shall
pay, promptly as and when due, and agrees to indemnify Landlord and its
successors and assigns and hold Landlord and its successors and assigns harmless
from and against all Impositions. The term "Impositions" shall mean all taxes,
assessments, use, real estate, personal property, sales, ad valorem, value-
added, lease use, stamp and occupancy taxes, sales taxes on rents, water and
sewer charges, rates and rents, charges for utilities public and private,
excises, levies, license and permit fees and other charges, general and special,
ordinary and extraordinary, foreseen and unforeseen, of any kind and nature
whatsoever, which shall or may during the term of this Lease be assessed,
levied, charged, confirmed or imposed upon or become payable out of or become a
lien upon (i) the Premises or Landlord's Estate or any part thereof or the
appurtenances thereto or the sidewalks or streets adjacent thereto, (ii) the
rent and income received by or for the account of Tenant from any subtenants,
(iii) the possession, use or occupancy of the Premises or Landlord's Estate,
(iv) the sale, purchase, ownership, delivery, leasing, operation, return or
other disposition of the Premises or Landlord's Estate, (v) such franchises,
licenses and permits as may be appurtenant to the use of the Premises, or (vi)
this Lease or the transactions hereunder or any document or documents related
hereto to which Tenant is a party, or creating or transferring an interest or
estate in the Premises or Landlord's Estate and shall mean all gross receipts or
similar taxes imposed or levied upon, assessed against or measured by any Basic
Rent, additional rent or other sum payable hereunder.
The term "Impositions" shall not include any municipal, state or Federal
income taxes, assessed against Landlord, or any municipal, state or Federal
capital levy, estate, succession, inheritance or transfer taxes of Landlord, or
any franchise taxes imposed upon any corporate owner of the Premises, or any
part thereof, or any income, profits or revenue tax, assessment or charge
imposed upon the rent received as such by Landlord under this Lease, except for
the gross receipts or similar taxes referred to above (the taxes enumerated in
this sentence are collectively referred to as "Landlord's Taxes").
Notwithstanding the foregoing, if at any time during the term of this Lease, if
any of the Landlord's Taxes are imposed, levied or assessed in substitution for
any Imposition which Tenant is required to pay pursuant to this Section 6(a),
then such Landlord's Taxes, to the extent that they are so substituted or
imposed, shall be deemed to be included within the term "Impositions".
-3-
<PAGE>
Tenant will furnish to Landlord, promptly after demand therefor, proof of
payment of all Impositions. If any such Imposition may legally be paid in
installments, Tenant may pay such Imposition in installments; in such event,
Tenant shall be liable only for installments which become due and payable during
the term hereof. Landlord shall, at the request of Tenant, execute such
applications for conversion of Impositions to installment payments.
(b) Tenant shall at its sole expense comply with and cause the Premises to
comply with (i) all laws and other governmental statutes, codes, ordinances,
rules, orders, permits, licenses, authorizations, directions and determinations
now or hereafter enacted, whether or not presently contemplated, including
without limitation all Environmental Laws (as hereinafter defined)
(collectively, "Legal Requirements"), applicable to the Premises or the use
thereof, and (ii) all contracts, agreements, insurance policies, permits,
licenses and restrictions applicable to the Premises or the ownership, occupancy
or use thereof, including but not limited to all such Legal Requirements,
contracts, insurance policies, agreements, permits, licenses and restrictions
which (x) require structural, unforeseen or extraordinary changes or (y) relate
to environmental protection or hazardous waste matters.
As used herein "Environmental Law" shall mean any applicable law, statute
or ordinance relating to public health, safety or the environment, including,
without limitation, relating to releases, discharges or emissions to air, water,
land or groundwater, to the withdrawal or use of groundwater, to the use and
handling of polychlorinated biphenyls or asbestos, to the disposal,
transportation, treatment, storage or management of solid or hazardous wastes or
to exposure to toxic or hazardous materials, to the handling, transportation,
discharge or release of gaseous or liquid substances and any regulation, order,
notice of demand issued pursuant to such law, statute or ordinance, in each case
applicable to the Premises or Tenant or the operation, construction or
modification of the Premises, including without limitation the following: the
Clean Air Act, the Federal Water Pollution Control Act, the Safe Drinking Water
Act, the Toxic Substances Control Act, the Comprehensive Environmental Response
Compensation and Liability Act as amended by the Superfund Amendments and
Reauthorization Act of 1986, the Resource Conservation and Recovery Act as
amendment by the Solid and Hazardous Waste Amendments of 1984, the Occupational
Safety and Health Act, the Emergency Planning and Community Right-to-Know Act of
1986, the Solid Waste Disposal Act, and any state statutes addressing similar
matters, and any state statute providing for financial responsibility for
cleanup or other actions with respect to the release or threatened release of
hazardous substances and any state nuisance statute.
Section 7. Liens. Tenant will promptly remove and discharge any charge,
lien, security interest or encumbrance upon the Premises or any Basic Rent,
additional rent or other sum payable hereunder which arises for any reason
(except as a result of an act of Landlord undertaken without the consent of
Tenant) including all liens which arise out of the use, occupancy, construction,
repair or rebuilding of the Premises or by reason of labor or materials
furnished or claimed to have been furnished to Tenant or for the Premises, but
not including any mortgage, charge, lien, security interest or encumbrance
created by Landlord without the consent of Tenant. Notice is hereby given that
Landlord will not be liable for any labor, services or materials furnished or to
be furnished to Tenant, or to anyone holding the Premises or any part
-4-
<PAGE>
thereof through or under Tenant, and that no mechanic's or other liens for any
such labor, services or materials shall attach to or affect the interest of
Landlord in and to the Premises.
Section 8. Indemnification. Tenant shall defend all actions against
Landlord with respect to, and shall pay, protect, indemnify and save harmless
Landlord and its successors and assigns and the Premises from and against, any
and all liabilities (including, without limitation, strict liability in tort),
losses, damages, costs, expenses (including reasonable attorneys' fees and
expenses), causes of action, suits, claims, demands or judgments of any nature
(a) to which Landlord or its successors and assigns are subject because of its
respective estate in the Premises or (b) arising or alleged to arise from or in
connection with (i) injury to or death of any Person, or damage to or loss of
property, on or about the Premises or on adjoining property, sidewalks, streets
or ways, or connected with the ownership, use, condition (including, without
limitation, latent and other defect whether or not discoverable by Landlord),
design, occupancy, lease, sublease, construction, maintenance, repair or
rebuilding of any thereof, (ii) violation of any Legal Requirement whether with
respect to environmental protection or hazardous waste matters or otherwise,
(iii) violation of the requirements of this Lease by Tenant, (iv) any nonpayment
or delayed payment of any Basic Rent or any additional rent, (v) any act or
omission of Tenant or its agents, contractors, licensees, sublessees or
invitees, and (vi) any contest referred to in Section 17.
The obligations of Tenant under this Section 8 shall survive the expiration
or other termination of this Lease and shall not be limited or affected by any
other provision of this Lease requiring Tenant to carry liability insurance.
Tenant's liability under this Section 8 shall be limited to actual or contingent
liabilities arising prior to the termination of this Lease.
Section 9. Maintenance and Repair. (a) Tenant acknowledges that it has
received the Premises in good order and repair. Tenant, at its own expense, will
maintain all parts of the Premises, including any altered, rebuilt, additional
or substituted buildings, structures and other improvements thereto and all
sidewalks, curbs, landscaping, parking lots, vaults and vault space located on
or adjacent to the Premises, in good repair and condition, except for ordinary
wear and tear, and will take all action and will make all structural and
nonstructural, foreseen and unforeseen and ordinary and extraordinary changes,
replacements and repairs which may be required to keep all parts of the Premises
in good repair and condition. All repairs, replacements and renewals shall be at
least equal in quality to the original work. Landlord shall not be required to
maintain, repair or rebuild all or any part of the Premises. Tenant waives the
right to (i) require Landlord to maintain, repair or rebuild all or any part of
the Premises, or (ii) make repairs at the expense of Landlord pursuant to any
Legal Requirement at any time in effect.
(b) In the event that all or any part of the Improvements shall encroach
upon any property, street, or right-of-way adjoining or adjacent to the
Premises, or shall violate the agreements or conditions now or hereafter
affecting the Premises or any part thereof, or shall hinder or obstruct any
easement or right-of-way to which the Premises are now or hereafter subject,
then, promptly after written request of Landlord or any Person so affected,
Tenant shall, at its expense, either (i) obtain valid and effective waivers or
settlements of all claims, liabilities and damages resulting therefrom or (ii)
make any changes, including alteration or removal, to the
-5-
<PAGE>
Improvements and take such other action as shall be necessary to remove or
eliminate such encroachments, violations, hindrances, obstructions or
impairments.
Section 10. Alterations. If no Event of Default, as defined in Section 18
hereof, shall exist under this Lease and no notice shall have been given to
Tenant of a default hereunder which has not been corrected, Tenant may, at its
expense, make additions to an alterations of the Improvements and construct
additional Improvements and make substitutions and replacements for the
Improvements, provided that (a) the fair market value of the Premises shall not
be lessened thereby, (b) such work shall be expeditiously completed in a good
and workmanlike manner and in compliance with all applicable Legal Requirements,
all insurance policies required to be maintained by Tenant hereunder, and all
other agreements to which Tenant is a party or by which Tenant or the Premises
may be bound, and (c) no Improvements shall be demolished unless (i) Tenant
shall have first furnished Landlord with such surety bonds or other security
acceptable to Landlord as shall be necessary to assure rebuilding of such
Improvements and Landlord shall be deemed to have consented to such demolition
unless Landlord shall deny such consent within 60 days after receipt of the
request for such consent. All such additions and alterations, substitutions and
replacements shall be and remain part of the realty and the property of the
Landlord and shall be subject to this Lease. Landlord agrees to execute such
utility easements, building permit applications, zoning changes and other
similar governmental applications as Tenant may deem necessary or requisite in
connection with any such addition and/or alteration, subject however, to such
limitations and conditions as may be imposed by the Note Purchaser.
Tenant may place upon the Premises any inventory, trade fixtures, machinery
or equipment belonging to Tenant or third parties ("Tenant's Trade Property")
and may remove the same at any time during the term of this Lease. Landlord
agrees, at the request of Tenant, to execute a waiver or subordination of its
statutory or contractual landlord's lien to any holder of a valid security
interest in any of Tenant's Trade Property or to any bona fide lessor of
Tenant's Trade Property provided that the holder of such security interest, or
such lessor, agrees in writing to repair any damage which may be done to the
Premises as a result of removal of any Tenant's Trade Property. Tenant shall
repair any damage to the Premises caused by its removal of any of Tenant' Trade
Property.
Section 11. Condemnation and Casualty. (a) Except as otherwise herein
provided, Tenant hereby irrevocably assigns to Landlord any award, compensation
or insurance payment to which Tenant may become entitled by reason of Tenant's
interest in the Premises (i) if the Premises are damaged or destroyed by fire or
other casualty or (ii) if the use, occupancy or title of the Premises or any
part thereof is taken, requisitioned or sold in, by or on account of any actual
or threatened eminent domain proceeding or other action by any Person having the
power of eminent domain. Landlord may, at Tenant's sole expense, appear in any
such proceeding or action, to negotiate, procure and adjust any claim for any
award, compensation or insurance payment on account or any such damage,
destruction, taking, requisition or sale and Landlord shall collect, hold and
apply any such award, compensation or insurance payment in conformity with the
provisions of this Section 11. Tenant shall be entitled to participate in any
such proceeding, action, negotiation, prosecution or adjustment. In addition,
Tenant may, at its
-6-
<PAGE>
option, prosecute a separate claim against any taking authority, or, join with
Landlord in its proceeding against any taking authority, for recovery of
Tenant's relocation expenses and/or loss of trade fixtures, so long as any
recovery by Tenant with respect thereto shall be separately stated and shall not
diminish the award to Landlord. Landlord shall not be liable to Tenant for any
recovery Landlord may obtain or recover from any taking authority.
All amounts paid in connection with any such damage, destruction, taking,
requisition or sale shall be applied pursuant to this Section 11, and all such
amounts (minus the expense of collecting such amounts) are herein called the net
Proceeds. The term Net Proceeds shall not include any award, compensation or
other payment receivable by Tenant pursuant to the provisions of the foregoing
paragraph with respect to relocation expenses or trade fixtures. Tenant shall
pay all reasonable expenses in connection with each such proceeding, action,
negotiation, prosecution and adjustment, including Landlord's costs therein,
which expenses Tenant shall be subject to reimbursement out of any award,
compensation or insurance payment received.
(b) If an occurrence of the character referred to in clauses (i) or (ii) of
Section 11(a) involves a loss which equals or exceeds $750,000 and Tenant
concludes that such loss affects all or a material portion of the Land or
Improvements and renders the Premises unsuitable for restoration and continued
use and occupancy in Tenant's business, then Tenant shall, not later than 30
days after such occurrence, deliver to Landlord (i) notice of its intention to
terminate this Lease on the next Payment Date which occurs not less than 90 days
after the delivery of such notice (the "Termination Date") and (ii) a
certificate of Tenant describing the event giving rise to such termination and
stating that its board of directors has in good faith determined that such event
has rendered the Improvements unsuitable for restoration for continued use and
occupancy in Tenant's business and that Tenant has discontinued use thereof and
will not resume use of such Premises for at least five years thereafter. If the
Termination Date occurs during the Initial Term or Primary Term, such notice to
Landlord shall be accompanied by an irrevocable offer by Tenant (and Tenant
hereby agrees to make the same) to purchase any remaining portion of Landlord's
Estate with the Net Proceeds, if any, payable in connection with such occurrence
(or the right to receive the same when made, if payment thereof has not yet been
made) on the Termination Date, at a price determined in accordance with Schedule
C. If the Termination Date occurs during an Extended Term, this Lease shall
terminate on the Termination Date, except with respect to obligations and
liabilities of Tenant hereunder, actual or contingent, which have arisen on or
prior to the Termination Date, upon payment by Tenant of all Basic Rent,
additional rent and other sums then due and payable hereunder to and including
the Termination Date, and the Net Proceeds shall belong to Landlord. Landlord
shall transfer and convey the entire Landlord's Estate to Tenant upon the terms
and provisions set forth in Section 15 hereof against payment by Tenant of the
purchase price therefor, together with all installments of Basic Rent,
additional rent and other sums then due and payable hereunder to and including
the Termination Date. If this Lease is so terminated as the result of an event
of the character described in clauses (i) or (ii) of Section 11(a), the award,
compensation or other payment payable with respect thereto shall be allocated
pro-rata to Landlord to compensate it for its interests as owner of the
Landlord's Estate and to Tenant to compensate it for its interests as Tenant of
the Premises. Notwithstanding anything to the contrary stated herein, if
Landlord's award, compensation or other payment is
-7-
<PAGE>
insufficient to pay in full the balance then due and owning under the Note
Agreement and the Deed of Trust in respect of the Premises and principal,
premium, if any, and accrued and unpaid interest on the Notes outstanding
thereunder issued to finance the Premises, the Tenant will promptly pay the
difference between such award, compensation or other payment and the amount
necessary to satisfy such obligations of the Landlord under the Note Agreement
and the Deed of Trust and in respect of such Notes.
(c) If, after an occurrence of the character referred to in clauses (i) or
(ii) of Section 11(a) which involves a loss of less than $750,000, or, if the
amount of such loss equals or exceeds $750,000 but Tenant does not give notice
of its intention to terminate this Lease, then this Lease shall continue in full
effect, and Tenant shall, at its expense, promptly restore, replace and rebuild
("Restore") any damage to the Premises caused by such event in conformity with
the requirements of Section 10 so as to restore the Premises (as nearly as
practicable) to the condition and fair market value thereof immediately prior to
such occurrence. For this purpose, Tenant shall be entitled to receive the Net
Proceeds payable in connection with such occurrence if the amount of such Net
Proceeds, together with such additional amounts, if any, theretofore expended by
Tenant out of its own funds for such Restoration, are sufficient to pay the
estimated cost of completing such Restoration, but only upon a written
application of the Tenant showing in reasonable detail the nature of such
Restoration, the estimated cost (which shall be verified by an accompanying
certificate of an engineer or architect not an employee of Tenant) to complete
Restoration and stating that Tenant has not theretofore received payment for
such work and that no Event of Default has occurred and is continuing under this
Lease to the knowledge of Tenant. Any Net Proceeds remaining after final payment
has been made for such work shall be retained by or for the account of Landlord.
However, if such Net Proceeds so retained by or for the account of Landlord
shall be more than $200,000, then (i) the Basic Amount set forth in Schedule C
shall be reduced by an amount equal to such Net Proceeds so retained by Landlord
and (ii) each installment of Basic Rent payable on and after the first Payment
Date occurring three months or more after the final payment to Tenant for such
work shall be reduced by a fraction of such installment, the numerator of which
fraction shall be the amount so retained and the denominator of which shall be
the Basic Amount prior to reduction thereof referred to in clause (i) above. In
the event of any temporary requisition, this Lease shall remain in full effect
and Tenant, if no Event of Default shall exist under this Lease and no notice
shall have been given to Tenant of a default hereunder which has not been
corrected, shall be entitled to receive the Net Proceeds allocable to such
temporary requisitions; except that such portion of the Net Proceeds allocable
to the period after the expiration or termination of the term of this Lease
shall be paid to Landlord. If the cost of any repairs required to be made by
Tenant pursuant to this Section 11(c) shall exceed the amount of such Net
Proceeds, the deficiency shall be paid by Tenant. If an Event of Default shall
exist under this Lease such Net Proceeds shall be payable to and held by
Landlord.
Section 12. Insurance. (a) Tenant will maintain insurance on the Premises
of the following character:
(i) Insurance, subject to an 80% co-insurance clause, against loss by
fire, windstorm and explosion and with extended coverage and against such
other risks of
-8-
<PAGE>
physical loss as are customarily insured against and in such amounts as are
customarily carried, by companies owning property of a character similar to
that of the Premises and engaged in a business similar to that engaged in
by Tenant but in any event in amounts not less than 100% of the full
replacement value of the Premises, exclusive of foundations and
excavations, as evidenced by "Replacement Costs" or "Restoration"
endorsements thereto. The term "full replacement value" as used herein
means actual replacement value without deduction for physical depreciation,
as determined upon request of Landlord at intervals not more than may be
required by the company issuing such insurance to provide the required
"Replacement Cost" or "Restoration" endorsements and at the expense of
Tenant, by independent appraisals.
(ii) General public liability insurance against claims for bodily
injury, death or property damage occurring on, in or about the Premises and
adjoining streets and sidewalks, in the minimum amounts of $1,000,000 for
bodily injury or death to any on Person, $1,000,000 for any one accident,
and $2,000,000 for property damage.
(iii) Worker's compensation insurance to the extent required by the
law of the state in which the Premises are located and to the extent
necessary to protect Landlord and the Premises against worker's
compensation claims; provided that if permitted under the laws of such
state in lieu of such worker's compensation insurance, Tenant may maintain
a program of self-insurance complying with the rules and regulations and
requirements from time to time in effect of the appropriate state agency of
the state in which the Premises are located.
(iv) Explosion insurance in respect of any boilers and similar
apparatus located in the Premises in the minimum amount of $150,000.
(v) Such other insurance, in such amounts and against such risks, as
is commonly obtained in the case of property similar in use to the Premises
and located in the state in which the Premises are located.
Such insurance shall be written by companies of recognized national
standing authorized to do business in the state in which the Premises are
located, and shall name as insured parties Landlord and Tenant as their
interests may appear. Provided no Event of Default shall exist under this Lease
and no notice shall have been given to Tenant of a default hereunder which has
not been corrected, the loss, if any, under any policy pertaining to loss by
reason of damage to or destruction of any portion of the Premises shall be
adjusted with the insurance companies by Tenant, subject to the approval of
landlord and the Note Purchaser if the loss exceeds $750,000. The loss so
adjusted shall be paid to the Note Purchaser pursuant to the loss payable clause
hereinafter referred to, unless said loss is $750,000 or less in which case said
loss shall be paid directly to Tenant.
(b) Every such policy (other than any general public liability or worker's
compensation policy) shall bear a first mortgage endorsement in favor of the
Note Purchaser, as purchaser of the 7.80% Secured Notes due June 1, 2009 (the
"Notes") of the Landlord issued
-9-
<PAGE>
pursuant to the Note Agreement dated as of May 12, 1994 (the "Note Agreement")
between the Landlord and the Note Purchaser dated the date hereof (the "Deed of
Trust") a first mortgage lien on the Premises. Any loss under such policy shall
be payable solely to the mortgage lien on the Premises. Any loss under any such
policy shall be payable solely to the Note Purchaser to be held and applied
pursuant to Section 11. All public liability policies shall name as insured
persons Landlord, Tenant and the Note Purchaser. Every policy referred to in
Section 12(a) shall provide that (i) Landlord's and the Note Purchaser's
interests shall be insured regardless of any breach or violation by Tenant of
any warranties, declarations or conditions contained in such policies, (ii) such
insurance as to the interests of the Landlord and the Note Purchaser therein
shall not be invalidated by the use or operation of the Premises for purposes
which are not permitted by such policies or by any foreclosure or other
proceedings relating to the Premises or by change in title to or ownership of
the Premises, (iii) the insurers shall waive any right of subrogation of the
insurers to any set-off or counterclaim or any other deduction, whether by
attachment or otherwise, in respect of any liability of Tenant, (iv) if any
premium or installment is not paid when due, or if such insurance would lapse or
be cancelled, terminated or materially changed for any reason whatsoever, the
insurers will promptly notify Landlord and the Note Purchaser and any such
lapse, cancellation, termination or change shall not be effective as to Landlord
and the Note Purchaser for 30 days after receipt of such notice, and (vi)
appropriate certification shall be made to Landlord and the Note Purchaser by
each insurer with respect thereto.
(c) Tenant shall deliver to Landlord and the Note Purchaser original or
duplicate policies or certificates of insurers, satisfactory to Landlord and the
Note Purchaser, evidencing the existence of all insurance which is required to
be maintained by Tenant hereunder, such delivery to be made (i) promptly after
the execution and delivery hereof and (ii) within 10 days prior to the
expiration of any such insurance. Tenant shall not obtain or carry separate
insurance concurrent in form or contributing in the event of loss with that
required by this Section 12 unless Landlord and the Note Purchaser are named
insureds therein, with loss payable as provided herein. Tenant shall immediately
notify Landlord and the Note Purchaser whenever any such separate insurance is
obtained and shall deliver to Landlord and the Note Purchaser the policies or
certificates evidencing the same. Any insurance required hereunder may be
provided under blanket policies of Tenant, provided that such blanket policies
otherwise comply with the provisions of this Section 12. Any insurance which
Tenant is obligated to carry under the terms of clauses (a)(i) and (a)(ii) of
this Section 12 may be carried under a plan of self-insurance with respect to
the first portion of any loss claimed under any such insurance by way of
deductible provisions in insurance policies up to such amount as is customary
for corporations of established reputation engaged in the same or a similar
business as Tenant and similarly situated and which maintain such insurance on
property similar to the Premises, provided that any such self-insurance shall no
event exceed $100,000.
(d) The requirements of this Section 12 shall not be construed to negate or
modify Tenant's obligations under Section 8 to fully indemnify Landlord and its
successors and assigns from and against all liability in any way arising out of
the Premises and Tenant's use, non-use, misuse, occupation or nonoccupation of
the Premises.
-10-
<PAGE>
Section 13. Assignment and Subletting. Tenant may sublet the Premises or
assign its interests hereunder; provided, that (a) at the time of any such
sublease or assignment no Event of Default or event which with the lapse of time
or the giving of notice, or both, would constitute an Event of Default has
occurred and is continuing, (b) any such sublease or assignment shall by its
terms be expressly made subject and subordinate to the terms of this Lease, (c)
Tenant shall have given Landlord 60 days' prior written notice of any such
sublease or assignment, and (d) any such sublease shall contain a section to
read as follows:
"Sublessee by its execution of this Sublease hereby unconditionally
acknowledges and agrees as follows: (a) Sublessee has received a
copy of the Lease Agreement Dated as of ____________, ____ (the
"Primary Lease") between __________, as tenant, and _______________,
as landlord, (b) this Sublease represents a sublease of Sublessor's
rights in and to the Premises and this Sublease the rights of
Sublessee hereunder are in all respects subject and subordinate to the
Primary Lease."
No such assignment or sublease shall modify or limit any right or power of
Landlord hereunder or affect or reduce any obligation of Tenant hereunder, and
all such obligations shall continue in full effect as obligations of a principal
and not of a guarantor or surety, as though no assignment or subletting had been
made. Tenant shall, within 10 days after the execution of any such sublease or
assignment, deliver a conformed copy thereof to Landlord and the Note Purchaser.
Neither this Lease nor the term hereby demised shall be mortgaged, pledged or
otherwise encumbered by Tenant nor shall Tenant mortgage, pledge or otherwise
encumber the interest of Tenant in and to any sublease of the Premises or of the
rentals payable thereunder. Any such mortgage, pledge, encumbrance, sublease or
assignment made in violation of this Section 16 shall be void. Tenant shall not
collect or accept payment, directly or indirectly, of any rent under any
sublease more than one month in advance of the due date thereof.
Section 14. Permitted Contests. Tenant shall not be required to (a) comply
with any Legal Requirement applicable to the Premises or the use thereof, (b)
pay any Imposition or (c) obtain any waivers or settlements or make any changes
or take any action with respect to any encroachment, hindrance, obstruction,
violation or impairment referred to in Sections 7, 9 or 10 hereof, as long as
Tenant shall contest the existence, applicability, amount or validity thereof in
good faith by appropriate proceedings which shall prevent the collection of, or
other realization with respect to, the matter so contested, and which also shall
prevent the sale, forfeiture or loss of the Premises, Landlord's Estate and any
Basic Rent or additional rent and which shall otherwise not affect the payment
of any Basic Rent or any additional rent; provided that in no event shall such
contest subject Landlord or its successors and assigns to the risk of any
criminal liability or any civil liability. Tenant shall (i) immediately give
written notice to Landlord and the Note Purchaser of any contest hereof, (ii)
give such reasonable security as may be demanded by Landlord or the Note
Purchaser to insure ultimate payment of such Imposition and compliance with such
Legal Requirements and to prevent any sale or forfeiture of the Premises,
Landlord's Estate, the Basic Rent or any additional rent by reason of such
nonpayment or noncompliance
-11-
<PAGE>
and (iii) indemnify and hold the Landlord and Note Purchaser harmless from any
liability in connection with any such contest.
Landlord agrees to sign such tax returns, applications and other documents
as may be necessary or requisite for Tenant to properly conduct any contest
permitted hereunder, and Landlord further agrees that it shall hold in trust and
forthwith pay Tenant the amount of any tax, or other refund received by Landlord
as a result of any contest permitted hereunder.
Section 15. Conditional Limitations; Default Provisions. (a) Any of the
following occurrences or acts shall constitute an Event of Default ("Event of
Default") under this Lease:
(i) if Tenant shall fail to pay any Basic Rent, additional rent or
other sum required to be paid by Tenant hereunder; or
(ii) if Tenant shall fail to observe or perform any other provision
hereof and such failure shall continue unremedied for 30 days after the
earlier of (1) written notice thereof from Landlord or, the Note Purchaser
or any holder of the Notes to Tenant, (2) the first date on which an
officer of Tenant shall have actual knowledge that a default has occurred
and is continuing under this Section 15(a)(ii); or
(iii) if Tenant or any of its subsidiaries has entered against it or
on its behalf an order for relief under the Federal bankruptcy laws, or any
other applicable Federal or state bankruptcy, insolvency or other similar
law, or becomes insolvent, or makes an assignment for the benefit of
creditors, or fails to generally pay its debts as such debts become due, or
Tenant or any such subsidiary applies for or consents to the appointment of
a trustee or receiver or for the major part of its property; or
(iv) a custodian (including without limitation a trustee or receiver)
is appointed for Tenant or any of its subsidiaries or for the major part of
the property of either and is not discharged within 90 days after such
appointment; or
(v) bankruptcy or insolvency proceedings, or other proceedings for
relief under any bankruptcy or similar Federal or state law or laws for the
relief of debtors, are instituted by or against Tenant or any of its
subsidiaries and, if instituted against Tenant or any such subsidiary are
consented to or are not dismissed within 90 days after such institution; or
(vi) if the Premises have been left abandoned for a period of 30 days;
or
(vii) if Tenant shall fail to observe or perform any provision of the
Assignment of Lease dated as of May 12, 1994 (the "Assignment") among
Landlord, Tenant and the Note Purchaser relating to the Premises; or
(viii) if any representation or warranty made by Tenant herein or in
the Assignment or made by Tenant in any statement or certificate furnished
by Tenant
-12-
<PAGE>
pursuant to the Note Agreement proves untrue in any material respect as of
the date of the issuance or making thereof.
(b) This Lease and the term and estate hereby granted are subject to the
limitation that whenever an Event of Default shall have happened and be
continuing Landlord shall have the right at its election at any time thereafter
to exercise any one or more or all, and in any order, of the remedies
hereinafter set forth, it being expressly understood that no remedy herein
conferred is intended to be exclusive of any other remedies but each and every
remedy shall be in addition to every other remedy given herein or now or
hereafter existing at law or in equity or by statute:
(i) Landlord may take all steps to protect and enforce the rights of
Landlord or obligations of Tenant hereunder, whether by action, suit or
proceeding at law or in equity (for the specific performance of any
covenant, condition or agreement contained in this Lease, or in aid of the
execution of any power herein granted or for any foreclosure, or for the
enforcement of any other appropriate legal or equitable remedy) or
otherwise as Landlord shall deem most advisable to protect and enforce any
of its rights or the obligations of Tenant hereunder;
(ii) Landlord may terminate this Lease by giving a written termination
notice to Tenant specifying a date not less than 15 days after the date of
such notice on which the term of this Lease shall terminate and on such
date the term of this Lease and the estate hereby granted shall expire and
terminate by limitation and all rights of Tenant under this Lease shall
cease on the Termination Date so specified;
(iii) Landlord, whether or not this Lease shall have been terminated
pursuant to clause (ii) of this Section 15(b), shall have the right to
terminate Tenant's right to possession under this Lease and to re-enter and
take possession of the Premises or any part thereof by giving a written
notice to Tenant to quit and surrender possession on a date not less than
15 days after the date of such notice whereupon the right of Tenant to the
possession of the Premises shall cease and terminate on such date, and
Landlord shall have the immediate and continuing right then and at any time
and from time to time thereafter without further notice, to re-enter upon
and take possession of the Premises or any part thereof with or without
legal proceedings (summary or otherwise) and to remove all Persons and
property therefrom as Landlord may elect to do. Should Landlord elect to
re-enter as herein provided or should Landlord take possession pursuant to
legal proceedings or pursuant to any notice provided for by law or upon
termination of this Lease pursuant to clause (ii) of this Section 15(b) or
termination of Tenant's right to possession pursuant to clause (iii) of
this Section 15(b) or otherwise as permitted by law, Tenant shall peaceably
quit and surrender the Premises to Landlord. In any such event, neither
Tenant nor any Person claiming through or under Tenant, by virtue of any
statute or of an order of any court, shall be entitled to possession or to
remain in possession of the Premises, or any part thereof, but shall
forthwith quit and surrender the Premises to Landlord;
-13-
<PAGE>
(iv) In the event of any termination of this Lease pursuant to clause
(ii) of this Section 15(b) or repossession pursuant to clause (iii) of this
Section 15(b), Tenant will pay to Landlord Basic Rent and all additional
rent and other sums required to be paid by Tenant up to the time of such
termination or repossession, and from and after such termination or
repossession until the end of what would have been the term of this Lease
in the absence of such termination or repossession, Tenant shall be liable
to Landlord for, and shall pay to Landlord the sums of money (herein called
"Current Damages") which would have been payable by Tenant, as Basic Rent
and all additional rent and other sums which would be payable under this
Lease by Tenant in the absence of such termination or repossession, less
the proceeds, if any, actually received by Landlord as a result of such
repossession and subsequent reletting or other disposition of the Premises,
after deducting from such proceeds, the expenses, costs and payments of
every kind of Landlord which in accordance with the terms of this Lease
would have been borne by Tenant and all of Landlord's expenses in
connection with such realization of proceeds, including without limiting
the generality of the foregoing all unpaid expenses incurred in obtaining
possession, and in altering, repairing and putting the Premises in good
order and condition and in reletting the Premises or any part thereof
including reasonable fees of attorneys, architects, and other experts and
any other reasonable and legitimate expenses. Tenant will pay such other
experts and any other reasonable and legitimate expenses. Tenant will pay
such Current Damages monthly on the days on which Basic Rent would have
been payable under this Lease in the absence of such termination or
repossession, and Landlord shall be entitled to recover the same from
Tenant on each such day. Tenant hereby agrees to be and remain liable for
all sums otherwise payable by Tenant under this Lease including, but not
limited to, the expenses of Landlord aforesaid, as well as for any
deficiency aforesaid, and Landlord shall have the right from time to time
to begin and maintain successive actions or other legal proceedings against
Tenant for the recovery of such deficiency or damages or for a sum equal to
any installments of Basic Rent or additional rent and any other sums
payable hereunder and to recover the same upon the liability of Tenant
herein provided, which liability it is expressly covenanted shall survive
the issuance of any action to secure possession of the Premises. Nothing
herein contained shall be deemed to require Landlord to wait to begin any
such action or other legal proceedings until the date when this Lease would
have expired by limitation had there been no such Event of Default;
(v) At any time after any termination of this Lease pursuant to clause
(ii) of this Section 15(b), or termination of possession pursuant to clause
(iii) of this Section 15(b), whether or not Landlord shall have collected
any Current Damages as aforesaid, Tenant will pay to Landlord, at
Landlord's option and upon demand, as and for liquidated and agreed final
damages (herein called "Final Damages") for Tenant's default and in lieu of
all Current Damages beyond the date of such demand, an amount equal to the
sum of (A) the excess, if any, of Basic Rent and the sums which would be
payable under this Lease from the date of such demand (or, if it be
earlier, the date to which Tenant shall have satisfied in full its
obligations under clause (iv) of this Section 15(b) to pay Current Damages)
for what would be the then unexpired term of this Lease in the absence of
such expiration or repossession, discounted at the rate of 7.8% per annum
on the basis of a
-14-
<PAGE>
360-day year of twelve consecutive 30-day months, over the fair rental
value of the Premises at the time of such termination for the balance of
such term, discounted at the same rate and in the same manner as above
stated, plus (B) to the extent legally enforceable and in addition to all
other amounts payable by tenant pursuant to this Section 15(b), as damages
suffered by the Landlord as the result of the occurrence of an Event of
Default hereunder for the loss of a bargain and not as a penalty, an amount
(the "Additional Final Damages") equal to the amount which the Landlord
would be obligated to pay the premium, if any, specified in the Note
Agreement as defined therein. Nothing herein contained shall, however,
limit or prejudice the right of Landlord, in any bankruptcy, reorganization
or insolvency proceedings, to prove for and obtain as liquidated damages by
reason of such termination, an amount equal to the maximum allowed by any
statute or rule of law in effect at the time when, and governing the
proceedings in which, such damages are to be proved, whether or not such
amount shall be greater than, equal to, or less than such Final Damages
and/or Additional Final Damages.
Section 16. Additional Rights of Landlord. (a) No right or remedy hereunder
shall be exclusive of any other right or remedy, but shall be cumulative and in
addition to any other right or remedy hereunder or now or hereafter existing.
Failure to insist upon the strict performance of any provision hereof or to
exercise any option, right, power or remedy contained herein shall not
constitute a waiver or relinquishment thereof for the future. Receipt by
Landlord of any Basic Rent, additional rent or other sum payable hereunder with
knowledge of the breach of any provision hereof shall not constitute waiver of
such breach, and no waiver by Landlord of any provision hereof shall be deemed
to have been made unless made in writing. Landlord shall be entitled to
injunctive relief in case of the violation, or attempted or threatened
violation, of any of the provisions hereof, or to a decree compelling
performance of any of the provisions hereof, or to any other remedy allowed to
Landlord by law.
(b) Tenant hereby waives and surrenders for itself and all those claiming
under it, including creditors of all kinds, (i) any right and privilege which it
or any of them may have to redeem or re-enter the Premises or to have a
continuance of this Lease after termination of Tenant's right of occupancy by
order or judgment of any court or by any legal process or writ, or under the
terms of this Lease, or after the termination of the term of this Lease as
herein provided, (ii) any notice to quit or notice of re-entry or of the
institution of legal proceedings to that end, and (iii) the benefits of any law
which exempts property from liability for debt or for distress for rent.
(c) If Tenant shall be in default in the performance of any of its
obligations hereunder, Tenant shall pay to Landlord, on demand, all expenses
incurred by Landlord as a result thereof, including reasonable attorney's fees
and expenses. If Landlord shall be made a party to any litigation commenced
against Tenant and Tenant shall fail to provide Landlord with counsel approved
by Landlord and pay the expenses thereof, Tenant shall pay, on demand, all costs
and reasonable attorneys' fees and expenses incurred by Landlord in connection
with such litigation.
-15-
<PAGE>
Section 17. Notices, Demands and Other Instruments. All notices, requests,
offers consents and other instruments given pursuant to this Lease shall be in
writing and shall be validly given when mailed by prepaid registered or
certified mail or by prepaid overnight air courier, (a) if to Landlord, at its
address set forth above Attention: Trustee, (b) if to Tenant, at its address set
forth above Attention: Vice President Finance, (c) if to the Note Purchaser
____________, ____________, ____________, Attention ____________. Landlord,
Tenant and the Note Purchaser each may from time to time specify, by giving 15
days' notice to the other parties, (i) any other address in the United States as
its address for purposes of this Lease and (ii) any other Person or entity that
is to receive copies of notices, offers, consents and other investment
hereunder.
Section 18. Estoppel Certificates. Tenant agrees that from time to time,
upon 20 days' prior request by Landlord or the Note Purchaser to execute,
acknowledge and deliver to Landlord and the Note Purchaser a certificate stating
that this Lease is unmodified and in full effect (or, if there have been
modifications, that this Lease is in full effect as modified, and setting forth
such modifications) and the dates to which Basic Rent, additional rent and other
sums payable hereunder have been paid, and either stating that to the knowledge
of the signer of such certificate no default exists hereunder or specifying each
such default of which the signer has knowledge. Any such certificate executed by
Tenant may be relied upon by any prospective mortgagee or purchasers of the
Landlord's Estate.
Section 19. No Merger. There shall be no merger of this Lease or of the
leasehold estate hereby created with the fee estate in the Premises by reason of
the fact that the same Person acquires or holds, directly or indirectly, this
Lease or the leasehold estate as well as the fee estate in the Premises or any
interest in such fee estate.
Section 20. Surrender. Upon the expiration or termination of the Primary
Term, or if exercised, the last day of any Extended Term, Tenant shall surrender
the Premises to Landlord in the condition in which the Premises were originally
received from Landlord, except as repaired, rebuilt, restored, altered or added
to as permitted or required hereby, except for ordinary wear and tear, and
except as otherwise provided in this Lease. Tenant shall remove from the
Premises on or prior to such expiration or termination all property situated
thereon which is not owned by Landlord, and shall repair any damage caused by
such removal. Property not so removed shall become the property of Landlord, and
Landlord may cause such property to be removed from the Premises and disposed
of, but the cost of any such removal and disposition and of repairing any damage
caused by such removal shall be borne by Tenant.
Section 21. Separability; Binding Effect. Each provision hereof shall be
separate and independent and the breach of any such provision by Landlord shall
not discharge or relieve Tenant from its obligations to perform each and every
covenant to be performed by Tenant hereunder. If any provision hereof or the
application thereof to any Person or circumstance shall to any extent be invalid
or unenforceable, the remaining provisions hereof, or the application of such
provision to Persons or circumstances other than those as to which it is invalid
or unenforceable, shall not be affected thereby, and each provision hereof shall
be valid and shall be enforceable to the extent permitted by law. All provisions
contained in this Lease shall be
-16-
<PAGE>
binding upon, inure to the benefit of, and be enforceable by, the respective
successors and assigns of Landlord and Tenant to the same extent as if each such
successor and assign were named as a party hereto. This Lease may not be
changed, modified or discharged except in writing signed by Landlord and Tenant
and with the prior written consent of the Note Purchaser.
Section 22. Recording of Lease. This Lease, or a short form or memorandum
thereof, shall be filed and/or recorded in the appropriate public office for
publishing notice of the existence of leases by the Tenant, at its expense.
Section 23. Lessor's Right to Cure Lessee's Default. If Tenant shall fail
to make any payment or perform any act required to be made or performed under
this Lease, Landlord, after notice to and demand upon Tenant, and without
waiving or releasing any obligation or default, may (but shall be under no
obligation to) at any time thereafter make such payment or perform such act for
the account and at the expense of Tenant, and may enter upon the Premises for
such purpose and take all such action thereon as, in Landlord's opinion, may be
necessary or appropriate therefor. No such entry shall be deemed an eviction of
Tenant. All sums so paid by Landlord and all costs and expenses (including,
without limitation, attorneys' fees and expenses so incurred, together with
interest thereon to the extent permitted by law) shall be paid by Tenant to
Landlord on demand, together with interest thereon at the lesser of (a) the
highest rate permitted by applicable law or (b) 7.8% per annum (computed on a
360-day year of twelve 30-day months), whichever is lower, for the period from
and including the date on which such sums or expenses are paid or incurred by
Landlord to but not including the date the same are paid.
Section 24. Expenses. If for any reason whatsoever Landlord does not pay
any of the expenses referred to in Section ___ of the Note Agreement, Tenant
shall immediately pay the same.
Section 25. Counterparts. This Lease may be executed in any number of
counterparts, each counterpart constituting an original but altogether only one
Lease.
Section 26. Headings. The headings which are used following the number of
each Section are so used in and for evidence in locating various provisions of
this Lease and shall not be deemed to affect the interpretation or structure of
such provisions.
Section 27. Schedules. Schedules A, B and C referred to in this Lease are
hereby incorporated by reference.
-17-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Lease to be
executed as of the date first above written.
AMERICAN NATIONAL BANK AND TRUST COMPANY
LAND TRUST 65387
[SEAL]
By_______________________________________________
Printed Name P. JOHANSEN
Its 2ND Vice President
ATTEST:
By______________________________
Printed Name Gregory S. Kasprzyk
Its Asst Secretary
FARLEY CANDY COMPANY
[SEAL]
By_______________________________________________
Printed Name Michael S. Gotkin
Its Senior Vice President and Secretary
ATTEST:
By______________________________
Printed Name
Its Secretary
-18-
<PAGE>
STATE OF ILLINOIS )
) SS
COUNTY OF COOK )
I, MARIA ALEXAKIS, a Notary Public in and for the County and State
aforesaid, do hereby certify that William H. Ellis and Michael S. Gotkin,
personally known to me to be the same persons whose names are respectively, as
PRESIDENT and SECRETARY of FARLEY CANDY COMPANY, a DELAWARE corporation,
subscribed to the foregoing instrument, appeared before me this day in person
and severally acknowledged that they, being thereunto duly authorized, signed,
sealed and with the seal of said corporation, and delivered the said instrument
as the free and voluntary act of said corporation and as their own free and
voluntary act, for the uses and purposes therein set forth.
Given under by hand and notarial sell this 12th day of May, 1994.
___________________________________
Notary Public
Printed Name: MARIA ALEXAKIS
[SEAL]
Commission expires: 4-19-95
-19-
<PAGE>
STATE OF ILLINOIS )
) SS
COUNTY OF COOK )
I, Dorothy Thiel, a Notary Public in and for the County and State
aforesaid, do hereby certify that Peter Johansen and Gregory S. Kasprzyk,
personally known to me to be the same persons whose names are respectively, as
SECOND VICE PRESIDENT and ASSISTANT SECRETARY of NATIONAL BANK & TRUST COMPANY
OF CHICAGO, a corporation, subscribed to the foregoing instrument, appeared
before me this day in person and severally acknowledged that they, being
thereunto duly authorized, signed, sealed with the seal of said corporation, and
delivered the said instrument as the free and voluntary act of said corporation
and as their own free and voluntary act, for the uses and purposes therein set
forth.
Given under by hand and notarial seal this 17th day of May, 1994.
___________________________________
Notary Public
Printed Name: Dorothy Thiel
[SEAL]
Commission expires:
-20-
<PAGE>
DESCRIPTION OF THE PREMISES
4500 W. Belmont, Chicago, Illinois 60641
SCHEDULE A
(to Lease Agreement)
-21-
<PAGE>
TERMS AND BASIC RENT PAYMENTS
I. TERMS:
(a) The Initial Term shall commence on May 12, 1994 and shall end at
midnight on June 1, 2009.
(b) The Primary Term shall commence on the expiration of the Initial Term
and shall end at midnight on N/A, ____.
(c) Each Extended Term shall commence on the day next succeeding the
expiration of the preceding term. The last possible Extended Term shall end at
midnight on N/A, ____.
II. BASIC RENT PAYMENTS:
(a) Fixed Rent payable for the Premises for the Initial Term of this Lease
shall be $15,500 per month and shall be payable on June 1, 1994.
SCHEDULE B
(to Lease Agreement)
-22-
<PAGE>
Upon Purchase of the Premises pursuant to Section 11(b), 13(b) or 14, the
amount determined in accordance with Schedule C shall be the amount equal to the
sum of $_________ (the Basic Amount), multiplied by the percentage set forth in
Column 2 below opposite the period in which the date of purchase occurs.
COLUMN 1 COLUMN 2
Date of Purchase Applicable Percentage
SCHEDULE C
(to Lease Agreement)
-23-
<PAGE>
ADDENDUM
--------
This is an Addendum to the Lease by and between American National Bank and
Trust Company, Land Trust 65387 ("Landlord"), and Farley Candy Company
("Tenant"). This document shall be considered to be made a part of as if
incorporated herein of the lease of said date of May 12, 1994.
Pg. 2. Section 3. The Premises are leased for a term of 15 years unless and
until the term of this Lease shall expire or be terminated pursuant to any
provision hereof.
Page 4. Section 7. The first line of this paragraph shall read as follows:
"Liens. Tenant will promptly remove and discharge or contest in good faith any
charge, lien, . . . ."
Page 7. Section 11(a). Item (i) shall read as follows: "if 50% or more of the
Premises are damaged or destroyed by fire or other casualty or . . ."
AMERICAN NATIONAL BANK AND TRUST CO.
LAND TRUST NO. 65387
____________________________________________
Second Vice President
FARLEY CANDY COMPANY - Tenant
By:_________________________________________
Authorized Representative
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the prospectus constituting part of this
registration statement on Form S-4 of Favorite Brands International, Inc. of
our reports dated August 21, 1998 and April 22, 1998 relating to the
consolidated financial statements of Favorite Brands International, Inc. and to
the financial statements of Farley Candy Company, respectively, which appear in
such prospectus. We also consent to the application of our report dated August
21, 1998 relating to the consolidated financial statements of Favorite Brands
International, Inc. to the financial statement schedule included as Schedule I
to this registration statement when such schedule is read in conjunction with
the financial statements referred to in our report. The audits referred to in
such report also included this schedule. We also consent to the references to
us under the headings "Experts" and "Selected Consolidated Historical Financial
Data" in such prospectus. However, it should be noted that
PricewaterhouseCoopers LLP has not prepared or certified such "Selected
Consolidated Historical Financial Data."
/s/ PricewaterhouseCoopers LLP
Chicago, Illinois
December 28, 1998
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in the Form S-4 Registration Statement for
Favorite Brands International, Inc. of our report dated March 16, 1996 on our
audit of the combined financial statements of Sathers, Inc. and Related
Entities as of and for the fifty-two weeks ended December 30, 1995.
/s/ Friedman Eisenstein Raemer and
Schwartz, LLP
Chicago, Illinois
December 28, 1998
<PAGE>
EXHIBIT 23.3
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this registration statement on Form S-4 of
our report, dated January 25, 1996, relating to the financial statements of
Kidd & Company, Inc. We also consent to the reference to our Firm under the
caption "Experts" in the prospectus.
/s/ McGladrey & Pullen LLP
Goshen, Indiana
December 23, 1998
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
EXHIBIT 23.4
We hereby consent to the use in the prospectus constituting part of this
registration statement on Form S-4 of our reports dated April 11, 1997 and
February 16, 1996 relating to the financial statements of Dae-Julie, Inc., and
our report dated February 21, 1995 relating to the financial statements of
Candyland Candies, Inc., which appear in such prospectus. We also consent to
the references to us under the heading "Experts" in such prospectus.
/s/ Wolf, Grieco & Co.
Chicago, Illinois
December 28, 1998
<PAGE>
EXHIBIT 23.5
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this registration statement of Favorite Brands
International, Inc. on Form S-4 of our report dated March 3, 1997 (relating to
the combined component financial statements of Mederer Corporation's U.S.
Confectionary Operations as of December 31, 1996 and 1995, and for the years
then ended), appearing in the prospectus, which is part of this registration
statement.
We also consent to the reference to us under the heading "Experts" in such
prospectus.
/s/ Deloitte & Touche LLP
Des Moines, Iowa
December 24, 1998
